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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] for the fiscal year ended March 31, 1996.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] for the transition period from
______________________ to ___________________.
Commission file number: 0-22994
GUNTHER INTERNATIONAL, LTD.
(Name of small business issuer in its charter)
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DELAWARE 51-0223195
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
5 Wisconsin Avenue
Norwich, Connecticut 06360
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number: (860) 823-1427
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
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Title of each class Name of each exchange on which registered
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None
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SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, $.001 Par Value
Common Stock Purchase Warrants
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports, and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Registrant's revenues for the most recent fiscal year were $12,481,262.
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of June 28, 1996, based upon the average of the reported closing
bid and asked prices of such stock on that date as reported by the OTC Bulletin
Board, was $11,902,341. The number of shares of the Registrant's Common Stock
outstanding as of June 28, 1996 was 4,133,269.
DOCUMENTS INCORPORATED BY REFERENCE. The information required by Part III of
this Annual Report on Form 10-KSB is incorporated by reference to the
Registrant's definitive proxy statement to be distributed to stockholders in
connection with the 1996 Annual Meeting of Stockholders. Such proxy statement is
expected to be filed with the Commission within one hundred and twenty (120)
days of the close of the fiscal year.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TABLE OF CONTENTS
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PART I
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Item 1. Description of Business.............................................. 1
General......................................................... 1
Development of the Business..................................... 1
Finishing Systems............................................... 1
Strategy........................................................ 2
Systems......................................................... 3
Marketing and Sales.................................................. 7
Customers............................................................ 8
Manufacturing........................................................ 8
Installation and Customer Service.................................... 9
Research and Development............................................. 10
Competition.......................................................... 10
Patents and Proprietary Rights....................................... 11
Employees............................................................ 12
Item 2. Description of Property.............................................. 12
Item 3. Legal Proceedings.................................................... 12
Item 4. Submission of Matters to a Vote of
Security Holders................................................ 13
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters............................................. 13
Item 6. Management's Discussion and Analysis or Plan of
Operation....................................................... 14
Recent Strategic Initiatives.................................... 14
Summary Financial Data.......................................... 16
Change in Accounting Method..................................... 17
Results of Operations........................................... 17
Liquidity and Capital Resources................................. 19
Inflation....................................................... 21
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Item 7. Financial Statements................................................. 21
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................. 21
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............... 22
Item 10. Executive Compensation............................................... 22
Item 11. Security Ownership of Certain Beneficial
Owners and Management........................................... 22
Item 12. Certain Relationships and Related Transactions....................... 22
PART IV
Item 13. Exhibits and Reports on Form 8-K..................................... 23
Signatures........................................................................ 27
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PART I
ITEM 1. DESCRIPTION OF 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.
In 1987, the Company and Connecticut Innovations, Inc., a specially
chartered Connecticut Corporation ("CII"), entered into the first of several
agreements (collectively, the "Development Agreements"), pursuant to which CII
provided funding to the Company for product development in exchange for the
issuance of 500 shares of Class B Senior Non-Convertible Preferred Stock
("Class B Stock") and future royalty payments based on the total sales of the
Company. The Development Agreements were completely amended and restated as of
December 31, 1995. As amended and restated, the Development Agreements require
the Company to pay CII a royalty equal to .67% of all systems sales of the
Company up to a maximum of $775,000 and provides for certain minimum annual
royalty payments, payable quarterly. To secure its obligations under the
Development Agreements, the Company assigned all then existing and future
Company patents to CII. Title to the patents will be transferred back to the
Company upon the fulfillment of its obligations under the Development
Agreements. See "-Patents and Proprietary Rights" below and "Management's
Discussion and Analysis or Plan of Operation - 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
$2,257,500 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.
On December 29, 1993, the Company completed its initial public offering
of 1,000,000 units of its securities (each unit consisting of one share of the
Company's Common Stock, par value $.001 per share, and one callable Common Stock
Purchase Warrant). The net proceeds to the Company from the public offering were
$3,975,000. The underwriters elected to exercise their over-allotment option in
January 1994, which generated additional net proceeds of $615,000. The Company
used the proceeds from the offering to reduce its accounts payable, pay down
outstanding debt, increase research and development efforts and for general
working capital purposes.
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
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allows for variations in the text of each document to be printed. The documents
can be personalized and modified as desired.
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 new way 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 labor, 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 turnaround 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. To generate sales, it relied 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 a broader range of insurance companies
and users in the banking, 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 upgraded.
Collaborative Development. The Company will continue to collaborate
with customers
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(including 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 can verify that a given document has been processed properly and
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 486DX2/66 megahertz central processing unit with
dual 850 megabyte hard drives. 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,
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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, i.e., 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
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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. In a dual mailer system, each sheet of a
document 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 towards 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 thickness'. 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 1/16 to 1/32 of an inch on the side edge and 1 to 2 inches from top and
bottom.
Stitcher Module. The StitchMaster module allows corner or booklet
stitching of 2 to 50 sheets of paper, including covers and other media. The
Stitcher is activated by the system control code on the primary documents, such
that stitching is performed dynamically throughout a run. Stitched booklets can
be intermixed with loose booklets, and those bound by other means. If the
Stitcher activates but does not deliver a stitch, the stitch detect feature will
sense a missing stitch, declare an error on the system CRT, and stop the
machine.
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 Punch Module. The VeloBind Punch Module punches the paper with
the four holes required to apply the VeloBind 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 strip.
VeloBind Fastening Module. The VeloBind 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.
Slip and Grip. Slip and Grip is a binding method that utilizes an
attractive plastic sleeve placed along the eleven inch edge of an 8-12x11 inch
booklet. The sleeve has a triangular cross section and pinches the paper in its
"jaws" for a secure grip. Paper can be removed by sliding the
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grip off by hand. This facilitates updating of documents. The Slip and Grip
module is made up of two sections: The grip feeder and the grip applicator. The
grip feeder, is loaded by the operator and holds up to 1200 grips. The
applicator section opens the grips and places them over the edge of the booklet.
The entire system is fully automatic and can bind up to 40 sheets of 20 LB
paper.
Flat Metering. The Flat Metering module provides a means for
automatically applying postage to flat envelopes of varying thickness up to 180
sheets. This is achieved by applying the postage to a label with a standard
postage meter, which is limited in its thickness capacity, and then applying the
label to the package. The Company's system calculates the weight of the complete
package and automatically applies the correct postage. Postage can be applied to
any of the four corners of the envelope in either a portrait or landscape
orientation.
Friction Feeder. The Friction Feeder is a versatile feeder which
separates and feed material from the bottom of a stack of up to 24 inches. It
efficiently feed a wide range of material from 20 LB sheets up to 1/2 inch thick
booklets. The single knob separator gate adjustment allows for quick and easy
set up and material change over.
Folded Mail Inserter. A completed document set is moved to the Folded
Mail Inserter for diverting oversize documents, next 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 meters.
Ink Jet Printing. MS and DM systems may be configured with multi-head
ink jet printing capability to dynamically print envelope address, return
addresses and bar codes in a variety of font styles and sizes.
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 to 10 inches wide to 11 1/4 inches to 13 inches long. The
pre-glued, 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 Modules 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
the Company
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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.
2-D Code. 2-D is an improved method of coding documents, replacing more
traditional means such as bar code or OMR. Unlike linear or one-dimensional bar
codes, 2-D code has the ability to represent large amounts of information in a
small area, thereby making the code less obtrusive and more aesthetic. Data
integrity is maintained through the use of 16 or 32 bit Cyclic Redundancy Check
(CRC), which is far more powerful than the self-checking within traditional bar
codes.
Convertible Systems. EP and MS systems can be configured to work in
both flat and folded modes, using a quick-connect and disconnect 10x13 flat
inserter or folded mail inserter. This feature allows a user to specify either
an EP or MS system, depending on the dominant applications, but still retain the
ability to run in both flat and folded mode.
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 health care 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, 1996,
approximately 31% of the Company's system sales were to previous purchasers of
the Company's systems and the Company believes that repeat sales and upgrades of
existing systems will continue to be an important source of revenue. 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.
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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, The Travelers
and many of the other major insurers in the United States. 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 1996, 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. However, the Company has not relied on any
of these customers to maintain that level of sales from year to year.
At March 31, 1996, the Company had a backlog of orders for 13 systems
aggregating approximately $1,085,000, compared to a backlog of approximately
$3,676,000 at March 31, 1995. 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 largely 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., Crown Machine
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.
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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 facilities for approximately two 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 6 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 specifies that maintenance be performed by the
customer itself. 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 76
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
9
<PAGE> 13
Company. Principal is payable in quarterly installments of $35,541 beginning in
September 1995 and continuing until 1998. The Company has not made any payments
against this note. DataCard has agreed to waive the payment of principal until
September 30, 1996. The Company owed DataCard an additional $200,000 for
services, which was payable beginning in September, 1995 from a percentage of
revenues from maintenance contracts. The Company has paid $35,481 against this
loan as of March 31, 1996.
