AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1996
REGISTRATION NO. 333-02556
=========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
GUNTHER INTERNATIONAL, LTD.
(Exact Name of Registrant as Specified in its Charter)
Delaware 7398 51-0223195
---------------------------- ----------------- ----------------
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
5 Wisconsin Avenue
Norwich, Connecticut 06360
(860) 823-1427
(Address and telephone number of Registrant's principal executive offices)
-------------------------
JAMES H. WHITNEY
President and Chief Executive Officer
GUNTHER INTERNATIONAL, LTD.
5 Wisconsin Avenue
Norwich, Connecticut 06360
(860) 823-1427
(Name, address, and telephone number of agent for service)
-------------------------
Please address a copy of all communications to:
STEVEN L. WASSERMAN, ESQ.
Reid & Priest LLP
40 West 57th Street
New York, New York 10019
(212) 603-2000
-------------------------
Approximate date of commencement of proposed sale to the public: as soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [x]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
GUNTHER INTERNATIONAL, LTD.
Cross Reference Sheet
Showing Location in Prospectus of Information
Required by Items of Form S-1
Item Number and Caption Heading in Prospectus
----------------------- ---------------------
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus . . . Front Cover Page
2. Inside Front and Outside
Back Cover Pages of
Prospectus . . . . . . . . . . Inside Front and Outside Back Cover
Pages
3. Summary Information; Risk
Factors; Ratio of Earnings to
Fixed Charges . . . . . . . . Prospectus Summary; Risk Factors
4. Use of Proceeds . . . . . . . Use of Proceeds
5. Determination of Offering
Price . . . . . . . . . . . . *
6. Dilution . . . . . . . . . . . Dilution
7. Selling Security Holders . . . Principal and Selling Shareholders
8. Plan of Distribution . . . . . Front Cover Page
9. Description of Securities
to be Registered . . . . . . . Description of Securities
10. Interest of Named Experts
and Counsel . . . . . . . . . Legal Matters; Experts
11. Information with Respect to
the Registrant . . . . . . . Prospectus Summary; Risk Factors;
Dividend Policy; Capitalization;
Selected Historical Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Management;
Principal and Selling Shareholders
Certain Transactions; Description of
Securities; Executive Compensation;
Index to Financial Statements
12. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities . . *
_____________________
* Omitted because the response is in the negative or inapplicable.
<PAGE>
PROSPECTUS
Subject to Completion
Preliminary Prospectus dated May 13, 1996
====================================================================
358,335 SHARES
GUNTHER INTERNATIONAL, LTD.
COMMON STOCK
The Selling Shareholders hereby offer 358,335 shares of the
common stock (the "Shares") of Gunther International, Ltd. (the "Company")
(the "Offering"). See "Principal and Selling Shareholders." The Company's
Common Stock is quoted on the National Association of Securities Dealers
OTC Bulletin Board (the "Bulletin Board") under the symbol "SORT". On May
1, 1996, the closing bid and ask prices for the Common Stock as reported on
the Bulletin Board were $7.125 and $6.8125, respectively. See "Risk
Factors -- Disclosure Relating to Low-Price Stocks." The Company has
outstanding two classes of authorized Common Stock, the Common Stock
offered hereby and Series B Common Stock. Until December 20, 1998, the
holders of Series B Common Stock, voting separately as a class, will be
entitled to elect that number of directors equal to one more than half the
total number of directors comprising the Board. See "Description of
Securities."
Prior to the Offering, there has been a limited public market for
the Company's securities. No assurance can be given that trading will
continue after this Offering.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE
A HIGH DEGREE OF RISK. SEE "RISK FACTORS."
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May __, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission
(the "Commission"), a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Act"), with
respect to the securities offered hereby. This Prospectus, filed as a part
of the Registration Statement, does not contain certain information set
forth in or annexed as exhibits to the Registration Statement. For further
information regarding the Company and the securities offered hereby,
reference is made to the Registration Statement and to the exhibits filed
as a part thereof, which may be inspected at the offices of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 without charge or copied
upon request to the Public Reference Section of the Commission and payment
of the prescribed fee. Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein are not
necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
The Company is a reporting company under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith
files reports, proxy statements and other information with the Commission.
Reports filed by the Company with the Commission pursuant to the
information requirements of the Exchange Act may be inspected and copied at
prescribed rates at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549,
and at the following Regional Offices of the Commission: 7 World Trade
Center, New York, New York 10048 and Northwest Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must
be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. As used in this Prospectus, unless the context otherwise
requires, the "Company" refers to Gunther International, Ltd., a Delaware
corporation. Unless otherwise indicated, the information in this
Prospectus does not give effect to the exercise of issued and outstanding
warrants to purchase Common Stock or any other currently outstanding rights
to acquire Common Stock. Investors should consider carefully the
information set forth under "Risk Factors."
THE COMPANY
Gunther International, Ltd. (the "Company") designs, develops,
assembles, markets and services high-speed systems that automatically
assemble printed documents, fold, staple or bind the documents, and insert
completed documents into appropriate envelopes for mailing or other
distribution. The Company's systems are modular, incorporating equipment
designed by the Company, or designed by other manufacturers but adapted by
the Company, and are driven by personal computers using software developed
by, and proprietary to the Company. Each Company product has been created
in response to the electronic publishing revolution of the past decade,
which has enabled businesses to create large quantities of documents
through the use of non-impact laser printers on-site, at "in-house"
printing centers.
The Company believes that the modular design of its systems and
the capabilities of its software distinguish them from products of
competitors and result in a number of benefits to customers:
* The Company's software and "read before feed" sorting
technology, using lasers and other scanners to read bar
codes and other symbols coded on each sheet, manage the
speedy and accurate assembly and packaging of documents and
their preparation for distribution. In addition, the system
creates a true audit trail that can be used by customers for
auditing and quality control and as evidence of document
preparation and integrity.
* The variety of finishing processes available through the use
of modularized components and Company developed software
enables the Company to meet the individual needs of each
customer.
* The automated folding, stapling, binding and packaging of
printed documents can result in a significant reduction in
the number of personnel required for such tasks.
* The Company's systems allow quicker document processing,
higher quality of finished product and the reduction of
unneeded customer inventories of preprinted materials.
* The Company's systems enable customers to change the type of
document being assembled and to alter and personalize
documents without stopping the assembly process and without
having to use special mainframe computer programs.
To date, the Company's principal customers have been property and
casualty insurance companies, which require accurate, high-speed
preparation and distribution of personalized policies and insurance
certificates. Since 1986, insurance companies that have purchased the
Company's systems have included Aetna, Allstate Insurance Co., Blue
Cross/Blue Shield of Connecticut, Chubb & Son Insurance, Colonial Penn,
Fireman's Fund, John Hancock Mutual Life Insurance, Metropolitan Life, St.
Paul Fire & Marine Insurance and The Travelers. At December 31, 1995, the
Company had a backlog of orders for nine systems aggregating approximately
$1,317,000, compared to a backlog of approximately $4,105,000 at December
31, 1994. The Company calculates its backlog by subtracting revenues
recognized to date from the total contract price of systems in progress.
At the time the Company receives an order, the customer typically pays 50%
of the purchase price, although revenues from system sales are recognized
on the percentage of completion method over the production period of the
system. The Company provides preventive and remedial maintenance service
to customers, guaranteeing four-hour response time, as well as upgrades or
modifications to the system as they become available. The Company believes
that the market for on-line finishing equipment comprises the largest
growth segment of the electronic publishing industry. Because of its
strong history of innovative product development and its aggressive program
to respond to customer needs, the Company believes it is uniquely
positioned to serve the evolving market.
In September 1992, the Company completed a restructuring that
resulted in the infusion of capital and the assumption of control by a
group of new investors, including Park Investment Partners, Inc. ("Park"),
a corporation of which Harold S. Geneen and Gerald H. Newman are sole
stockholders. As part of the restructuring, the Company initiated several
strategies intended to increase revenues, attain profitability and improve
operations. A key element of the restructuring has been the development of
a new marketing strategy. Until early 1993, the Company relied principally
on contacts within the insurance industry, particularly among large
property and casualty insurers, and on the growing reputation of its
products to generate sales. The Company's marketing staff is actively
marketing Company systems and has targeted other types of insurance
companies as well as potential customers in the banking and finance, and
health care industries. The Company also is refining the engineering of
its systems to shorten delivery cycles (the period between the receipt by
the Company of a customer's order and the installation of a system) from as
long as nine months to as little as four or five months. By reducing the
length of the delivery cycle, the Company anticipates that it will be
better able to match its inventory requirements to production needs and
reduce costs. In addition, the Company established a software library and
increased its programming staff to enable it to more efficiently produce
customer responsive software and improve maintenance and servicing of
systems. There can be no assurance that the Company will succeed in
expanding its customer base, increasing revenues or improving operations.
The success of the Company will depend, in part, upon the conclusion of
this Offering and, possibly, the Company obtaining additional sources of
financing in the future.
The Company has suffered recurring loses from operations and may
require additional debt or equity financing to continue operations. See
"Risk Factors -- Accountants Report Substantial Doubt about the Company's
Ability to Continue as a Going Concern." The Company faces competition
from organizations that have substantially greater resources, financial and
otherwise. The Company and the market for the Company's products are in
the development stages and are subject to a high level of uncertainty. See
"Risk Factors -- Developing Market for the Company's Products."
Sales of the Company's Common Stock, including resales of the
shares offered hereby, are subject to "penny stock" rules promulgated by
the Securities and Exchange Commission that impose various sales practice
requirements on broker-dealers and may adversely impact the ability to sell
the Common Stock, See "Risk Factors -- Disclosure Relating to Low-Price
Stocks."
All of the shares of the Company's Series B Common Stock are held
by a single stockholder who voting separately as a class, is entitled to
elect a majority of the Company's Board of Directors. See "Risk Factors -
Voting Control by Holders of Series B Common Stock; Voting Agreement."
The Company was incorporated in the State of Delaware on March
22, 1978. After an initial period of inactivity, the Company engaged,
between 1981 and 1985, with a joint venture partner, in a program to
develop an automated system for packaging for distribution of Federal food
stamps. Although the Company was unsuccessful in its efforts to obtain a
Federal government contract, the technology it developed was applicable to
other uses. In 1985, Aetna requested that the Company develop finishing
systems for use in the insurance business and purchased the first systems
produced by the Company in 1986.
The Company's executive offices are located at 5 Wisconsin
Avenue, Norwich, Connecticut 06360, and its telephone number is (860) 823-
1427.
RECENT EVENTS
On April 5, 1996 The Securities and Exchange Commission dismissed
the Company's application for review of action taken by the National
Association of Securities Dealers, Inc. ("NASD") in delisting the Company's
Securities from the Nasdaq SmallCap Market. The Company's securities were
initially delisted from the Nasdaq SmallCap Market for failure to maintain
capital and surplus in excess of $1,000,000; the amount required for
continued inclusion.
No further avenues of appeal are available to the Company,
therefore, the Company must reapply to the NASD if and when its capital and
surplus exceed $2,000,000; the amount required for initial inclusion on
Nasdaq SmallCap Market. At December 31, 1995, the Company's capital and
surplus was $1,627,089.
The Company believes that the delisting of its securities from
the Nasdaq may adversely affect its ability to raise capital in the public
markets and may adversely impact the liquidity of the Common Stock. See
"Risk Factors -- "Disclosure Relating to Low-Price Stocks" and "-- Limited
Public Market: Possible Volatility of Securities Prices; OTC Bulletin
Board".
THE OFFERING
Common Stock Offered by
Selling Shareholders............... 358,335 Shares
Common Stock Outstanding
before Offerings................... 4,133,269 shares of Common Stock
and 500 shares of Series B Common
Stock (1)(2)
Common Stock to be Outstanding
after Offerings.................... 4,133,269 shares of Common Stock
and 500 shares of Series B Common
Stock (1)(2)
Risk Factors....................... An investment in Shares offered
hereby involves a high degree of
risk and immediate and substantial
dilution. See "Risk Factors" and
"Dilution."
Use of Proceeds.................... The Company will receive no
proceeds in this Offering.
OTC Bulletin Board Symbols(3) Common Stock - SORT
Warrants - SORTW
____________________________________________________________
(1) Does not include (i) 1,150,000 shares of Common Stock reserved for
issuance upon the exercise of warrants sold by the Company as a
component of units sold in the Company's initial public offering; (ii)
215,000 shares of Common Stock reserved for issuance under the
Company's 1993 Stock Option Plan and 95,000 shares of Common Stock
reserved for issuance under the Company's Founder Option Plan; (iii)
an aggregate of 200,000 shares of Common Stock reserved for issuance
upon exercise of underwriters' warrants and upon exercise of warrants
included in the units underlying such underwriters' warrants; (iv)
80,000 shares reserved for issuance upon the exercise of the warrants
issued to Park Investment Partners; (v) 43,067 shares of Common Stock
reserved for issuance upon exercise of other outstanding warrants;
(vi) the possible issuance of 106,666 shares of Common Stock upon
exercise of the Fisher Warrants and Jesselson Warrants; (vii) the
possible issuance of 50,000 shares of Common Stock upon exercise of
the Barness and Camrich Warrants; or (viii) the possible issuance of
25,000 shares of Common Stock upon exercise of the New Barness
Warrants. See "Management - Stock Option Plan" and "Certain
Transactions."
(2) Until December 20, 1998, the holders of Series B Common Stock, voting
separately as a class, will be entitled to elect that number of
directors equal to one more than half the total number of directors
comprising the Board. All of the shares of Series B Common Stock will
be held by Park. See "Risk Factors," "Management" and "Description of
Securities."
(3) OTC Bulletin Board symbols do not imply that an established trading
market exists for any of these securities, or if existing, that any
such market will be sustained.
SUMMARY FINANCIAL DATA
COMPANY
--------------------------------------------------
NINE MONTHS ENDED
-----------------
DECEMBER 31 YEARS ENDED MARCH 31
----------- --------------------
STATEMENT OF
OPERATIONS 1994 1995 1995 1994
---- ---- ---- -----
DATA (UNAUDITED) (UNAUDITED)
----------------------------------------------------------------------
Net income
(loss) $(887,246) $(2,823,798) $(3,652,445) $(3,825,951)
Loss per share $(0.23) $(0.84) $(1.08) $(1.61)
Weighted
average shares
outstanding(2) 3,825,820 3,377,740 3,383,730 2,371,220
PREDECESSOR
--------------------------------------------------
PERIOD FROM PERIOD FROM
SEPTEMBER 4, APRIL 1,
1992 TO 1992 TO YEAR ENDED MARCH 31
STATEMENT OF MARCH 31, SEPTEMBER 3,
OPERATIONS 1993 1992(1) 1991 1992
---- ------- ---- -----
DATA (UNAUDITED) (UNAUDITED)
----------------------------------------------------------------------
Net income
(loss) $(899,847) $4,064,518 $(2,872,285) $(3,132,664)
Loss per share $(0.46)
Weighted
average shares
outstanding(2) 1,968,072
March 31,
-------------------
BALANCE
SHEET DATA: December 31, 1995 1995 1994
----------------- ------ ---------
Working capital (deficit)....... $ (791,003) $ (1,143,994) $ 823,554
Total assets.................... 8,630,585 9,183,714 10,054,988
Long-term debt (excluding
current portion................. 2,261,408 1,951,108 1,638,121
Stockholders' equity............ 1,627,089 509,364 3,121,639
----------------------------------
(1) On September 4, 1992, a group of investors, including Park, acquired
control of the Company from its then controlling stockholders. For
financial reporting purposes, purchase transactions that result in a
substantial change in ownership require that a new basis of accounting
for assets and liabilities be established. Accordingly, assets have
been restated at their fair market value as of the date of the
transaction and an intangible asset has been recognized for the excess
of the proceeds received in such transaction over the fair value of
the net assets acquired. As a result, data for periods subsequent to
September 3, 1992 are not comparable in all respects to data for prior
periods. See "Certain Transactions - Recapitalization Agreement" and
Note 1 of Notes to Financial Statements.
(2) Weighted average shares of stock outstanding include all shares of
Common Stock outstanding after the Recapitalization, as adjusted for
the reverse stock split and the conversion of the Class A Preferred
Stock.
PRICE RANGE OF COMMON STOCK
The Common Stock had been listed on the NASDAQ SmallCap Market
since December 20, 1993. On April 12, 1995, the National Association of
Securities Dealers ("NASD") delisted the Common Stock from the NASDAQ
system due to the Company's failure to maintain capital and surplus of
$1,000,000. Since that date, the Common Stock has been quoted on the OTC
Bulletin Board. The table below sets forth the high and low bid quotations
for the Common Stock for the periods indicated. These over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
1994 High Low
------------------ ---- ---
First Quarter 4 1/4 3 5/8
Second Quarter 4 3/8 3 1/8
Third Quarter 4 3/4 3 1/4
Fourth Quarter 4 3/8 2 3/8
1995
------------------
First Quarter 2 15/16 1 1/4
Second Quarter 4 2 3/4
Third Quarter 5 1/4 3 1/2
Fourth Quarter 7 1/8 3 3/4
On May 1, 1996, the closing bid and ask prices for the Common Stock
were $7.125 and $6.8125, respectively. As of May 1, 1996 there were
approximately 137 record owners of the Company's Common Stock and one
record owner of the Company's Series B Common Stock.
RISK FACTORS
An investment in the Shares offered hereby involves a high degree of
risk. Prospective investors, prior to making an investment decision,
should consider carefully, in addition to the other information contained
in this Prospectus (including the financial statements and notes thereto),
the following factors.
ACCOUNTANTS REPORT SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO
CONTINUE AS A GOING CONCERN
The Company's independent certified public accountants include an
explanatory paragraph in their report dated May 26, 1995, indicating that
certain conditions raise substantial doubt about the Company's ability to
continue as a going concern. The report states that the Company has
suffered recurring losses from operations, which losses are continuing, and
may require additional debt or equity financing. The report also states
that the financial statements do not include any adjustments that might
result from the outcome of this uncertainty. The Company has undertaken
plans with respect to developing sources of capital to remove the threat to
its continuation in business as a going concern. There can be no assurance
that the Company's strategies to develop sources of capital will be
successful. See "Report of Independent Public Accountants" and Note 2 of
Notes to Financial Statements.
NET LOSSES FROM OPERATIONS; NEGATIVE WORKING CAPITAL
The Company sustained net losses of $1,424,979, $3,825,951, $3,652,445
and $887,246 during the years ended March 31, 1993 (on a pro forma basis),
1994, 1995, and the nine months ended December 31, 1995 respectively.
Losses are continuing, and the Company expects to incur losses from
operations at least through the first quarter of fiscal year 1997. The
Company's ability to achieve profitability will depend on significantly
expanding its sales of products and controlling its expenses. At December
31, 1995, current liabilities exceeded current assets by $791,003 including
approximately $388,505 of net billings in excess of costs and estimated
earnings on uncompleted contracts which are reduced as customer orders are
filled. The Company has relied upon loans which have been guaranteed by
certain stockholders and directors of the Company to fund operating losses
during the fiscal years 1995 and 1996. In addition, the Company has relied
upon infusions of equity from time to time by such stockholders and
directors. There can be no assurance that the Company will achieve or
sustain significant levels of revenues or profitable operations in the
future or that adequate financing can be arranged to fund the Company's
working capital needs. See "Selected Historical Financial Data" and
"Management's Discussion and Analysis of Results of Operations and
Financial Condition."
VOTING CONTROL BY HOLDERS OF SERIES B COMMON STOCK; VOTING AGREEMENT
Until December 20, 1998, the holders of Series B Common Stock, voting
separately as a class, will be entitled to elect that number of directors
equal to one more than one half the total number of directors comprising
the Board. All of the shares of Series B Common Stock are issued to Park.
The sole stockholders of Park are Harold S. Geneen and Gerald H. Newman.
Park owns approximately 35.7% of the issued and outstanding shares of
Common Stock and holders of an additional 174,167 shares of the issued and
outstanding Common Stock will be required by agreement with Park to vote
for its nominees until June 1, 1998. Such agreement also requires the
holders of such shares to offer them to the Company and, to the extent not
purchased by the Company, to Park before selling them to a third party. As
a result of its ownership of Series B Common Stock and Common Stock, Park
will be able to control the outcome of matters requiring a stockholder
vote, including the election of the entire Board of Directors, without the
concurrence of any of the purchasers of securities in this transaction.
The Series B Common Stock and other arrangements will allow Park to deter
hostile takeovers and prevent changes in the control or management of the
Company that it does not approve. See "Management," "Certain
Transactions," "Security Ownership of Certain Beneficial Owners and
Management" and "Description of Securities."
ROYALTY OBLIGATIONS
Under the terms of an agreement the Company entered into in connection
with its restructuring, its original stockholders, including William H.
Gunther, Jr., a founder of the Company, and Joseph E. Lamborghini, Vice
President, Administration of the Company, and William H. Gunther III are
entitled to receive royalty payments from the Company. The amount of the
payments are to equal (i) one percent of the Company's sales as shown on
the Company's annual audited financial statements covering the period
during which the right to royalty payments arises ("Company Sales") and
(ii) an additional one half percent of Company Sales, so long as the
payment of such additional amount does not reduce the Company's after tax
profits below 9% of Company Sales for the period for which the payment is
to be made, subject, in certain events, to set-off for claims against such
stockholders. The Company's obligation to pay royalties terminates upon
the payment of royalties aggregating $12,000,000.
Pursuant to a development agreement between the Company and
Connecticut Innovations, Inc., a specially chartered Connecticut
corporation ("CII"), originally entered into between the Company and CII
during 1987 (collectively and, as amended, the "Development Agreement"),
the Company agreed to pay CII royalties equal to a percentage of its net
sales of all of its products in consideration of a grant from CII to
develop two products, the F-300 Fast Feeder and the ADP Check/Statement.
The Development Agreement generally provided much needed funding to the
Company in exchange for the issuance of 500 shares of Class B Senior Non-
Convertible Preferred Stock of the Company (the "Class B Preferred Stock")
and future royalty payments based on the total sales of the Company. Under
the terms of the Development Agreement, the Company was obligated to redeem
the Class B Preferred Stock by making three equal installments of $166,667,
payable three, six and nine months following the redemption date of
September 4, 1995.
Effective December 31, 1995, the Company successfully completed
negotiations with CII, and the parties entered into a new agreement
completely amending and restating the Company's obligations under the
Development Agreement (the "Amended and Restated Development Agreement").
Under the Amended and Restated Development Agreement, (i) CII agreed to
surrender to the Company the 500 shares of Class B Preferred Stock of the
Company formerly held by CII, (ii) the Company agreed to make royalty
payments to CII based on a revised formula calculated with respect to
future systems sales of the Company, and (iii) CII agreed to waive any
prior defaults of the Company under the Development Agreement.
The revised royalty formula contained in the Amended and Restated
Development Agreement requires the Company to pay CII a royalty equal to
.67% (sixty seven hundreds of a percent) of all system sales of the Company
up to a maximum of $775,000 and provides for certain minimum annual royalty
payments between $75,000 and $175,000, payable quarterly.
If, during any quarter, the royalty computation does not exceed the
scheduled minimum payment, the minimum payment would be made instead of the
actual computed royalty amount. CII continues to have a security interest
in all of the Company's patents, trademarks and other assets as collateral
for the payment of the royalty obligations, but CII has agreed to
subordinate its security interest (except for its security interest in
patents and trademarks) in the event that the Company enters into a
financing arrangement with an institutional lender.
Payments of royalties to the original stockholders and CII are based on
Company revenues and are not related to or contingent upon the Company
attaining profitability or positive cash flow. As a result, such payments
will adversely affect operating results and divert cash resources from use
in the Company's business, and possibly at times when the Company's
liquidity and access to funding may be limited. See "Certain
Transactions."
DEPENDENCE ON SUPPLIERS, CONTRACT MANUFACTURERS AND SERVICE
The Company does not manufacture any of the hardware components of its
finishing systems and is solely dependent upon third parties to manufacture
components on a purchase order basis. The Company does not have written
long-term arrangements with such contract manufacturers. Although the
Company believes that several suppliers are available to manufacture such
products, the termination of the Company's relationship with one or more of
such contract manufacturers may result in a temporary interruption in the
manufacture and assembly of the Company's systems. The Company is not
aware of any material change in the relationships with its suppliers during
the past year, nor have any suppliers indicated an intent to materially
modify the terms on which they supply materials to the Company.
The Company also provides maintenance services to its customers and
during the fiscal year ended March 31, 1995 revenues from the provision of
such services accounted for approximately 31% of the Company's revenues.
The Company has used an independent company, DataCard Corporation
("DataCard"), to meet its maintenance obligations since 1987, except in
cases where the customer specifies that maintenance must be performed by
Company employees or the customer performs its own maintenance. In
September 1992, the Company issued a note in the principal amount of
$426,502 to DataCard as payment for services previously performed under its
contract with the Company. Principal is payable in quarterly installments
of $35,541 beginning in September 1995 and continuing until June 1998. The
Company owes DataCard an additional $200,000 for services, which were
payable beginning in September 1995 from revenues from maintenance
contracts. As of December 31, 1995, the Company had not made any payments
to Datacard. The Company is required by DataCard to direct payment for
maintenance services to a lockbox account for the benefit of DataCard until
the Company's accounts payable with DataCard are current. The Company
believes that it could replace DataCard; however, if DataCard were unable
to satisfactorily perform its obligations or if its relationship with the
Company were otherwise terminated, it could adversely affect the Company's
relationship with its customers and the Company's results of operations and
financial condition. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition" and "Business-Manufacturing," and
"Installation and Customer Service."
ABILITY TO MANAGE GROWTH
The Company's ability to substantially increase sales, delivery,
installation and maintenance of its preprocessing and postprocessing
systems remains unproven. There can be no assurance that the Company will
be successful in procuring expanded third-party sources for the manufacture
of the components of its systems, or in expanding the capabilities of its
personnel and subcontractors engaged in the installation and servicing of
them. See "Business - Manufacturing" and "Marketing and Sales."
DEVELOPING MARKET FOR THE COMPANY'S PRODUCTS
The market for finishing systems, which first developed in the mid-
1980's, is in the development stage, and market acceptance of and demand
for these systems is subject to a high level of uncertainty. The Company's
ultimate success will depend upon the rate at and extent to which large
corporations, banking and financial institutions, and governmental entities
choose to automate and personalize their electronic publishing efforts or
to replace existing equipment. There can be no assurance that the Company
will be successful in selling its systems to other businesses which may not
have the same stringent requirements for the high levels of accuracy,
confidentiality or personalization that the Company's systems are capable
of providing. See "Business - Marketing and Sales."
COMPETITION
The Company's principal competitors are Pitney-Bowes and Bell &
Howell, each of which has substantially greater resources, financial and
otherwise, than the Company. The Company believes that it competes
effectively in sales to its existing customer base because of, among other
things, the flexibility of its systems resulting from the application of
its proprietary technology. However, there can be no assurance that the
Company will have the resources to compete effectively or, in the future,
to market its systems to a greater customer base or respond to
technological changes. See "Business - Competition."
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively will depend, in part, on
its ability to continue to develop its proprietary technology. The Company
relies principally upon protective codes embedded in its software to
protect its proprietary technology. The Company also relies on non-
disclosure agreements with its employees, customers, consultants and
strategic partners. There can be no assurance that such measures are
adequate to protect the Company's proprietary technology. The Company's
business could be adversely affected by increased competition in the event
that any patent granted to it is adjudicated to be invalid or is inadequate
in scope to protect the Company's operations, or if any of the Company's
other arrangements related to technology are breached or violated.
Although the Company believes that its products and technology do not
infringe the proprietary rights of others, there can be no assurance that
third parties will not assert infringement claims in the future or that
such claims will not be successful. See "Business - Patents and
Proprietary Rights."
RELIANCE ON FINANCING BY AFFILIATES
Because of its history of losses and negative operating cash flow, the
Company has not been able to obtain financing from banks or other
traditional sources of funding. Consequently, the Company has depended on
loans and equity infusions from stockholders or their affiliates. Messrs.