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, 1996, revenues from customer maintenance agreements
represented approximately 32% 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, 1996 and 1995, the Company
incurred expenses of approximately $64,407 and $79,764, 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.
10
<PAGE> 14
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 9 patents in the United States, has 2
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 nondisclosure agreements with its employees
and, where the Company regards it as necessary, with customers.
In connection with the Development Agreements with CII and as partial
consideration for loans made in connection therewith, the Company has
assigned all existing and future Company patents to CII as security for the
Company's performance. Title to the patents will be transferred back to the
Company upon the fulfillment of its obligations under the Development
Agreements, as amended and restated as of December 31, 1995.
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 infringes.
In connection with the restructuring completed by the Company in
September 1992, the Company granted to Bell & Howell a nonexclusive license for
read and 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
11
<PAGE> 15
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.
EMPLOYEES
At March 31, 1996, the Company had 79 full-time employees, consisting
of 52 engaged in engineering and development and manufacturing support, 12 in
marketing and sales activities, 6 in customer services and 9 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.
ITEM 2. DESCRIPTION OF PROPERTY
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. The Company is
currently negotiating with the owner of the facility, and owners of other
properties in the area, to secure a long term lease of this or other
facilities. 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 sales offices in Charleston, Rhode Island and Chicago, Illinois, that are
leased on a month-to-month basis for rent aggregating $850 per month.
ITEM 3. LEGAL PROCEEDINGS.
A former employee who was terminated from employment on December 3,
1993, filed an application for a prejudgment remedy in the Connecticut Superior
Court for the Judicial District of Fairfield at Bridgeport on January 28, 1994
seeking an attachment of $300,000 on Company assets. On March 8, 1995, the court
issued a written decision denying the employee's application, holding that the
employee had failed to demonstrate "probable cause" that a judgment would be
rendered in his favor should the case proceed to trial. On June 12, 1995, the
Company was served with a complaint despite the denial of the prejudgment remedy
application. The complaint
12
<PAGE> 16
attempts in three counts to set out claims or wrongful discharge under
Connecticut common law exceptions to the employment - at - will doctrine. The
case has been claimed for a jury trial, but no specific trial date has been set.
Mayer-Wittman Joint Ventures, Inc. ("MWJV") brought suit against the
Company in the Connecticut Superior Court for the Judicial District of
Stamford/Norwalk at Stanford on October 13, 1993. MWJV alleged breach of written
contract, breach of oral contract, unjust enrichment and promissory estoppel in
connection with the investment banking services plaintiff purportedly rendered
to the Company in the period December 14, 1990 to October 14, 1992. The case was
tried before a Connecticut State Trial Referee during November, 1995, and a
written decision was filed on March 16, 1996. The Referee ruled in the Company's
favor on the first four counts of the complaint and against the Company on the
fifth count. If judgment enters in the amounts set by the referee, the Company
will be liable to pay the principal amount of $110,000 and prejudgment interest
at the rate of 10% per year since October 1992. The Company has objected to
the interest portion of the award. The appeal period has not run, and it is
unknown whether the plaintiff will appeal the ruling against it on counts in
which it sought $309,922.50.
The Company believes that it has valid defenses to the actions
described above and has established appropriate financial reserves that are
believed to be adequate for potential liabilities the Company is reasonably
likely to incur. Accordingly, the Company believes that the ultimate disposition
of such actions will not have a material adverse effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
From December 21, 1993 to April 12, 1995, the Company's Common Stock
was traded on the NASDAQ SmallCap Market under the symbol SORT. On April 12,
1995, the National Association of Securities Dealers ("NASD") delisted the
Common Stock from the NASDAQ SmallCap Market due to the Company's failure to
maintain capital and surplus of at least $1,000,000. Since that time, the Common
Stock has been quoted on the OTC Bulletin Board.
The following table sets forth the high and low closing bid prices of
the Company's Common Stock for each quarter of fiscal 1995 and fiscal 1996, as
reported by NASDAQ and the OTC Bulletin Board. These quotations represent prices
between dealers and do not include retail mark-ups, mark-downs or other fees or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Bid Price
---------
Fiscal Quarter High Low
-------------- ---- ---
<S> <C> <C>
First Fiscal Quarter - 1995 $4 3/8 $3 1/8
(April 1 - June 30, 1994)
</TABLE>
13
<PAGE> 17
<TABLE>
<S> <C> <C>
Second Fiscal Quarter - 1995 4 3/4 3 1/4
(July 1 - September 30, 1994)
Third Fiscal Quarter - 1995 4 3/8 2 3/8
(October 1 - December 31, 1994)
Fourth Fiscal Quarter - 1995 2 15/16 1 1/4
(January 1 - March 31, 1995)
First Fiscal Quarter - 1996 3 2 3/4
(April 1 - June 30, 1995)
Second Fiscal Quarter - 1996 4 1/4 3
(July 1 - September 30, 1995)
Third Fiscal Quarter - 1996 4 7/8 3 1/2
(October 1 - December 31, 1995)
Fourth Fiscal Quarter - 1996 6 13/16 3 3/4
(January 1 - March 31, 1996)
</TABLE>
On June 28, 1996, the high and low bid price quotations for the
Company's Common Stock were $5 1/4 and $5, respectively, as reported by the OTC
Bulletin Board.
As of June 28, 1996 there were approximately 125 record owners of the
Company's Common Stock, although the Company believes its Common Stock is
beneficially held by more than 300 persons. There is one record owner of the
Company's Class B Common Stock. The Company has not paid dividends of its Common
Stock and intends for the foreseeable future to retain earnings, if any, to
finance the expansion and development of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RECENT STRATEGIC INITIATIVES
Management Changes. In July, 1995, Frederick W. Kolling III, CPA,
joined the Company to fill the position of Vice President, Chief Financial
Officer, Treasurer and Secretary. Mr. Kolling has held the senior financial
position in two other high technology, high growth companies over the past
eleven years. In September, 1995, James H. Whitney, the Chief Executive Officer,
Alan W. Morton, the Vice President of Operations, and Mr. Kolling were elected
to the Board of Directors.
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, HMO field,
14
<PAGE> 18
and banking and brokerage 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.
In years prior to fiscal year 1996, due to the Company's financial
position and resulting cash needs, the Company was focused on consummating sales
without due regard to a coherent product pricing strategy. This practice
resulted in an erosion of gross profit margins. Similarly, the Company had
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, and has been successful in implementing such a policy
in fiscal year 1996. 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.
Cost Reduction. In addition to the initiatives discussed above,
Management intends to aggressively 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 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 improved gross margins.
15
<PAGE> 19
SUMMARY FINANCIAL DATA
The summary financial data presented below should be read in
conjunction with the information set forth in the financial statements and notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
March 31, 1996 March 31, 1995 March 31, 1994
-------------- -------------- --------------
(restated)(1)
<S> <C> <C> <C>
Sales:
Systems $ 8,458,700 $ 6,629,988 $ 5,117,151
Maintenance 4,022,562 2,935,333 2,458,363
------------ ------------ ------------
Total Sales 12,481,262 9,565,321 7,575,514
------------ ------------ ------------
Cost of Sales:
Systems 4,895,387 4,844,531 3,017,612
Maintenance 2,826,853 2,306,597 2,146,244
------------ ------------ ------------
Total Cost of Sales 7,722,240 7,151,128 5,163,856
------------ ------------ ------------
Gross Profit 4,759,022 2,414,193 2,411,658
Selling and Administrative
Expenses 5,330,807 5,710,062 5,743,982
Research and Development
Expenses 64,407 79,764 356,211
------------ ------------ ------------
Operating Loss (636,192) (3,375,633) (3,688,535)
Interest (243,363) (176,814) (137,416)
Debt Conversion Expense 0 (99,998) 0
Net Income (Loss) ($ 879,555) ($ 3,652,445) ($ 3,825,951)
============ ============ ============
Loss Per Share ($ 0.23) ($ 1.08) ($ 1.61)
============ ============ ============
Weighted Average Shares
Outstanding (2) 3,897,367 3,383,730 2,371,220
============ ============ ============
</TABLE>
(1) See Note 4 of the Notes to Financial Statements and the discussion below
under "Change in Accounting Method".
(2) Loss per share is computed using the weighted average number of common
shares outstanding during each period presented. Outstanding warrants and
options would be anti-dilutive, and, therefore, were not considered as common
stock equivalents.
16
<PAGE> 20
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 was a
reduction of net loss for the period ended March 31, 1994 of $136,478, and a
reduction of loss per share of $.06 for the same period.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 1996
COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995
Systems sales for fiscal 1996 increased $1,829,000, or 28%, from fiscal
1995. Substantially all of this increase was attributable to increased unit
sales, rather than changes in the prices of the Company's systems. Approximately
29 systems were completed in fiscal 1996, compared to 16 in fiscal 1995. At
March 31, 1996, the systems order backlog, consisting of total order price less
revenue recognized to date for all signed orders on hand, was $1,085,000 (or 13
systems) as compared to $3,676,000 (or 18 systems) at March 31, 1995. The
reduction in backlog is attributable solely to the timing of order flows, which
have improved substantially since the end of fiscal 1996. Accordingly,
management does not believe the reduction in backlog between the periods
reflects any deterioration in the Company's prospects.
Maintenance revenues increased $1,087,000, or 37%, as a result of the
larger number of systems in the field and inflationary price increases in
maintenance contracts between the periods.
Gross profit increased to $4,759,000 in fiscal 1996. The gross margin
on system sales increased significantly from 27% in fiscal 1995 to 42% in
fiscal 1996 reflecting a return to the Company's historic gross profit margins.
The maintenance gross profit percentage increased from 21% in fiscal 1995 to 30
% in fiscal 1996, 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.
17
<PAGE> 21
Selling and administrative expenses decreased $379,000, or 7 %, from
fiscal 1995 to fiscal 1996. The decreased 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 $15,000, or 19%, from
fiscal 1995 to fiscal 1996, 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 1996 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 1996 increased $66,000, or 38 %, from
fiscal 1995, increasing from $177,000 to $243,000. This increase was directly
attributable to the increase in borrowings between the periods. 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 common stock.
As a result of the foregoing, the Company incurred a net loss of
$880,000 for the fiscal year ended March 31, 1996, as compared to a net loss of
$3,652,000 for the fiscal year ended March 31, 1995.
The Company believes that it will achieve a substantial reduction or
elimination of its operating and cash flow losses during the next year. The
Company's ability to achieve profitability will depend on its ability to
increase systems and maintenance sales and continue to improve gross margins.
FISCAL YEAR ENDED MARCH 31, 1995
COMPARED TO PRO FORMA 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 increased 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.
18
<PAGE> 22
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 $40,000, 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 common
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for liquidity is to fund operations while it
endeavors to increase sales and achieve profitability. During the year ended
March 31, 1996, the Company had a negative cash flow from operations of
$655,000, compared to negative cash flows of $2,981,000 and $3,631,000 for the
years ended March 31, 1995 and 1994, respectively. These cash flow deficiencies
reflect the increased costs associated with the Company's expanded marketing and
sales efforts and the lack of additional sales sufficient to offset the
increased expenditures.
The negative cash flows of the Company during fiscal 1996 and 1995 have
been funded primarily through increased borrowings and the conversion of
outstanding notes payable as well as new issuances of the Company's equity
securities. Management's strategy is to maintain or reduce expenses and increase
sales to the point where the Company becomes profitable. See "Description of
Business - Strategy" and "Management's Discussion and Analysis or Plan of
Operation - Recent Strategic Initiatives."
In general, as the Company achieves higher sales volumes, a
cash flow benefit will be realized from the increasing levels of deposits
received from customers, usually 50% of the system price at the time the order
is placed. This will be evidenced by an increasing liability balance when
19
<PAGE> 23
the liability "billings in excess of costs and estimated earnings on uncompleted
contracts" and the asset "costs and estimated earnings in excess of billings on
uncompleted contracts" are netted. The Company believes that an increased level
of sales can be supported without a significant corresponding increase in
inventory levels due to improvements in purchasing procedures and parts receipts
scheduling.
Effective December 31, 1995, the Company completed negotiations with
CII, and the parties entered into a new agreement completely amending and
restating the Company's obligations under the Development Agreements (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 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 all prior
unpaid royalties owed and any prior defaults of the Company under the
Development Agreements.
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:
<TABLE>
<CAPTION>
Total Minimum
Calendar Year Payments for the Year
------------- ---------------------
<S> <C>
1996 $ 75,000
1997 75,000
1998 100,000
1999 100,000
2000 125,000
2001 125,000
2002 175,000
-------
$775,000
========
</TABLE>
Purchases of property and equipment totaled $207,000 in fiscal 1996 and
are expected to be slightly higher in fiscal year 1997. The current and planned
capital spending levels are not believed to be a significant element of
liquidity.
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 has
not made any payments against this note. The Company owed DataCard an additional
$200,000 for services, which was payable beginning in September, 1995 from a
percentage of revenues from maintenance contracts. The Company has paid $35,481
against this loan as of March 31, 1996. These loans do not have any material
restrictive covenants.
The Company estimates that its debt service requirements, including
principal and interest payments, through March 31, 1997 will aggregate
approximately $667,000.
20
<PAGE> 24
Historically, the Company has financed its operations through cash
generated from financing arrangements with third parties, bank borrowings
secured by affiliate guarantees or cash collateral furnished by affiliates,
customer deposits, and the sale of equity interests in the Company. As of March
31, 1996, the balance of cash and marketable securities was $452,893, $325,834
of which was pledged to secure the Company's $300,000 note payable to a bank. As
of such date, the Company had a $2,000,000 revolving credit facility with a
bank, of which $1,700,000 was outstanding at March 31, 1996.
On June 4, 1996, the Company entered into a new line of credit
arrangement with a bank which was used to refinance the Company's pre-existing
line of credit. The new arrangement provides for two revolving loans totaling
$2,000,000. The available borrowing under Facility A is in the amount of
$1,750,000, and is to be fully cash collateralized by assets provided by Mr.
Harold S. Geneen, a stockholder and a Director of the Company. The funds
advanced under Facility A bear interest at the bank's base rate. The maturity
date of Facility A is January 10, 1998. The available borrowing under Facility B
is in the amount of $250,000, and is secured by all tangible and intangible
personal property of the Company. The funds advanced under Facility B bear
interest at the bank's base rate, plus 1%. The maturity date of Facility B is
January 10, 1998. On July 5, 1996, there was an outstanding balance of
$1,700,000 owed to the bank on Facility A, and a $0 balance owed to the bank on
Facility B. There are no mandatory prepayments due for either Facility A or B
prior to the maturity date.
Except for the financing arrangements 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 1997. Management believes that such internally
generated funds and available borrowings under its revolving credit facility
will be sufficient to fund its cash requirements during fiscal 1997.
INFLATION
The effect of inflation on the Company has not been significant during
the last two fiscal years.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
This report contains forward looking statements based on current
expectations that involve a number of risks and uncertainties. The factors that
could cause actual results to differ materially include the following: general
economic conditions and growth rates in the finishing and related industries,
competitive factors and pricing pressures, changes in the Company's product
mix, technological obsolescence of existing products and the timely development
and acceptance of new products, inventory risks due to shifts in market
demands, component constraints and shortages, and the ramp-up and expansion of
manufacturing capacity.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this item are presented on pages
F-1 through F-23 immediately following the signature page of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
21
<PAGE> 25
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by Item 9 is hereby incorporated by reference
to the Company's Proxy Statement that will be distributed in connection with the
1996 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 1996. Such proxy statement will be filed with the Commission within
one hundred and twenty (120) days of the close of the fiscal year, or this
Annual Report on Form 10-KSB will be amended to include the requisite
information.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by Items 10 is hereby incorporated by
reference to the Company's Proxy Statement that will be distributed in
connection with the 1996 Annual Meeting of Stockholders, which is currently
scheduled to be held in September 1996. Such proxy statement will be filed with
the Commission within one hundred and twenty (120) days of the close of the
fiscal year, or this Annual Report on Form 10-KSB will be amended to include the
requisite information.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 11 is hereby incorporated by reference
to the Company's Proxy Statement that will be distributed in connection with the
1996 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 1996. Such proxy statement will be filed with the Commission within
one hundred and twenty (120) days of the close of the fiscal year, or this
Annual Report on Form 10-KSB will be amended to include the requisite
information.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 12 is hereby incorporated by reference
to the Company's Proxy Statement that will be distributed in connection with the
1996 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 1996. Such proxy statement will be filed with the Commission within
one hundred and twenty (120) days of the close of the fiscal year, or this
Annual Report on Form 10-KSB will be amended to include the requisite
information.
22
<PAGE> 26
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits required by Item 601 of Regulation S-B:
3.1 Restated Certificate of Incorporation of the Company
(filed as Exhibit 3(i)(a) to the Company's
Registration Statement on Form SB-2, Commission File
No. 33- 70052-B, and incorporated herein by
reference).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Company (filed as Exhibit
3(i)(b) to the Company's Registration Statement on
Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
3.3 Certificate of Amendment of Restated Certificate of
Incorporation (the form of which was filed as Exhibit
3(i)(c) to the Company's Registration Statement on
Form SB-2, Commission File No. 3370052-B, and is
incorporated herein by reference).
3.4 By-Laws of the Company, as amended (filed as Exhibit
3(ii) to the Company's Registration Statement on Form
SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.1 Recapitalization Agreement dated September 4, 1992
(filed as Exhibit 10(a) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-
70052-B, and incorporated herein by reference).