Geneen and Newman have guaranteed payment of the Company's borrowings under
its line of credit with Fleet Bank, National Association, its institutional
lender ("Fleet"), which currently allows for borrowings of up to $2,000,000
for working capital purposes. Neither Mr. Geneen, Mr. Newman nor any other
stockholder has made any commitment or is otherwise required to provide
financing to the Company or to guarantee borrowings from other sources.
There can be no assurance that the Company will be able to obtain financing
from other sources, if it is required, or that affiliates of the Company
will provide financing or guarantees if financing from independent sources
is not otherwise available. In the event that Messrs. Geneen and Newman
were to be unwilling or unable to continue to guarantee the borrowings of
the Company or otherwise finance its operations during periods of continual
negative cash flows, it would materially and adversely affect the ability
of the Company to continue as a going concern. See "Certain Transactions."
LEGAL PROCEEDINGS
The Company is a defendant in an action in which the plaintiff claims,
among other things, that it has not received investment banking fees owed
to it exceeding $300,000. Closing arguments have been filed by brief and
the Company is waiting for the decision. The Company is not able to
predict the outcome of the decision. In addition, a former salesman has
commenced an action against the Company claiming damages in the amount of
$300,000. Although the Company believes that it has meritorious defenses
in both cases, it has established what it considers appropriate reserves
with respect to the claims. A loss of either claim will have a material
adverse effect on the Company. See "Business -- Legal Proceedings."
PLEDGED ASSETS
In connection with the development agreement with CII and as partial
consideration for loans made in connection therewith, in June 1992 the
Company assigned its existing, and all future patents to CII as security
for the Company's performance, while retaining the exclusive right to make,
have made, use and sell the inventions to which such patents apply. Title
to the patents will be transferred back to the Company upon its
satisfaction of the terms of the original development agreement. CII
continues to have a security interest in all of the Company's patents,
trademarks and other assets as collateral for the payment of the royalty
obligations, but CII has agreed to subordinate its security interest
(except for its security interest in patents and trademarks) in the event
that the Company enters into a financing arrangement with an institutional
lender.
KEY PERSONNEL
The Company's success is dependent to a great extent upon the
performance of management. The loss of the services of key management
personnel could, under certain circumstances, have a material adverse
effect on the Company. See "Management."
PREFERRED STOCK AUTHORIZED FOR ISSUANCE
The Company has available for issuance 500,000 shares of preferred
stock. The Board of Directors is authorized, without stockholder approval,
to issue such preferred stock in one or more series and to fix the voting
powers and the designations, preferences and relative, participating,
optional or other rights and restrictions thereof. Accordingly, the
Company may issue a series of preferred stock in the future that will have
preference over the Common Stock with respect to the payment of dividends
and upon the Company's liquidation, dissolution or winding up or have
voting or conversion rights that could adversely affect the voting power
and ownership percentage of the holders of Common Stock. The issuance of
shares of preferred stock, or the issuance of rights to purchase such
shares, could have the effect of delaying, deferring or preventing a change
of control of the Company. See "Description of Securities - Preferred
Stock."
DILUTION
This Offering involves immediate and substantial dilution between the
net tangible book value per share of Common Stock after the Offering and
the per Share public offering price. See "Dilution."
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common
Stock, and management expects that the Company's future earnings, if any,
will be retained for expansion or development of the Company's business.
See "Dividend Policy."
DISCLOSURE RELATING TO LOW-PRICE STOCKS.
The National Association of Securities Dealers, Inc. ("NASD") has
notified the Company that its securities have been delisted from NASDAQ for
failure of the Company to maintain capital and surplus in excess of
$1,000,000. The Company's Common Stock and warrants may be traded in the
non-NASDAQ over-the-counter market in what is commonly referred to as the
"OTC Bulletin Board." As a result of trading in the OTC Bulletin Board, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Common Stock or warrants. In
addition, sale of the Company's securities are now subject to a rule
promulgated by the Commission that imposes various sales practice
requirements on broker-dealers who sell securities governed by the rule to
persons other than established customers and accredited investors. For
these types of transactions, the broker-dealer must make a special
suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale.
Consequently, such delisting may have an adverse effect on the ability of
broker-dealers to sell the Common Stock, which may affect the ability of
purchasers in this Offering to sell the Common Stock in the secondary
market.
The Commission has adopted regulations which define a "penny stock" to
be any equity security that has a market price (as defined) of less than
$5.00 per share, subject to certain exceptions including for securities
authorized for quotation on the NASDAQ SmallCap Market. For any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to any transaction in a penny stock, of a disclosure
schedule prepared by the Commission relating to the penny stock market.
Disclosure also has to be made about commissions payable to both the
broker-dealer and the registered representative, and about current
quotations for the securities. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
The Company anticipates that, upon completion of this Offering, the
shares of Common Stock offered hereby will be deemed to be a "penny stock,"
on the basis that the Common Stock will have a market price of less than
$5.00 per share and will not be listed on the NASDAQ SmallCap Market.
SHARES ELIGIBLE FOR FUTURE SALE
The Company is unable to predict the effect that sales made under
Rule 144 or otherwise may have on the then-prevailing market price of the
Common Stock, but such sales could have a depressive effect in the public
market on the price of the securities offered hereby and may impair the
Company's ability to raise additional capital by the sale of its equity
securities. See "Shares of Common Stock Eligible for Future Sale."
OUTSTANDING WARRANTS AND OPTIONS
At the date of this Prospectus, the Company had outstanding warrants
exercisable to purchase an aggregate of 1,654,733 shares of Common Stock at
exercise prices ranging from $1.88 to $6.00 per share, and outstanding
options to purchase 160,000 shares of Common Stock at exercise prices
ranging from $3.25 to $3.625 per share. For the life of such warrants and
options, the holders will have the opportunity to profit from a rise in the
market price of the underlying Common Stock. Such holders may be expected
to exercise such warrants and options at a time when the Company would, in
all likelihood, be able to obtain additional financing through a sale of
its Common Stock on terms more favorable than those provided by such
warrants and options. Such exercises could result in a dilution of the
interests of the Company's public stockholders and the existence of such
warrants and options may therefore adversely affect the Company's ability
to obtain future financing and the terms of any such financing. See
"Description of Securities."
EXERCISE OF UNDERWRITERS' WARRANTS
The Company has sold warrants to the underwriters in its initial
public offering for nominal consideration. The warrants are exercisable
for units consisting of one share of Common Stock and one warrant to
purchase Common Stock. The underwriters' warrants are currently
exercisable and will continue until December 20, 1997, at a purchase price
of $7.50 per unit (150% of the public offering price of the units), each
unit consisting of one share of Common Stock and one Warrant to purchase an
additional share of Common Stock. The underwriters' warrants may have
certain dilutive effects because the holders thereof will be given the
opportunity to profit from a rise in the market price of the underlying
shares with a resulting dilution in the interest of the Company's other
stockholders. The terms on which the Company could obtain additional
capital during the life of the underwriters' warrants may be adversely
affected because the holders of the underwriters' warrants might be
expected to exercise them at a time when the Company would otherwise be
able to obtain comparable additional capital in a new offering of
securities at a price per share greater than the exercise price of the
underwriters' warrants.
The Company has agreed that, at the request of the holders under
certain circumstances, it will register under federal and state securities
laws the underwriters' warrants and/or the securities issuable thereunder.
Exercise of these registration rights could involve substantial expense to
the Company at a time when it could not afford such expenditures and may
adversely affect the terms upon which the Company may obtain additional
funding and may adversely affect the price of the Common Stock. In
addition, no prediction can be made as to the effect, if any, that sales of
shares of Common Stock or the availability of such shares for sale will
have on the market prices prevailing from time to time. Nevertheless, the
possibility that substantial amounts of Common Stock may be sold in the
public market may adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the
sale of its equity securities.
LIMITED PUBLIC MARKET; POSSIBLE VOLATILITY OF SECURITIES PRICES; OTC
BULLETIN BOARD
There has been a limited public market for the Common Stock. The
Common Stock will be quoted on the OTC Bulletin board, an NASD sponsored
and operated inter-dealer automated quotation system for equity securities
not included in the NASDAQ System. Although the Common Stock will be
quoted on the OTC Bulletin Board, there can be no assurance that a regular
trading market will be sustained, or that purchasers will be able to resell
their securities or otherwise liquidate their investment without
considerable delay, if at all. Recent history relating to the market
prices of newly public companies indicates that, from time to time, there
may be significant volatility in their market price. There can be no
assurance that the market price of the Company's securities will not be
volatile as a result of a number of factors, including the Company's
financial results or various matters affecting the stock market generally.
DILUTION
At December 31, 1995, the net tangible equity (deficit) of the Company
was ($2,289,069) or ($.56) per share. "Net tangible equity (deficit) per
share" is determined by dividing the tangible net worth of the Company
(tangible assets less the total amount of liabilities) by the number of
shares of Common Stock issued and outstanding. Since the Company will
continue to have a net tangible deficit, investors in this Offering will
have dilution per share in excess of the Offering price per share.
"Dilution" per share represents the difference between the price per share
to be paid by the New Investors and the pro forma net tangible equity
(deficit) per share immediately after this Offering.
USE OF PROCEEDS
The Company will receive no proceeds from this Offering.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common
Stock, and management expects that the Company's future earnings, if any,
will be retained for expansion or development of the Company's business.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1995.
Actual
------
Long-term debt (less current maturities)(1).............. $2,261,408
----------
Stockholders' equity:
Preferred Stock, $.001 par value; 500,000
shares authorized; no shares issued and outstanding..... --
Common Stock, $.001 par value; 16,000,000 shares authorized;
4,108,269 shares issued and outstanding (1)(2).......... 4,108
Series B Common Stock, $.001 par value, 500 shares authorized,
issued and outstanding.................................. 1
Additional paid-in capital.............................. 10,888,469
Accumulated deficit..................................... (9,265,489)
----------
Total stockholder's equity.............................. 1,627,089
----------
Total capitalization................................. $3,888,497
==========
(1) Subsequent to December 31, 1995, the Company issued 25,000 shares of
Common Stock in settlement of a $100,000 note of the Company.
(2) The foregoing calculations do not reflect (i) the possible issuance of
1,150,000 shares of Common Stock upon exercise of outstanding warrants
exercisable at a price of $6.00 per share at any time on or before
December 20, 1997; (ii) the possible issuance of an aggregate of up to
200,000 shares of Common Stock upon exercise of the underwriters'
warrants and the warrants included therein; (iii) the possible
issuance of 80,000 shares upon the exercise of warrants held by Park;
(iv) the possible issuance of 43,067 shares of Common Stock upon
exercise of outstanding warrants exercisable at a price of $1.88 per
share at any time on or before September 4, 1997; (v) the possible
issuance of 310,000 shares of Common Stock reserved, in the aggregate,
for issuance under the Company's Founder Option Plan and 1993 Stock
Option Plan; (vi) the possible issuance of 106,666 shares of Common
Stock upon exercise of the Fisher Warrants and Jesselson Warrants;
(vii) the possible issuance of 50,000 shares of Common Stock upon
exercise of the Barness and Camrich Warrants; or (viii) the possible
issuance of 25,000 shares of Common Stock upon exercise of the New
Barness Warrants.
SELECTED HISTORICAL FINANCIAL DATA
The selected financial data as of and for the nine months ended December
31, 1994 and 1995 have been derived without audit from the Company's
interim financial statements. The selected financial data as of March 31,
1994 and 1995 and for the periods from April 1, 1992 through September 3,
1992 and September 4, 1992 through March 31, 1993 and the years ended March
31, 1994 and 1995 have been derived from the financial statements of the
Company, which financial statements have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report included
elsewhere herein. Data for periods subsequent to September 3, 1992 are not
in all respects comparable to data for prior periods due to the effects of
a substantial change in the ownership of the Company completed on that
date. This data should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
and the financial statements and notes thereto that appear elsewhere
herein.
COMPANY
----------------------------------------------------------------
PERIOD FROM
NINE MONTHS ENDED SEPTEMBER 4,
DECEMBER 31 YEARS ENDED MARCH 31 1992 TO MARCH
------------------ ----------------------- 31,
1995 1994 1995 1994 1993
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
STATEMENT OF
OPERATIONS DATA:
Sales:
Systems $6,626,006 $4,997,375 $6,629,988 $5,117,151 $2,990,310
Maintenance 2,672,067 2,087,892 2,935,333 $2,458,363 1,348,189
---------- ---------- ---------- ---------- ----------
Total
sales 9,298,073 7,085,267 9,565,321 7,575,514 4,338,499
---------- ---------- ---------- ---------- ----------
Cost of sales:
Systems 3,978,768 3,170,890 4,844,531 3,017,612 1,310,957
Maintenance 1,958,981 1,723,975 2,306,597 2,146,244 1,177,947
---------- ---------- ---------- ---------- ----------
Total cost of
sales 5,937,749 4,894,865 7,151,128 5,163,856 2,488,904
---------- ---------- ---------- ---------- ----------
Selling and
administrative
expenses 3,940,667 4,645,456 5,710,062 5,743,982 2,529,405
Research &
development
expenses 150,045 168,839 79,764 356,211 171,572
---------- ---------- ---------- ---------- ----------
Operating
loss (730,388) (2,623,893) (3,375,633) (3,688,535) (851,382)
Interest and debt
conversion
expense 156,858 199,905 276,812 137,416 48,465
Other expense -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Loss before
extraordinary
item $(887,246)$(2,823,798) $(3,652,445)$(3,825,951) (899,847)
Extraordinary
item (2) -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net Income
(loss) $(887,246)$(2,823,798) $(3,652,445)$(3,825,951) $(899,847)
========== ========== ========== ========== ==========
Loss
per share $(0.23) $(0.84) $(1.08) $(1.61) $(0.46)
========== ========== ========== ========== ==========
Weighted
average shares
outstanding 3,825,820 3,377,740 3,383,730 2,371,220 1,968,072
========== ========== ========== ========== ==========
PREDECESSOR
----------------------------------------------------------------
PERIOD FROM
APRIL 1,
1992 TO YEARS ENDED MARCH 31,
SEPTEMBER 3, ---------------------
1992(1) 1992 1992
----------------- -------- ------
STATEMENT OF
OPERATIONS DATA:
Sales:
Systems $1,625,686 $2,866,390 $5,556,237
Maintenance 819,459 1,612,711 893,017
---------- ---------- ----------
Total
sales 2,445,145 4,479,101 6,449,254
---------- ---------- ----------
Cost of sales:
Systems 503,213 2,309,258 3,098,695
Maintenance 588,885 1,253,491 --
---------- ---------- ----------
Total cost of
sales 1,092,098 3,562,749 3,098,695
---------- ---------- ----------
Selling and
administrative
expenses 1,596,326 2,200,386 5,743,603
Research &
development
expenses 79,238 749,205 --
---------- ---------- ----------
Operating
loss (322,517) (2,033,239) (2,393,044)
Interest and debt
conversion
expense
Other expense --- --- --
---------- ---------- ----------
Loss before
extraordinary
item (728,854) (2,872,285) (3,132,664)
Extraordinary
item (2) --- --- --
---------- ---------- ----------
Net Income
(loss) $4,064,518 $(2,872,285) $(3,132,664)
========= ========== ==========
BALANCE SHEET DATA: MARCH 31,
----------------
DECEMBER 31, 1995 1995 1994
----------------- ------ ------
(UNAUDITED)
Working capital (deficit)..... $ (791,003) $(1,143,994) $823,554
Total assets.................. 8,630,585 9,183,714 10,054,988
Long-term debt(excluding
current portion).............. 2,261,408 1,951,108 1,638,121
Stockholders' equity.......... 1,627,089 509,364 3,121,639
(1) On September 4, 1992, a group of investors, including Park,
acquired control of the Company from its then controlling
stockholders. For financial reporting purposes, purchase
transactions that result in a substantial change in ownership
require that a new basis of accounting for assets and
liabilities be established. Accordingly, assets have been
restated at their fair market value as of the date of the
transaction and an intangible asset has been recognized for the
excess of the proceeds received in such transaction over the
fair value of the net assets acquired. As a result, data for
periods subsequent to September 3, 1992 are not comparable in
all respects to data for prior periods. See "Certain
Transactions - Recapitalization Agreement" and Note 1 of Notes
to Financial Statements.
(2) Extraordinary item represents gain realized by the Company as a
result of the forgiveness of debt and other obligations of the
Company to a vendor in exchange for the vendor receiving the
right to transfer a non-exclusive license to use certain of the
Company's technology. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition" and Note 1 of
Notes to Financial Statements.
(3) Weighted average shares of stock outstanding include all shares
of Common Stock outstanding after the Recapitalization, as
adjusted for the reverse stock split and the conversion of the
Class A Preferred Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RECENT STRATEGIC INITIATIVES
Management Changes. In February 1995, the Board of Directors
reorganized the senior management of the Company, promoting James H.
Whitney, who previously was Vice President of Sales and Marketing, to
the position of President and Chief Executive Officer. At the same
time, the prior Chief Executive Officer and Vice Chairman, Jon D.
Freeman, resigned to pursue other interests. The Board also
recruited Alan W. Morton to fill the position of Vice President and
Chief Operating Officer. Messrs. Whitney and Morton have worked
closely together for a number of years, specializing in turnaround
situations in high-tech environments.
In July 1995, the Company appointed Frederick W. Kolling III,
Certified Public Accountant, as Vice President, Chief Financial
Officer, Treasurer, and Secretary. The Company also promoted MaryAnn
Henk to the position of Financial Controller.
Marketing Strategy. As discussed above, the Company plans
aggressively to pursue other market segments to widen the potential
customer base. See "Business -- Strategy." Historically, the
Company has enjoyed considerable success in penetrating the insurance
industry, where package complexity and document integrity are well
served by the Company's sophisticated finishing systems. Although
this segment will continue to be an important source of future
revenues, the Company expects to pursue previously unexplored
opportunities in the mutual fund and banking industries, where the
increased complexity of mailing operations lend themselves to Company
solutions. The Company also will endeavor to increase its geographic
penetration beyond its traditional North American market territory.
Management believes that significant additional revenues can be
obtained from key accounts in certain European countries, as well as
from the more developed markets in Asia-Pacific.
Due to the Company's recent financial position and resulting cash
needs, the Company has been focused on consummating sales without due
regard to a coherent product pricing strategy. This practice has
resulted in an erosion of gross profit margins from historical
levels. Similarly, the Company has undertaken specific contracts
involving significant development effort without adequately
anticipating (or being reimbursed for) such efforts. Management
believes that it is possible to establish and maintain selling prices
without losing significant volume. At the same time, the Company
intends to focus its future selling efforts primarily on standard
products, while acknowledging that some degree of customization is
inherent in the type of products the Company supplies. Management
believes these actions will enhance the Company's ability to
successfully enter new markets and allow the Company to increase
gross profit margins to historical levels.
Cost Reduction. In addition to the initiatives discussed above,
Management intends aggressively to pursue product cost reduction.
Management believes that substantial cost reduction can be achieved
without compromising quality and, in some cases, while simultaneously
improving system performance. Engineering resources are currently
being devoted to redesign and reduce the cost of all major components
of the Company's systems. In addition, manufacturing operations are
being restructured to improve operating efficiency by assembling
commonly used modules in multiple lots, as opposed to assembling
components in response to individual orders. Similarly, component
parts supplied by third party suppliers are being ordered against
blanket orders for best pricing and improved supplier efficiency.
Finally, materials ordering is being coordinated more effectively
with manufacturing schedules to assure that such materials are
available when needed. As discussed below, Management believes that
these and other actions will result in a return to favorable gross
margins previously enjoyed by the Company.
CHANGE IN ACCOUNTING METHOD
Effective as of April 1, 1994, the Company adopted the percentage
of completion method of accounting for systems sales and related
costs. Previously, the Company had reported revenue and costs on
systems sales under the completed contract method of accounting. For
purposes of providing comparative statements, except where noted all
prior year financial information included in this report has been
restated to reflect this change in accounting method.
The Company believes that the percentage of completion method of
accounting is the preferable method of accounting for contracts
extending beyond one reporting period. Under the percentage of
completion method of accounting, contract revenues are recorded
ratably as the work progresses on a system and related costs are
recognized based on the estimated costs of the total contract. In
contrast, the completed contract method of accounting records
contract revenue only when a system is substantially completed. The
Company believes that the completed contract method of accounting may
generate large and potentially misleading fluctuations in reported
revenue that bear little or no relationship to the manufacturing
cycle of the Company. Under the percentage of completion method of
accounting, the revenues and profits are more evenly distributed in
the periods during which they were actually earned. This change in
accounting method will lessen the possibility of large fluctuations
in revenues and profits which may occur among the reporting periods
due to a delay in the shipment date from one week to another. The
effect of the change in accounting method is as follows:
Period from Period from
Year Ended Sept. 4, 1992 to April 1, 1992 to
March 31, 1994 March 31, 1993 Sept. 3, 1992
-------------- -------------- --------------
Effect on:
Net Income $ 136,478 $ (7,162) $ (45,989)
Earnings
Per Share .06 (.01) --
RESULTS OF OPERATIONS
NINE MONTH ENDED DECEMBER 31, 1995
COMPARED TO NINE MONTH ENDED DECEMBER 31, 1994
Net sales for the three month period ended December 31, 1995
increased 36% compared to the same period in 1994. System sales for
the three month period ended December 31, 1995 increased 36% from the
same period in 1994. Maintenance sales increased 38% over the same
three month period. Net sales for the nine month period ended
December 31, 1995 increased 31% from the same period in 1994.
Systems sales increased 33% in the nine month period ended December
31, 1995 compared to the same period in 1994. Maintenance sales rose
28% in the same nine month period. The increase in systems sales is
attributable to increased market penetration of the Company's
products and repeat orders from the existing customer base. The
increase in maintenance sales was due primarily to the increased
number of systems under maintenance contract in the field. The
systems order backlog, consisting of total order price less revenue
recognized to date for all signed orders on hand at December 31, 1995
was $1,317,000 compared to $4,105,000 at December 31, 1994. At
January 31, 1996, systems order backlog was at $2,258,000, which
reflects three additional systems sold in January, 1996.
Gross profit as a percentage of net sales for the three month
period ended December 31, 1995 increased to 37% from 28% for the same
period last year. Gross profit relating to systems sales increased
to 41% from 32% for the same three month period last year. Gross
profit on maintenance sales increased to 28% in the three month
period ended December 31, 1995 compared to 19% in the same period
last year. For the nine month period ended December 31, 1995, gross
profit as a percentage of net sales increased to 36% compared to 31%
in the same period last year. Gross profit relating to systems sales
increased to 40% from 37% for the same nine month period last year.
Gross profit on maintenance sales increased to 27% in the nine month
period ended December 31, 1995 compared to 17% in the same period
last year. The increase in gross profit for systems sales was
primarily due to fixed manufacturing expenses having been held
constant during the period and less lower margin custom work on
systems in process and completed during the current period. The
increase in gross margin for maintenance sales is primarily due to an
increase in higher priced special services provided outside the
standard maintenance agreements.
Selling and administrative expenses decreased to 40% from 70% as a
percentage of net sales for the three month period ended December 31,
1995 compared to the same period one year ago. Selling and
administrative expenses decreased to 42% from 66% as a percentage of
net sales for the nine month period ended December 31, 1995 compared
to the same period one year ago. For the three month period, 10% of
the 30% reduction (as a percentage of net sales) in selling and
administrative expenses was due to changing the estimate of royalty
expenses due to Connecticut Innovations Inc. (CII). For the nine
month period, 4% of the 24% decline was due to the same change in
estimate. The change in estimate was due to an Amendment and
Restatement of a certain Development Agreement. See "Risk Factors -
Royalty Obligations."
Research and development (R&D) expenses decreased as a percentage
of net sales to 1.2% in the three month period ended December 31,
1995 from 1.6% for the same three month period in 1994. R&D expenses
decreased as a percentage of net sales to 1.6% in the nine month
period ended December 31, 1995 from 2.4% for the same nine month
period in 1994. The percentage decrease was due to expenses
remaining approximately constant for the three month period, and
decreasing slightly for the nine month period, while revenue was
increasing during the respective periods.
Net interest expense increased to $42,192 for the three month
period ended December 31, 1995 from $37,494 for the same period last
year. Net interest expense increased to $156,858 for the nine month
period ended December 31, 1995 from $99,907 for the same period last
year. This was due to the larger balance outstanding under the
Company's revolving credit agreement. As a result of all the
foregoing, the Company incurred a net loss of $178,011 for the three
month period and $887,246 for the nine month period ended December
31, 1995.
While the Company is unable to predict when it will achieve
profitability, the Company believes that it will achieve a
substantial reduction or elimination of its operating and cash flow
losses during the next one to two years. The Company's ability to
achieve profitability will depend on its ability to increase systems
and maintenance sales and improve gross margins.
FISCAL YEAR ENDED MARCH 31, 1995
COMPARED TO FISCAL YEAR ENDED MARCH 31, 1994
Systems sales for fiscal 1995 increased $1,513,000, or 30%, from
fiscal 1994. Substantially all of this increase was attributable to
increased unit sales, rather than changes in the prices of the
Company's systems. Approximately 16 systems were completed in fiscal
1995, compared to 12 in fiscal 1994. At March 31, 1995, the systems
order backlog, consisting of total order price less revenue
recognized to date for all signed orders on hand, was $3,676,000 (or
18 systems) as compared to $2,736,000 (or 14 systems) at March 31,
1994.
Maintenance revenues increased $477,000 or 19%, as a result of the
larger number of systems in the field and inflationary price
increases in maintenance contracts between the periods.
Gross profit was essentially unchanged between the periods,
increasing slightly from $2,412,000 in fiscal 1994 to $2,414,000 in
fiscal 1995. However, the gross margin on system sales decreased
significantly from 41% in fiscal 1994 to 27% in fiscal 1995 due to an
unusually high level of custom work that the Company chose to
undertake on many of the systems that were in production during
fiscal 1995 or in process at March 31, 1995. These systems included
nonstandard features requested by customers, and the Company is
incurring higher than normal production costs resulting from the
incorporation of these features. Management believes these newly
developed features can lead to additional future sales as the Company
expands its market penetration. Management expects that the
incorporation of these features in future production will be done at
lower costs which will result in a return to the Company's historic
gross profit margins, although there can be no assurance that the
Company will be able to do so. The maintenance gross profit
percentage increased from 13% in fiscal 1994 to 21% in fiscal 1995,
reflecting an increase in requests for special services, which yield
a higher gross margin than the services covered by the Company's
standard maintenance contract.
Selling and administrative expenses decreased $34,000, or 1%, from
fiscal 1994 to fiscal 1995. The relatively unchanged level of
expenses reflects the efforts of management to hold fixed costs
steady during a period of growing sales revenues.
Research and development expenses decreased $276,000, or 78%, from
fiscal 1994 to fiscal 1995, as the Company's personnel worked to
engineer the increased number of systems sold between the periods.
The increased level of sales activity during fiscal 1995 necessitated
the diversion of resources from research and development to
production and a corresponding shift of costs from research and
development to cost of sales.
Interest expense for fiscal 1995 increased $39,000, or 29%, from
fiscal 1994, increasing from $137,000 to $177,000. This increase was
directly attributable to the increase in borrowings between the
periods. The additional borrowings were necessary to support the
continuing operating losses of the Company. Debt conversion expense
for 1995 consists of a one-time charge of $100,000 for the early
conversion of $400,000 of outstanding debt into stock.
As a result of the foregoing, the Company incurred a net loss of
$3,652,000 for the fiscal year ended March 31, 1995, as compared to a
net loss of $3,826,000 for the fiscal year ended March 31, 1994.
FISCAL YEAR ENDED MARCH 31, 1994
COMPARED TO PRO FORMA FISCAL YEAR ENDED MARCH 31, 1993
Systems sales for fiscal 1994 increased $501,000, or 11%, from pro
forma fiscal 1993. Substantially all of this increase was
attributable to increased unit sales, as opposed to an increase in
the prices of the Company's systems. Approximately 12 systems were
completed in fiscal 1994, compared to 11 in fiscal 1993. At March
31, 1994, the systems order backlog, consisting of total order price
less revenue recognized to date for all signed orders on hand, was
$2,736,000 (or 14 systems), as compared to $1,170,000 (or 5 systems)
at March 31, 1993.
Maintenance revenues increased $291,000, or 13%, as a result of
the larger number of systems in the field and inflationary price
increases in maintenance contracts between the periods.
Gross profit decreased $782,000, or 25%, from fiscal 1993 to
fiscal 1994. The gross margin percentage on system sales decreased
from 61% in fiscal 1993 to 41% in fiscal 1994. The unusually high
margin in fiscal 1993 resulted primarily from the fact that four
systems were sold to two customers in the period ended September 3,
1993, which enabled the Company to achieve significant economies of
production.
Selling and administrative expenses increased $1,509,000, or 36%,
from fiscal 1993 to fiscal 1994. Most of the increase was
attributable to increased personnel and employee benefit costs in the
Company's sales, marketing and engineering operations. The Company
added two sales people and two marketing people to further develop
the Company's presence in the marketplace. In addition, the Company
increased its sales and marketing efforts, including an expanded
presence at a major industry trade show, new marketing materials and
the use of additional resources to develop new sales leads.
Research and development expenses increased $105,000, or 42%, from
fiscal 1993 to fiscal 1994, as the Company continued its efforts to
reduce manufacturing costs, to develop a new binding method and to
develop a new folder that will increase system capacities.
After giving effect to the restructuring, interest expense for the
year ended March 31, 1993 would be approximately $82,000, as compared
to $137,000 for the year ended March 31, 1994. The increase in
interest expense was due to an increase in amounts outstanding under
financing arrangements prior to the Company's initial public offering
in December 1993 which were used primarily to support operating
losses.
As a result of the foregoing, the Company incurred a net loss of
$3,826,000 for the fiscal year ended March 31, 1994, as compared to a
net loss (on a pro forma basis) of $1,425,000 for the fiscal year
ended March 31, 1993.
FISCAL YEAR ENDED MARCH 31, 1993
COMPARED TO FISCAL YEAR ENDED MARCH 31, 1992
Net sales for the pro forma fiscal year ended March 31, 1993 were
$6,784,000, representing an increase of $2,305,000, or 51% from net
sales of $4,479,000 for the fiscal year ended March 31, 1992. The
increase was attributable to the sale of 13 systems in fiscal 1993
resulting in net sales of $4,627,000, compared to eight systems sold
in fiscal 1992 resulting in net sales of $3,380,000. Net sales from
maintenance contracts for fiscal 1993 were $2,168,000 compared to net
sales of $1,613,000 for fiscal 1992. The increase in net sales from
maintenance contracts was attributable to an increase in the number
of Company systems in service and an increase in the Company's
contract prices.
Cost of sales for fiscal 1993 was $3,581,000 representing a
decrease of $18,000 or 1% from cost of sales of $3,563,000 for fiscal
1992. Gross margins on system sales increased to approximately 61%
in fiscal 1993 from approximately 19% in fiscal 1992.
Operating expenses were $4,377,000 for fiscal 1993, representing
an increase of $1,427,000, or 48% from operating expenses of
$2,950,000 for fiscal 1992. The increase during fiscal 1993 was
attributable to the expansion of the Company's sales staff, the
formation of a marketing group, the creation of new marketing
materials including a video and increased participation in trade
shows. Operating expenses for fiscal 1993 also include costs of
$294,000 associated with financial consulting expenses incurred in
developing business plans, negotiating payment terms on outstanding
debt and providing management with advice and counsel on the
restructuring of the Company's capital base and additional royalty
expenses and amortization of the excess of cost over the net assets
acquired through the Recapitalization. Operating expenses included
research and development expenses of $749,000 and $251,000, for
fiscal 1992 and 1993, respectively. The decrease in research and
development expenses in fiscal 1993 resulted from the
reclassification of the components of 1992 research and development
costs to administrative costs in 1993. Subsequent to the
recapitalization, the Company resumed work on certain of the
suspended projects and initiated new projects.
Interest expense for fiscal 1993 was $82,000, on a pro forma basis
(giving effect to the recapitalization completed in September 1992).
The recapitalization resulted in the forgiveness of Company
indebtedness of $4,793,000, including accrued and unpaid interest of
$197,000, for fiscal 1993. Interest expense for fiscal 1992 was
$839,000.
As a result of the foregoing, the Company incurred a net loss of
$2,872,000 for fiscal 1992, compared to a net loss before
extraordinary items of $1,425,000 for fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for liquidity is to fund operations
while increasing sales and improving gross margins. The Company
derives liquidity through systems and maintenance sales (including
customer deposits), bank borrowing, financing arrangements with third
parties and, from time to time, sales of its equity securities.
During the three month period ended December 31, 1995, the Company
had a lower negative cash flow from operations of $208,504 compared
to a negative cash flow of $331,510 for the same three month period
in 1994. Additionally, the net loss for the three month period
decreased by $812,921 from the same three month period in 1994. The
net loss for the nine month period ended December 31, 1995 decreased
by $1,936,552 from the same nine month period in 1994. During the
first nine months of this fiscal year, the net cash used by operating
activities was reduced by $1,097,259 from 1994 to 1995.
The Company has a $2,000,000 revolving credit agreement with a
bank of which $1,650,000 was outstanding at December 31, 1995. In
order to induce the bank to enter into the credit facility, Messrs.
Harold S. Geneen and Gerald H. Newman, both of whom are directors and
stockholders of the Company, agreed to provide the bank with
sufficient cash collateral to secure all borrowing under the
facility. The Company believes that it received more favorable terms
and less restrictive loan covenants than would have been available to
it in the absence of the cash collateral furnished to the bank by
Messrs. Geneen and Newman. Messrs. Geneen and Newman have verbally
indicated their willingness to consider providing the bank with
additional cash collateral to permit the Company to borrow up to the
maximum amount of the credit facility during its current term,
provided there are no unforseen adverse developments affecting the
Company.
In addition to the credit facility with the bank, the Company is
actively seeking alternative sources of financing. Through these
efforts, on August 14, 1995, the Company raised $1,000,000 through a
private placement of stock. If the Company were unsuccessful in
securing alternative outside financing sources and Messrs. Geneen and
Newman were unwilling to guarantee the borrowings of the Company
during periods of continued negative cash flows, it would have a
material adverse effect on the Company.
Except for the revolving credit facilities described above, the
Company does not have any commitments for outside funding of any
kind. It must depend, therefore, upon the generation of sufficient
internally generated funds and the remaining funds available under
its revolving line of credit to fund its operations during fiscal
1996. It is possible that the Company's business may require larger
amounts of capital than the Company currently anticipates. There can
be no assurance that the Company will be able to obtain such capital.
The Company had been engaged in negotiations with CII concerning
the potential restructuring of the Company's obligations under
several agreements (collectively and, as amended, the "Development
Agreement") originally entered into between the Company and CII
during 1987. The Development Agreement generally provided much
needed funding to the Company in exchange for the issuance of 500
shares of Class B Senior Non-Convertible Preferred Stock of the
Company (the "Class B Preferred stock") and future royalty payments
based on the future systems sales of the Company.
Effective December 31, 1995, the Company successfully completed
negotiations with CII, and the parties entered into a new agreement
completely amending and restating the Company's obligations under the
Development Agreement (the "Amended and Restated Development
Agreement"). Under the Amended and Restated Development Agreement,
(i) CII agreed to surrender to the Company the 500 shares of Class B
Preferred Stock of the Company formerly held by CII, (ii) the Company
agreed to make royalty payments to CII based on a revised formula
calculated with respect to future systems sales of the Company, and
(iii) CII agreed to waive any prior defaults of the Company under the
Development Agreement.
The revised royalty formula contained in the Amended and Restated
Development Agreement requires the Company to pay CII a royalty equal
to .67% (sixty seven hundredths of a percent) of all systems sales of
the Company up to a maximum of $775,000 and provides for certain
minimum annual royalty payments, payable quarterly, as follows:
Total Minimum
Calendar Year Payments for the Year
------------- ----------------------
1996 $ 75,000
1997 $ 75,000
1998 $100,000
1999 $100,000
2000 $125,000
2001 $125,000
2002 $175,000
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Total $775,000
-------
If, during any quarter, the royalty computation does not exceed
the minimum payment derived from the foregoing table, the minimum
payment would be made instead of the actual computed royalty amount.
CII continues to have a security interest in all of the Company's
patents, trademarks and other assets as collateral for the payment of
the royalty obligations, but CII has agreed to subordinate its
security interest (except for its security interest in patents and
trademarks) in the event that the Company enters into a financing
arrangement with an institutional lender.
At December 31, 1995, total Stockholders' Equity was $1,627,089
compared to Stockholders' Equity of $509,364 at March 31, 1995. It
is the Company's intention to continue to focus on growing revenue,
concentrate on higher gross margin sales and improve on manufacturing
and purchasing efficiencies. These efforts have the potential to
further reduce losses in fiscal year 1996 compared to fiscal year
1995, and eventually improve results on a long-term basis.
INFLATION
The effect of inflation on the Company has not been significant
during the last two fiscal years.
BUSINESS
GENERAL
The Company designs, develops, assembles, markets and services
high-speed systems that automatically assemble printed documents,
fold, staple or bind the documents, as required, and insert completed
documents into appropriate envelopes for mailing or other
distribution. The Company's systems are modular, and may be
reconfigured in accordance with customer specifications, and are
controlled by Company developed and owned software.
DEVELOPMENT OF THE BUSINESS
The Company was incorporated under the laws of the State of
Delaware on March 22, 1978. After an initial period of inactivity,
the Company engaged, between 1981 and 1985, with a joint venture
partner, in a program to develop an automated system for packaging
for distribution of Federal food stamps. Although the Company was
unsuccessful in its efforts to obtain a Federal Government contract,
the technology it developed was applicable to other uses. In 1985,
Aetna Life and Casualty Company requested the Company to develop
finishing systems for use in the insurance business and purchased the
first systems produced by the Company in 1986.
The Company and Connecticut Innovations, Inc., a specially
chartered Connecticut corporation ("CII"), entered into a Development
Agreement dated as of November 16, 1989 (the "Development
Agreement"), pursuant to which CII granted the Company $461,000 to
develop two products in exchange for royalties equal to a percentage
of the Company's total net sales. The Development Agreement was
amended as of August 31, 1992 and September 30, 1993. As amended,
the Development Agreement calls for the Company to pay royalties to
CII based on net sales; license fees, if any, with respect to the
sponsored products; and net sales of any licensee of the developed
products. In addition, the Company issued $500,000 of Class B Senior
Non-Convertible Redeemable Preferred Stock ("Class B Preferred
Stock") and assigned its then existing, and all future patents to CII
to secure its obligations under the Development Agreement. Title to
the patents will be transferred back to the Company upon its
satisfaction of the terms of the original development agreement.
After payment of such obligations, under the Development Agreement,
the Company will continue to pay CII, for a period of five years, a
royalty of one percent of net sales.
Effective December 31, 1995, the Company successfully completed
negotiations with CII, and the parties entered into a new agreement
completely amending and restating the Company's obligations under the
Development Agreement (the "Amended and Restated Development
Agreement"). Under the Amended and Restated Development Agreement,
(i) CII agreed to surrender to the Company the 500 shares of Class B
Preferred Stock of the Company formerly held by CII, (ii) the Company
agreed to make royalty payments to CII based on a revised formula
calculated with respect to future systems sales of the Company, and
(iii) CII agreed to waive any prior defaults of the Company under the
Development Agreement. See "Management's Discussion and Analysis of
Operations and Financial Condition -- Liquidity and Capital
Resources."
In September 1992, the Company completed a restructuring that
resulted in the infusion of additional capital and the assumption of
control by a group of new investors, including Park Investment
Partners, Inc. ("Park"), a corporation of which Harold S. Geneen and
Gerald H. Newman are the sole stockholders. Pursuant to the
restructuring the Company received approximately $2,257,000 in equity
financing in exchange for shares of common stock, warrants to
purchase common stock and convertible preferred stock. The
convertible preferred stock was fully converted into common stock
upon completion of the initial public offering of the Company.
FINISHING SYSTEMS
Traditionally, printing of large quantities of documents has been
done primarily by using offset printing presses. The document to be
produced is engraved onto a printing plate and multiple copies are
produced rapidly and inexpensively. Offset printing produces
documents that are identical to each other. Recent advances in
computer technology have produced alternatives to offset printing
presses including non-impact laser printers. Laser printers take
data from computers and transfer the data onto a print drum with a
laser beam. Non-impact laser printing allows for variations in the
text of each document to be printed. Personalization and other
modifications to documents can be made.
Computer-directed printers are employed, in conjunction with
mainframe or personal computers, to produce documents. The largest
printers most often are placed in centralized print centers that are
near mainframe computers. More recently developed non-impact laser
printers that print five to 25 sheets per minute can be placed in any
location within offices where personal computers are concentrated.
The availability of non-impact laser printers has enabled many
businesses that generate large quantities of documents to create "in-
house" printing centers. The heaviest concentration of non-impact
laser printers is in the insurance, finance and banking industries,
and government.
The ability to generate large quantities of documents has created
a need to automate the assembly, sorting and distribution of such
documents, a process referred to as "finishing." Most of these
functions have been performed "off line," that is, without
intelligent or computer directed machines. This requires substantial
manpower and documents cannot be assembled with the same degree of
accuracy, completeness and speed as allowed by intelligent machines.
The output or finishing of documents is referred to as post
processing and includes such functions as folding, stapling, binding,
booklet making and packaging assembled documents for mailing and
other distribution. Rolls of feed paper allow for the continuous use
of printers without reloading for up to 15 hours, resulting in labor
savings. Automated processing systems also permit quicker turn-
around of documents, improve the accuracy and completeness of
assembled documents, facilitate the elimination of large inventories
of pre-printed forms and enable the operator to make changes in the
type of documents being assembled without stopping the assembly
process and without incurring the expense of designing special
mainframe computer programs.
STRATEGY
The Company's objective is to capitalize on its position as a
pioneer in the design and sale of intelligent finishing systems and
to expand its customer base. To achieve these objectives, the
Company believes that it must continue to offer systems that are
flexible enough to meet the varying needs of users and to pursue a
strategy that includes the following key elements:
Expanded Marketing Efforts. Until early 1993, the Company did
not have a marketing staff and relied for sales principally on
contacts within the insurance industry, particularly among large
property and casualty insurers, and the growing reputation of
its products. Since hiring a new management team, the Company
has been committed to aggressively marketing its systems and
expanding its customer base to include other types of insurance
companies and users in the banking and finance, and health care
industries. The Company also plans to increase its geographic
expansion beyond its traditional North American market
territory.
System flexibility. The Company remains committed to the
objective of providing modular systems to meet customer needs.
The Company's systems' modularity offers customers the ability
to have a custom designed system assembled from standard
components using software written for specific requirements.
Such systems are highly flexible and easily upgradeable.
Collaborative Development. The Company will continue to
collaborate with customers (including by organizing and
conducting user seminars) in order to develop a better
understanding of customer needs and to offer comprehensive
solutions.
Focus on Accuracy of Document Assembly. The swift, accurate
assembly of documents is critical to customer satisfaction. The
Company's systems incorporate technology, including the ability
to read bar codes on each sheet included in documents, that
check for proper page sequence, detect duplicate or missing
pages and verify recipients as each document moves down a
conveyor. Systems enable users to verify that a given document
has been processed properly, and to maintain a record of the
document. The Company continues to emphasize document integrity
in all its research, development and marketing efforts.
Focus on Customer Productivity and Costs. The Company focuses
its product development efforts on further increasing customer
productivity and the reduction of system costs while maintaining
the document integrity customers require.
SYSTEMS
The Company's principal products are the DM-2000 Dual Mailer, the
EP-4000 Electronic Publishing System, the MS-6000 Mailing System and
the FM-1000 Flat Mailer.
The DM-2000 is designed to process both flat and folded mail from
------------
the same print stream, and eliminates the need to separate print runs
by page count, a costly and time consuming process. The DM-2000 can
process documents from one page to 180 pages in length.
The EP-4000 processes flat mail and allows documents to be
------------
processed in a series of individually processed subgroups. These
subgroups can be stapled, bound, matched with other documents and
combined for insertion into a large, flat envelope by the EP-4000.
The MS-6000 processes folded documents. The MS-6000 can tri-fold
-----------
up to ten sheets and insert the documents into a No. 10 envelope, and
can half-fold up to fifteen sheets and insert the documents into a 6-
by 9-inch envelope. Postage is then automatically applied.
The FM-1000 processes flat documents that do not need stapling or
-----------
binding. The FM-1000 can either envelope or shrink wrap flat
documents.
These systems are typically comprised of some or all of the following
component modules:
System Control Module and Operator Console. The System Control
------------------------------------------
Module incorporates an IBM compatible 486-SX 33 megahertz central
processing unit with a 50 megabyte hard drive. It performs the
system's control functions and operates the system as defined by the
customized application program created by the Company after
consultations with the customer. The System Control Module
communicates with microprocessors located in each module in the
system, monitoring all system functions. Upon initiation of
operation, the System Control Module triggers the operation of a
Laser Reader or a CCD Linear Image Reader. After the resulting
information is checked against parameters contained in the system's
software, a signal is sent to the Feed Module so that the sheet can
be fed into the finishing system. A laser reader is a scanning
device which uses a laser light source to read bar-code or OMR
(Optical Mark Recognition) information. A CCD (Charged Coupled
Device) Linear Image Reader is a scanning device which is used to
read bar-code or OMR information. In the CCD Linear Image Reader,
the code being read is illuminated with ambient light rather than a
laser light source. OMR is a paper marking technology used with
mailing systems to indicate to the main system how to process the
sheets that are assembled into an envelope.
Microprocessors monitor the sensors in each module and carry out
the instructions from the System Control Module, validating that each
action initiated has been completed. If an error occurs, e.g., an
----
operation is not completed, a message is sent back to the Operator
Console for operator action. The Operator Console communicates all
messages from the system's modules to the operator through the use of
a CRT (cathode ray tube). Bar code or OMR information, scanned by
the Laser Reader or CCD Linear Image Reader, is stored on the System
Control Module's hard disk for retrieval and auditing with the
system's performance information for reporting purposes. A printer
is included with each system to provide a hard copy audit trail, and
postage reports. Communications software and a modem are provided
with each system to permit remote system diagnosis and software
updates.
Laser Reader and CCD Linear Image Reader. The Company was the
----------------------------------------
first to develop processing systems utilizing Laser Readers to scan a
bar code to identify each sheet of paper processed. Reading the bar
code at over 200 times per second, the System Control Module requires
three consecutive identical reads from the Laser Reader before the
sheets are fed into the system. Each document set is given a
sequence and completeness check from the information in the bar code
prior to feeding ("read before feed"). Corrective action, if needed,
is taken prior to the assembly or packaging of the document. Systems
also may incorporate CCD Linear Image Readers. This reading
technology returns a very precise image of the bar code or OMR image
being scanned. The CCD Linear Image Reader transmits the image to be
processed by the System Control Module approximately 2,000 times a
second. With this reading technology, bar code and OMR marks can be
used interchangeably, with reading accuracy and speed the equal of
laser reading technology.
F-300 Feeder. The F-300 is a high speed, vacuum fed system. The
------------
first stage of the feeder "shingle-feeds" the sheets from the bottom
of the bin to the second stage of the feeder. Optimum stack height
in the second stage is maintained by microprocessor control of the
first stage. A Laser Reader or CCD Linear Image Reader is located in
the second stage, where the sheets are read and fed individually at
rates of up to 30,000 sheets per hour. In the final stage, the
sheets are collected on a conveyor and document set accumulator,
which is connected to the next module. Through the use of a
diverter, the F-300 can separate particular sheets, such as banners
or trailers, from the document prior to collection on the conveyor.
F-2 Matched Document Feeder. The F-2 is a vacuum feeder that
---------------------------
cycles at more than 10,000 sheets per hour. Sheets to be processed
are placed face down in the sheet feeder input hopper. This "bottom-
feed" design permits the operator to load the hopper while the feeder
is cycling. Each sheet is verified, and double or misfeeds are
instantly detected by a double feed detector and by analysis of the
bar code data by the System Control Module. After verification, each
sheet of a document is fed face down until the document set is
complete. Incomplete or out of sequence sets stop the system and the
operator is informed of the problem through the CRT located in the
Operator Console.
F-2 Insert/Cover Feeders. These modules are vacuum feeders
------------------------
capable of feeding a wide range of paper stocks, permitting the
customization of processed documents. Controlled by the System
Control Module, these feeders are capable of feeding inserts from
three and one-half to eleven inches long and eight and one-half to
nine inches wide, and covers eight and one-half inches wide by eleven
inches long. The System Control Module initiates the proper feed
cycle upon receipt of bar code information from a Laser Reader or CCD
Linear Image Reader.
Two-Way Conveyor Module. From the feeder module, each sheet of a
-----------------------
document set is fed, face down, onto the Two-Way Conveyor until the
document set is complete. When the number of sheets in a document
set is ten or less, they are moved in the direction of the Folded
Mail Inserter. When the number of sheets in the document set is
greater than ten, but less than 200, the document set is moved in the
opposite direction toward a 10 x 13 Enveloper.
Stapler Module. The Stapler Module applies preformed staples to
--------------
the left-hand edge of a document as required by the application and
as instructed by information in the bar code. Different size staples
can be used to accommodate various package thicknesses. The maximum
number of sheets which can be stapled is 125 for 24-pound paper and
140 for 20-pound paper. The staple position ranges from 5/16 to
21/32 of an inch on the side edge and 1 1/2 inches from top and
bottom.
Spine Tape Module. The taping module automatically applies a
-----------------
water-moistened adhesive tape to the spine of the stapled document.
The result is an attractive, secure binding. The bar code controlled
system automatically selects the document to be taped. Built-in
sensors detect the beginning and end of the document. The moistened
tape is applied accurately to the document and secured by top and
bottom pressure rollers.
VeloBind<registered trademark> Punch Module. The VeloBind
--------------------------------------------
<registered trademark> Punch Module punches the paper with the four
holes required to apply the VeloBind<registered trademark> plastic
strip. Up to 20 sheets can be punched at one time. If the package
is larger than 20 sheets, the paper is punched in groups of 20 sheets
or less and accumulated prior to adding the VeloBind<registered
trademark> strip.
VeloBind<registered trademark> Fastening Module. The
-----------------------------------------------
VeloBind<registered trademark> Fastening Module is a fully automatic
binding method that can bind from two pages to approximately one inch
of paper. This binding method is designed for documents where sheets
may have to be added or deleted by the recipient at a later time.
The actual binder is made up of two plastic strips. One strip has
four flexible pins which pass through the punched paper. The second
strip with matching holes is placed over the pins on the back of the
document. The pins are bent and snapped into the grooves of the
second strip. The pins can be removed from the grooves manually to
allow the recipient to add and/or delete pages.
Folded Mail Inserter. A completed document set is moved to the
--------------------
Folded Mail Inserter for diverting oversize documents, nest folding
the document around the enclosures, inserting the complete document
set into an envelope, and sealing. The final folded product is
inserted into stuffing shoes which jog the product and provide a
guidance system for the insertion process. The envelope hopper
bottom feeds, allowing freedom of loading while running. If an
envelope failure occurs, the unit retries to allow no operator
interface. After repeated failure, the machine pauses for operator
attention. Three definable diverters are included after the Folded
Mail Inserter prior to the postage meter(s).
10 x 13 Enveloper Module. The 10 x 13 Enveloper places the
------------------------
document sets in flat pocket envelopes (flap along short side). The
envelopes can range in size from 8 3/4 to 10 inches wide to 11 1/4
inches to 13 inches long. The preglued, self-sealing envelopes are
placed on their short ends, open side up. They are fed one at a time
to the insertion station. The envelope is opened, and a receiving
shoe is slid into the envelope to form an easy entry for the
material. After insertion, the envelope is moved to the sealing
station where the flap is sealed. The completed package is then
placed onto a conveyor. This module is also capable of exception and
oversize document processing. Exception documents can be inserted
into the envelope without sealing the flap. Oversize documents can
be accumulated and placed directly onto the output conveyor.
Dual Postage Software, Interface, and Meter with Divert. This
-------------------------------------------------------
system component provides two postage meters for intermixed document
weight groups. The System Control Module calculates the amount of
postage for each document set using a formula based on sheet count
and insert weight previously supplied to the system. The System
Control Module transmits directions to the meters for controlling
which meter is to be used. If the postage amount is different than
the amount set on either meter, the product is deflected into the
divert bin.
Manifest Mail Software for Flat Mail. The most common technique
------------------------------------
used by Company systems to meet current United States Postal Service
requirements for flat manifest mail requires the manifest
identification and postal zone information to be passed to the system
in the bar code. In addition, the customer application prints the
manifest identification on the address page, above the first line of
the address, so that it is visible through the envelope window. The
manifest mail software processes the information stored in single or
multiple log files and generates reports required by the United
States Postal Service. Other alternatives are available to print a
manifest identification on the envelopes if the customer cannot print
the identification in the envelope window.
Dynamic Shrink Wrap Module. The Company's Dynamic Shrink Wrap
--------------------------
Module is specifically designed for processing variable-size
packages. The plastic wrap provides a strong, sealed package that
keeps the contents clean and dry. A shrink tunnel causes the film to
conform firmly to the package. This fully automatic, in-line system
packages intermixed stacks of paper and other products from two
sheets to 12 inches high at a rate of up to 20 packages per minute.
The module automatically adjusts the amount of film to the height of
the stack, ensuring a tight wrap and minimum waste.
MARKETING AND SALES
Until early 1993, the Company relied principally on contacts
within the insurance industry, particularly among large property and
casualty insurers, and on the growing reputation of its products to
generate sales. Since 1993, the Company's marketing staff has
actively marketed Company systems and has targeted other types of
insurance companies as well as potential customers in the banking,
finance and healthcare industries.
The Company will continue its efforts to expand sales to its
existing customer base. Based upon available industry reports,
approximately 40% of all non-impact cut sheet laser printers are used
in the insurance industry. During the fiscal year ended March 31,
1995, approximately 14.2% of the Company's system sales were to
previous purchasers of Company systems and the Company believes that
repeat sales and upgrades of existing systems will continue to be an
important source of sales. The Company organizes user group seminars
to allow customers to discuss their system requirements with each
other and the Company, and to collaborate on system design.
In 1990, the Company was selected by Xerox Corporation to serve as
a Xerox Worldwide Printing Systems Marketing Finishing Partner. This
partnership program is a formalized approach for managing
arrangements between Xerox Worldwide Printing Systems Marketing and
its partners. A Xerox Worldwide Printing Systems marketing partner
is a vendor who, with the assistance of Xerox, develops and/or
markets a high quality product which significantly enhances or
enables applications to be effectively printed and/or finished in
Xerox page printing environments. In addition, the Company has other
informal marketing arrangements with other manufacturers and
suppliers of high speed, non-impact laser printers.
CUSTOMERS
To date, the Company's principal customers have been property and
casualty insurance companies, which require accurate, high-speed
preparation and distribution of personalized policies and insurance
certificates. Since 1986, insurance companies that have purchased
the Company's systems have included Aetna, Allstate Insurance Co.,
Blue Cross/Blue Shield of Connecticut, Chubb & Son Insurance,
Colonial Penn, Fireman's Fund, John Hancock Mutual Life Insurance,
Metropolitan Life, St. Paul Fire & Marine Insurance and The
Travelers. In addition, the Company's systems have been purchased by
A. C. Nielsen, Electronic Data Systems, Nippon Telephone & Telegraph,
the State of Mississippi and Automatic Data Processing.
During fiscal 1995, the Company expanded into the mutual fund and
pharmaceutical markets with sales to customers in each of these
industries. Despite reliance on sales in the insurance industry, the
development of the business has not been dependent upon any single or
few customers. Due to the relatively high sales price of the
Company's systems, customers who place multiple machine orders within
a single year may account for more than 10% of the Company's revenues
for that year. In fiscal 1995, Allstate Insurance and Allstate Life
accounted for 10.8% and 10.4%, respectively, of the Company's
revenue. However, the Company has not relied on any of these
customers to maintain that level of sales from year to year.