10.2 Underwriting Agreement, dated December 20, 1993, by
and among the Company, JW Charles Securities, Inc.
and Corporate Securities Group, Inc. (the form of
which was filed as Exhibit 1 to the Company's
Registration Statement on Form SB-2, Commission File
No. 33-70052-B, and is incorporated herein by
reference).
10.3 Employment Agreement, dated September 4, 1992,
between the Company and William H. Gunther, Jr.
(filed as Exhibit 10(o) to the Company's Registration
Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.4 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") (filed as
Exhibit 10(h) to the Company's Registration Statement
on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.5 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
(filed as Exhibit 10(i) to the Company's Registration
Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.6 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
(filed as Exhibit 10(j) to the Company's Registration
Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
23
<PAGE> 27
10.7 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
(filed as Exhibit 10(k) to the Company's Registration
Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.8 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
(filed as Exhibit 10(l) to the Company's Registration
Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.9 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 (filed as
Exhibit 10(m) to the Company's Registration Statement
on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.10 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
(filed as Exhibit 10(n) to the Company's Registration
Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.11 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
(filed as Exhibit 10(o) to the Company's Registration
Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.12 Royalty Agreement, dated September 3, 1992, between
the Company and William H. Gunther, Jr. (filed as
Exhibit 10(s) to the Company's Registration Statement
on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.13 Royalty Agreement, dated September 3, 1992, between
the Company and William H. Gunther III (filed as
Exhibit 10(t) to the Company's Registration Statement
on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.14 Royalty Agreement, dated September 3, 1992, between
the Company and Joseph E. Lamborghini (filed as
Exhibit 10(u) to the Company's Registration Statement
on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.15 Royalty Agreement, dated September 3, 1992, between
the Company and Rufus V. Smith (filed as Exhibit
10(v) to the Company's Registration Statement on Form
SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.16 Royalty Agreement, dated September 3, 1992, between
the Company and Christine E. Gunther (filed as
Exhibit 10(w) to the Company's Registration
24
<PAGE> 28
Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.17 Royalty Agreement, dated September 3, 1992, between
the Company and Susan G. Hotkowski (filed as Exhibit
10(x) to the Company's Registration Statement on Form
SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.18 Letter Agreement, dated September 1, 1992, between
the Company and DataCard (filed as Exhibit 10(ee) to
the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated
herein by reference).
10.19 Promissory Note of the Company, dated September,
1992, to DataCard, in the amount of $426,501.99
(filed as Exhibit 10(ff) to the Company's
Registration Statement on Form SB-2, Commission File
No. 33-70052-B, and incorporated herein by
reference).
10.20 Third Party Product Service Agreement, dated October
13, 1992, between the Company and DataCard (filed as
Exhibit 10(gg) to the Company's Registration
Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.21 First Amendment to the Third Party Product Service
Agreement, dated July 2, 1993, between the Company
and DataCard (filed as Exhibit 10.31 to the
Company's Annual Report on Form 10-KSB dated June 26,
1995, and incorporated herein by reference).
10.22 Second Amendment to the Third Party Product Service
Agreement, dated February 17, 1994, between the
Company and DataCard (filed as Exhibit 10.32 to the
Company's Annual Report on Form 10-KSB dated June 26,
1995, and incorporated herein by reference).
10.23 Agreement, dated August 29, 1991, between the Company
and Standard Duplicating Machines Corporation (filed
as Exhibit 10(hh) to the Company's Registration
Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.24 Form of Employee Stock Option Plan and Founders
Option Plan (filed as Exhibit 10(kkk) to the
Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated
herein by reference).
10.25 Letter Agreement, dated December 13, 1993, deferring
certain payments by the Company (filed as Exhibit
10(III) to the Company's Registration Statement on
Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.26 Warrant, dated October 20, 1993, to purchase 40,000
shares of Common Stock issued to Mark Fisher (filed
as Exhibit 10(vvv) to the Company's Registration
Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.27 Warrant, dated January 9, 1995, to purchase 13,333
shares of Common Stock issued to Mark Fisher (filed
as Exhibit 10.49 to the Company's Annual Report on
Form 10-KSB dated June 26, 1995, and incorporated
herein by reference).
10.28 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 Samuel
Joseph Jesselson (filed as Exhibit 10.51 to the
Company's Annual Report on Form 10-KSB dated June 26,
1995, and incorporated herein by reference).
25
<PAGE> 29
10.29 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 Roni
Aron Jesselson (filed as Exhibit 10.52 to the
Company's Annual Report on Form 10-KSB dated June 26,
1995, and incorporated herein by reference).
10.30 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 Jonathan
Judah Jesselson (filed as Exhibit 10.53 to the
Company's Annual Report on Form 10-KSB dated June 26,
1995, and incorporated herein by reference).
10.31 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 to the
Company's Annual Report on Form 10-KSB dated June 26,
1995, and incorporated herein by reference).
10.32 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 to the
Company's Annual Report on Form 10-KSB dated June 26,
1995, and incorporated herein by reference).
10.33 Non-exclusive License Agreement between the Company
and Bell & Howell (filed as Exhibit 10(.qaii) to the
Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated
herein by reference).
10.34 Memorandum Agreement dated as of March 30, 1992
between the Company, Ascom Holding, Inc. and Ascom
Auteka, AG (filed as Exhibit 10(bbbb) to the
Company's Registration Statement on Form SB-2,
Commission File No. 33- 70052-B, and incorporated
herein by reference).
10.35 Agreement dated as of June 25, 1992 between the
Company, Ascom Holding, Inc. and Ascom Auteka, AG
(filed as Exhibit 10(cccc) to the Company's
Registration Statement on Form SB-2, Commission File
No. 33-70052-B, and incorporated herein by
reference).
10.36 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 to the Company's
Annual Report on Form 10-KSB dated June 26, 1995, and
incorporated herein by reference).
10.37 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 to the Company's Annual
Report on Form 10-KSB dated June 26, 1995, and
incorporated herein by reference).
10.38 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 to the Company's
Annual Report on Form 10-KSB dated June 26, 1995, and
incorporated herein by reference).
10.39 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 to the Company's
Annual Report on Form 10-KSB dated June 26, 1995, and
incorporated herein by reference).
10.40 Xerox Worldwide Printing Systems Partners Program
Partnership Guide dated August 1990 (filed as Exhibit
10.64 to the Company's Annual Report on Form 10-KSB
dated June 26, 1995, and incorporated herein by
reference).
10.41 Third Amendment to the Revolving Credit Note of the
Company from Fleet Bank dated September 29, 1995,
extending the maturity of the Note to October 31,
1996 (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB dated November 13,
1995 and incorporated herein by reference).
10.42 Amendment and Restatement of Development Agreement
made as of December 31, 1995 between the Company and
CII (filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-QSB dated February 12, 1996 and
incorporated herein by reference).
10.43 Letter from Fleet Bank dated February 9, 1996,
extending the maturity of the Revolving Credit Note
of the Company to July 31, 1997, from September 30
and October 31, 1996 (filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-QSB dated
February 12, 1996 and incorporated herein by
reference).
24 Power of Attorney pursuant to which this report has
been executed.
27 Financial Data Schedule
b. Reports on Form 8-K. None.
26
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
GUNTHER INTERNATIONAL, LTD.
By: /s/ Frederick W. Kolling III
-------------------------------------------
Frederick W. Kolling III
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER
(ON BEHALF OF THE REGISTRANT AND AS
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Date: July 12, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and dates indicated.
<TABLE>
<CAPTION>
Signature: Title: Date:
- ---------- ------ ----
<S> <C> <C>
/s/ James H. Whitney President, Chief Executive July 12, 1996
- -------------------- Officer (Principle Executive
James H. Whitney Officer)
/s/ Frederick W. Kolling III July 12, 1996
- ----------------------------
Frederick W. Kolling III
Attorney-in-Fact for:
Guy W. Fiske Director
Harold S. Geneen Director
J. Kenneth Hickman Director
Frederick W. Kolling, III Director
Alan W. Morton Director
Gerald H. Newman Director
James H. Whitney Director
</TABLE>
27
<PAGE> 31
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page No.
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheets as of March 31, 1996 and 1995 F-3
Statements of Operations for the Years Ended March 31, 1996
1995 and 1994 F-5
Statements of Stockholders' Equity for the Period April 1, 1993
to March 31, 1996 F-6
Statements of Cash Flows for the Years Ended March 31, 1996,
1995 and 1994 F-7
Notes to Financial Statements F-8
</TABLE>
F-1
<PAGE> 32
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, 1996
and 1995, and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended March 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
June 5, 1996
F-2
<PAGE> 33
<TABLE>
<CAPTION>
GUNTHER INTERNATIONAL, LTD.
BALANCE SHEETS
MARCH 31, 1996 AND 1995
1996 1995
---- ----
<S> <C> <C>
Assets
Current Assets:
Unrestricted Cash and Short-Term Investments $ 127,059 $ 308,596
Restricted Cash and Short-Term Investments 325,834 300,000
Accounts Receivable, Net 1,187,082 641,397
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts 331,644 1,197,572
Inventories 1,312,407 1,815,887
Prepaid Expenses 88,863 222,228
---------- ----------
Total Current Assets 3,372,889 4,485,680
---------- ----------
Property and Equipment:
Machinery and Equipment 761,700 566,901
Furniture and Fixtures 113,982 103,087
Leasehold Improvements 67,811 66,326
----------- ----------
943,493 736,314
Less - Accumulated Depreciation
and Amortization (292,099) (198,609)
----------- ----------
651,394 537,705
----------- ----------
Other Assets:
Excess of Cost Over Fair Value of Net
Assets Acquired, Net 3,668,772 3,892,250
Deferred Preproduction Costs, Net 397,444 145,140
Accounts and Notes Receivable From Stockholders 19,177 92,939
Investment, at Lower of Cost or Market 30,000 30,000
Other 16,183 0
----------- ----------
4,131,576 4,160,329
----------- ----------
$ 8,155,859 $ 9,183,714
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 34
<TABLE>
<CAPTION>
GUNTHER INTERNATIONAL, LTD.
BALANCE SHEETS (CONTINUED)
MARCH 31, 1996 AND 1995
1996 1995
---- ----
<S> <C> <C>
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Notes Payable to Stockholders $ 0 $ 200,000
Accounts Payable to Stockholder 100,000 0
Notes Payable and Current Maturities of
other Long-Term Debt 666,325 462,245
Accounts Payable 1,951,551 1,787,341
Accrued Expenses 494,089 347,445
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 243,371 1,655,838
Deferred Service Contract Revenue 1,124,028 1,176,805
------------ -----------
Total Current Liabilities 4,579,364 5,629,674
------------ -----------
Long-Term Debt, Less Current Maturities 1,964,709 1,951,108
Class B Senior, Non-Convertible, Redeemable
Preferred Stock, $.001 Par Value; 500 Shares
Authorized, Issued and Outstanding 0 500,000
Convertible Notes Payable 0 593,568
Commitments and Contingencies (Notes 2,
12 and 14)
Stockholders Equity:
Preferred Stock, $.001 Par Value; 500,000
Shares Authorized; No Shares Issued
or Outstanding 0 0
Common Stock, $.001 Par Value; 16,000,000
Shares Authorized; 4,133,269 and 3,596,275
Shares Issued and Outstanding at March 31,
1996 and 1995, Respectively 4,133 3,596
Series B Common Stock, $.001 Par Value; 500
Shares Authorized, Issued and Outstanding
at March 31, 1996 and 1995 1 1
Additional Paid-in Capital 10,865,450 8,884,010
Accumulated Deficit (9,257,798) (8,378,243)
------------ -----------
Total Stockholders' Equity 1,611,786 509,364
------------ -----------
$ 8,155,859 $ 9,183,714
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 35
<TABLE>
<CAPTION>
GUNTHER INTERNATIONAL, LTD.
STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
March 31, 1996 March 31, 1995 March 31, 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
Sales:
Systems $ 8,458,700 $6,629,988 $5,117,151
Maintenance 4,022,562 2,935,333 2,458,363
---------- ---------- ---------
Total Sales 12,481,262 9,565,321 7,575,514
----------- ---------- ---------
Cost of Sales:
Systems 4,895,387 4,844,531 3,017,612
Maintenance 2,826,853 2,306,597 2,146,244
---------- ---------- ---------
Total Cost of Sales 7,722,240 7,151,128 5,163,856
---------- ---------- ---------
Gross Profit 4,759,022 2,414,193 2,411,658
---------- ---------- ---------
Operating Expenses:
Selling and Administrative 5,330,807 5,710,062 5,743,982
Research and Development 64,407 79,764 356,211
----------- --------- ---------
Total Operating Expenses 5,395,214 5,789,826 6,100,193
----------- --------- ---------
Operating Loss (636,192) (3,375,633) (3,688,535)
----------- ----------- -----------
Other Expenses:
Interest Expense, Net (243,363) (176,814) (137,416)
Debt Conversion Expense 0 (99,998) 0
----------- ----------- -----------
(243,363) (276,812) (137,416)
----------- ----------- -----------
Net Loss $(879,555) $(3,652,445) $(3,825,951)
=========== =========== ===========
Loss Per Common Share $(0.23) $(1.08) $(1.61)
=========== =========== ===========
Weighted Average
Shares Outstanding 3,897,367 3,383,730 2,371,220
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 36
<TABLE>
<CAPTION>
GUNTHER INTERNATIONAL, LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY
APRIL 1, 1993 TO MARCH 31, 1996
Class A Voting
Convertible Series B
Preferred Stock Common Stock Common Stock
$.001 Par Value $.001 Par Value $.001 Par Value
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1993 3,315,917 $3,316 1,400,000 $1,400 0 $0
Sale of common stock and
warrants 0 1,150,000 1,150 500 1
Conversion of notes payable
to stockholders to common
stock 0 80,000 80 0 0
Conversion of Class A Voting
convertible preferred
stock to common stock (3,315,917) (3,316) 663,183 663 0 0
Net loss 0 0 0 0 0 0
----------- ------- --------- ------ ---- --
Balance, March 31, 1994 0 0 3,293,183 3,293 500 1
Conversion of notes payable
to stockholders to common
stock 0 0 303,092 303 0 0
Net loss 0 0 0 0 0 0
----------- ------- --------- ------ ---- --
Balance, March 31, 1995 0 0 3,596,275 3,596 500 1
Conversion of notes
payable to common stock 0 0 203,659 204 0 0
Private placement of common
stock 0 0 333,335 333 0 0
Retirement of Class B senior
preferred stock 0 0 0 0 0 0
Net loss 0 0 0 0 0 0
----------- ------- --------- ------ ---- --
Balance, March 31, 1996 0 $0 4,133,269 $4,133 500 $1
=========== ======= ========= ====== ==== ==
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
------- ------- -----
<S> <C> <C> <C>
Balance, April 1, 1993 $2,852,490 ($899,847) $1,957,359
Sale of common stock and
warrants 4,589,080 0 4,590,231
Conversion of notes payable
to stockholders to common
stock 399,920 0 400,000
Conversion of Class A Voting
convertible preferred
stock to common stock 2,653 0 0
Net loss 0 (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 0 1,040,170
Net loss 0 (3,652,445) (3,652,445)
---------- ---------- -----------
Balance, March 31, 1995 8,884,010 (8,378,243) 509,364
Conversion of notes
payable to common stock 568,956 0 569,160
Private placement of common
stock 999,667 0 1,000,000
Retirement of Class B senior
preferred stock 412,817 0 412,817
Net loss 0 (879,555) (879,555)
---------- ---------- -----------
Balance, March 31, 1996 $10,865,450 ($9,257,798) $1,611,786
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 37
<TABLE>
<CAPTION>
GUNTHER INTERNATIONAL, LTD.
STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
March 31, 1996 March 31, 1995 March 31, 1994
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(879,555) $(3,652,445) $(3,825,951)
Adjustments to reconcile net loss to
net cash used for operating activities -
Depreciation and amortization 344,866 321,611 296,272
Royalties forgiven (81,084) 0 0
Loss on investment and sale of
property and equipment 0 8,167 5,865
Debt conversion expense 0 99,998 0
Decrease (increase) in accounts receivable, net (545,685) 29,943 (123,621)
(Increase) decrease in inventories 503,480 (218,013) (883,529)
Decrease (increase) in prepaid expenses and other assets 117,182 (6,459) (54,836)
Royalties applied against accounts and notes receivable
from stockholder 73,762 0 0
Increase in accounts payable
and accrued expenses 410,854 545,426 208,964
Increase (decrease) in deferred service
contract revenue (52,777) 153,094 424,391
(Increase) decrease in billings in excess of
costs and estimated earnings, net (546,539) (262,028) 321,020
---------- ------------ ------------
Net cash used for operating activities (655,496) (2,980,706) (3,631,425)
---------- ------------ ------------
Cash Flows From Investing Activities:
Purchases of property and equipment (207,179) (105,498) (233,277)
Increase in deferred preproduction costs (280,202) (125,977) (19,163)
Proceeds from sale of property and equipment 0 1,500 3,015
---------- ------------ ------------
Net cash used for investing activities (487,381) (229,975) (249,425)
---------- ------------ ------------
Cash Flows From Financing Activities:
Proceeds from notes payable and long-term debt 1,030,114 1,910,844 2,171,084
Repayments of notes payable and long-term debt (813,014) (317,325) (731,104)
Decrease (increase) in restricted cash and
short-term investments (25,834) 39,643 (339,643)
Net proceeds from sale of common
stock and warrants 1,000,000 0 4,590,231
Closing costs in connection with conversion
of notes payable to common stock
and retirement of Class B preferred stock (229,926) 0 0
---------- ------------ ------------
Net cash provided by financing activities 961,340 1,633,162 5,690,568
---------- ------------ ------------
Net (Decrease) Increase in Unrestricted Cash
and Short-Term Investments (181,537) (1,577,519) 1,809,718
Unrestricted Cash and Short-Term
Investments, beginning of year 308,596 1,886,115 76,397
---------- ------------ ------------
Unrestricted Cash and Short-Term
Investments, end of year $127,059 $308,596 $1,886,115
========== ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $169,223 $102,161 $98,264
Cash paid for income taxes 12,700 9,700 6,300
Common stock issued for notes payable and
accrued interest 711,903 1,040,170 400,000
Retirement of Class B Preferred Stock 500,000 0 0
The accompanying notes are an integral part of these financial statements.