At December 31, 1995, the Company had a backlog of orders for 9
systems aggregating approximately $1,317,000, compared to a backlog
of approximately $4,105,000 at December 31, 1994. At January 31,
1996, systems order backlog was at $2,258,000, which reflects three
additional systems sold in January, 1996. The Company calculates its
backlog by subtracting revenues recognized to date from the total
contract price of systems in progress. At the time the Company
receives an order from a customer, the customer typically pays 50% of
the purchase price, 40% of the purchase price is paid when the system
is approved for shipment and the last installment (typically 10% of
the purchase price) is paid within 30 days of installation. The
Company recognizes revenues on the percentage of completion method
over the production period of the system.
MANUFACTURING
The Company does not fabricate most of the hardware components of
its finishing systems and is solely dependent upon third party
suppliers to fabricate and, in some cases, assemble components and/or
sub-assemblies of a typical system. At present, the principal
suppliers of components or sub-assemblies to the Company include Bowe
Systec Inc., Carlin Machine, Crown Manufacturing Corporation and
Seiberco, Incorporated. With the exception of Bowe Systec Inc., the
Company does not have long-term supply arrangements with these
suppliers. Although the Company believes that other suppliers are
available to perform the services provided by the above companies,
the termination of the Company's relationship with one or more of
these suppliers may result in a temporary interruption in the supply,
and potentially the manufacture and shipment, of the Company's
systems. The Company is not aware of any material change in the
relationships with its suppliers during the past year, nor have any
suppliers indicated an intent to materially modify the terms on which
they supply materials to the Company. In the past, the Company has
replaced certain suppliers who have been unable to meet the Company's
requirements with respect to quality, delivery or pricing, and the
Company in the future may replace certain other suppliers for similar
reasons.
The Company manufactures, assembles and tests each system at its
facilities in Norwich, Connecticut. Each system is further tested
for hardware and software compliance with each customer's unique
application and media requirements, using customer supplied
materials. Upon satisfactory completion of such tests and customer
acceptance of the system, each system is disassembled for shipment
and reassembly at customer facilities, which is followed by less
stringent site acceptance testing and operator training.
INSTALLATION AND CUSTOMER SERVICE
The Company's systems usually can be installed at a customer's
facilities in one day. The Company typically uses a team of two
employees, who plan and carry out the installation and programming of
the systems. A Company employee will remain at the customer's facil-
ities for two to three weeks to monitor the initial operation of the
system. As part of the installation, the Company trains two
operators for one week at either the Company's or the customer's
facilities in the operation and maintenance of the system. The
Company has monthly meetings with customers to evaluate the
performance of systems. All systems are installed with a modem and
diagnostic software that enable the Company to monitor system
performance off-site. As part of each installation, the Company
includes a supply of spare parts which can be resupplied on one day's
notice. Each system has been designed to facilitate parts
replacements. The Company typically warrants each system for a
period of 90 days after installation.
The Company's customer service group is staffed with seven
employees. If a customer desires, the Company service group details
maintenance procedures that may be implemented by the customer. The
customer also may purchase the Company's maintenance agreement, which
provides for parts and labor for preventive and remedial maintenance,
as well as upgrades or modifications to the system purchased by the
customer, as they become available. Basic on-call coverage comes
with a four-hour response time guarantee; two-hour response is
available to customers upon request.
Since 1987, the Company has contracted with an outside maintenance
company, DataCard, to perform the Company's maintenance obligations,
except in cases where the customer specifies that maintenance be
performed by Company employees or the customer performs its own
maintenance. DataCard, a nationally dispatched organization with
over 400 technicians and regional technical support staff, is a
service company which maintains a variety of computer driven hardware
and paper handling equipment. DataCard has 87 base city service
locations throughout the United States. DataCard engineers currently
perform remedial and preventive maintenance on 90 Company systems
across the country. The Company entered into a contract with
DataCard on October 13, 1992 in the form of a Third Party Product
Service Agreement, which was subsequently amended on July 2, 1993 and
February 17, 1994. The Agreement, which has a term of three years,
or until satisfaction by the Company of all outstanding obligations
to DataCard, specifies the terms and rates under which maintenance
service is to be provided to the Company's customers for various
levels of maintenance support. The Agreement also specifies support
to be given by the Company to DataCard, including initial training of
DataCard personnel, product documentation, all required replacement
parts and technical support.
In September 1992, the Company issued a note in the principal
amount of $426,502 to DataCard as payment for services previously
performed under the contract with the Company. Principal is payable
in quarterly installments of $35,541 beginning in September 1995 and
continuing until 1998. The Company owes DataCard an additional
$200,000 for services, which will be payable beginning in 1995 from
revenues from maintenance contracts. As of December 31, 1995, the
Company had not made any payments to Datacard. The Company is
required by DataCard to direct payment for maintenance services to a
lockbox account for the benefit of DataCard until the Company is
current in its accounts payable account with DataCard. If the
Company subsequently defaults in the performance of its obligations
to DataCard, the lockbox account will be reinstated.
Customers can elect to have the Company train its personnel to
maintain their systems. Such training is provided for up to three
qualified technicians for three weeks at the Company's facility prior
to delivery of the system. Under this program, a spare parts kit is
purchased, and as parts are used, they are replaced at a charge to
the customer. Along with the maintenance program, the Company also
provides maintenance support of the system's software, monthly
performance meetings and telephone support for a monthly charge.
The typical cost to a customer of an annual maintenance contract
is equal to approximately 10% of the cost of the customer's system.
For the fiscal year ended March 31, 1995, revenues from customer
maintenance agreements represented approximately 31% of the Company's
net sales. The Company believes that, as it places more systems in
service, maintenance revenues will continue to account for a
significant component of its net sales.
RESEARCH AND DEVELOPMENT
The Company's principal research and development efforts have been
conducted through software and hardware development groups located at
its facility in Norwich, Connecticut. These groups focus on
improving upon and creating new applications of the Company's
technology. The Company's engineering staff also generates the
functional specifications and development schedules for each of the
Company's customers. The Company performs all material development
and engineering functions internally. The Company from time to time
engages third parties to design hardware components based upon
specifications developed by the Company.
For the fiscal years ended March 31, 1995 and 1994, the Company
incurred expenses of approximately $80,000 and $356,000,
respectively, for research and development activities.
COMPETITION
The Company's principal competitors are Pitney-Bowes and Bell &
Howell, each of which has substantially greater resources, financial
and otherwise, than the Company. The Company is not aware of any
studies concerning the size of the market for finishing systems.
However, based principally upon information from customers, the
Company believes that it has only a small share of the entire market
for finishing systems. Although the Company's market share for
finishing systems is small relative to its competition, the Company
is nonetheless successful in many situations, primarily due to the
unique capabilities of Gunther equipment to handle effectively more
complex mailing system applications. The principal competitive
factors in the Company's business are product functionality,
price/performance and reliability, and the Company believes that it
competes favorably on the basis of each of these factors. The
Company also believes that it competes effectively in sales to its
existing customer base because of, among other things, its emphasis
on document integrity, its focus on customer needs and the
flexibility of its systems resulting from the application of its
proprietary technology. However, there can be no assurance that the
Company will have the resources to compete effectively or, in the
future, to market its systems to a greater customer base or respond
to technological changes.
PATENTS AND PROPRIETARY RIGHTS
The Company has pursued an intellectual property rights strategy
to protect its proprietary product developments. The Company's
policy is to file patent applications to protect its technology, and
the inventions and improvements that may be important to the
development of its business. As a further precaution, the Company
licenses, rather than sells, its proprietary system software to
customers. The Company also relies upon trade secrets, know-how,
continuing technological innovation and licensing opportunities to
protect its intellectual property rights. However, the Company does
not consider its patent and other intellectual property rights as
material to its competitive position, which, it believes, depends on
the ability to adapt technology to customer needs and in particular
to modify software that controls system functions and, to a lesser
extent, to combine modules.
The Company has been issued 11 patents in the United States, has
two pending patent applications in the United States, and intends to
continue to file patent applications on its products and systems.
All patent applications filed by the Company are directed to salient
features of the Company's systems. The Company regards certain
computer software and service applications as proprietary. The
Company relies on non-disclosure agreements with its employees and,
where the Company regards it as necessary, with customers.
In connection with the development agreement with CII and as
partial consideration for loans made in connection therewith, in June
1992 the Company assigned its existing, and all future patents to CII
as security for the Company's performance, while retaining the
exclusive right to make, have made, use and sell the inventions to
which such patents apply. Title to the patents will be transferred
back to the Company upon its satisfaction of the terms of the
original development agreement.
Although the Company believes that patents and other intellectual
property rights may be important to its business, there can be no
assurance that patents will issue from any applications therefor, or
if patents issue, that the claims allowed will be of adequate scope
to protect the Company's technology or the issued patents or other
technology rights will not be challenged or invalidated. The
Company's business could be adversely affected by increased
competition in the event that any patent granted to it is adjudicated
to be invalid or is inadequate in scope to protect the Company's
operations, or if any of the Company's other arrangements related to
technology are breached or violated. Although the Company believes
that its products and technology do not infringe the proprietary
rights of others, there can be no assurance that third parties will
not assert infringement claims in the future or that such claims will
not be successful. Furthermore, the Company could incur substantial
costs in defending itself in patent infringement suits brought by
others and in prosecuting suits against patent infringers. See "Risk
Factors - Dependence on Proprietary Technology."
In connection with the restructuring completed by the Company in
September 1992, the Company granted to Bell & Howell a nonexclusive
license for "read before feed" technology developed and patented by
the Company. The technology previously had been licensed by the
Company to one of its component suppliers, Ascom Holding, Inc.
("Ascom"), but was not transferable by Ascom. The license granted to
Bell & Howell was in consideration for the forgiveness of
indebtedness of the Company to Ascom and the payment by Ascom of
$250,000 to CII on behalf of the Company. The Company believes that
Bell & Howell purchased the business and assets of Ascom in 1992.
The license granted to Bell & Howell is royalty free and coterminous
with the patents with respect to the licensed technology. The
Company does not believe that the license granted to Bell & Howell
has affected the Company's competitive position. To the Company's
knowledge, to date, Bell & Howell has not incorporated the technology
into its systems, and the Company believes that use of the technology
would require substantial modification of Bell & Howell's system,
including making it software driven. The Company does not regard the
technology itself as material to its competitive position, which
depends on the Company's ability to adapt technology to customer
needs and, in particular, to modify software that controls system
functions and, to a lesser extent, to combine modules. However, the
development by Bell & Howell of a software driven system based in
part on the technology could adversely affect the Company's
competitive position.
FACILITIES
The Company's principal facilities are located at 5 Wisconsin
Avenue, Norwich, Connecticut, where the Company leases approximately
40,000 square feet of space. The Company leases its facility on a
month-to-month basis which requires payment of monthly rent in the
amount of $21,000. Of the Company's space in Norwich, approximately
3,000 square feet is devoted to office and administrative uses,
approximately 34,000 square feet to engineering, development and
assembly activities, and approximately 3,000 square feet to
marketing, sales and customer service functions.
The Company also has a sales office in Charleston, Rhode Island
that is leased on a month-to-month basis for rent aggregating $400
per month.
EMPLOYEES
At December 31, 1995, the Company had 79 full-time employees,
consisting of 54 engaged in engineering and development and
manufacturing support, 12 in marketing and sales activities, seven in
customer services and six in general administrative and executive
functions. The Company does not have a collective bargaining
agreement with any of its employees and considers its relationship
with its employees to be good.
In February 1995, the Board of Directors reorganized the senior
management of the Company, promoting James H. Whitney, who previously
was Vice President of Sales and Marketing, to the position of
President and Chief Executive Officer. At the same time, the prior
Chief Executive Officer and Vice Chairman, Jon D. Freeman, resigned
to pursue other interests. The Board also recruited Alan W. Morton
to fill the position of Vice President and Chief Operating Officer.
Messrs. Morton and Whitney have worked closely together for a number
of years, specializing in turnaround situations in high-tech
environments.
In addition, in July 1995 the Board of Directors appointed
Frederick W. Kolling III Vice President, Chief Financial Officer,
Treasurer and Secretary. See "Management's Discussion and Analysis
of Operations and Financial Condition -- Recent Strategic Initiatives
-- Management Changes."
LEGAL PROCEEDINGS
The Company is a defendant in an action in which the plaintiff
claims, among other things, that it has not received investment
banking fees owed to it exceeding $300,000. Closing arguments have
been filed by brief and the Company is waiting for the decision. The
Company is not able to predict the outcome of the decision. In
addition, a former salesman has commenced an action against the
Company claiming damages in the amount of $300,000. Although the
Company believes that it has meritorious defenses in both cases it
has established what it considers appropriate reserves with respect
to the claims. A loss of either claim will have a material adverse
effect on the Company.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as
follows:
Name Age Position
------------ --- --------
Harold S. Geneen 86 Chairman of the Board of Directors
James H. Whitney 50 President, Chief Executive Officer
and Director
Alan W. Morton 57 Vice President, Chief Operating
Officer and Director
Frederick W. Kolling III 48 Vice President, Chief Financial
Officer, Treasurer, Secretary and
Director
Gerald H. Newman 54 Director
Guy W. Fiske 71 Director
J. Kenneth Hickman 67 Director
The business experience, principal occupations and employment of
each of the executive officers and directors of the Company during
the past five years, together with their periods of service as
directors and executive officers of the Company are set forth below.
Harold S. Geneen has served as Chairman of the Board and as a
Director of the Company since September, 1993. Mr. Geneen served as
Chief Executive Officer of ITT Corporation from 1959 until 1977, and
as Chairman thereof from 1965 until 1979. He has been Chairman
Emeritus of ITT since 1983. Mr. Geneen is also Chairman and a
director of First Rock Financial Corporation, an equipment leasing
company, and of Insurakco Holdings Inc., a holding company. In
addition, Mr. Geneen is a director of Investors Management
Corporation, an owner of restaurants, and of IVAX Corporation, a
pharmaceutical company.
James H. Whitney has served as the President and Chief Executive
Officer of the Company since February 1995. In 1994 he served as
President of the Intertec Group, a Company engaged in international
technology transfer. From 1990 to 1994 Mr. Whitney was President,
Sales & Services division of Summagraphics Corporation, a
manufacturer of digitizers, plotters and scanners.
Alan W. Morton joined the Company in February, 1995 as Vice
President and Chief Operating Officer. Previously he had been
President of North American Operations for Summagraphics Corporation
since 1992. Prior to that he had been President of the Digitizer
Division of Summagraphics, and before that Senior Vice President of
Operations. From 1982 to 1984 Mr. Morton was Vice President of
Operations for Electro Signal Labs, Inc. Prior to that he was
Director of Technical Services for Timex Corporation and General
Manager of TMX Taiwan, Ltd., a 4000-person manufacturing company.
Mr. Morton has extensive engineering, manufacturing and
administrative experience from prior managerial positions at Varian
Associates and Caltex Petroleum Corporation. He holds a BS degree in
Electrical Engineering and an MBA, both from the University of
Michigan.
Frederick W. Kolling III has been Vice President, Chief Financial
Officer, Treasurer and Secretary since July 1995. Prior to that,
from 1989 to July 1995, Mr. Kolling was Director of Finance for
American Power Conversion Corporation, a manufacturer of
uninterruptible power supplies. From 1984 to 1989, he was Vice
President of Finance and Administrator at Daly & Wolcott, a computer
software manufacturer and consulting firm. He is a Certified Public
Accountant and was with Price Waterhouse & Company from 1982 to 1984.
Gerald H. Newman has been a Director of the Company since
September 1993. Since 1971, Mr. Newman has been a private investor
and consultant to various high technology companies. From 1969 to
1971, Mr. Newman was a registered representative of Eastman Dillon
Union Securities. From 1962 to 1969, Mr. Newman was a certified
public accountant at the accounting firm of Hertz Herson & Co.
Guy W. Fiske has been a Director of the Company since November
1993. Mr. Fiske, a private investor, has been Chairman and Chief
Executive Officer of Fiske Associates, Inc., an investment company,
from 1984 to the present. He served as Chief Executive Officer of
Educational Publishing Corp. from 1985 to 1991. From 1984 to the
present, he has served as a Director of Bird Inc., a building
materials company. His other directorships include Graphic Controls
Corp. from 1987 to the present, Education Publishing Corp. from 1985
to the present and SEV Corp. from 1990 to the present. Mr. Fiske
also served as Deputy Secretary of Commerce, and then as
Undersecretary of Energy, from 1981 to 1983. Previously, he served
as Executive Vice President and a director of General Dynamics from
1977 to 1981, and as a Corporate Vice President of ITT Corporation
from 1968 to 1977.
J. Kenneth Hickman has been an independent business consultant
since January 1991. For twenty-seven years prior to that he was a
partner in Arthur Andersen & Co., with various responsibilities
including managing partner of the firm's New Jersey office and
director of its international business practice program. He is a
trustee of Fordham University and has served as a director and
officer of a number of not-for-profit international trade
organizations.
The holder of the shares of Series B Common Stock, Park, voting
separately as a class, has the right to elect that number of
directors equal to one more than half the total number of directors
comprising the Board. See "Description of Securities." See "Certain
Transactions" for a description of the voting agreement among Park
and certain other stockholders.
Directors hold office until the next annual meeting of
stockholders following their election, or until their successors are
elected and qualified. Officers are elected annually by the Board of
Directors and serve at the discretion of the Board.
The standing committees of the Board of Directors are the Audit
Committee and the Compensation/Stock Option Committee.
The Audit Committee of the Board of Directors consists of three
directors, each of whom are independent directors. The Audit
Committee's function is to review and report to the Board of
Directors with respect to the selection and the terms of engagement
of the Company's independent public accountants, and to maintain
communications among the Board of Directors, such independent public
accountants, and the Company's internal accounting staff with respect
to accounting and audit procedures, the implementation of
recommendations by such independent public accountants, the adequacy
of the Company's internal controls and related matters. The Audit
Committee will also review certain related-party transactions and any
potential conflict-of-interest situations involving officers,
directors or stockholders beneficially owning more than 10% of an
equity security of the Company.
The Compensation/Stock Option Committee consists of Messrs. Geneen
and Newman, both of whom are independent directors. The
Compensation/Stock Option Committee's function is to review and
approve annual salaries and bonuses for all employees with salaries
in excess of $100,000 and review, approve and recommend to the Board
of Directors the terms and conditions of all employee benefit plans
or changes thereto including the granting of stock options pursuant
to the Company's stock option plans.
EMPLOYMENT AGREEMENTS
James H. Whitney became the Chief Executive Officer of the Company
on February 23, 1995. Mr. Whitney and the Company intend to enter
into a formal employment agreement in the near future, however such
an agreement has not yet been executed. Mr. Whitney will receive
annual compensation of $120,000 plus a bonus based upon earnings
which is guaranteed for the first year only at $30,000. Mr. Whitney
has been granted options to purchase 75,000 shares of common stock at
an exercise price of $3.25 per share, vesting over a three-year
period.
Alan W. Morton assumed the position of Vice President and Chief
Operating Officer of the Company on February 23, 1995. Mr. Morton
and the Company intend to enter into a formal employment agreement in
the near future, however such an agreement has not yet been executed.
As compensation for his services, Mr. Morton will receive a salary of
$100,000 plus a bonus based upon earnings which is guaranteed for the
first year at $40,000. Mr. Morton has been granted options to
purchase 50,000 shares of common stock at an exercise price of $3.25
per share, vesting over a three-year period.
Frederick W. Kolling III was appointed Vice President, Chief
Financial Officer, Treasurer and Secretary in July 1995. Mr. Kolling
will receive a salary of $85,000 plus a bonus based upon earnings
which is guaranteed for the first year at $25,000. Mr. Kolling and
the Company intend to enter into a formal employment agreement in the
near future, however, such an agreement has not been executed. Mr.
Kolling has been granted options to purchase 35,000 shares of common
stock at an exercise price of $3.625 per share, vesting over a three-
year period.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid for
services rendered in all capacities to each of the Company's
executive officers who received compensation of $100,000 or more
during the fiscal years ended March 31, 1995, 1994 and 1993:
Annual Compensation (1)
-----------------------
Name and Principal Position Fiscal
-------------------------- Year Salary $ Bonus $
----- -------- ------
James H. Whitney (2) 1995 $30,577 0
President and 1994 -- --
Chief Executive Officer 1993 -- --
Jon D. Freeman (3) 1995 $94,904 0
Vice Chairman and 1994 $78,846 0
Chief Executive Officer 1993 $64,615 0
Long-Term
Compensation
--------------
Restricted
Stock Stock All Other
Awards ($) Options # Compensation $
----------- ----------- -------------
0 75,000 0
-- -- --
-- -- --
0 0 0
0 0 0
0 0 0
------------------------------------
(1) Perquisites and other personal benefits are not included
because they do not exceed the lesser of $50,000 or 10% of the
total base salary and annual bonus for each of the named
executive officers.
(2) Mr. Whitney joined the Company in fiscal 1995.
(3) Mr. Freeman was appointed Chief Executive Officer in fiscal
1994 and resigned his position in fiscal 1995.
STOCK OPTION PLAN
In December 1993, the Company adopted a Stock Option Plan,
which authorizes the Executive Compensation/Stock Option
Committee of the Board of Directors to grant to key employees and
directors of the Company and subsidiaries of the Company
incentive or non-qualified stock options. Currently, options to
purchase up to 215,000 shares of Common Stock may be granted
under the plan. The Compensation/Stock Option Committee
determines the prices and terms at which options may be granted.
Options may be exercisable in installments over the option
period, but no options may be exercised before six months or
after ten years from the date of grant.
The purpose of the Plan is to encourage stock ownership by
persons instrumental to the success of the Company, in order to
give them a greater personal interest in the Company's business.
The exercise price of any incentive stock option granted to an
eligible employee may not be less than 100% of the fair market
value of the shares underlying such option on the date of grant,
unless such employee owns more than 10% of the outstanding
Common Stock or stock of any subsidiary or parent of the Company,
in which case the exercise price of any incentive stock option
may not be less than 110% of such fair market value. No option
may be exercisable more than ten years after the date of grant
and, in the case of an incentive stock option granted to an
eligible employee owning more than 10% of the Common Stock or
stock of any subsidiary or parent of the Company, no more than
five years from its date of grant. Payment for shares purchased
upon exercise of any option may be in cash or in shares of the
Company's Common Stock. Options are not transferable, except
upon the death of the optionee. In general, upon termination of
employment of an optionee, all options granted to such person
which are not exercisable on the date of such termination
immediately expire, and any options that are exercisable expire
30 days following termination of employment, if such termination
is not the result of death or retirement, and one year following
such termination if such termination was because of death or
retirement under the provisions of any retirement plan that may
be established by the Company, or with the consent of the
Company.
In October 1993, the Company also adopted the Founders
Option Plan which authorizes the Compensation/Stock Option
Committee of the Board of Directors to grant to employees and
directors of the Company options to purchase up to 95,000 shares
of Common Stock. See "Certain Transactions - Recapitalization
Agreement."
OPTION GRANTS IN FISCAL 1995
Option/SAR Grants in Last Fiscal Year
--------------------------------------
Individual Grants
--------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Option/SARS
Underlying Granted to Exercise
Options/SARS Employees in of Base Expiration
Names Granted(#)(1) Fiscal Year(2) Price Date
----- ------------ ------------- ------- ----------
James H. Whitney 75,000 60% $3.25 2/23/2000
John D. Freeman -0- -0- N/A N/A
Potential Realizable Value at Alternative to (f)
Assumed Rates of Stock Price and (g) Grant
Appreciation for Option Term Date Value
--------------------------------------------------------------------------
(f) (g) (h)
Grant
Date
Present
5%($) 10%(5) Value $
------- -------- -------------
$67,343 $148,812
-- -- --
AGGREGATED OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR-END OPTION
VALUES
The following table provides information on option
exercises in fiscal 1995 by the executive officers named in the summary
compensation table and the value of such officers' unexercised stock
options as of March 31, 1995.
Shares Acquired Value
Name On Exercise(#) Realized($)
----- --------------- ------------
James H. Whitney -0- -0-
John D. Freeman -0- -0-
Value of Unexpected
Number of Unexercised In-the-Money Options
Options at 3/31/95 at 3/31/95
------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
---------- ------------ ---------- -------------
-0- 75,000 -0- -0-
-0- -0- -0- -0-
(1) Options granted in 1995 are exercisable with respect to 33%
of the option shares on the first anniversary of the grant
date, with an additional 33.33% of the option shares
becoming exercisable on the second anniversary date and the
final 33.34% of the option shares becoming exercisable on
the third anniversary date.
(2) The Company granted options representing 125,000 shares to
employees in fiscal 1995.
(3) The exercise price and tax withholding obligations related
to exercise may be paid by delivery of already owned shares
or by offset of the underlying shares subject to certain
conditions.
(4) The options were granted for a term of 5 years, subject to
earlier termination in certain events related to termination
of employment.
CERTAIN TRANSACTIONS
RECAPITALIZATION AGREEMENT
Securities Issuance. The Company entered into a
recapitalization agreement, dated as of September 4, 1992 (the
"Recapitalization Agreement"), with Park, and William H. Gunther,
Jr., Joseph E. Lamborghini, William H. Gunther III, Christine E.
Gunther, Susan G. Hotkowski and Rufus V. Smith (collectively, the
"Founding Stockholders"). Pursuant to the Recapitalization
Agreement, the Company issued (i) 1,115,000 shares of Common
Stock to Park in consideration for $582,500, paid by the
cancellation of notes from the Company in that principal amount
held by Park or its stockholders, representing a portion of the
financing in the aggregate amount of $1,007,500 provided to the
Company pending completion of the Recapitalization ("Bridge
Notes"), (ii) warrants to purchase 43,067 shares of Common Stock
at an exercise price of $1.88 per share (the number of shares and
exercise price subject, in certain events, to adjustment,
including to protect against dilution) to holders of Bridge Notes
and (iii) 2,366,657 shares of Class A Convertible Preferred Stock
at a price of $.75 per share to 27 investors, paid in cash or by
the cancellation of Bridge Notes (which will be converted into
473,331 shares of Common Stock at a price of $3.75 per share).
The shares of Common Stock issued to Park represented 85.4%
of the Common Stock issued and outstanding after completion of
the transaction (approximately 54.0%, giving effect to the
conversion of the Class A Preferred Stock into Common Stock),
with the remaining 14.6% of the Common Stock held by the Founding
Shareholders. The Recapitalization Agreement provided that until
such time as the Company conducted a public offering registered
under the Act or an additional private placement resulting in at
least $1,000,000 of additional capital, the Company would issue
such number of additional shares of Common Stock to the Founding
Stockholders as required to ensure that they would own 10% of the
Company's outstanding Common Stock, including shares issuable
upon conversion of the Class A Convertible Preferred Stock and
reserved for issuance under the Founder Option Plan, which the
Recapitalization Agreement required the Company to establish.
The Recapitalization Agreement contemplated an initial grant
under such plan of options to purchase 95,000 shares of Common
Stock, at an exercise price of $1.88 per share. The
Recapitalization Agreement specified that options would vest 25%
on each of the first, second, third and fourth anniversaries of
the date of grant, provided that (i) the vesting of options for
employees would be contingent upon their continued employment by
the Company, unless an employee was terminated without cause, and
(ii) the vesting of options granted to William H. Gunther, Jr.
would be contingent upon his continued employment by the Company
for two years from the date of the Recapitalization Agreement.
To date, no options have been granted under such plan.
Founding Stockholders Royalties. Under the terms of the
Recapitalization Agreement, the Founding Stockholders and
Robert E. Wallace (a former officer and stockholder of the
Company) are entitled to receive from the Company royalty
payments with respect to the period commencing on the first to
occur of (i) 18 months from the closing of the transactions
contemplated by the Recapitalization Agreement (the
"Recapitalization Closing"), (ii) a public offering conducted by
the Company under the Act or (iii) one or more private placements
resulting in gross proceeds to the Company of $5,000,000 or more.
The royalty payments are required to be made as partial
consideration for the agreement of the Founding Stockholders to
enter into and perform the terms of the Recapitalization
Agreement including their approval of the transaction (which
resulted in the reduction of their ownership interest from 100%
to approximately 15% of the Company voting stock), their
agreements to subject their shares to a right of first refusal,
subordinate the payment of Company debt to them, and to vote
their shares for nominees of Park. The amount of the payments
are to equal (i) one percent of the Company's sales as shown on
the Company's annual audited financial statements covering the
period during which the right to royalty payments arises
("Company Sales") and (ii) an additional one half percent of
Company Sales, so long as the payment of such additional amount
does not reduce the Company's after-tax profits below 9% of
Company Sales for the period for which the payment is to be made.