F-7
</TABLE>
<PAGE> 38
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
1. Business:
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 was incorporated in Delaware in 1978 and currently operates from
its facilities located in Norwich, Connecticut.
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 1,210,000 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 8).
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.
2. Market and Operating Environment:
From inception, the Company has incurred losses from operations. 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.
While operating results improved significantly during the fiscal year ended
March 31, 1996 compared with prior periods, the Company did not attain a
sustained level of order volume
F-8
<PAGE> 39
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). Management believes operating results will continue to improve and
generate sufficient cash flow to meet the Company's obligations in the
normal course of business. However, 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 $8,458,700 in the year
ended March 31, 1996, compared to $6,629,988 in the year ended March 31,
1995, an increase of 28%. Backlog as of March 31, 1996 stood at
approximately $1,085,000, a decrease of approximately $2,591,000 from March
31, 1995.
* 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.
* Reduced administrative and other overhead costs to below fiscal 1994
and 1995 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 in the future.
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
F-9
<PAGE> 40
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, 1996 and 1995, the Company had recorded an allowance of
approximately $9,000 and $12,600, respectively, for potential uncollectible
accounts receivable.
Inventories -
Inventories consist primarily of purchased parts used in the assembly
and repair of the Company's products and are stated at the lower of cost or
market using the first-in, first-out (FIFO) method.
Property and equipment -
Depreciation and amortization of property and equipment is charged against
income over the estimated useful lives of the respective assets using the
straight-line method as follows:
<TABLE>
<CAPTION>
Lives
<S> <C>
Machinery and equipment 7 years
Furniture and fixtures 3-7 years
Leasehold improvements Life of lease
</TABLE>
Excess of cost over fair value of net assets acquired -
The excess of cost over the fair value of net assets acquired is being
amortized over its estimated life of 20 years. As of March 31, 1996 and
1995, accumulated amortization was $800,796 and $577,318, 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 sustain profitable
operations in the future. 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 year. 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.
Deferred preproduction costs -
Certain preproduction costs incurred subsequent to determining the
feasibility of new product
F-10
<PAGE> 41
introductions are capitalized and are amortized over a three-year period
upon delivery of the first product. As of March 31, 1996 and 1995,
accumulated amortization was $27,898 and $5,510, respectively.
Research and development -
Expenses associated with research and development activities are
expensed as incurred.
Investment -
The Company's investment at March 31, 1996 and 1995 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 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,
1996, 1995 and 1994, totaled approximately $123,000, $95,000, and $55,000,
respectively.
Income taxes -
The Company accounts for income taxes using the provisions of the
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". As of March 31, 1996 and 1995, 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 $3,900,000 and $3,400,000, 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. Due to the
net operating losses in all periods, no provision for federal income taxes
was required. Provisions for minimum state taxes are provided through a
charge to operating expenses and are not material in all periods presented.
At March 31, 1996, the Company has net operating loss carryforwards of
approximately $8,400,000 and $10,500,000 available to be applied against
future Federal and state taxable income, respectively. The Federal and
state loss carryforwards expire at various dates from 1997 through 2011.
F-11
<PAGE> 42
Royalty expense-
The Company has royalty agreements with Connecticut Innovations, Inc.
and with certain stockholders (see Note 12). Royalties due under these
agreements are expensed as incurred.
Loss per share -
Loss per share is computed using the weighted average number of common
shares outstanding during each period presented. Outstanding warrants and
options would be antidilutive and, therefore, were not considered as common
stock equivalents.
Use of estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications -
Certain prior year amounts have been reclassified in order to conform
with the current year presentation.
4. Change in Method of Accounting for Long-Term Contracts:
Effective 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 effect of the accounting change on prior
periods which were restated to reflect this new method of accounting is a
reduction of net loss of $136,478 and reduction in loss per share of $.06
per share for the year ended March 31, 1994.
F-12
<PAGE> 43
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, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Costs incurred on uncompleted
contracts $ 684,384 $ 1,579,465
Estimated earnings 467,713 740,927
----------- -----------
1,152,097 2,320,392
Less: Billings to date (1,063,824) (2,778,658)
----------- -----------
$ 88,273 $ (458,266)
=========== ===========
Included in the accompanying balance sheets under the following captions:
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 331,644 $ 1,197,572
Billings in excess of costs
and estimated earnings on
uncompleted contracts (243,371) (1,655,838)
----------- -----------
$ 88,273 $ (458,266)
=========== ===========
</TABLE>
6. Financing Arrangements:
Notes payable and long-term debt at March 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Line of credit, maximum of $300,000 available at March 31, 1996, bearing
interest at prime (8.25% at March 31, 1996), maturing September 30, 1996,
collateralized by restricted cash
and short-term investments $ 300,000 $ 300,000
Line of credit, maximum of $2,000,000 available at March 31, 1996 bearing
interest at prime, maturing October 31, 1996, secured by certain assets
of two stockholders and directors of the Company (subsequently refinanced
- see Note 16) 1,700,000 1,350,000
</TABLE>
F-13
<PAGE> 44
<TABLE>
<CAPTION>
<S> <C> <C>
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 164,519 200,000
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 11) 0 200,000
Note payable to a bank, bearing interest at 10.5%, payable in monthly
installments of $405 of principal and interest, due
October 1997, secured by investment 28,973 47,349
Other 11,040 89,502
----------- ----------
2,631,034 2,613,353
Less: Short-Term notes payable and current maturities of
long-term debt (666,325) (662,245)
----------- ----------
$ 1,964,709 $1,951,108
=========== ==========
</TABLE>
As of March 31, 1996, maturities of notes payable and long-term debt,
including debt payments related to the line of credit as refinanced (see
Note 16) were as follows:
<TABLE>
<CAPTION>
Fiscal year
Ending March 31, Amount
<S> <C>
1997 $ 666,325
1998 1,921,846
1999 37,896
2000 2,695
2001 2,272
----------
$2,631,034
==========
</TABLE>
F-14
<PAGE> 45
7. 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 was effective. Accordingly, the
principal and accrued interest, aggregating $593,568, was reflected as
convertible notes payable in the accompanying balance sheet as of March 31,
1995. In September 1995, the Company issued 178,659 shares of common stock
in satisfaction of these notes payable and related accrued interest.
8. 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 20 trading days within
any 30 consecutive trading day period ending not more than 10 days prior to
the notice of the call.
Concurrent with the closing of the offering, certain stockholders and
Directors 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.
F-15
<PAGE> 46
Also, in connection with the offering, the Company sold to the
underwriters, for nominal consideration, the "Underwriters' Warrants".
These warrants entitle the holders to purchase 100,000 units (one share of
common stock and one warrant to purchase one share of common stock) at an
exercise price of $7.50 per unit. The Underwriters' Warrants are
non-callable and expire in December, 1998. The Company has agreed that the
warrants, if any, issued to the Underwriters, upon exercise of the
Underwriters' Warrants will not be subject to repurchase by the Company.
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 7). 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 6). These warrants
expire in December 1997. During fiscal year 1996, the Company also issued
25,000 warrants to purchase one share of common stock for $4.00 per share
in connection with a note payable to a stockholder (see Note 11). These
warrants expire in August, 2000.
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, 1996. The warrants expire five years from date of
issuance and are exercisable any time within this term.
Certain stockholders of the Company are required to vote their shares
of common stock until June 1, 1998 for certain individuals as directors of
the Company.
9. Common Stock Purchase Options:
The Company has adopted an option plan for certain individuals who were
founders of the Company (Founders' Stock Option Plan). Options to purchase
up to 95,000 shares of common stock at an exercise price of $1.88 per share
may be granted under the plan. These options would vest 25%
F-16
<PAGE> 47
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 until September, 1994. No options have been granted under this
Founders Stock Option Plan.
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
and 1996 with three employees, the Company granted options under the above
plan to acquire up to an aggregate of 125,000 and 35,000 shares,
respectively, of the Company's common stock at exercise prices of $3.25 and
$3.625 per share, respectively, which approximated fair market value at the
dates of the grants. 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 and July 17, 2000, respectively.
10. 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 Innovations, Inc. in connection
with the Development Agreement (see Note 12). The holder of Class B
preferred stock was 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 could
not be changed without the consent of the holders of all such shares.
Each share of Class B preferred stock was 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 was 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 were not legally available to redeem
all of the shares of Class B preferred stock then due to be redeemed, any
and all unredeemed shares would be carried forward and redeemed to the full
extent the Company had funds legally available for such purpose.
F-17
<PAGE> 48
In the event of any liquidation, dissolution or winding up of the
affairs of the Company, each share of Class B preferred stock had 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 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 had
been classified outside of stockholders' equity in the accompanying balance
sheets. Effective December 31, 1995, the Company entered into a new
agreement with the holders of the Class B preferred stock whereby the
stockholder agreed to surrender all outstanding shares of Class B preferred
stock (See Note 12). The Company recorded this surrender net of related
expenses, as additional paid-in capital.
11. Related Party Transactions:
At March 31, 1996 and 1995, the Company had accounts and notes
receivable from an officer and certain stockholders totaling $19,177 and
$92,939, respectively. These receivables are non-interest bearing and have
been offset with royalties due these individuals(see Note 12).
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. 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 8). These warrants
remain outstanding at March 31, 1996.
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 were 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 8). 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 $1,700,000 line of credit (see Note
6).
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 were 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 8). Both notes
were repaid in fiscal 1996.
During the year ended March 31, 1996, the Company borrowed $100,000
from an individual who is a stockholder of the Company. The note bears
interest at 8.5% and was due February 15, 1996. This note was convertible,
at the creditors' option, at any time until the due date into 25,000 shares
of the Company's common stock at a conversion price of $4.00 per share. In
connection with the
F-18
<PAGE> 49
borrowing, the Company also issued warrants to purchase up to 25,000
shares of common stock at $4.00 per share. On March 28, 1996, the Company
issued 25,000 shares of common stock in satisfaction of this note.
12. 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.
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 was 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 of net sales of the sponsored products would be
required for the period through March 31, 1995 with a minimum quarterly
payment of $27,000.
The above royalties were to be paid until total royalties and
redemptions under the Class B senior, non-convertible, redeemable preferred
stock of $903,000 were paid. Thereafter, for a period of five years, a
royalty of one percent (1%) would be paid. Payment of 50% of royalties
earned for the period September 1, 1992 to March 31, 1993 were deferred
until total royalties of $903,000 were paid. Interest on the unpaid balance
was to be paid quarterly at an interest rate of 12%.
Effective December 31, 1995, the Company completed negotiations with
CII, and the parties entered into a new agreement completely amending and
restating the Company's obligations under the Development Agreements (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 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 all prior unpaid royalties owed and any prior defaults
of the Company under the Development Agreements.
The revised royalty formula contained in the Amended and Restated
Development Agreement
F-19
<PAGE> 50
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:
<TABLE>
<CAPTION>
Total Minimum
Calendar Year Payments for the Year
<S> <C>
1996 $ 75,000
1997 75,000
1998 100,000
1999 100,000
2000 125,000
2001 125,000
2002 175,000
---------
$ 775,000
=========
</TABLE>
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.
Total royalty expense for the year ended March 31, 1995 was $130,528.
The Company recorded a net benefit of $89,816 for the year ended March 31,
1996, due to the forgiveness of prior royalties owed under the prior
agreement.
Contingencies -
The Company was involved in a lawsuit with an individual hired on a
consulting basis for investment banking services. The individual claimed
the Company owed him approximately $310,000 for his services. Management
believed this amount to be in excess of what was due and accrued its
estimate of amounts due. Subsequent to year-end, Management was notified of
judgment of this matter and was ordered to pay $110,000 plus interest from
October 1992 until the date of payment. All amounts due have been accrued
by the Company.
A former employee has asserted a claim for damages totaling $300,000 as
a result of breach of an alleged agreement related to 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.
F-20
<PAGE> 51
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.
The Company has a royalty agreement with certain founding 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 years ended March 31, 1996, 1995 and 1994, royalties expensed under
this agreement totaled $125,332, $95,654 and $11,428, respectively. Had
this royalty agreement been in effect for the full year ended March 31,
1994, royalty expenses would have increased by approximately $49,500.
Leases -
The Company leases its office and manufacturing facility under an
operating lease which provides for monthly rental of $21,000. The Company
is currently leasing the facility on a monthly basis. Under this agreement,
the Company is responsible for paying all operating costs, and repairs and
maintenance. The Company also leases certain office equipment under an
operating lease agreement which expires in fiscal year 2001. Lease expense
for the years ended March 31, 1996, 1995 and 1994, totaled approximately
$258,000, $292,000 and $260,000, respectively. Future minimum rental
payments for equipment total $8,112 per year until fiscal year 2001.
13. 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.
14. Significant Customers and Business Concentration:
Due to the nature of the Company's products, a significant portion of
the Company's revenues in
F-21
<PAGE> 52
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, 1996, sales to one customer accounted for 16.7% of net
sales. During the year ended March 31, 1995, sales to two customers
accounted for 10.8% and 10.4% of net sales. During the year ended March 31,
1994, sales to one customer accounted for 12.2% of net sales.
15. Recently Issued Accounting Standards:
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". The statement defines a fair value based method
of accounting for an employee stock option or similar equity instrument.
However, it also allows an entity to continue to measure compensation cost
for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". Entities electing to remain with the accounting in Opinion No.
25 must make pro forma disclosures of net income, as if the fair value
based method of accounting defined in the statement had been applied. The
Company believes that they will elect the pro forma method of disclosure.
The Company is required to adopt the new standard no later than fiscal
1997.
In March 1995, Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets", was issued. This
statement requires a company to review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company is required to adopt
the new standard for fiscal 1997. Management does not believe the adoption
of the new standard will have a significant impact on the Company's future
results of operations or financial position.
16. Subsequent Events
On June 4, 1996, the Company entered into a line of credit arrangement
with a bank which was used to refinance the Company's existing line of
credit which was scheduled to mature on October 31, 1996. The arrangement
is for two revolving loans totaling $2,000,000. The available borrowing
under Facility A is in the amount of $1,750,000, and is to be fully cash
collateralized by assets of a certain stockholder and Director. The funds
advanced under Facility A bear interest at the Bank's base rate. The
maturity date of Facility A is January 10, 1998. The available borrowing
under Facility B is $250,000, and is secured by all tangible and intangible
personal property of the Company. The funds advanced under Facility B bear
interest at the Bank's base rate, plus 1%. The maturity date of Facility B
is January 10, 1998. On June 5, 1996, there was an outstanding balance of
$1,700,000 owed to the Bank on Facility A, and a $0 balance owed to the
Bank on Facility B. There are no mandatory prepayments due for either
Facility A or B prior to the maturity date. The line of credit agreement
requires the Company to meet minimum operating income levels for each
quarter during the term of the loan.
F-22
<PAGE> 53
17. Disclosure About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Unrestricted cash and short-term investments, restricted cash and short-term
investments, accounts receivable, accounts payable and accrued expenses
The carrying amount approximates fair value because of the short
maturity of those instruments
Long-term debt
The carrying amount of the bank debt is a reasonable estimate of the
fair value as the debt was refinanced subsequent to year end based upon
similar terms. Also, the interest charged on outstanding borrowings is
based upon prime rate.
F-23
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page in Sequentially
Numbered Index
--------------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit
3(i)(a) to the Company's Registration Statement on Form SB-2,
Commission File No. 33- 70052-B, and incorporated herein by reference).
3.2 Certificate of Amendment of Restated Certificate of Incorporation of
the Company (filed as Exhibit 3(i)(b) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
3.3 Certificate of Amendment of Restated Certificate of Incorporation (the
form of which was filed as Exhibit 3(i)(c) to the Company's
Registration Statement on Form SB-2, Commission File No. 3370052-B, and
is incorporated herein by reference).
3.4 By-Laws of the Company, as amended (filed as Exhibit 3(ii) to the
Company's Registration Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.1 Recapitalization Agreement dated September 4, 1992 (filed as Exhibit
10(a) to the Company's Registration Statement on Form SB-2, Commission
File No. 33- 70052-B, and incorporated herein by reference).
10.2 Underwriting Agreement, dated December 20, 1993, by and among the
Company, JW Charles Securities, Inc. and Corporate Securities Group,
Inc. (the form of which was filed as Exhibit 1 to the Company's
Registration Statement on Form SB-2, Commission File No. 33-70052-B,
and is incorporated herein by reference).
10.3 Employment Agreement, dated September 4, 1992, between the Company and
William H. Gunther, Jr. (filed as Exhibit 10(o) to the Company's
Registration Statement on Form SB-2, Commission File No. 33-70052-B,
and incorporated herein by reference).
10.4 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") (filed as
Exhibit 10(h) to the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by reference).