The Company's obligation to pay royalties terminates upon the
payment of royalties aggregating $12,000,000 and does not
terminate prior to payment in full of such amount. The Company
may set off against royalty payments any losses exceeding, in the
aggregate, $50,000, incurred by the Company arising from the
breach of any covenant, representation or warranty of the
Founding Stockholders in the Recapitalization Agreement (the
amount of the set-off to be allocated among the Founding
Stockholders in accordance with their relative stockholdings as
of the Recapitalization Closing) or of any employment agreement
or other obligation to the Company, which loss is reduced to a
non-appealable final judgment in favor of the Company (any such
set-off being applicable only to the Founding Stockholder who
breached such obligation). The Recapitalization Agreement
requires payment of royalties within 30 days after the Company
receives its annual audited financial statements.
Registration Rights. Under the terms of the
Recapitalization Agreement, the holders of the shares of Common
Stock issued to Park and issuable upon conversion of the Class A
Preferred Stock or exercise of warrants issued to holders of
Bridge Notes and the Founding Stockholders (the "Holders") have
the right to include shares of Common Stock in the first two
registration statements filed by the Company under the Act, if a
majority of such Holders so elect and subject to the right of the
underwriter of any offering that is the subject of a registration
statement to object to the inclusion of Holders' shares in the
registration statement. Pursuant to the Recapitalization
Agreement, the Holders will pay underwriting discounts and
commission attributable to their shares and fees and
disbursements of their counsel. The Company will pay all other
expenses relating to the registration statements, including,
without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel to the Company, blue
sky fees and expenses and the expense of any special audits
incident to or required by any such registration.
Right of First Refusal. The Recapitalization Agreement
requires, if any of the Founding Stockholders desires to sell any
of his shares of Common Stock, that (i) the sale be made pursuant
to a bona fide offer from a third party and (ii) before the sale
may be made to such third party, the selling Founding Stockholder
must first offer the shares to be sold to the Company (which may
purchase all or any part of the shares so offered), next, to the
extent not purchased by the Company, to Park and then, to the
extent not purchased by the Company or Park, to the other
Founding Stockholders. Any purchaser of such shares who is not a
stockholder must agree to be bound by and comply with the
Recapitalization Agreement.
Voting Agreements. Park and the Founding Stockholders are
required by the Recapitalization Agreement to vote their shares
of Common Stock (however acquired) until June 1, 1998, as
follows: (i) as to the Founding Stockholders, for the persons
designated by Park as directors of the Company and as directed by
Park regarding the size of the Board; (ii) as to Park and each of
the Founding Stockholders, for William Gunther, Jr., until such
time as he ceases to be an employee of the Company and (iii) as
to Park and the Founding Stockholders, for one person designated
by the holders of Class A Preferred Stock. The Company is
required to use its best efforts to cause the nominees of Park,
the Founding Stockholders and holders of Class A Preferred Stock
to be recommended to, and elected by, the stockholders at each
annual meeting of stockholders, and at any special meeting of
stockholders of the Company called for the election of directors.
In addition, if Park or the holders of Class A Preferred Stock
wish to remove a director it or they designated, the Company,
Park and the Founding Stockholders are required to take such
action as may be necessary to call a special meeting of
stockholders for the purpose of effecting any such removal,
filling such vacancy or reducing the size of the board, as the
case may be, and as directed by the stockholders having such
right, and at such meeting, Park and the Founding Stockholders
will vote to accomplish such results.
Employment Agreement. In connection with the
Recapitalization Agreement, the Company entered into an
employment agreement with William H. Gunther, Jr. which provides
that he will serve as an employee of the Company and perform such
duties as the Company designates, and have the title of Vice
Chairman. The agreement had a two-year term, expiring
September 4, 1994, which was automatically renewable for an
additional two years, unless either the Company or Mr. Gunther,
Jr. notified the other in writing six months before the
expiration of the initial term that the agreement will not be
renewed. The agreement provides for a salary at the annual rate
of $200,000 and severance pay, including in the event the
agreement is not renewed, equal to 18 months salary payable in
equal monthly installments on the last day of each month over the
two-year period commencing the last day of the month of
termination. The Company also is required to continue a life
insurance policy on Mr. Gunther's life in the amount of
$1,000,000 and to provide all employee benefits generally
available to executive officers of the Company. In addition, Mr.
Gunther agreed to the cancellation of the payment of back salary
and reimbursable expenses, aggregating $92,404, to the extent the
Company made advances to Mr. Gunther for the payment of loans to
him by The Connecticut National Bank in the amount of $130,000
and federal income taxes owed by him in the amount of $31,000.
The excess of advances by the Company to Mr. Gunther over
$92,404, $68,596, is payable by Mr. Gunther on demand. There is
not any interest payable on such excess amount.
The Company has timely notified Mr. Gunther, Jr. that it
will not be renewing his employment agreement.
LOANS TO COMPANY
Prior to entering into the Recapitalization Agreement and in
anticipation of the transactions contemplated therein, the
Company obtained bridge financing through the issuance of
promissory notes to Park, certain of Park's stockholders and
others in the aggregate amount of $1,007,500 (the "Bridge
Notes"), of which $582,500 was owed to Park (the "Park Notes"),
$50,000 was owed to Harold S. Geneen and $50,000 was owed to
Gerald H. Newman. Upon the Recapitalization Closing, the Company
sold to Park 1,115,000 shares of Common Stock of the Company in
exchange for the Park Notes.
The Bridge Notes issued to Park, Harold S. Geneen and Gerald
H. Newman, among others, provided that the holders thereof were
entitled to receive warrants to purchase shares of Common Stock
of the Company upon cancellation of such Bridge Notes. Upon
cancellation of these Bridge Notes, Park received warrants to
purchase 20,400 shares of Common Stock and Harold S. Geneen and
Gerald H. Newman each received warrants to purchase 2,667 shares
of the Common Stock of the Company, exercisable until September
4, 1997 at a price of $1.88 per share. The Bridge Notes held by
Harold S. Geneen and Gerald H. Newman also entitled the holders
thereof to convert the principal amount of such Bridge Notes into
shares of the Company's Class A Preferred Stock at the rate of
$.75 of principal for each share of such Class A Preferred Stock.
Upon the Recapitalization Closing, Harold S. Geneen and Gerald H.
Newman each received 66,667 shares of Class A Preferred Stock in
exchange for their Bridge Notes (which have been converted into a
total of 26,666 shares of Common Stock at a price of $3.75 per
share). In March 1993, Park, Geneen and Newman were issued,
respectively, 17,022, 8,281 and 5,556 shares of Class A Preferred
Stock in payment of accrued and unpaid interest on the Bridge
Notes, at a price of $.75 per share (which has been converted
into 3,404, 1,656 and 1,111 shares of Common Stock, respectively,
at a price of $3.75 per share).
In March 1993, Park purchased an additional 400,000 shares
of Class A Preferred Stock at a price of $.75 per share (which
will be converted into 80,000 shares of Common Stock at a price
of $3.75 per share), as part of an additional placement by the
Company of an aggregate of 766,667 shares of Class A Preferred
Stock at a price of $.75 per share (which aggregate amount will
be converted into 153,333 shares of Common Stock at a price of
$3.75 per share). In addition, for purposes of adjusting the
capitalization of the Company to conform to the requirements set
forth in the Recapitalization Agreement, the Company issued Park
95,000 additional shares of Common Stock in March 1993. This
issuance resulted in the ownership of 90% of the aggregate number
of outstanding shares of Class A Preferred Stock and of the
Common Stock by investors other than the Founding Stockholders.
Since April 1993, Messrs. Geneen and Newman have lent to the
Company an aggregate of $855,000. Such loans bear interest at
the rate of 8% per annum. The principal amount together with all
accrued interest is payable on demand. In a prior registration
statement the Company registered the issuance of 80,000 units, in
the aggregate, to Park, a corporation of which Messrs. Geneen and
Newman are the sole stockholders, in satisfaction of $400,000
aggregate principal amount of such loans. The units and the
warrants included therein are identical to the units and the
warrants offered to the public. Effective March 31, 1995 Messrs.
Geneen and Newman have converted the remaining $455,000 principal
amount of loans plus accrued and unpaid interest for a total of
$540,172 into 196,426 shares of Common Stock at a conversion rate
of $2.75 per share.
Mr. Geneen and Mr. Newman have guaranteed payment of the
Company's borrowings under its line of credit with Fleet, which
allows for borrowings of up to $2,000,000 for working capital
purposes. As of December 31, 1995, the outstanding principal
amount of such borrowings was $1,650,000.
On October 20, 1993 and December 1, 1993, Mark Fisher and
Michael Jesselson each respectively lent the Company $200,000, at
an interest rate of 8% per annum. As partial consideration for
this loan, Mr. Fisher and Mr. Jesselson were issued warrants to
purchase 40,000 additional shares of Common Stock, at a price of
$5.00 per share. Such warrants are exercisable until December
20, 1997. On May 27, 1994 Mr. Fisher and Mr. Jesselson converted
these loans into an aggregate of 106,666 shares at a conversion
rate of $3.75 per share. In connection with the conversion, each
of Messrs. Fisher's and Jesselson's warrants were amended to be
exercisable for 53,333 shares of Common Stock at an exercise
price equal to $4.00 per share.
William H. Gunther, Jr., a stockholder of the Company and
formerly its chief executive officer, and Joseph E. Lamborghini,
an officer of the Company, have guaranteed payment of a portion
of the royalties to CII under the Development Agreement.
On October 31, 1994, the Company borrowed $200,000 from
another stockholder and an affiliated entity (collectively, the
"Barness Loan"). This indebtedness, bearing interest at 8 1/2% per
annum, matured on April 30, 1995. The Barness Loan was
convertible, at the option of the lenders, into shares of Common
Stock at a conversion price of $4.00 per share. In order to
facilitate the borrowings, the Company granted each lender a
warrant to purchase up to 25,000 shares of Common Stock (50,000
shares in the aggregate) at $4.00 per share. The warrants expire
on December 20, 1997. The Loan was repaid as of June 30, 1995.
On August 15, 1995, the Company borrowed an additional
$100,000 from a stockholder (the "New Barness Loan"). This
indebtedness, bearing interest at 8 1/2% per annum, matured on
February 15, 1996. The principal of the New Barness Loan was
convertible, at the option of the lender, into 25,000 shares of
common stock of the Company. In order to facilitate the
borrowings, the Company granted the lender warrants to purchase
25,000 shares of common stock at $4.00 per share (the "New
Barness Warrants"). The warrants expire on August 14, 2000. On
February 12, 1996, the lender exercised its option to convert the
$100,000 loan to 25,000 shares of common stock of the Company.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus, the
number of shares of Common Stock of the Company beneficially owned by each
director and current executive officers of the Company, by all directors
and executive officers of the Company as a group, by each person who to the
Company's knowledge beneficially owns more than 5% of the outstanding
Common Stock and by the Selling Shareholders.
Name and Address Amount and Nature
of Beneficial of Beneficial Percentage of
Owner(1) Ownership(2)(3) Outstanding Shares
-------------------- ----------------- ------------------
Park Investment
Partners, Inc.. . . . . . . . . . ..1,474,318(4) 35.67%
Harold S. Geneen. . . . . . . . . . .1,702,809(5) 41.20%
Gerald H. Newman. . . . . . . . . . .1,549,687(5) 37.49%
Guy W. Fiske . . . . . . . . . . . . . 32,683(6) *
J. Kenneth Hickman. . . . . . . . . . . -- N/A
James H. Whitney. . . . . . . . . . . . -- N/A
Alan W. Morton. . . . . . . . . . . . . -- N/A
Frederick W. Kolling III. . . . . . . . -- N/A
Four Partners,. . . . . . . . . . . . . 584,903 14.15%
a New York general partnership
c/o Thomas J. Tisch
667 Madison Ave.
New York, NY 10021
Maya Jesselson. . . . . . . . . . . . . 8,334 *
1301 Avenue of the Americas
New York, NY 10019
Jonathan Jesselson. . . . . . . . . . . 15,000 *
1301 Avenue of the Americas
New York, NY 10019
Roni Jesselson. . . . . . . . . . . . . 15,000 *
1301 Avenue of the Americas
New York, NY 10019
Yosepha Jesselson. . . . . . . . . . . 15,000 *
1301 Avenue of the Americas
New York, NY 10019
Micha Jesselson. . . . . . . . . . . . 15,000 *
1301 Avenue of the Americas
New York, NY 10019
Yaira Jesselson. . . . . . . . . . . . 15,000 *
1301 Avenue of the Americas
New York, NY 10019
Joshua Welch. . . . . . . . . . . . . . 33,334 *
667 Madison Avenue, 7th Floor
New York, NY 10021
Caren and Amnon Barness. . . . . . . . 25,000 *
805 Third Avenue, 21st Floor
New York, NY 10022
All directors and executive . . 1,632,002(4)(5)(6) 39.48%
officers as a group
(7 persons)
*Less than 1%
Shares Beneficially
Shares to Owned After Offering
be Sold --------------------
----- Number Percent
------- -------
-- 1,474,318(4) 35.67%
50,000 1,652,809(5) 39.99%
33,334 1,516,353(5) 36.69%
-- 32,683(6) *
-- -- N/A
-- -- N/A
-- -- N/A
-- -- N/A
133,333 451,570(0) 10.93%
8,334 -- --
15,000 -- --
15,000 -- --
15,000 -- --
15,000 -- --
15,000 -- --
33,334 -- --
25,000 -- --
-- 1,632,002(4)(5)(6) 39.48%
-------------------
(1) Unless otherwise indicated, the address for each of the
beneficial owners listed in the table is 5 Wisconsin Avenue,
Norwich, Connecticut 06360.
(2) Unless otherwise indicated, the Company believes that all
persons named in the table have sole voting and investment
power with respect to all shares of Common Stock owned by
them.
(3) Assumes that shares which the named person or group has a
contractual right to acquire within 60 days have been
acquired and are outstanding.
(4) Park, a corporation, of which Harold S. Geneen and Gerald H.
Newman are the sole stockholders, beneficially owns
1,293,418 shares of Common Stock of the Company and is
currently the holder of a stock subscription warrant
("Subscription Warrant") entitling Park to purchase 20,400
shares of the Company's Common Stock at the exercise price
("Warrant Price") of $1.88 per share, at any time prior to
September 4, 1997 (the "Term"). Includes 80,000 shares of
Common Stock included in units issued in a prior offering,
80,000 shares of Common Stock issuable upon the exercise of
warrants included in such units and 500 shares of Common
Stock issuable upon the conversion of the Series B Common
Stock.
(5) Harold S. Geneen and Gerald H. Newman each individually owns
Subscription Warrants to purchase 2,667 shares of Common
Stock at the Warrant Price during the Term. Includes the
shares beneficially owned by Park, as to which Messrs.
Geneen and Newman may be deemed to be beneficial owners.
(6) Guy W. Fiske owns Subscription Warrants to purchase 5,333
shares of Common Stock at the Warrant Price during the Term.
All of the shares of Series B Common Stock are beneficially owned
by Park Investment Partners, Inc.
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 16,000,000 shares of
Common Stock, $.001 par value per share; 500 shares of Series B
Common Stock, $.001 par value per share ("Series B Common
Stock"); 500 shares of Class B Senior Preferred Stock, $.001 par
value per share (the "Class B Preferred Stock") and 500,000
shares of Preferred Stock, $.001 par value per share. As of the
date hereof, there are issued and outstanding 4,133,269 shares of
Common Stock (after giving effect to the five to one reverse
stock split completed as of October 1, 1993); 500 shares of
Series B Common Stock; and 500 shares of Class B Preferred Stock.
The 500 shares of Series B Common Stock is owned by Park. The
Class A Preferred Stock was converted into Common Stock in
September, 1993.
The following summary is qualified in its entirety by
reference to the Restated Certificate of Incorporation (the
"Certificate of Incorporation") and the Company's Amended and
Restated By-Laws (the "By-laws"), a copy of each of which has
been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
COMMON STOCK
Each holder of Common Stock is entitled to cast one vote,
either in person or by proxy, for each share owned of record on
all matters submitted to a vote of stockholders, including the
election of directors. Until the date five years from the date
of this Prospectus, the holders of Common Stock, voting
separately as a class, will be entitled to elect that number of
directors equal to one less than one half of the total number of
directors comprising the Board of Directors (subject to the
rights, if any, of holders of shares of Preferred Stock that the
Company may issue, from time to time, to elect separately a
class of directors, which will reduce the number of directors to
be elected by holders of Common Stock). The holders of shares do
not possess cumulative voting rights, which means that the
holders of more than 50% of the outstanding shares voting for the
election of the class of directors to be elected by the Common
Stock can elect all of such directors, and, in such event, the
holders of the remaining shares will be unable to elect any of
the Company's directors.
Holders of outstanding shares of Common Stock are entitled
to share ratably in such dividends as may be declared by the
Board of Directors out of funds legally available therefor. Upon
the liquidation, dissolution, or winding up of the Company, each
outstanding share of Common Stock will be entitled to share
equally in the assets of the Company legally available for
distribution to stockholders after the payment of all debts and
other liabilities, subject to any superior rights of the holders
of any outstanding shares of Preferred Stock. See "Dividend
Policy."
Holders of the shares of Common Stock have no preemptive
rights. There are no conversion or subscription rights, and
shares are not subject to redemption. All of the outstanding
shares of Common Stock are, and the shares offered hereby will
be, when issued and paid for in accordance with the terms
thereof, duly issued, fully paid and nonassessable.
SERIES B COMMON STOCK
Until December 20, 1998, the holders of Series B Common
Stock, voting separately as a class, will be entitled to elect
that number of directors equal to one more than one half of the
total number of directors comprising the Board. The shares of
Series B Common Stock will vote together with the Common Stock on
all other matters and will be entitled to one vote per share,
except as to any matters proposed for stockholder approval to
amend, modify, or terminate the voting rights of Series B Common
Stock or to create any other class or series of Capital Stock
with preferential, senior or superior voting rights, all of which
will require approval of a majority of the outstanding Series B
Common Stock voting separately as a class. All of the shares of
Series B Common Stock are owned by Park.
Holders of Series B Common Stock will not be entitled to
receive any dividends. Upon the liquidation, dissolution or
winding up of the Company, each outstanding share of Series B
Common Stock will be entitled to receive the amount of $.001 per
share from the assets legally available for distribution to
stockholders after the payment of all debts and other
liabilities, subject to any superior rights of any outstanding
shares of Preferred Stock, on an equal basis with the shares of
Common Stock. Holders of Series B Common Stock will not have any
preemptive rights. Each outstanding share of Series B Common
Stock will be converted into one share of Common Stock on January
1, 1999, or prior to January 1, 1999, (i) at the option of the
holder, (ii) in the event of the transfer of the shares other
than to Mr. Geneen or Mr. Newman, or (iii) in the event more than
50% of the outstanding voting securities of Park no longer is
owned by Messrs. Geneen and Newman, or either of them, or a
partnership, trust or corporation of which they are the sole
partners, beneficiaries or stockholders.
CLASS B PREFERRED STOCK
The Class B Preferred Stock was issued to CII in September,
1992 as part of the amendment of certain obligations of the
Company to CII pursuant to the Development Agreement. Holders of
shares of Class B Preferred Stock are not entitled to receive
dividends or to vote upon any matter submitted to stockholders,
except (i) as required by applicable law and (ii) the number of
authorized shares or terms of Class B Preferred Stock may not be
changed without the consent of the holders of all such shares.
Each share of Class B Preferred Stock is required to be
redeemed by the Company at a redemption price of $1,000 per share
(the "Redemption Price"), to the extent there are legally
available funds for such purpose upon the first to occur of the
following events (each a "Redemption Event"): (i) six months
after the Company completes a sale of its shares which is
registered under the Act; (ii) three years after the date on
which the Company completes a sale of shares of Class A Preferred
Stock for an aggregate purchase price of $1,500,000 or more;
(iii) a conveyance of all or substantially all of the capital
stock or assets of the Company; or (iv) a merger of the Company
with or into another corporation (unless, upon consummation
thereof, the holders of voting securities of the Company own
directly or indirectly greater than 50% of the voting power to
elect directors of the surviving or acquiring corporation). The
date of the Redemption Event was September 4, 1995. The Company
is required to pay the Redemption Price in three equal
installments due on the third, sixth and ninth month following
the Redemption Event. If sufficient funds are not legally
available to redeem all of the shares of Class B Preferred Stock
then due to be redeemed, the number of shares to be redeemed from
each holder will be determined by multiplying such amount held by
each holder by a fraction, the numerator of which is the
aggregate number of shares which may legally be redeemed on such
redemption date and the denominator of which is the aggregate
number of shares held by all holders on such redemption date.
Any and all unredeemed shares shall be carried forward and
redeemed to the full extent the Company has funds legally
available for such purchase at a later date. The shares of Class
B Preferred Stock which are subject to redemption but which have
not been redeemed and as to which the Redemption Price is not
paid or set aside due to insufficient legally available funds
continue to be entitled to the dividend, and other rights,
preferences and privileges of the Class B Preferred Stock until
such shares have been redeemed and the Redemption Price has been
paid or otherwise set aside in full. The Company is required, to
the fullest extent permitted by law, to do all things necessary
to redeem the Class B Preferred Stock and make the payments
therefor required by the terms of the Company's Certificate of
Incorporation.
In the event of any liquidation, dissolution or winding up
of the affairs of the Company, each holder of shares of Class B
Preferred Stock is entitled to receive, prior and in preference
to any distribution of any of the assets or surplus funds of the
Corporation to the holders of Class A Preferred Stock, any class
or series of Preferred Stock ranking junior to the Class B
Preferred Stock, or the Common Stock of the Company, by reason of
their ownership thereof, the amount of $1,000 per share.
The Development Agreement provides that amounts paid to the
holders of Class B Preferred Stock on account of the Class B
Preferred Stock will be credited against the Company's
obligations to CII under the Development Agreement. The
Company's obligations to the holders of the Class B Preferred
Stock are limited to the amount of the Company's obligations to
CII outstanding at such time under the Development Agreement. At
such time that the Corporation has no further obligations to CII
under the Development Agreement then, without any further act or
deed, the Company may redeem all of the shares of the Class B
Preferred Stock then outstanding for an aggregate purchase price
of $1.00, such redemption to be effective upon the date the
Company gives notice of such redemption. Pursuant to
negotiations with the Company, CII agreed to surrender to the
Company the 500 shares of Class B Preferred Stock of the Company
formerly held by CII.
PREFERRED STOCK
The Preferred Stock may be issued, from time to time, in one
or more series, and the Board of Directors, without further
approval of the stockholders, is authorized to amend the
Certificate of Incorporation to fix the dividend rights and
terms, conversion rights, voting rights, redemption rights and
terms, liquidation preferences, sinking funds and any other
rights, preferences, privileges and restrictions applicable to
each such series of Preferred Stock. The Board of Directors,
without obtaining stockholder approval, may issue shares of the
Preferred Stock with voting or conversion rights that could
adversely affect the voting power of the holders of Common Stock.
The issuance of shares of Preferred Stock could be utilized,
under certain circumstances, in an attempt to prevent an
acquisition of the Company. The Company has no present intention
to issue any shares of Preferred Stock.
WARRANTS
The Company issued Warrants ("Warrants") as a component of
the units sold in the initial public offering. The Warrants were
issued in registered form pursuant to an agreement, dated
December 20, 1993 (the "Warrant Agreement"), between the Company
and American Stock Transfer Trust Co., as Warrant Agent (the
"Warrant Agent").
Each of the Warrants entitles the registered holder to
purchase one share of Common Stock. The Warrants are exercisable
until December 20, 1997 at a price of $6.00 subject to certain
adjustments. The Warrants are entitled to the benefit of
adjustments in their exercise prices and in the number of shares
of Common Stock or other securities deliverable upon the exercise
thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation, or merger.
The Company from time to time issues warrants to lenders
having substantially similar terms as the Warrants. The exercise
price of these warrants varies based on the trading price of
Common Stock on the date of issuance of such warrants.
TRANSFER AGENT
The transfer agent for the Common Stock is American Stock
Transfer & Trust Co., 40 Wall Street, New York, New York 10005.
SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE
The Company has 4,133,269 shares of Common Stock
outstanding. Of these shares, 1,686,994 shares of Common Stock
registered in this Offering and prior offerings will be freely
tradeable without restriction or further registration under the
Act, except for shares purchased by affiliates of the Company,
which will be subject to certain resale limitations of Rule 144
under the Act. The remaining 2,426,275 outstanding shares were
issued and sold by the Company in private placement transactions
in reliance upon exemptions contained in the Act and the rules
and regulations promulgated by the Commission thereunder (the
"Private Placement Shares"). All of the holders of the
outstanding restricted shares of Common Stock have registration
rights. See "Certain Transactions -Reorganization Agreement."
In general, under Rule 144, as currently in effect, subject
to the satisfaction of certain conditions, a person, including an
affiliate of the Company, who has beneficially owned restricted
shares of Common Stock for at least two years is entitled to
sell, within any three-month period, a number of shares that does
not exceed the greater of one percent of the total number of
outstanding shares of Common Stock or the average weekly trading
volume of shares of Common Stock during the four calendar weeks
preceding the sale. A person who has not been an affiliate of
the Company for at least the three-month period immediately
preceding the sale and who has beneficially owned shares of
Common Stock for at least three years is entitled to sell such
shares under Rule 144 without regard to any of the limitations
described above.
No prediction can be made of the effect, if any, that the
sale of Private Placement Shares under Rule 144 will have on the
market price of such securities prevailing from time to time.
Nevertheless, sales of substantial amounts of Private Placement
Shares in the public market may have an adverse impact on
prevailing market prices of such securities and could impair the
Company's future ability to raise capital through the sale of its
equity securities. See "Risk Factors - Limited Public Market; -
Possible Volatility of Securities Prices."
LEGAL MATTERS
The validity of the securities offered hereby will be passed
upon for the Company by Reid & Priest LLP New York, New York, who
have acted as special counsel to the Company in connection with
this Offering.
EXPERTS
The financial statements of the Company included in this
Prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority
of said firm as experts in giving said reports.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
------------------------------
Annual Financial Statements: Page No.
-------------------------- --------
Report of Independent Public Accountants F-2
Balance Sheets as of March 31, 1995 and 1994 F-4
Statements of Operations for the years ended March
31, 1995 and 1994, the period September 4, 1992 to
March 31, 1993 and the period April 1, 1992 to
September 3, 1992 F-5
Statements of Stockholders' Equity for the period
April 1, 1992 to March 31, 1995 F-6
Statements of Cash Flows for the years ended March
31, 1995 and 1994, the period September 4, 1992 to
March 31, 1993 and the period April 1, 1992 to
September 3, 1992 F-7
Notes to Financial Statements F-8
Interim Financial Statements:
-----------------------------------
Balance sheets as of December 31, 1995 (unaudited) F-23
Statements of Income -- Nine Months Ended December F-25
31, 1995 and 1994 (unaudited)
Statements of Cash Flows -- Nine Months Ended December F-26
31, 1995 and 1994 (unaudited)
Notes to Financial Statements F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gunther International, Ltd.:
We have audited the accompanying balance sheets of Gunther International,
Ltd. (the Company) (a Delaware corporation) as of March 31, 1995 and 1994,
and the related statements of operations, stockholders' equity and cash
flows for the years ended March 31, 1995 and 1994 and the period from
September 4, 1992 to March 31, 1993 (the Successor Periods) and the
statements of operations, stockholders' equity and cash flows for the
period from April 1, 1992 to September 3, 1992 (the Predecessor Period).
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of March
31, 1995 and 1994, and the results of its operations and its cash flows for
the Successor Periods and Predecessor Period in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, on September 4, 1992,
the Company entered into an agreement (the Acquisition) which resulted in a
substantial change in ownership of the Company. As a result of the
Acquisition, the financial statements for the periods after the Acquisition
are presented on a different cost basis, reflecting the fair market value
of the assets acquired, rather than the historical cost basis used for the
periods before the Acquisition, and therefore, are not comparable.