10.5 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 (filed as Exhibit 10(i) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.6 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 (filed as Exhibit 10(j) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.7 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 (filed as Exhibit 10(k) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.8 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 (filed as Exhibit 10(l) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.9 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 (filed as Exhibit 10(m) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.10 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 (filed as Exhibit 10(n) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.11 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 (filed as Exhibit 10(o) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.12 Royalty Agreement, dated September 3, 1992, between the Company and
William H. Gunther, Jr. (filed as Exhibit 10(s) to the Company's
Registration Statement on Form SB-2, Commission File No. 33-70052-B,
and incorporated herein by reference).
10.13 Royalty Agreement, dated September 3, 1992, between the Company and
William H. Gunther III (filed as Exhibit 10(t) to the Company's
Registration Statement on Form SB-2, Commission File No. 33-70052-B,
and incorporated herein by reference).
10.14 Royalty Agreement, dated September 3, 1992, between the Company and
Joseph E. Lamborghini (filed as Exhibit 10(u) to the Company's
Registration Statement on Form SB-2, Commission File No. 33-70052-B,
and incorporated herein by reference).
10.15 Royalty Agreement, dated September 3, 1992, between the Company and
Rufus V. Smith (filed as Exhibit 10(v) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.16 Royalty Agreement, dated September 3, 1992, between the Company and
Christine E. Gunther (filed as Exhibit 10(w) to the Company's
Registration Statement on Form SB-2, Commission File No. 33-70052-B,
and incorporated herein by reference).
10.17 Royalty Agreement, dated September 3, 1992, between the Company and
Susan G. Hotkowski (filed as Exhibit 10(x) to the Company's
Registration Statement on Form SB-2, Commission File No. 33-70052-B,
and incorporated herein by reference).
10.18 Letter Agreement, dated September 1, 1992, between the Company and
DataCard (filed as Exhibit 10(ee) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.19 Promissory Note of the Company, dated September, 1992, to DataCard, in
the amount of $426,501.99 (filed as Exhibit 10(ff) to the Company's
Registration Statement on Form SB-2, Commission File No. 33-70052-B,
and incorporated herein by reference).
10.20 Third Party Product Service Agreement, dated October 13, 1992, between
the Company and DataCard (filed as Exhibit 10(gg) to the Company's
Registration Statement on Form SB-2, Commission File No. 33-70052-B,
and incorporated herein by reference).
10.21 First Amendment to the Third Party Product Service Agreement, dated
July 2, 1993, between the Company and DataCard (filed as Exhibit 10.31
to the Company's Annual Report on Form 10-KSB dated June 26, 1995, and
incorporated herein by reference).
10.22 Second Amendment to the Third Party Product Service Agreement, dated
February 17, 1994, between the Company and DataCard (filed as Exhibit
10.32 to the Company's Annual Report on Form 10-KSB dated June 26,
1995, and incorporated herein by reference).
10.23 Agreement, dated August 29, 1991, between the Company and Standard
Duplicating Machines Corporation (filed as Exhibit 10(hh) to the
Company's Registration Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.24 Form of Employee Stock Option Plan and Founders Option Plan (filed as
Exhibit 10(kkk) to the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by reference).
10.25 Letter Agreement, dated December 13, 1993, deferring certain payments
by the Company (filed as Exhibit 10(III) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.26 Warrant, dated October 20, 1993, to purchase 40,000 shares of Common
Stock issued to Mark Fisher (filed as Exhibit 10(vvv) to the Company's
Registration Statement on Form SB-2, Commission File No. 33-70052-B,
and incorporated herein by reference).
10.27 Warrant, dated January 9, 1995, to purchase 13,333 shares of Common
Stock issued to Mark Fisher (filed as Exhibit 10.49 to the Company's
Annual Report on Form 10-KSB dated June 26, 1995, and incorporated
herein by reference).
10.28 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 Samuel Joseph Jesselson (filed as Exhibit 10.51 to the
Company's Annual Report on Form 10-KSB dated June 26, 1995, and
incorporated herein by reference).
10.29 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 Roni Aron Jesselson (filed as Exhibit 10.52 to the
Company's Annual Report on Form 10-KSB dated June 26, 1995, and
incorporated herein by reference).
10.30 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 Jonathan Judah Jesselson (filed as Exhibit 10.53 to the
Company's Annual Report on Form 10-KSB dated June 26, 1995, and
incorporated herein by reference).
10.31 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 to the
Company's Annual Report on Form 10-KSB dated June 26, 1995, and
incorporated herein by reference).
10.32 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 to the
Company's Annual Report on Form 10-KSB dated June 26, 1995, and
incorporated herein by reference).
10.33 Non-exclusive License Agreement between the Company and Bell & Howell
(filed as Exhibit 10(.qaii) to the Company's Registration Statement on
Form SB-2, Commission File No. 33-70052-B, and incorporated herein by
reference).
10.34 Memorandum Agreement dated as of March 30, 1992 between the Company,
Ascom Holding, Inc. and Ascom Auteka, AG (filed as Exhibit 10(bbbb) to
the Company's Registration Statement on Form SB-2, Commission File No.
33- 70052-B, and incorporated herein by reference).
10.35 Agreement dated as of June 25, 1992 between the Company, Ascom Holding,
Inc. and Ascom Auteka, AG (filed as Exhibit 10(cccc) to the Company's
Registration Statement on Form SB-2, Commission File No. 33-70052-B,
and incorporated herein by reference).
10.36 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
to the Company's Annual Report on Form 10-KSB dated June 26, 1995, and
incorporated herein by reference).
10.37 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 to the Company's
Annual Report on Form 10-KSB dated June 26, 1995, and incorporated
herein by reference).
10.38 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 to the Company's Annual
Report on Form 10-KSB dated June 26, 1995, and incorporated herein by
reference).
10.39 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 to the Company's Annual Report
on Form 10-KSB dated June 26, 1995, and incorporated herein by
reference).
10.40 Xerox Worldwide Printing Systems Partners Program Partnership Guide
dated August 1990 (filed as Exhibit 10.64 to the Company's Annual
Report on Form 10-KSB dated June 26, 1995, and incorporated herein by
reference).
10.41 Third Amendment to the Revolving Credit Note of the Company from Fleet
Bank dated September 29, 1995, extending the maturity of the Note to
October 31, 1996 (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-QSB dated November 13, 1995 and incorporated herein
by reference).
10.42 Amendment and Restatement of Development Agreement made as of December
31, 1995 between the Company and CII (filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-QSB dated February 12, 1996 and
incorporated herein by reference).
10.43 Letter from Fleet Bank dated February 9, 1996, extending the maturity
of the Revolving Credit Note of the Company to July 31, 1997, from
September 30 and October 31, 1996 (filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-QSB dated February 12, 1996 and
incorporated herein by reference.
24 Power of Attorney pursuant to which this report has been executed.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does
hereby appoint and constitute James H. Whitney and Frederick W. Kolling, III
and each of them as his agent and attorney-in-fact to execute in his name,
place and stead (whether on behalf of the undersigned individually or as an
officer or director of Gunther International, Ltd. or otherwise) the Annual
Report on Form 10-KSB of Gunther International, Ltd. respecting its fiscal year
ended March 31, 1996 and any and all amendments thereto and to file such Form
10-KSB and any such amendment thereto with the Securities and Exchange
Commission. Each of the said attorneys shall have the power to act hereunder
with or without the other.
IN WITNESS WHEREOF, the undersigned have executed this instrument this
12th day of July, 1996.
/s/ GUY W. FISKE /s/ HAROLD S. GENEEN
- ------------------------------------- -------------------------------------
Guy W. Fiske Harold S. Geneen
/s/ J. KENNETH HICKMAN /s/ FREDERICK W. KOLLING, III
- ------------------------------------- -------------------------------------
J. Kenneth Hickman Frederick W. Kolling, III
/s/ ALAN W. MORTON /s/ GERALD H. NEWMAN
- ------------------------------------- -------------------------------------
Alan W. Morton Gerald H. Newman
/s/ JAMES H. WHITNEY
- -------------------------------------
James H. Whitney
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 452,893
<SECURITIES> 0
<RECEIVABLES> 1,196,041
<ALLOWANCES> 8,959
<INVENTORY> 1,312,407
<CURRENT-ASSETS> 3,372,889
<PP&E> 943,493
<DEPRECIATION> 292,099
<TOTAL-ASSETS> 8,155,859
<CURRENT-LIABILITIES> 4,579,364
<BONDS> 1,964,709
0
0
<COMMON> 4,134
<OTHER-SE> 10,865,450
<TOTAL-LIABILITY-AND-EQUITY> 8,155,859
<SALES> 8,458,700
<TOTAL-REVENUES> 12,481,262
<CGS> 4,895,387
<TOTAL-COSTS> 7,722,240
<OTHER-EXPENSES> 243,363
<LOSS-PROVISION> 3,817
<INTEREST-EXPENSE> 243,363
<INCOME-PRETAX> (879,555)
<INCOME-TAX> 0
<INCOME-CONTINUING> (879,555)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (879,555)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