In addition, as discussed in Note 4 to the financial statements, effective
April 1, 1994, the Company changed its method of accounting for long-term
contracts, which change has been retroactively reflected in these financial
statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from
operations which are continuing and may require additional debt or equity
financing. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial
statements do not include any adjustments relating to the recoverability
and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be
unable to continue as a going concern.
/s/ Arthur Anderson LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
May 26, 1995
<PAGE>
GUNTHER INTERNATIONAL, LTD.
--------------------------
BALANCE SHEETS
---------------
MARCH 31, 1995 AND 1994
-----------------------
1995 1994
ASSETS
------
CURRENT ASSETS:
Unrestricted cash and
short-term investments $308,596 $ 1,886,115
Restricted cash and short-term
investments 300,000 339,643
Accounts receivable, net 641,397 671,340
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,197,572 546,409
Inventories 1,815,887 1,597,874
Prepaid expenses 222,228 177,401
--------- ---------
Total current assets 4,485,680 5,218,782
--------- ---------
PROPERTY AND EQUIPMENT:
Machinery and equipment 566,901 504,974
Furniture and fixtures 103,087 98,158
Leasehold improvements 66,326 38,053
--------- ---------
736,314 641,185
Less - Accumulated depreciation
and amortization (198,609) (101,177)
--------- ---------
537,705 540,008
--------- ---------
OTHER ASSETS:
Excess of cost over fair value of net
assets acquired, net 3,892,250 4,115,728
Deferred preproduction costs, net 145,140 19,163
Accounts and notes receivable from
stockholders 92,939 92,939
Investment, at lower of cost or market 30,000 30,000
Other - 38,368
--------- ---------
4,160,329 4,296,198
--------- ---------
$ 9,183,714 $10,054,988
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable to stockholders $200,000 $ -
Notes payable and current maturities of
other long-term debt 462,245 430,281
Accounts payable 1,787,341 1,274,739
Accrued expenses 347,445 399,794
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,655,838 1,266,703
Deferred service contract revenue 1,176,805 1,023,711
--------- ---------
Total current liabilities 5,629,674 4,395,228
--------- ---------
LONG-TERM DEBT:
Notes payable to stockholders - 455,000
Other long-term debt,
less current maturities 1,951,108 1,183,121
--------- ---------
1,951,108 1,638,121
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 2,
13 and 15)
CLASS B SENIOR, NON-CONVERTIBLE, REDEEMABLE
PREFERRED STOCK, $.001 par value; 500 shares
authorized, issued and outstanding 500,000 500,000
--------- ---------
CONVERTIBLE NOTES PAYABLE 593,568 -
--------- ---------
CONVERTIBLE NOTES PAYABLE TO STOCKHOLDERS - 400,000
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 500,000
shares authorized; no shares issued
or outstanding - -
Common stock, $.001 par value; 16,000,000
shares authorized; 3,596,275 and 3,293,183
shares issued and outstanding at March 31,
1995 and 1994, respectively 3,596 3,293
Series B common stock, $.001 par value; 500
shares authorized, issued and outstanding
at March 31, 1995 and 1994 1 1
Additional paid-in capital 8,884,010 7,844,143
Accumulated deficit (8,378,243) (4,725,798)
--------- ---------
509,364 3,121,639
--------- ---------
$9,183,714 $10,054,988
========== ===========
The accompanying notes are an integral
part of these financial statements.
<PAGE>
GUNTHER INTERNATIONAL, LTD.
---------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
APRIL 1, 1992 TO MARCH 31, 1995
-------------------------------
Class A Voting
Convertible
Preferred Stock Common Stock
-------------- ------------
$.001 Par Value No Par Value
Shares Amount Shares Amount
------ ------- ------ -----
PREDECESSOR:
Balance, April 1, 1992, as
previously reported - $ - $1,666 $1,250
Adjustment for the cumulative
effect of change in method
of accounting for long-term - - - -
contracts (Note 4)
--------- -------- ---------- ----------
Balance, April 1, 1992, as
restated - - 1,666 1,250
Net income for the period
April 1, 1992 to
September 3, 1992 - - - -
Stock dividend and other - - 1,334 -
--------- -------- ---------- ----------
Balance, September 3, 1992 - - 3,000 1,250
COMPANY:
September 4, 1992 transactions:
Exchange of stock - - (3,000) (1,250)
Sale of stock 2,366,657 2,367 - -
Adjustment to record effect
of push-down accounting - - - -
Reclassification of
undistributed losses of
S Corporation - - - -
Issuance of warrants - - - -
--------- -------- ---------- ----------
Balance, September 4, 1992 2,366,657 2,367 - -
Issuance of common stock - - - -
Sale of preferred stock 949,260 949 - -
Net loss for the period
September 4, 1992 to
March 31, 1993 - - - -
--------- -------- ---------- ----------
Balance, March 31, 1993 3,315,917 3,316 - -
Sale of common stock and
warrants - - - -
Conversion of notes
payable to stockholders
to common stock - - - -
Conversion of Class A Voting
convertible preferred
stock to common stock (3,315,917) (3,316) - -
Net loss - - - -
--------- -------- ---------- ----------
Balance, March 31, 1994 - - - -
Conversion of notes
payable to
stockholders to common
stock - - - -
Net loss - - - -
--------- -------- ---------- ----------
Balance, March 31, 1995 - - - -
========= ======== ========== ==========
Series B
Common Stock Common Stock
------------ ------------
$.001 Par Value No Par Value
--------------- ------------
Shares Amount Shares Amount
------ ------- ------ -----
PREDECESSOR:
Balance, April 1, 1992, as
previously reported - $ - $ - $ -
Adjustment for the cumulative
effect of change in method
of accounting for long-term - - - -
contracts (Note 4)
--------- -------- ---------- ----------
Balance, April 1, 1992, as
restated - - - -
Net income for the period
April 1, 1992 to
September 3, 1992 - - - -
Stock dividend and other - - - -
--------- -------- ---------- ----------
Balance, September 3, 1992 - - - -
COMPANY:
September 4, 1992 transactions:
Exchange of stock 190,000 190 - -
Sale of stock 1,115,000 1,115 - -
Adjustment to record effect
of push-down accounting - - - -
Reclassification of
undistributed losses of
S Corporation - - - -
Issuance of warrants - - - -
--------- -------- ---------- ----------
Balance, September 4, 1992 1,305,000 1,305 - -
Issuance of common stock 95,000 95 - -
Sale of preferred stock - - - -
Net loss for the period
September 4, 1992 to
March 31, 1993 - - - -
--------- -------- ---------- ----------
Balance, March 31, 1993 1,400,000 1,400 - -
Sale of common stock and
warrants 1,150,000 1,150 500 1
Conversion of notes
payable to stockholders
to common stock 80,000 80 - -
Conversion of Class A Voting
convertible preferred
stock to common stock 663,183 663 - -
Net loss - - - -
--------- -------- ---------- ----------
Balance, March 31, 1994 3,293,183 3,293 500 1
Conversion of notes
payable to
stockholders to common
stock 303,092 303 - -
Net loss - - - -
--------- -------- ---------- ----------
Balance, March 31, 1995 3,596,275 $3,596 500 1
========= ======== ========== ==========
Additional
Paid-in Accumulated
Capital Deficit Total
------ ------- ------
PREDECESSOR:
Balance, April 1, 1992, as
previously reported $ - $(9,244,224)
$(9,242,974)
Adjustment for the cumulative
effect of change in method
of accounting for long-term
contracts (Note 4) - 365,909 365,909
--------- -------- ----------
Balance, April 1, 1992, as
restated - (8,878,315)
(8,877,065)
Net income for the period
April 1, 1992 to
September 3, 1992 - 4,064,518 4,064,518
Stock dividend and other - - -
--------- -------- ----------
Balance, September 3, 1992 - (4,813,797)
(4,812,547) -
COMPANY:
September 4, 1992 transactions:
Exchange of stock 1,060 - -
Sale of stock 2,254,018 - 2,257,500
Adjustment to record effect
of push-down accounting - 4,619,558 4,619,558
Reclassification of
undistributed losses of
S Corporation (194,239) 194,239 -
Issuance of warrants 80,750 - 80,750
--------- -------- ----------
Balance, September 4, 1992 2,141,589 - 2,145,261
Issuance of common stock (95) - -
Sale of preferred stock 710,996 - 711,945
Net loss for the period
September 4, 1992 to
March 31, 1993 - (899,847)
(899,847)
--------- -------- ----------
Balance, March 31, 1993 2,852,490 (899,847) 1,957,359
Sale of common stock and
warrants 4,589,080 - 4,590,231
Conversion of notes
payable to stockholders
to common stock 399,920 - 400,000
Conversion of Class A Voting
convertible preferred
stock to common stock 2,653 - -
Net loss - (3,825,951)
(3,825,951)
--------- -------- ----------
Balance, March 31, 1994 7,844,143 (4,725,798) 3,121,639
Conversion of notes
payable to
stockholders to common
stock 1,039,867 - 1,040,170
Net loss - (3,652,445)
(3,652,445)
--------- -------- ----------
Balance, March 31, 1995 $8,884,010 $(8,378,243) $509,364
========== =========== ==========
The accompanying notes are an integral
part of these financial statements.
<PAGE>
GUNTHER INTERNATIONAL, LTD.
--------------------------
STATEMENTS OF OPERATIONS
------------------------
Predecessor Company
- --------------- -------------------------------------------------------
Period Period
Year Ended Year Ended September 4, April 1, 1992
March 31, March 31, 1992 to March to September
1995 1994 31, 1993 3, 1992
-------- --------- ------------ ------
SALES:
Systems $ 6,629,988 $ 5,117,151 $2,990,310 $1,625,686
Maintenance 2,935,333 2,458,363 1,348,189 819,459
----------- ----------- ---------- ----------
Total sales 9,565,321 7,575,514 4,338,499 2,445,145
----------- ----------- ---------- ----------
COST OF SALES
Systems 4,844,531 3,017,612 1,310,957 503,213
Maintenance 2,306,597 2,146,244 1,177,947 588,885
----------- ----------- ---------- ----------
Total cost
of sales 7,151,128 5,163,856 2,488,904 1,092,098
----------- ----------- ---------- ----------
Gross profit 2,414,193 2,411,658 1,849,595 1,353,047
----------- ----------- ---------- ----------
OPERATING EXPENSES:
Selling and
administrative 5,710,062 5,743,982 2,529,405 1,596,326
Research and
development 79,764 356,211 171,572 79,238
----------- ----------- ---------- ----------
5,789,826 6,100,193 2,700,977 1,675,564
----------- ----------- ---------- ----------
Operating loss (3,375,633) (3,688,535) (851,382)
(322,517)
----------- ----------- ---------- ----------
OTHER EXPENSES:
Interest, net 176,814 137,416 48,465 355,597
Debt conversion
expense 99,998 - - -
Other - - - 50,740
----------- ----------- ---------- ----------
276,812 137,416 48,465 406,337
----------- ----------- ---------- ----------
Loss before
extraordinary
item (3,652,445) (3,825,951) (899,847)
(728,854)
EXTRAORDINARY ITEM,
gain on settlement of
debt and other
obligations - - - 4,793,372
----------- ----------- ---------- ----------
Net income
(loss) $(3,652,445) $(3,825,951) $(899,847) $4,064,518
=========== =========== ========== ==========
LOSS PER COMMON
SHARE $(1.08) $(1.61) $(.46)
=========== =========== =========== ==========
WEIGHTED AVERAGE
SHARES OUTSTANDING 3,383,730 2,371,220 1,968,072
=========== =========== ========== ==========
The accompanying notes are an integral
part of these financial statements.
<PAGE>
GUNTHER INTERNATIONAL, LTD.
---------------------------
STATEMENT OF CASH FLOWS
-----------------------
Predecessor Company
- ----------- ------------------------------------------------------
Period Period
Year Ended Year Ended September 4, April 1, 1992
March 31, March 31, 1992 to March to September
1995 1994 31, 1993 3, 1992
-------- --------- ------------ ------
CASH FLOWS FROM
OPERATING
ACTIVITIES:
Net income
(loss) $(3,652,445) $(3,825,951) $(899,847) $4,064,518
Adjustments to reconcile
net income (loss) to net
cash used for operating
activities -
Extraordinary item,
gain on settlement of
debt and other
obligations - - -
(4,793,372)
Depreciation and
amortization 321,611 296,272 159,928 18,384
Loss on investment
and sale of property
and equipment 8,167 5,865 - 50,740
Debt conversion
expense 99,998 - - -
Change in operating
assets and liabilities -
Decrease (increase)
in accounts receivable,
net 29,943 (123,621) (404,132) (101,400)
Increase in
inventories (218,013) (883,529) (323,270) (23,099)
(Increase)
decrease in
prepaid
expenses and
other assets (132,436) (73,999) (121,956) 3,571
Increase (decrease)
in accounts
payable and
accrued
expenses 545,426 208,964 (25,643) 361,898
Increase (decrease)
in deferred service
contract
revenue 153,094 424,391 (28,967) (322,464)
(Decrease) increase
in billings in
excess of costs
and estimated
earnings, net (262,028) 321,020 85,340 94,538
----------- ----------- ---------- ----------
Net cash used
for operating
activities (3,106,683) (3,650,588) (1,558,547) (646,686)
----------- ----------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of
property and
equipment (105,498) (233,277) (84,805) -
Proceeds from
sale of property
and equipment 1,500 3,015 - -
----------- ----------- ---------- ----------
Net cash used
for investing
activities (103,998) (230,262) (84,805) -
----------- ----------- --------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from notes
payable and
long-term debt 1,910,844 2,171,084 - 991,097
Repayments of notes
payable and
long-term debt (317,325) (731,104) (299,680) (289,795)
Decrease (increase)
in restricted cash
and short-term
investments 39,643 (339,643) - -
Net proceeds from
sale of common
stock and warrants - 4,590,231 1,961,945 -
----------- ----------- ---------- ----------
Net cash
provided by
financing
activities 1,633,162 5,690,568 1,662,265 701,302
----------- ----------- ---------- ----------
NET (DECREASE) INCREASE
IN UNRESTRICTED CASH
AND SHORT-TERM
INVESTMENTS (1,577,519) 1,809,718 18,913 54,616
UNRESTRICTED CASH
AND SHORT-TERM
INVESTMENTS,
beginning of
period 1,886,115 76,397 57,484 2,868
----------- ----------- ---------- ----------
UNRESTRICTED CASH
AND SHORT-TERM
INVESTMENTS,
end of period $ 308,596 $ 1,886,115 $ 76,397 $ 57,484
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid
for interest $ 102,161 $ 98,264 $ 60,444 $ 35,631
Cash paid
for income
taxes 9,700 6,300 250 250
Class A voting
convertible
preferred stock,
issued for
interest - - 36,945 -
Common stock issued
for notes payable and
accrued interest 1,040,170 400,000 1,007,500 -
Issuance of common
stock warrants - - 80,750 -
The accompanying notes are an integral
part of these financial statements.
<PAGE>
GUNTHER INTERNATIONAL, LTD.
---------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
MARCH 31, 1995
--------------
1. Business and Acquisition:
------------------------
Gunther International, Ltd. (the Company) designs, develops,
assembles, markets and services high sped systems that automatically
assemble printed documents, fold, staple or bind the documents and
insert completed documents into appropriate envelopes for mailing or
other distribution. The Company was incorporated in Delaware in 1978
and currently operates from its facilities located in Norwich,
Connecticut.
In September 1993, the Board of Directors of the Company adopted a
resolution for a 5 for 1 reverse stock split of the Company's common
stock. All share and per share information in these financial
statements have been restated to retroactively reflect this stock
split.
On September 4, 1992, the Company and its stockholders entered into an
Acquisition Agreement (the Acquisition). Under the terms of the
Acquisition, the existing stockholders exchanged their 3,000 shares of
the Company's no par value common stock for 190,000 shares of newly
issued $.001 par value common stock. In addition, certain new
stockholders purchased from the Company 1,115,000 shares of $.001 par
value common stock and 2,366,657 shares of Class A voting convertible
preferred stock for an aggregate purchase price of $2,257,500. A
portion of the purchase price was paid by the cancellation of notes
from the Company in the principal amount of $1,007,500. The Company
also issued warrants to purchase 43,067 shares of $.001 par value
common stock at an exercise price of $1.88 per share to such
noteholders (see Note 9). Subsequent to September 4, 1992, the
Company issued an additional 95,000 shares of common stock to the new
stockholders for no additional consideration as an adjustment of the
September 4, 1992 Acquisition.
Due to the substantial change in ownership of the Company and the
assumption of control of the Company's Board of Directors by the new
stockholder group resulting from the Acquisition, this transaction was
accounted for as a purchase of the Company by the new stockholder
group as required by Accounting Principles Board Opinion No. 16. In
addition, under the provisions of Securities and Exchange Commission
Staff Accounting Bulletin No. 54, the purchase price has been "pushed-
down" to the financial statements of the Company to reflect the new
stockholder group's investment in the Company to the extent acquired
by the new stockholder group. As required by generally accepted
accounting principles, the existing stockholders' investment
(deficiency) was retained to the extent of their continuing
participation in the Company (10%). The Company adopted this
accounting since the new stockholder group acted as one entity in
negotiating and executing the agreements to consummate the
Acquisition.
Accordingly, the Company, as a successor entity, has recorded the
assets and liabilities of the predecessor company at estimated fair
values. The excess of the cost, equal to the stockholders' investment
upon completion of the Acquisition, over the fair market value of the
net assets acquired, has been reflected in the accompanying financial
statements of the Company as "excess of cost over fair value of net
assets acquired."
The following table summarizes the cost of the Acquisition and the
allocation of this cost to the assets acquired (in 000's):
Amount
------
Cost of Acquisition:
Investment of new stockholders $ 2,258
Existing stockholders' deficiency retained prior to change
in method of accounting for long-term contracts (Note 4) (514)
Value of warrants issued at Acquisition 81
-------
Total $ 1,825
=======
Allocation of Cost of Acquisition:
Current assets $ 2,176
Property and equipment 333
Investment 30
Excess of cost over fair value of net assets acquired 4,470
Liabilities assumed (5,184)
-------
Total $ 1,825
=======
The unaudited pro forma condensed statement of operations for the full
fiscal year ended March 31, 1993 (restated for the change in method of
accounting for long-term contracts - see Note 4) as though the
Acquisition had occurred at the beginning of this period is as
follows:
Year Ended
Pro Forma -- Unaudited March 31, 1993
--------------------- --------------
Net Sales $ 6,783,644
Net Loss (1,424,979)
Net Loss per Share (.74)
Weighted Average Shares Outstanding 1,928,597
The unaudited pro forma results of operations reflect the (1)
elimination of the extraordinary gain resulting from the forgiveness
of debt and other obligations of the Company prior to the Acquisition
(see Note 6), (2) reduction of interest expense resulting from the
above mentioned forgiveness of debt and other obligations, (3)
modification of the development agreement for certain products of the
Company (see Note 13), (4) amortization of the excess of cost over
fair value of net assets acquired resulting from the Acquisition (see
Notes 1 and 3) and (5) additional depreciation expense resulting from
the Acquisition. Weighted average shares outstanding used in the
calculation of pro forma net loss per share includes all common and
Class A voting convertible preferred shares outstanding after the
Acquisition, as adjusted for the reverse stock split.
The accompanying financial statements for the period from April 1,
1992 to September 3, 1992 reflect the results of operations, changes
in stockholders' equity (deficiency) and cash flows on the basis of
accounting used by the Company prior to the Acquisition (the
Predecessor). The financial statements as of March 31, 1995 and 1994
and for the years ended March 31, 1995 and 1994 and the period from
September 4, 1992 to March 31, 1993 reflect the financial condition,
results of operations, changes in stockholders' equity and cash flows
of the Company on the basis of accounting resulting from the
Acquisition.
2. Market and Operating Environment:
--------------------------------
From inception, the Company has incurred losses from operations and is
expected to continue to incur such losses into fiscal 1996. The
Company's products were developed in the mid-1980's to meet a need for
greater reliability and integrity in document finishing systems.
These products are dependent upon proprietary technology and require
specially skilled engineers and technicians to design, enhance and
produce them to customer needs. The Company's products also face
competition from other products and companies with greater financial
resources than the Company. The Company has not yet attained a
sustained level of order volume to support these personnel costs and
other administrative, selling and overhead expenses or to realize the
carrying value of the Company's assets, including the excess of cost
over fair value of net assets acquired (see Note 3). Further, the
Company may require additional financing before attaining this level
of operations.
Among other things, management has implemented or is implementing the
following programs and practices to bring the Company to
profitability:
. Developed strategic sales and marketing plans to improve market
penetration. As a result, systems sales increased to
$6,629,988 in the year ended March 31, 1995, compared to
$5,117,151 in the year ended March 31, 1994, an increase of
30%. Backlog as of March 31, 1995 stood at approximately
$3,676,000, an increase of approximately $940,000 from March
31, 1994.
. Implemented reductions in manufacturing and component costs and
in assembly time through re-engineering and improved design.
. Placed increased emphasis on development of new products and
enhancements to existing products so as to broaden the
application of these products to other market segments.
. Maintained administrative and other overhead costs at fiscal 1994
levels in spite of significantly higher revenues and order
volume.
Management believes that these initiatives will maximize the
probability of profitable operations and positive cash flow.
Since the Acquisition described in Note 1, the Company has been
successful in raising funds to support its operating losses through
debt and equity financing from its principal stockholders, private
placements and an initial public offering in December 1993. If it
becomes necessary, the Company would pursue additional financing
through these or similar sources.
3. Significant Accounting Policies:
-------------------------------
Revenue recognition -
-------------------
The Company recognizes systems sales using the percentage of
completion method (see Notes 4 and 5). Systems sales include a
percentage of the earnings expected to be realized based on costs
incurred compared with estimated total costs. Changes to total
estimated contract costs are recognized in the period they are
determined. Revenues recognized in excess of amounts billed are
included in current assets. Amounts billed in excess of revenues
recognized to date are included in current liabilities.
Cash and short-term investments -
-------------------------------
For purposes of cash flow information, the Company considers cash and
short-term investments purchased with a maturity of three months or
less to be highly liquid investments. Amounts pledged to
collateralize borrowings are reflected as restricted cash and short-
term investments in the accompanying balance sheets.
Allowance for doubtful accounts -
-------------------------------
The Company evaluates the collectibility of accounts receivable on a
case by case basis and makes allowances for accounts deemed
uncollectible. As of March 31, 1995 and 1994, the Company had
recorded an allowance of $12,600 and $13,200, respectively, for
potential uncollectible accounts receivable.
Inventories -
-----------
Inventories are stated at the lower of cost or market using the first-
in, first-out (FIFO) method. At March 31, 1995 and 1994 inventories
consisted of the following:
1995 1994
---- ----
Purchased Parts $1,815,887 $1,252,409
Work in Process - 345,465
---------- ----------
$1,815,887 $1,597,874
========== ==========
Property and equipment -
----------------------
Depreciation and amortization of property and equipment is charged
against income over the estimated useful lives of the respective
assets using straight-line methods as follows:
Lives
-----
Machinery and equipment 7 years
Furniture and fixtures 3-7 years
Leasehold improvements Life of lease
Excess of cost over fair value of net assets acquired -
----------------------------------------------------
The excess of cost over the fair value of net assets acquired arising
from the Acquisition (see Note 1) is being amortized over its
estimated life of 20 years. As of March 31, 1995 and 1994,
accumulated amortization was $577,318 and $353,840, respectively.
As discussed in Note 2, the realization of the carrying value of the
Company's assets, including the excess of cost over fair value of
net assets acquired, is dependent on the Company's ability to
continue as a going concern. If objective evidence becomes known
indicating the carrying value of the excess of cost over fair value
of net assets acquired has been impaired, the Company will record a
charge reducing the carrying value.
Management anticipates that the Company will achieve a substantial
reduction or elimination of its operating and cash flow losses during
the next one to two years. Management believes that once profitable
operations are achieved, they can be sustained for the foreseeable
future and, as a result, the carrying value of the excess of cost over
fair value of net assets acquired will be able to be recovered through
future operations.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". This statement is effective for fiscal 1996. The
Company is in the process of evaluating the effect of the application
of this new accounting pronouncement on its accounting for the excess
of cost over fair value of net assets acquired.
Deferred preproduction costs -
---------------------------
Certain preproduction costs incurred subsequent to determining the
feasibility of new product introductions are capitalized and are
amortized over a three-year period upon commencement of sales of the
product. As of March 31, 1995 and 1994, accumulated amortization was
$5,510 and $0, respectively.
Research and development -
------------------------
Expenses associated with research and development activities are
expensed as incurred.
Investment -
----------
The Company's investment at March 31, 1995 and 1994 represents an
ownership interest in a dockominium which was purchased in 1989 for
an original cost of approximately $80,000. This investment was
written down to its estimated net realizable value of $30,000 during
the period April 1, 1992 to September 3, 1992.
Deferred service contract revenue -
---------------------------------
Deferred service contract revenue represents amounts received as
advance payments for maintenance service. The Company's standard
payment terms require prepayment on a quarterly or annual basis.
Revenue from such contracts is deferred and recognized ratably over
the term of the contract.
Product warranties -
------------------
The Company provides a warranty on each product for a period of 90
days after installation and accrues the estimated cost of future
warranty claims at the time of shipment. Warranty expense for the
years ended March 31, 1995 and 1994, the period September 4, 1992 to
March 31, 1993 and the period April 1, 1992 to September 3, 1992
totalled approximately $95,000, $55,000, $15,000 and $12,000,
respectively.
Income taxes -
------------
Prior to September 4, 1992, the Company had elected to be treated as
an S Corporation for Federal income tax reporting purposes. Federal
income taxes on the Company's earnings for periods prior to September
4, 1992 were the responsibility of the stockholders and, thus, are not
reflected in the accompanying financial statements. Minimum state
income taxes were not material and are included in selling and
administrative expenses.
In connection with the Acquisition (see Note 1), the Company is now
treated as a C Corporation for Federal income tax purposes. Due to
the net operating losses subsequent to the Acquisition, no provision
for Federal income taxes was required. Concurrent with the change to
a C Corporation, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The
adoption of SFAS 109 did not have a material impact on the Company's
results of operations. As of March 31, 1995 and 1994, the Company has
a net deferred income tax benefit relating to temporary differences in
the recognition of items for financial accounting and income tax
reporting purposes of approximately $3,400,000 and $1,900,000,
respectively, which was fully reserved. Temporary differences relate
principally to net operating loss carryforwards and financial
accounting accruals for certain expenses which will be deducted for
income tax reporting purposes upon payment.
At March 31, 1995, the Company has net operating loss carryforwards of
approximately $8,100,000 and $10,200,000 available to be applied
against future Federal and state taxable income, respectively. The
Federal loss carryforwards expire at various dates through 2010 and
the state loss carryforwards expire after five years from when
incurred.
Royalty expense -
---------------
The Company has royalty agreements with Connecticut Innovations, Inc.
and with certain stockholders (see Note 13). Royalties due under
these agreements are expensed as incurred.
Loss per share -
--------------
Loss per share is computed using the weighted average number of common
and Class A voting convertible preferred shares outstanding during
each period presented, as adjusted for the reverse stock split (see
Note 1). Outstanding warrants and options would be antidilutive and,
therefore, were not considered as common stock equivalents.
4. Change in Method of Accounting for Long-Term Contracts:
------------------------------------------------------
Effective as of April 1, 1994, the Company adopted the percentage-of-
completion method of accounting for systems sales. Previously, the
Company had elected to use the completed-contract method to account
for these contracts because the total cost of the systems was not
reliably estimable. The Company has developed more reliable estimates
of its contract costs because of its experience in making such
estimates and due to establishing a more standardized production
process. Management believes that the Company can now reasonably
estimate the cost of the systems contracts and, therefore, the
percentage-of-completion method will result in recognizing income on a
basis that more accurately reflects the work performed for the period.
The financial statements of prior periods have been restated to apply
the new accounting method retroactively. The effect of the accounting
change on all periods presented is as follows:
Period Period
Year Ended September 4, 1992 April 1, 1992
March 31, 1994 to March 31, 1993 to September 3, 1992
-------------- ----------------- --------------------
Effect on:
Net income $136,478 $(7,162) $(45,898)
Earnings
per share .06 (.01) -
The balance of retained earnings as of April 1, 1992 has been adjusted
for the cumulative effect of applying retroactively the new method of
accounting. No adjustments have been made to the allocation of the
cost of the Acquisition as the effect on recorded equity and the
excess of cost over fair value of net assets acquired would not be
significant.
5. Costs and Estimated Earnings on Uncompleted Contracts:
-----------------------------------------------------
The following schedule reflects the costs incurred, estimated earnings
and billings to date on uncompleted contracts as of March 31, 1995 and
1994:
1995 1994
---- ----
Costs incurred on
uncompleted
contracts $ 1,579,465 $ 923,571
Estimated earnings 740,927 449,326
------------ ------------
2,320,392 1,372,897
Less: Billings to date (2,778,658) (2,093,191)
------------ ------------
$ (458,266) $ (720,294)
============ ============
Included in the accompanying
balance sheets under the
following captions:
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 1,197,572 $ 546,409
Billings in excess of costs
and estimated earnings on
uncompleted contracts (1,655,838) (1,266,703)
------------ ------------
$ (458,266) $ (720,294)
============ ============
6. Extraordinary Item:
------------------
Prior to the Acquisition, the Company completed a restructuring of
certain of its liabilities. This restructuring included a vendor, who
had also loaned money to the Company, forgiving indebtedness in
exchange for the right to transfer certain technology licensed from
the Company to a third-party. As a result of the above transaction,
the Company recorded a gain of $4,793,372 which has been reflected as
an extraordinary item in the accompanying statement of operations for
the period April 1, 1992 to September 3, 1992.
7. Financing Arrangements:
----------------------
Notes payable and long-term debt at March 31, 1995 and 1994 consisted
of the following:
1995 1994
---- ----
Line of credit, maximum of
$300,000 available
at March 31, 1995, bearing
interest at prime
(9% at March 31, 1995),
maturing September
30, 1995, collateralized by
restricted cash
and short-term investments $ 300,000 $ 300,000
Line of credit, maximum of
$1,350,000 available
at March 31, 1995 increased
to $1,500,000 effective
April 13, 1995, bearing
interest at prime, maturing
June 30, 1996, secured
by certain assets of two
stockholders and
directors of the Company 1,350,000 -
Demand notes payable to two
individuals who are
stockholders and directors
of the Company,
bearing interest at 8%,
unsecured (see Note 12) - 455,000
Notes payable to individuals,
bearing interest at 6%,
unsecured (see Note 8) - 550,986
Note payable to a vendor,
bearing interest at prime
plus 1%, payable in monthly
installments of interest only
until September 30, 1995
and then equal quarterly principal
installments of $35,541 plus
interest, until June 30, 1998,
unsecured 426,502 426,502
Note payable to a vendor, non-interest
bearing, payable beginning September 1,
1995 from revenues on maintenance
contracts, unsecured 200,000 200,000
Notes payable to two individuals
and an affiliated entity who are
stockholders of the Company, bearing
interest at 8.5%, due April 30, 1995,
unsecured (see Note 12) 200,000 -
Note payable to a bank, bearing
interest at prime plus 1.75%,
payable in monthly installments of
$766 of principal and interest,
due September 1995, secured by
investment 47,349 53,137
Other 89,502 82,777
------ ------
2,613,353 2,068,402
Less: Short-term notes payable
and current maturities of
long-term debt (662,245) (430,281)
---------- ---------
$1,951,108 $1,638,121
========== ==========
As of March 31, 1995, maturities of notes payable and long-term debt,
including debt payments related to the line of credit were as follows:
Fiscal year
ending March 31, Amount
---------------- ------
1996 $ 662,245
1997 1,569,273
1998 217,167
1999 164,668
----------
$2,613,353
==========
8. Convertible Notes Payable:
------------------------
During fiscal 1994, the Company received $400,000 from two
stockholders in exchange for the Company's unsecured convertible notes
payable bearing interest at 8%. The Company also granted warrants to
the noteholders to purchase 80,000 shares of the Company's common
stock at $5.00 per share through December 20, 1997. These notes were
convertible into common stock at a rate of $5.00 per share.
On May 27, 1994, the Company amended the note agreements and the notes
were converted into 106,666 shares of common stock at the rate of
$3.75 per share, which approximated fair market value at that date.
The difference between the fair market value of the shares issued and
that called for under the original conversion terms resulted in a
charge of $99,998 which has been reflected as debt conversion expense
in the accompanying statement of operations for the year ended March
31, 1995. Further, the related warrant agreements were amended to
provide for the purchase of 106,666 shares at $4.00 per share.
On December 30, 1994, the holders of two unsecured promissory notes in
the principal amount of $550,986 agreed to exchange all claims under
these notes for unrestricted registered shares of common stock
provided the Company register such shares to be issued with the
Securities and Exchange Commission by April 28, 1995. The agreement
was subsequently extended until such time as the registration of the
shares is effective. Accordingly, the principal and accrued interest,
aggregating $593,568, has been reflected as convertible notes payable
in the accompanying balance sheet as of March 31, 1995.
9. Capital Stock and Equity:
-----------------------
In December 1993, the Company completed the sale of 1,000,000 units
(comprised of one share of common stock and one warrant to purchase
common stock) for $5,000,000. In addition, in January 1994, the
underwriter exercised its option to purchase an additional 150,000
units for $750,000. Underwriting commissions and expenses associated
with these sales of common stock and warrants aggregated $1,159,769.
The warrants issued in connection with the sale of the units entitle
the holder to purchase one share of common stock for $6.00 per share
and may be exercised at any time between December 1994 and December
1997. The warrants may be redeemed by the Company for $.05 per
warrant subsequent to December 20, 1994 provided that the closing bid
price for the Company's common stock equals or exceeds $8.25 per share
for 10 days prior to the date notice of redemption is given.
Concurrent with the closing of the offering, certain stockholders of
the Company converted $400,000 of demand notes payable due them by the
Company into 80,000 units comprised of one share of common stock and
one warrant equivalent to that issued in the Company's public
offering. The note and related warrant agreements were amended May
27, 1994 (see Note 8).
The Class A voting convertible preferred stock outstanding at March
31, 1993 was convertible into and was entitled to vote with common
stock at the rate of 5 shares of Class A voting convertible preferred
stock for 1 share of common stock. In the event of liquidation of the
Company, the Class A voting convertible preferred stock had a
preference to any distribution of assets or surplus funds to the
holders of common stock of $.75 per share plus any accrued dividends
($2,487,000 at March 31, 1993). Each share of Class A voting
convertible preferred stock was automatically converted to common
stock upon the closing of the Company's public offering in
December 1993.
The Series B common stock was issued in connection with the Company's
public offering. The holders of Series B common stock are entitled to
elect the number of directors of the Company equal to one more than
one half of the total number of directors comprising the Company's
Board of Directors through December 1998.
The Company has outstanding 106,666 warrants to purchase one share of
the Company's common stock for $4.00 per share which are exercisable
until December 1997. These warrants were issued in connection with
the Company's convertible notes payable (see Note 8). The Company
also has outstanding 50,000 warrants to purchase one share of the
Company's common stock for $4.00 per share which were issued in
connection with the notes payable to two individuals and an affiliated
entity (see Note 7). These warrants expire in December 1997.
In connection with the Acquisition (see Note 1), the Company issued
warrants to certain individuals who provided interim financing to the
Company. Under the terms of this financing, upon cancellation of the
notes, the noteholders received shares of Class A voting convertible
preferred stock at a price of $.75 per share and warrants to purchase
43,067 shares of common stock at a price of $1.88 per share. These
warrants remain outstanding at March 31, 1995. The warrants expire
five years from date of issuance and are exercisable any time within
this term. The Company recorded interest expense of $80,750
attributable to the fair value of these warrants at the issuance date.
The effective interest rate under these borrowings, including the
stated interest of 12%, was approximately 38%.
Certain stockholders of the Company are required by the Acquisition to
vote their shares of common stock until June 1, 1998 for certain
individuals as directors of the Company.
10. Common Stock Purchase Options:
-----------------------------
The Acquisition required that an option plan be established for
certain individuals (the Founding Shareholders). The Acquisition
contemplated an initial grant under such plan to purchase 95,000
shares of common stock at an exercise price of $1.88 per share. These
options would vest 25% on each of the first, second, third and fourth
anniversaries of the date of grant, provided that the vesting of
options for employees would be contingent upon their continued
employment by the Company, unless an employee were terminated without
cause, and vesting of options granted to the former Chairman of the
Board would be contingent upon his continued employment for two years
from the Acquisition date. The Company has not formally adopted this
plan and no options have been granted.
In December 1993, the Company adopted a Stock Option Plan, which
authorizes the Compensation/Stock Option Committee of the Board of
Directors to grant to key employees and directors of the Company
incentive or non-qualified stock options. Options to purchase up to
215,000 shares of common stock may be granted under the plan. The
Compensation/Stock Option Committee determines the prices and terms at
which options may be granted. Options may be exercisable in
installments over the option period, but no options may be exercised
before six months or after ten years from the date of grant.
In connection with stock option agreements entered into in fiscal 1995
with two employees, the Company granted options under the above plan
to acquire up to an aggregate of 125,000 shares of the Company's
common stock at an exercise price of $3.25 per share which
approximated fair market value at the date of grant. One third of the
options become exercisable on each of the first, second and third
anniversaries of the grant date. The options expire February 23,
2000.
11. Class B Senior, Non-Convertible, Redeemable Preferred Stock:
-----------------------------------------------------------
The Company's certificate of incorporation authorizes the issuance of
500 shares of Class B Senior, Non-Convertible, Redeemable Preferred
Stock. The Class B senior, non-convertible, redeemable preferred
stock (Class B preferred stock) was issued to Connecticut Innovation,
Inc. in connection with the Development Agreement (see Note 13). The
holder of Class B preferred stock is not entitled to receive dividends
nor to vote upon any matter submitted to stockholders, except (i) as
required by applicable law and (ii) the number of authorized or terms
of Class B preferred stock may not be changed without the consent of
the holders of all such shares.
Each share of Class B preferred stock is required to be redeemed by
the Company at a redemption price of $1,000 per share ($500,000 at
March 31, 1995), to the extent there are legally available funds for
such purpose, upon the first to occur of the following events: (i)
September 4, 1995 (ii) a conveyance of all or substantially all of the
capital stock or assets of the Company or (iii) a merger of the
Company with or into another corporation (unless, upon consummation
thereof, the existing holders of voting securities of the Company own
directly or indirectly greater than 50% of the voting power to elect
directors of the surviving or acquiring corporation). The Company is
required to pay the redemption price in three equal installments due
on the third, sixth and ninth month following the redemption event.
If sufficient funds are not legally available to redeem all of the
shares of Class B preferred stock then due to be redeemed, any and all
unredeemed shares shall be carried forward and redeemed to the full
extent the Company has funds legally available for such purpose.
In the event of any liquidation, dissolution or winding up of the
affairs of the Company, each share of Class B preferred stock has a
preference of $1,000 per share ($500,000 at March 31, 1995) to any
distribution of any of the assets or surplus funds of the Company to
the holders of Class A voting convertible preferred stock, any class
or series of preferred stock ranking junior to the Class B preferred
stock, or the common stock of the Company.
Due to the mandatory redemption features of these securities, they
have been classified outside of stockholders' equity in the
accompanying balance sheets.
12. Related Party Transactions:
--------------------------
At March 31, 1995 and 1994, the Company had accounts and notes
receivable from an officer and certain stockholders totaling $92,939.
These receivables are non-interest bearing (see Note 13).
During the period from September 4, 1992 to March 31, 1993, a
stockholder was repaid notes payable due him as of September 4, 1992
of $75,000. The Company also paid $1,039 in interest related to this
borrowing.
Prior to the Acquisition of the Company, two directors of the Company
and a company owned by them had loaned $682,500 to the Company under
bridge loan agreements. These amounts were converted into common and
convertible preferred stock in connection with the Acquisition (see
Note 1). Under the terms of these agreements, these parties were
issued warrants to purchase 25,734 shares of common stock at $1.88 per
share (see Note 9).
During the year ended March 31, 1994, the Company borrowed $855,000
from two stockholders and directors of the Company under note
agreements. These notes bear interest at 8% and are due on demand.
These noteholders converted $400,000 of these amounts due from the
Company to 80,000 units in connection with the public offering (see
Note 9). Effective March 31, 1995, the remaining $455,000 principal
plus accrued interest of $85,172, aggregating $540,172, was converted
to 196,426 shares of common stock at a conversion rate of $2.75 per
share. These individuals have also provided assets as collateral for
the Company's $1,350,000 line of credit (see Note 7).
During the year ended March 31, 1995, the Company borrowed $200,000
from two individuals and an affiliated entity who are stockholders of
the Company. These notes bear interest at 8.5% and are due on April
30, 1995. These notes were convertible, at the creditors' option, at
any time until the due date into 50,000 shares of the Company's common
stock at a conversion price of $4.00 per share. In connection with
the borrowings, the Company granted the creditors warrants to purchase
up to an aggregate of 50,000 shares of common stock at $4.00 per share
(see Note 9).
13. Commitments and Contingencies:
-----------------------------
Development Agreement -
--------------------
In October 1989, the Company entered into a Development Agreement (the
Agreement) with Connecticut Innovations, Inc. (CII) (formerly the
Connecticut Product Development Corporation) to develop certain
products. Under the terms of the Agreement, CII agreed to reimburse
the Company for 60% of the development costs of sponsored products.
The Company was required to repay those reimbursements plus interest
and to pay certain royalties to CII based upon sales or licenses of
the sponsored products. Royalties expensed under this Agreement for
the period April 1, 1992 through September 3, 1992 approximated
$71,350.
In August 1992, the Agreement referred to above was modified and the
unpaid reimbursements and royalties which approximated $500,000 were
converted into Class B preferred stock of the Company. Under the
terms of the modified Agreement, the Company is also required to pay
the following royalties to CII:
. Six percent (6%) of net sales of the sponsored products,
. One hundred percent (100%) of license fees, if any, with respect
to the sponsored products, and
. Five percent (5%) of net sales of any licensee of the developed
products.
In September 1993, the Agreement was further modified such that a
royalty of three percent would be required for the period through
March 31, 1995 with a minimum quarterly payment of $27,000.
The above royalties will be paid until total royalties and redemptions
under the Class B Senior, Non-Convertible, Redeemable Preferred Stock
of $903,000 are paid. Thereafter, for a period of five years, a
royalty of one percent (1%) will be paid. Payment of 50% of royalties
earned for the period September 1, 1992 to March 31, 1993 are deferred
until total royalties of $903,000 are paid. Interest on the unpaid
balance is paid quarterly at an interest rate of 12%. Total royalty
expense for the years ended March 31, 1995 and 1994 and the period
September 4, 1992 to March 31, 1993 was $130,528, $126,397 and
$91,269, respectively.
Contingencies -
-------------
The Company is currently involved in a lawsuit with an individual
hired on a consultant basis for investment banking services. The
individual claims the Company owes him approximately $310,000 for his
services. Management believes this amount is in excess of what is due
and has accrued its estimate of amounts due. Management believes that
settlement of this matter will not have a material adverse effect on
the Company's financial position or results of operations.
A former employee has asserted a claim for damages totaling $300,000
as a result of breach of an alleged agreement as a result of his
demotion and reassignment. Subsequent to becoming aware of the
potential that this claim might be asserted, the Company terminated
this individual's employment. Management believes that the claim is
without merit and settlement of the claim will not have a material
adverse effect on the Company's financial position or results of
operations.
The Company is a party to various other legal proceedings arising in
the ordinary course of business which management believes, after
consultation with legal counsel, will not have a material adverse
effect on the Company's financial position or future operating
results.
Other commitments -
-----------------
The Company has entered into a termination and non-competition
agreement with an individual which extends through September 1996.
Under the terms of this agreement, the Company is required to pay
approximately $12,500 monthly through September 1996.
In connection with the Acquisition, the Company has entered into a
royalty agreement with certain stockholders whereby the Company will
pay an amount equal to 1% of all the Company's sales (as defined)
commencing on the date of a public offering of the Company's common
stock. An additional royalty of .5% will be paid 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 this agreement
terminate upon the payment of royalties aggregating $12,000,000.
A certain stockholder elected to have his royalty rights deferred
until January 1995. In exchange for this deferral, the Company may
only collect on an outstanding note receivable of $69,939 by
offsetting royalties due to the stockholder. For the period
subsequent to the Company's public offering, royalties accrued under
this agreement totaled $18,442. Had this royalty agreement been in
effect for the year ended March 31, 1993 and the full year ended
March 31, 1994, royalty expenses, on a pro forma basis, would have
increased by approximately $67,950 and $49,500, respectively.
Leases -
------
The Company leases its office and manufacturing facility under an
operating lease which provided for monthly rental of $21,000 through
March 1994. The Company is in the process of negotiating a new
lease and is currently leasing the facility on a monthly basis.
Under this agreement, the Company is responsible for paying all
operating costs, property taxes and repairs and maintenance. The
Company also leases certain manufacturing and office equipment and
automobiles under operating lease agreements which expired at various
dates through fiscal year 1995. Lease expense for the years ended
March 31, 1995 and 1994, the period September 4, 1992 to March 31,
1993 and the period April 1, 1992 to September 3, 1992 totaled
approximately $292,000, $260,000, $118,000 and $52,000, respectively.
There is no commitment to future minimum rental payments subsequent
to March 31, 1995.
14. Employee Benefit Plans:
----------------------
The Company adopted a defined contribution benefit plan (the Plan)
covering substantially all employees of the Company. The Plan is
intended to comply with Section 401(k) of the Internal Revenue Code.
Each year eligible participants may elect to make salary reduction
contributions on their behalf up to a maximum of the lesser of 15%
of compensation or the annual maximum established by the Internal
Revenue Service. Participants may also make voluntary after-tax
contributions to the Plan. The Company does not make contributions
to the Plan but does pay certain expenses of the Plan.
15. Significant Customers and Business Concentration:
------------------------------------------------
Due to the nature of the Company's products, a significant portion of
the Company's revenues in all periods are derived from a few
customers. The majority of the Company's customers are property
and casualty insurance companies. During the year ended March 31,
1993 (which includes both the periods prior to and after the
Acquisition), sales to three customers accounted for 12.1%, 11.7%
and 10.1% of net sales. During the year ended March 31, 1994, sales
to one customer accounted for 12.2% of net sales. During the year
ended March 31, 1995, sales to two customers accounted for 10.8% and
10.4% of net sales.
<PAGE>
GUNTHER INTERNATIONAL, LTD.
---------------------------
BALANCE SHEETS
--------------
ASSETS
December 31,
1995
(UNAUDITED)
CURRENT ASSETS:
UNRESTRICTED CASH AND SHORT-TERM INVESTMENTS $161,632
RESTRICTED CASH AND SHORT-TERM INVESTMENTS 300,000
ACCOUNTS RECEIVABLE 1,240,663
COSTS AND ESTIMATED EARNINGS IN EXCESS OF
BILLINGS ON UNCOMPLETED CONTRACTS 769,191
INVENTORIES 1,375,379
PREPAID EXPENSES 104,220
TOTAL CURRENT ASSETS 3,951,085
-----------
LONG-TERM ASSETS:
PROPERTY AND EQUIPMENT:
MACHINERY AND EQUIPMENT 727,582
FURNITURE AND FIXTURES 113,844
LEASEHOLD IMPROVEMENTS 66,326
907,752
----------
LESS-ACCUMULATED DEPRECIATION AND AMORTIZATION 267,349
----------
NET PROPERTY AND EQUIPMENT 640,403
----------
OTHER ASSETS:
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED, NET OF ACCUMULATED AMORTIZATION
OF $744,928 AND $577,319 AT DECEMBER 31 AND
MARCH 31, 1995 RESPECTIVELY 3,724,641
DEFERRED PREPRODUCTION COSTS 191,517
ACCOUNT AND NOTE RECEIVABLE FROM STOCKHOLDERS 92,939
INVESTMENT, AT LOWER OF COST OR MARKET 30,000
----------
TOTAL OTHER ASSETS 4,039,097
----------
TOTAL LONG-TERM ASSETS 4,679,500
----------
TOTAL ASSETS $8,630,585
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE FINANCIAL STATEMENTS
<PAGE>
GUNTHER INTERNATIONAL, LTD.
--------------------------
BALANCE SHEETS
--------------
LIABILITIES AND STOCKHOLDERS EQUITY
December 31,
1995
(UNAUDITED)
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $2,006,741
ACCRUED EXPENSES 526,773
NOTE PAYABLE AND CURRENT MATURITIES OF
LONG-TERM DEBT 320,028
NOTE PAYABLE TO STOCKHOLDERS 100,000
BILLINGS IN EXCESS OF COSTS AND ESTIMATED
EARNINGS ON UNCOMPLETED CONTRACTS 388,505
DEFERRED SERVICE CONTRACT REVENUE 1,400,041
---------
TOTAL CURRENT LIABILITIES 4,742,088
---------
LONG-TERM LIABILITIES:
LONG-TERM DEBT, LESS CURRENT MATURITIES 2,261,408
CLASS B SENIOR, NON-CONVERTIBLE, REDEEMABLE
PREFERRED STOCK, $.001 PAR VALUE; 500 SHARES
AUTHORIZED, ISSUED AND OUTSTANDING 0
CONVERTIBLE NOTES PAYABLE 0
TOTAL LONG-TERM LIABILITIES 2,261,408
---------
TOTAL LIABILITIES 7,003,496
---------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $.001 PAR VALUE, 500,000 SHARES
AUTHORIZED, NO SHARES ISSUED OR OUTSTANDING 0
COMMON STOCK, $.001 PAR VALUE, AUTHORIZED
16,000,000 SHARES IN 1995, ISSUED AND OUTSTANDING
4,108,269 AND 3,596,275 AT DECEMBER 31, AND
MARCH 31, 1995, RESPECTIVELY 4,108
SERIES B COMMON STOCK, $.001 PAR VALUE, 500
SHARES AUTHORIZED, ISSUED AND OUTSTANDING AT
DECEMBER 31, AND MARCH 31, 1995 1
ADDITIONAL PAID IN CAPITAL 10,888,469
ACCUMULATED DEFICIT (9,265,489)
-----------
TOTAL STOCKHOLDERS' EQUITY 1,627,089
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,630,585
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE FINANCIAL STATEMENTS
<PAGE>
GUNTHER INTERNATIONAL, LTD.
--------------------------
UNAUDITED STATEMENTS OF INCOME
------------------------------
NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1995 1994
---- ----
SALES:
SYSTEMS $6,626,006 $4,997,375
MAINTENANCE 2,672,067 2,087,892
---------- ----------
TOTAL SALES 9,298,073 7,085,267
---------- ----------
COST OF SALES:
SYSTEMS 3,978,768 3,170,890
MAINTENANCE 1,958,981 1,723,975
---------- ----------
TOTAL COST OF SALES 5,937,749 4,894,865
---------- ----------
GROSS PROFIT 3,360,324 2,190,402
---------- ----------
OPERATING EXPENSES:
SELLING AND
ADMINISTRATIVE 3,940,667 4,645,456
RESEARCH AND
DEVELOPMENT 150,045 168,839
--------- ----------
TOTAL OPERATING
EXPENSES 4,090,712 4,814,295
--------- ----------
OPERATING LOSS (730,388) (2,623,893)
--------- ----------
OTHER EXPENSES:
INTEREST EXPENSE,
NET 156,858 99,907
DEBT CONVERSION
EXPENSE 0 99,998
--------- ---------
NET LOSS ($887,246) ($2,823,798)
=========== ==========
LOSS PER SHARE ($0.23) ($0.84)
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,825,820 3,377,740
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE FINANCIAL STATEMENTS
<PAGE>
GUNTHER INTERNATIONAL, LTD.
---------------------------
UNAUDITED STATEMENTS OF CASH FLOWS
----------------------------------
NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1995 1994
---- ----
CASHFLOWS FROM
OPERATING ACTIVITIES:
NET LOSS ($887,246) ($2,823,798)
---------- ----------
ADJUSTMENTS TO
RECONCILE NET LOSS TO
NET CASH USED BY
OPERATING ACTIVITIES:
DEPRECIATION AND
AMORTIZATION 236,349 235,109
DEBT CONVERSION
EXPENSE 0 99,998
(INCREASE) IN
ACCOUNTS RECEIVABLE (599,266) (366,570)
(INCREASE) DECREASE
IN INVENTORIES 440,508 (353,745)
(INCREASE) DECREASE
IN PREPAID EXPENSES
AND OTHER ASSETS (35,300) 73,716
INCREASE (DECREASE)
IN ACCOUNTS PAYABLE 219,400 428,760
INCREASE (DECREASE)
IN ACCRUED EXPENSES 179,328 231,539
INCREASE (DECREASE)
IN DEFERRED SERVICE
CONTRACT REVENUE 223,236 (54,672)
INCREASE (DECREASE)
IN BILLINGS IN EXCESS
OF COSTS AND ESTIMATED
EARNINGS ON
UNCOMPLETED CONTRACTS,
NET (838,952) 370,461
--------- ---------
NET CASH USED BY
OPERATING ACTIVITIES (1,061,943) (2,159,202)
----------- -----------
CASHFLOWS FROM
INVESTING ACTIVITIES:
PURCHASE OF
PROPERTY AND EQUIPMENT (171,438) (94,522)
--------- -----------
NET CASH USED BY
INVESTING ACTIVITIES (171,438) (94,522)
--------- -----------
CASHFLOWS FROM
FINANCING ACTIVITIES:
PROCEEDS FROM NOTES
PAYABLE AND
LONG-TERM DEBT 868,336 822,029
REPAYMENT OF NOTES
PAYABLE AND
LONG-TERM DEBT (781,919) (13,076)
ISSUANCE OF
COMMON STOCK 1,000,000 0
--------- --------
NET CASH PROVIDED
(USED) BY
FINANCING ACTIVITIES 1,086,417 808,953
--------- --------
NET INCREASE (DECREASE)
IN UNRESTRICTED
CASH AND SHORT-TERM
INVESTMENTS (146,964) (1,444,771)
--------- -----------
UNRESTRICTED CASH AND
SHORT-TERM
INVESTMENTS AT BEGINNING
OF PERIOD 308,596 2,225,758
UNRESTRICTED CASH AND
SHORT-TERM
INVESTMENTS AT END
OF PERIOD $161,632 $780,987
======== ========
SUPPLEMENTAL DISCLOSURE OF
CASHFLOW INFORMATION:
CONVERSION OF NOTES PAYABLE FOR
COMMON STOCK $611,903 $400,000
CANCELLATION OF
PREFERRED STOCK $500,000 0
The Company paid $0 and $0 for income taxes and $39,761 and $18,415
for interest expense for the three month periods ended December 31, 1995
and 1994 respectively. The Company paid $0 and $12,700 for income taxes
and $126,576 and $43,355 for interest expense for the nine month period
ended December 31, 1995 and 1994 respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
<PAGE>
GUNTHER INTERNATIONAL, LTD.
---------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) MANAGEMENT REPRESENTATION: In the opinion of management, the
accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles and contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position and the results of operations for the
interim periods. These financial statements should be read in conjunction
with the financial statements and related notes included in the Company s
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995. The
results of operations for the interim period are not necessarily indicative
of results to be expected for the full year.
(2) PER SHARE DATA: Earnings per common share are based on the weighted
average number of shares of common stock outstanding during each period.
(3) SELLING AND ADMINISTRATIVE: Selling and administrative expenses
decreased to 40% from 70% as a percentage of net sales for the three
month period ended December 31, 1995 compared to the same period one
year ago. Selling and administrative expenses decreased to 42% from 66%
as a percentage of net sales for the nine month period ended December
31, 1995 compared to the same period one year ago. For the three month
period, 10% of the 30% reduction in selling and administrative expenses
was due to changing the estimate of royalty expenses due to Connecticut
Innovations Inc. (CII). For the nine month period, 3% of the 24% decline
was due to the same change in estimate. The change in estimate equaled
$301,425, and was due to an Amendment and Restatement of a certain
development agreement which has been discussed in prior filings of the
Registrant.
<PAGE>
NO DEALER, SALESMAN OR ANY ===============================
OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED
IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE
TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, TO ANY
PERSON IN ANY JURISDICTION WHERE
SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER 358,335 Shares
ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE GUNTHER INTERNATIONAL, LTD
INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
TABLE OF CONTENTS
Page
Available Information. . . . . . . . . . .2
Prospectus Summary. . . . . . . . . . . . 3
The Company. . . . . . . . . . . . . . . .3
Risk Factors . . . . . . . . . . . . . . 8
Dilution . . . . . . . . . . . . . . . . 14
Use of Proceeds . . . . . . . . . . . . .14
Dividend Policy . . . . . . . . . . . . .14
Capitalization . . . . . . . . . . . . . 15
Management's Discussion and
Analysis of Results
of Operations and Financial
Condition . . . . . . . . . . . . . . 18
Business . . . . . . . . . . . . . . . . 25 ---------------------------
Management . . . . . . . . . . . . . . .36 PROSPECTUS
Certain Transactions . . . . . . . . . . 40 ---------------------------
Principal and Selling Shareholders . . . 44
Description of Securities . . . . . . . 46
Shares of Common Stock Eligible
for Future Sale . . . . . . . . . . . . 49
Legal Matters . . . . . . . . . . . . . .50
Experts . . . . . . . . . . . . . . . . .50
Index to Financial Statements. . . . . . F-1
Until ____________, 1996 (25 days after
the date of this Prospectus) all dealers
effecting transactions in the Common
Stock whether or not participating in
this distribution, may be required to
deliver a Prospectus. This is in
addition to the obligations of dealers
to deliver a Prospectus when acting as
underwriters and with respect to their
unsold allotments or subscriptions.
-------------, 1996
=======================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with the Offering described in this Registration Statement. All
amounts are estimated except the Registration Fee.
Registration fee . . . . . . . . . . . . . . . . . . . . . $704.32
Accounting fees and expenses . . . . . . . . . . . . . . . *
Legal fees and expenses . . . . . . . . . . . . . . . . . 5,000,000
Blue Sky fees and expenses . . . . . . . . . . . . . . . . 2,500,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . *
----------
Total . . . . . . . . . . . . . . . . . . . . . . $-----------
---------------
All of the above expenses of this Offering will be paid by the
Company.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Restated Certificate of Incorporation of the Company provides that
the Company shall indemnify to the fullest extent permitted by Section 145
of the General Corporation Law of the State of Delaware (the "Delaware
Law") any person whom it may indemnify thereunder. The Amended and
Restated By-laws of the Company provide that indemnification shall be made
by the Company only upon a determination that indemnification is proper in
the circumstances because the individual met the applicable standard of
conduct. Advances for such indemnification may be made pending such
determination upon receipt of an undertaking by the director or officer to
repay all amounts so advanced in the event that it shall ultimately be
determined that such director or officer is not entitled to be indemnified
by the Company. In addition, the Certificate of Incorporation provides for
the limitation to the extent permitted by the Delaware Law of personal
liability of directors to the Company and its stockholders for monetary
damages for breach of fiduciary duty as directors of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company issued notes in the aggregate principal amount of
$1,007,500 (the "Bridge Notes") to eight investors between April and August
1992. Pursuant to the Recapitalization Agreement, dated as of September 4,
1992, among the Company, Park Investment Partners, Inc. ("Park"), William
H. Gunther, Jr., Joseph E. Lamborghini, William H. Gunther III, Christine
E. Gunther, Susan G. Hotkowski and Rufus V. Smith, the Company issued (i)
1,115,000 shares of Common Stock to Park in consideration for $582,500,
paid by the cancellation of notes from the Company in that principal amount
held by Park or its stockholders, representing a portion of the Bridge
Notes, (ii) warrants to purchase 43,067 shares of Common Stock at an
exercise price of $1.88 per share (the number of shares and exercise price
subject, in certain events, to adjustment, including to protect against
dilution) to holders of Bridge Notes and (iii) 2,366,657 shares of Class A
Convertible Preferred Stock at a price of $.75 per share to 27 investors,
paid in cash or by the cancellation of Bridge Notes. In addition, for
purposes of adjusting the capitalization of the Company to conform to the
requirements set forth in the Recapitalization Agreement, the Company
issued Park 95,000 additional shares of Common Stock in March 1993.
Between October 1992 and March 1993, the Company issued 949,260 shares
of Class A Preferred Stock at a price of $.75 per share to 12 investors.
Effective March, 31, 1995, the Company issued an aggregate of 196,426
shares of Common Stock in conversion of $455,000 of the notes outstanding,
plus accrued and unpaid interest, to Messrs. Geneen and Newman.
In August, 1995, the Company issued an aggregate of 333,335 shares of
Common Stock to 10 private investors at a price of $3.00 per share.
Pursuant to agreements effective December 31, 1995, the Company issued
an aggregate of 197,856 shares of Common Stock to two creditors of the
Company in conversion of outstanding notes at a price of $3.42 per share.
On February 12, 1996, the Company issued 25,000 shares of Common Stock
in conversion of a $100,000 outstanding note to Amnon and Caren Barness.
The Company issued all of the foregoing securities in reliance upon
the exemption from the registration requirements of the Securities Act of
1933, as amended, contained in Section 4(2) thereof. The Company did not
pay any commissions or discounts in connection with such sales.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
Exhibit No. Description of Exhibit
------------ ---------------------
*3 (i)(a) Restated Certificate of Incorporation of the Company.
*3 (i)(b) Restated Certificate of Incorporation of the Company,
as amended.
*3 (ii) Amended and Restated By-Laws of the Company
*4 (a) Form of Warrant Agreement.
*4 (b) Form of Underwriters' Warrants.
*5 Opinion of Reid & Priest LLP
* 10(a) Recapitalization Agreement dated September 4, 1992.
* 10(b)(i) Lease, dated as of May 1, 1990, between the Company and
Carl G. and Shirley M. Sontheimer.
* 10(b)(ii) Lease Modification and Extension Agreement,
dated as of October 1, 1992, between the
Company and Carl D. and Shirley M.
Sontheimer.
* 10(c) Promissory Note of the Company, dated September 7,
1992, to Carl G. Sontheimer and Shirley M. Sontheimer
in the amount of $138,280.
* 10(d) Demand Promissory Note of William H. Gunther, Jr.,
dated August 13, 1992, to the Company, in the amount of
$28,790.33.
* 10(e) Demand Promissory Note of William H. Gunther, Jr.,
dated August 13, 1992, to the Company, in the amount of
$41,000.
* 10(f) Employment Agreement, dated September 4, 1992, between
the Company and William H. Gunther, Jr.
* 10(g) Employment Agreement, dated December 10, 1992, between
the Company and Joseph E. Lamborghini.
* 10(h) Stock Subscription Warrant, issued September 4, 1992,
entitling Park Investment Partners, Inc. to purchase
102,000 shares of the Company's Common Stock at $0.375
per share (the "Warrant Price").
* 10(i) Stock Subscription Warrant, issued September 4, 1992,
entitling Gerald H. Newman to purchase 13,333 shares of
the Company's Common Stock at the Warrant Price.
* 10(j) Stock Subscription Warrant, issued September 4, 1992,
entitling Joyce D. Flaschen to purchase 13,333 shares
of the Company's Common Stock at the Warrant Price.
* 10(k) Stock Subscription Warrant, issued September 4, 1992,
entitling Harold S. Geneen to purchase 13,333 shares of
the Company's Common Stock at the Warrant Price.
* 10(l) Stock Subscription Warrant, issued September 4, 1992,
entitling Howard Alper to purchase 26,667 shares of the
Company's Common Stock at the Warrant Price.
* 10(m) Stock Subscription Warrant, issued September 4, 1992,
entitling Mark Fisher to purchase 6,667 shares of the
Company's Common Stock at the Warrant Price.
* 10(n) Stock Subscription Warrant, issued September 4, 1992,
entitling Caren Barness to purchase 13,333 shares of
the Company's Common Stock at the Warrant Price.
* 10(o) Stock Subscription Warrant, issued September 4, 1992,
entitling Guy W. Fiske to purchase 26,667 shares of the
Company's Common Stock at the Warrant Price.
* 10(p) Deferred Payment Agreement, dated September 3, 1992,
between the Company and Joseph E. Lamborghini.
* 10(q) Deferred Payment Agreement, dated September 3, 1992,
between the Company and James Grover.
* 10(r) Deferred Payment Agreement, dated September 3, 1992,
between the Company and Edgar F. Beaver.
* 10(s) Royalty Agreement, dated September 3, 1992, between the
Company and William H. Gunther, Jr.
* 10(t) Royalty Agreement, dated September 3, 1992, between the
Company and William H. Gunther III.
* 10(u) Royalty Agreement, dated September 3, 1992, between the
Company and Joseph E. Lamborghini.
* 10(v) Royalty Agreement, dated September 3, 1992, between the
Company and Rufus V. Smith.
* 10(w) Royalty Agreement, dated September 3, 1992, between the
Company and Christine E. Gunther.
* 10(x) Royalty Agreement, dated September 3, 1992, between the
Company and Susan G. Hotkowski.
* 10(y) Development Agreement, effective November 16, 1989,
between the Company and CII.
* 10(z) Modification and Termination Agreement, dated August
31, 1992, between the Company and CII.
* 10(aa) Modification Agreement, dated September 30, 1993,
between the Company and CII.
* 10(bb) Agreement Regarding Redemption of Class B Senior Non-
Convertible Preferred Stock of Company, dated September
30, 1993.
* 10(cc) Collateral Assignment and Security Agreement, dated
June 5, 1992, between the Company and CII.
* 10(dd) Security Agreements, dated April 9, 1987, between the
Company and CII.
* 10(ee) Letter Agreement, dated September 1, 1992, between the
Company and DataCard.
* 10(ff) Promissory Note of the Company, dated September, 1992,
to DataCard, in the amount of $426,501.99.
* 10(gg) Third Party Product Service Agreement, dated October
13, 1992, between the Company and DataCard.
* 10(hh) Agreement, dated August 29, 1991, between the Company
and Standard Duplicating Machines Corporation.
* 10(ii) Promissory Note of the Company, dated February 18,
1992, to Park Investment Partners, Inc., in the amount
of $200,000.
* 10(jj) Promissory Note of the Company, dated April 2, 1992, to
Joyce Flaschen, in the amount of $50,000.
* 10(kk) Promissory Note of the Company, dated April 2, 1992, to
Howard S. Geneen, in the amount of $50,000.
* 10(ll) Promissory Note of the Company, dated April 2, 1992, to
Gerald H. Newman, in the amount of $50,000.
* 10(mm) Promissory Note of the Company, dated April 2, 1992, to
Howard Alper, in the amount of $100,000.
* 10(nn) Promissory Note of the Company, dated April 3, 1992, to
Mark Fisher, in the amount of $25,000.
* 10(oo) Promissory Note of the Company, dated April 10, 1992,
to Amnon Barness, in the amount of $50,000.
* 10(pp) Promissory Note of the Company, dated May 20, 1992, to
Gerald H. Newman, in the amount of $25,000.
* 10(qq) Promissory Note of the Company, dated May 20, 1992, to
Harold S. Geneen, in the amount of $25,000.
* 10(rr) Promissory Note of the Company, dated June 18, 1992, to
Guy W. Fiske, in the amount of $100,000.
* 10(ss) Promissory Note of the Company, dated June 26, 1992, to
Gerald H. Newman, in the amount of $15,000.
* 10(tt) Promissory Note of the Company, dated July 2, 1992, to
Gerald H. Newman, in the amount of $17,500.
* 10(uu) Promissory Note of the Company, dated July 2, 1992, to
Harold S. Geneen, in the amount of $17,500.
* 10(vv) Promissory Note of the Company, dated July 22, 1992, to
Gerald H. Newman, in the amount of $50,000.
* 10(ww) Promissory Note of the Company, dated July 22, 1992, to
Harold S. Geneen, in the amount of $50,000.
* 10(xx) Promissory Note of the Company, dated July 30, 1992, to
Harold S. Geneen, in the amount of $35,000.
* 10(yy) Promissory Note of the Company, dated August 6, 1992,
to Gerald H. Newman, in the amount of $35,000.
* 10(zz) Promissory Note of the Company, dated August 17, 1992,
to Steward Flaschen, in the amount of $127,500.
* 10(aaa) Promissory Note of the Company, dated April 22, 1993,
to Harold S. Geneen, in the amount of $75,000.
* 10(bbb) Promissory Note of the Company, dated May 6, 1993, to
Harold S. Geneen, in the amount of $50,000.
* 10(ccc) Promissory Note of the Company, dated May 6, 1993, to
Gerald H. Newman, in the amount of $50,000.
* 10(ddd) Promissory Note of the Company, dated May 13, 1993, to
Gerald H. Newman, in the amount of $35,000.
* 10(eee) Promissory Note of the Company, dated May 13, 1993, to
Harold S. Geneen, in the amount of $35,000.
* 10(fff) Promissory Note of the Company, dated May 21, 1993, to
Harold S. Geneen, in the amount of $100,000.
* 10(ggg) Promissory Note of the Company, dated May 27, 1993, to
Harold S. Geneen, in the amount of $100,000.
* 10(hhh) Promissory Note of the Company, dated June 2, 1993, to
Harold S. Geneen, in the amount of $250,000.
* 10(iii) Promissory Note of the Company, dated July 8, 1993, to
Harold S. Geneen, in the amount of $60,000.
* 10(jjj) Promissory Note of the Company, dated July 29, 1993, to
Harold S. Geneen, in the amount of $100,000.
* 10(kkk) Form of Employee Stock Option Plan.
* 10(lll) Form of Founders Stock Option Plan.
* 10(mmm) Agreement, dated February 14, 1992, between the Company
and Edgar F. Beaver and James Grover.
* 10(nnn) Agreement, dated as of August 31, 1992 between the
Company and James Grover.
* 10(ooo) Promissory Note of the Company, dated September 4,
1992, to James Grover, in the amount of $498,450.09.
* 10(ppp) Waiver, dated September 30, 1993, between James Grover
and the Company.
* 10(qqq) Agreement as of August 31, 1992 between the Company and
Edgar F. Beaver.
* 10(rrr) Promissory Note of the Company, dated September 4,
1992, to Edgar F. Beaver, in the amount of $171,356.98.
* 10(sss) Waiver, dated September 30, 1993, between Edgar F.
Beaver and the Company.
* 10(ttt) Security Agreement, dated July 30, 1993, between the
Company and Fleet Bank.
* 10(uuu) Promissory Note of the Company, dated October 20, 1993,
to Mark Fisher in the amount of $200,000.
* 10(vvv) Warrant, dated October 20, 1993, to purchase 40,000
shares of Common Stock.
* 10(www) Promissory Note of the Company, dated November 1, 1993,
to Fleet Bank.
* 10(xxx) Form of Financial Consulting Agreement.
* 10(yyy) Promissory Note of the Company, dated
December 1, 1993, to Michael Jesselson in
the amount of $200,000.
* 10(zzz) Warrant, dated December 1, 1993, to
purchase 40,000 shares of Common Stock.
* 10(aaaa) Non-exclusive License Agreement between the
Company and Bell & Howell
* 10(bbbb) Memorandum Agreement dated as of March 30,
1992 between the Company, Ascom Holding,
Inc. and Ascorn Auteka, AG.
* 10(cccc) Agreement dated as of June 25, 1992 between
the Company, Ascom Holding, Inc. and Ascom
Auteka, AG.
10(dddd) Commercial Revolving Promissory Note of the Company,
dated December 29, 1993, to Fleet Bank (filed as
Exhibit 10.60 on the Company's annual report on Form
10-KSB for its fiscal year ended March 31, 1994 and
incorporated herein by reference).
10(eeee) Promissory note of William H. Gunther, Jr. dated
December 10, 1993, to the Company in the amount of
$69,790.33 (filed as Exhibit 10.61 on the Company's
annual report on Form 10-KSB for its fiscal year ended
March 31, 1994 and incorporated herein by reference).
10(ffff) Letter Agreement, dated May 18, 1994, between Mark
Fisher and the Company modifying the terms of the
Company's outstanding Promissory Note to Mr. Fisher and
related warrants, together with a letter, dated May 27,
1994, from Mr. Fisher notifying the Company of his
election to convert the outstanding principal amount of
such Note into shares of Common Stock (filed as Exhibit
10.62 on the Company's annual report on Form 10-KSB for
its fiscal year ended March 31, 1994 and incorporated
herein by reference).
10(gggg) Letter Agreement, dated May 18, 1994, between Michael
G. Jesselson and the Company modifying the terms of the
Company's outstanding Promissory Note to Mr. Jesselson
and related warrants, together with a letter, dated May
27, 1994, from Mr. Jesselson notifying the Company of
his election to convert the outstanding principal
amount of such Note into shares of Common Stock (filed
as Exhibit 10.63 on the Company's annual report on Form
10-KSB for its fiscal year ended March 31, 1994 and
incorporated herein by reference).
10(hhhh) Letter dated April 10, 1995 from Harold S. Geneen to
the Company.
10(iiii) Letter dated April 10, 1995 from Gerald H. Newman to
the Company.
10(jjjj) First Amendment to the Third Party Product Service
Agreement, dated July 2, 1993, between the Company and
DataCard (filed as Exhibit 10.31 on the Company's
annual report on Form 10-KSB for its fiscal year ended
March 31, 1995 and incorporated herein by reference).
10(kkkk) Second Amendment to the Third Party Product Service
Agreement, dated February 17, 1994, between the Company
and DataCard (filed as Exhibit 10.32 on the Company's
annual report on Form 10-KSB for its fiscal year ended
March 31, 1995 and incorporated herein by reference).
10(llll) Extension Agreement, dated June 20, 1995, between James
R. Grover and the Company (filed as Exhibit 10.41 on
the Company's annual report on Form 10-KSB for its
fiscal year ended March 31, 1995 and incorporated
herein by reference).
10(mmmm) Extension Agreement, dated June 20, 1995, between Edgar
F. Beaver and the Company (filed as Exhibit 10.46 on
the Company's annual report on Form 10-KSB for its
fiscal year ended March 31, 1995 and incorporated
herein by reference).
10(nnnn) Warrant, dated October 20, 1993, to purchase 13,333
shares of Common Stock issued to Mark Fisher (filed as
Exhibit 10.49 on the Company's annual report on Form
10-KSB for its fiscal year ended March 31, 1995 and
incorporated herein by reference).
10(oooo) Warrant, dated December 1, 1993, to purchase 10,000
shares of Common Stock issued to Michael Jesselson and
Linda Jesselson Trustees UIT 3/27/84 FOB Samuel Joseph
Jesselson (filed as Exhibit 10.51 on the Company's
annual report on Form 10-KSB for its fiscal year ended
March 31, 1995 and incorporated herein by reference).
10(pppp) Warrant, dated December 1, 1993, to purchase 10,000
shares of Common Stock issued to Michael Jesselson and
Linda Jesselson Trustees UIT 3/27/84 FOB Roni Aron
Jesselson (filed as Exhibit 10.52 on the Company's
annual report on Form 10-KSB for its fiscal year ended
March 31, 1995 and incorporated herein by reference).
10(qqqq) Warrant, dated December 1, 1993, to purchase 10,000
shares of Common Stock issued to Michael Jesselson and
Linda Jesselson Trustees UIT 3/27/84 FOB Jonathan Judah
Jesselson (filed as Exhibit 10.53 on the Company's
annual report on Form 10-KSB for its fiscal year ended
March 31, 1995 and incorporated herein by reference).
10(rrrr) Warrant, dated January 12, 1995, to purchase 10,000
shares of Common Stock issued to Michael Jesselson and
Linda Jesselson Trustees UIT 3/27/84 FOB Maya Ariel
Ruth Jesselson (filed as Exhibit 10.54 on the Company's
annual report on Form 10-KSB for its fiscal year ended
March 31, 1995 and incorporated herein by reference).
10(ssss) Warrant, dated January 12, 1995, to purchase 13,333
shares of Common Stock issued to Michael Jesselson and
Linda Jesselson Trustees UIT 3/27/84 FOB Maya Ariel
Ruth Jesselson (filed as Exhibit 10.55 on the Company's
annual report on Form 10-KSB for its fiscal year ended
March 31, 1995 and incorporated herein by reference).
10(tttt) Commercial Revolving Promissory Note of the Company in
the amount of $300,000, dated March 29, 1995, to Fleet
Bank (filed as Exhibit 10.59 on the Company's annual
report on Form 10-KSB for its fiscal year ended March
31, 1995 and incorporated herein by reference).
10(uuuu) Revolving Credit Note of the Company in the amount of
$1,350,000, dated March 16, 1995, to Fleet Bank (filed
as Exhibit 10.60 on the Company's annual report on Form
10-KSB for its fiscal year ended March 31, 1995 and
incorporated herein by reference).
10(vvvv) First Amendment to the Revolving Credit Note of the
Company increasing the principal amount from $1,350,000
to $1,500,000, dated April 13, 1995, to Fleet Bank
(filed as Exhibit 10.61 on the Company's annual report
on Form 10-KSB for its fiscal year ended March 31, 1995
and incorporated herein by reference).
10(wwww) Second Amendment to the Revolving Credit Note of the
Company increasing the principal amount from $1,500,000
to $2,000,000, dated May 31, 1995, to Fleet Bank
(filed as Exhibit 10.62 on the Company's annual report
on Form 10-KSB for its fiscal year ended March 31, 1995
and incorporated herein by reference).
10(xxxx) Xerox Worldwide Printing Systems Partners Program
Partnership Guide dated August 1990 (filed as Exhibit
10.63 on the Company's annual report on Form 10-KSB for
its fiscal year ended March 31, 1995 and incorporated
herein by reference).
10(yyyy) Letter from Fleet Bank dated August 11, 1995 extending
maturity of the Revolving Credit Note of the Company to
October 31, 1996 from June 30, 1996 (filed as Exhibit
10.64 on the Company's annual report on Form 10-KSB for
its fiscal year ended March 31, 1995 and incorporated
herein by reference).
++ 10(zzzz) Promissory Note of the Company, dated August 15, 1995,
to Amnon and Caren Barness, in the amount of $100,000.
++ 10(aaaaa) Warrant, dated August 15, 1996, to purchase 25,000
shares of Common Stock issued to Amnon and Caren
Barness.
++ 10(bbbbb) Amendment and Restatement of Development Agreement made
as of December 31, 1995 between the Company and
Connecticut Innovations Inc. (filed as Exhibit 10.2 on
the Company's Form 10-QSB dated December 31, 1995 and
incorporated herein by reference).
++ 10(ccccc) Letter from Fleet Bank dated February 9, 1996,
extending maturity of the Revolving Credit Notes of the
Company to July 31, 1997 from September 30 and October
31, 1996 (filed as Exhibit 10.3 on the Company's Form
10-QSB dated December 31, 1995 and incorporated herein
by reference).
23(a) Consent of Arthur Andersen LLP.
23(b) Consent of Reid & Priest LLP contained in Exhibit 5
hereto.
++ 24 Power of Attorney (included on page II-12).
* Incorporated by reference to the registrant's Registration statement
on Form SB-2, Registration No. 33-70052-B.
+ To be filed by amendmen
++ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULE
Report of Independent Public Accountants on Schedule
Schedule II - Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(a) Insofar as indemnification for liability arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) For determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Act shall be deemed to be part of this registration statement as of the
time it was declared effective.
(c) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the Offering of such securities at that time shall be deemed
to be the initial bona fide Offering thereof.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form S-1 and authorizes this
Registration Statement to be signed on its behalf by the undersigned, in
the Town of Norwich, State of Connecticut, on this 10th day of May, 1996.
GUNTHER INTERNATIONAL, LTD.
/s/ James H. Whitney
---------------------
James H. Whitney
President and Chief Executive Officer
(Principal Executive Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below under the heading "Signatures" constitutes and appoints
Frederick W. Kolling III and James H. Whitney, or either of them his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, each acting alone, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in
connection with the above premises, as fully for all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
Signatures Title Date
---------- ----- -----
*
------------------- Chairman of the May 10, 1996
Harold S. Geneen Board of Directors
*
------------------- Director May 10, 1996
Gerald H. Newman
*
------------------- Director May 10, 1996
Guy W. Fiske
------------------- Director May __, 1996
J. Kenneth Hickman
/s/ James H. Whitney President, Chief May 10, 1996
------------------- Executive Officer,
James H. Whitney and Director
* Vice President, May 10, 1996
-------------------- Chief Operating Officer
Alan W. Morton and Director
* Vice President, May 10, 1996
---------------------------- Chief Financial Officer,
Frederick W. Kolling III Treasurer, Secretary
and Director
(Principal Financial
and Accounting Officer)
---------------
*By: /s/ James H. Whitney
---------------------------
James H. Whitney
Attorney in Fact
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
----------------------------------------------------
To Gunther International, Ltd.:
We have audited in accordance with generally accepted auditing
standards, the financial statements included in this registration
statement, and have issued our report thereon dated May 26, 1995. Our
audit was made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in the index above
is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's
rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as
whole.
/s/ Arthur Anderson LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
May 26, 1995
<PAGE>
SCHEDULE II
GUNTHER INTERNATIONAL, LTD.
--------------------------
VALUATION AND QUALIFYING ACCOUNTS
----------------------------------
Additions
---------
Balance at Charged to Charged Balance
beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions (1) of Period
----------- --------- -------- -------- -------------- ---------
Predecessor:
Period
April 1,
1992 to
September 3,
1992:
Allowance for
doubtful
accounts: $ - $ - $ - $ - $ -
Reserve for
investment - 50,000 - - 50,000
Company
-------
Period September 4,
1992 to March 31,
1993:
Allowance for
doubtful
accounts - - - - -
Reserve for
investment 50,000 - - - 50,000
Year ended
March 31,
1994:
Allowance for
doubtful
accounts - 13,237 - - 13,327
Reserve for
investment 50,000 - - - 50,000
Year ended
March 31,
1995:
Allowance for
doubtful
accounts 13,327 - - 600 12,637
Reserve for
investment 50,000 - - - 50,000
(1) Write-off of uncollectible accounts.
<PAGE>
EXHIBIT INDEX
--------------
Exhibit No. Description of Exhibit Page No.
----------- ---------------------- --------
5.1 Opinion of Reid & Priest.
23(a) Consent of Arthur Andersen LLP.
Exhibit 5.1
REID & PRIEST LLP
40 West 57th Street
New York, NY 10019-4097
Telephone 212 603-2000
Fax 212 603-2001
New York, New York
May 9, 1996
Gunther International, Ltd.
5 Wisconsin Avenue
Norwich, Connecticut 06360
Ladies and Gentlemen:
We have examined Amendment No. 1 to the
Registration Statement on Form S-1 (Registration No.
333-02558) to be filed with the Securities and Exchange
Commission on May 13, 1996 for registration under the
Securities Act of 1933, as amended (the "Act"), of 358,335
shares of voting common stock, par value $0.001 per share
(the "Common Stock"), of Gunther International, Ltd. (the
"Company"), which will be offered by certain selling
stockholders (the "Selling Stockholders' Shares") and which
were issued in private placements. We have examined
pertinent corporate documents and records of the Company,
including the Certificate of Incorporation and By-Laws of
the Company, and we have made such examination as we have
deemed necessary or appropriate as a basis for the opinion
hereafter expressed.
On the basis of the foregoing, we are of the
opinion that the Selling Stockholders' Shares are legally
issued, fully paid and non-assessable shares of Common
Stock of the Company.
We hereby consent to the filing of this opinion
as an exhibit to the Registration Statement and to the
reference to our firm in the prospectus under the caption
"Legal Matters". In giving the foregoing consent, we do
not thereby admit that we belong to the category of persons
whose consent is required under Section 7 of the Act, or
the rules and regulations promulgated by the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/ Reid & Priest LLP
Exhibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use
of our reports and to all references to our Firm included in this
registration statement.
/s/ Arthur Anderson LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
May 9, 1996
