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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 for the fiscal year ended March 31, 1998.
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from _______________ to ____________________.
Commission file number: 0-22994
GUNTHER INTERNATIONAL, LTD.
(Name of small business issuer in its charter)
DELAWARE 51-0223195
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Winnenden Road
Norwich, Connecticut 06360
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (860) 823-1427
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
None
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 $15,236,188.
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of July 6, 1998, 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 $5,905,961. The number of shares of the Registrant's Common Stock
outstanding as of July 6, 1998 was 4,291,269.
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 1998 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
PART I
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Item 1 Description of Business .......................................................................... 1
General ................................................................................... 1
Development of the Business ............................................................... 1
Finishing Systems ......................................................................... 2
Strategy .................................................................................. 2
Systems ................................................................................... 3
Marketing and Sales .............................................................................. 6
Customers ........................................................................................ 6
New Products...................................................................................... 7
Manufacturing .................................................................................... 8
Installation and Customer Service ................................................................ 8
Research and Development ......................................................................... 9
Competition ...................................................................................... 9
Patents and Proprietary Rights ...................................................................10
Employees ........................................................................................11
Item 2. Description of Property ..........................................................................11
Item 3. Legal Proceedings ................................................................................11
Item 4. Submission of Matters to a Vote of
Security Holders ..........................................................................11
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters .......................................................................11
Item 6. Management's Discussion and Analysis or Plan of Operation
Update Concerning Developments.............................................................13
Summary Financial Data ....................................................................14
Results of Operations .....................................................................15
Liquidity and Capital Resources ...........................................................15
Recent Strategic Initiatives ..............................................................16
Inflation .................................................................................16
Forward-Looking Statements.................................................................16
Year 2000 .................................................................................17
(i)
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Item 7. Financial Statements .............................................................................17
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ....................................................18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act .........................................18
Item 10. Executive Compensation ...........................................................................18
Item 11. Security Ownership of Certain Beneficial
Owners and Management .....................................................................18
Item 12. Certain Relationships and Related Transactions ...................................................18
PART IV
Item 13. Exhibits and Reports on Form 8-K .................................................................19
Signatures ..................................................................................................22
Index to Financial statements ...............................................................................F-1
(ii)
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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 October 1989, the Company entered into a Development Agreement (the
"Development Agreement") with Connecticut Innovations, Inc. ("CII") (then known
as the Connecticut Product Development Corporation), pursuant to which CII
agreed to reimburse the Company for 60% of the development costs of certain
sponsored products. The Development Agreement contemplated that the Company
would repay the reimbursements received from CII, plus interest, and pay certain
additional royalties to CII based upon future sales or licenses of the sponsored
products.
In August 1992, the Development Agreement was modified and amended to
convert the unpaid reimbursements and royalties due and owing to CII (which
approximated approximately $500,000) into 500 shares of Class B Preferred Stock
and restructure the Company's future royalty obligations.
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 the late Harold S. Geneen and Gerald H. Newman were 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.
In September 1993, the Development Agreement was further modified and
amended to restructure the Company's royalty obligations arising under the
Development Agreement and modify the redemption terms of the Class B Preferred
Stock then held by CII.
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.
Effective December 31, 1995, the Company and CII entered into a new
agreement (the "Amended and Restated Development Agreement") completely amending
and restating the Company's obligations under the Development Agreement. Under
the Amended and Restated Development Agreement, CII agreed to surrender the 500
shares of Class B Preferred Stock then held by CII and waive all royalty
payments then due and owing under the Development Agreement, as well as any
other defaults of the Company, and the Company agreed to make future royalty
payments to CII based on a revised royalty formula. See Note 11 to the Company's
Financial Statements.
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FINISHING SYSTEMS
Traditionally, printing of large quantities of documents has been done
primarily by using offset printing presses. The document to be produced is
engraved onto a printing plate and multiple copies are produced rapidly and
inexpensively. Offset printing produces documents that are identical to each
other. Recent advances in computer technology have produced alternatives to
offset printing presses including non-impact laser printers. Laser printers take
data from computers and transfer the data onto a print drum with a laser beam.
Non-impact laser printing allows for variations in the text of each document to
be printed. 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 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
and technology leader in the design and sale of intelligent document mailing and
finishing systems and leading edge, high quality, low cost ink jet solutions for
end user and OEM applications. The Company's goal is to broaden the range of
markets, applications, and customers utilizing these unique technologies while
continuing to increase its leadership position in insurance and financial
markets. Further, it is the Company's objective to leverage both its blue-chip
customer base and the strength of its relationships/alliances with partners like
Hewlett-Packard into a dominant position in the growing marketplaces, both end
user and OEM, for low cost, high resolution ink jet printing at document
processing speeds. The Company has also targeted aggressive expansion of its
system service and consumables/supplies businesses.
Expanded Marketing Efforts. The Company initially 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. More
recently, the Company's sales and marketing efforts have actively targeted a far
broader range of applications and industries including other types of insurance
companies and customers in the banking, finance and health care industries. The
Company has continued to experience success in expanding into other markets
including government, retail distribution, outsourcing, service bureaus and
others. The Company also continues to generate additional sales to its existing
customer base. As much as 50% of the Company's system sales in a given year have
been 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.
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.
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Collaborative Development. The Company will continue to collaborate with
customers (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 various methods of coding
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, the FM-1000
Flat Mailer and SIII Billing System.
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.
The Series III is a high-speed statement and billing system. Up to nine
inserts may be added to the primary document prior to envelope insertion. The
system features a high-speed primary document feeder/accumulator, and an
up-stream folder.
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 Pentium 200MHZ CPU with a 2 Gigabyte hard drive,
and a ZIP drive for back-up. 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 (Charged
Coupled Device) 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 Image Reader is a scanning device
which is used to read bar-code or two dimensional information. In the CCD Image
Reader, the code being read is illuminated with ambient light rather than a
laser light source. OMR is a paper marking technology used with mailing systems
to indicate to the main system how to process the sheets that are assembled into
an envelope. Microprocessors monitor the sensors in each module and carry out
the instructions from the System Control Module, validating that each action
initiated has been completed. If an error occurs, 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 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.
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Communications software and a modem are provided with each system to permit
remote system diagnosis and software updates.
Laser Reader and CCD 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 two
dimensional (2D) Image Readers. This reading technology returns a very precise
copy of the bar code or 2D image being scanned. The CCD Linear Image Reader
transmits the image to be processed by the System Control Module approximately
25 times a second. With this reading technology, large amounts of data can be
stored on the page, with reading accuracy and speed the equal of laser reading
technology.
F-300 Feeder. The F-300 is a high speed, vacuum fed system. The first
stage of the feeder "shingle-feeds" the sheets from the bottom of the bin to the
second stage of the feeder. Optimum stack height in the second stage is
maintained by microprocessor control of the first stage. A Laser Reader or CCD
Linear Image Reader is located in the second stage, where the sheets are read
and fed individually at rates of up to 30,000 sheets per hour. In the final
stage, the sheets are collected on a conveyor and document set accumulator,
which is connected to the next module. Through the use of a diverter, the F-300
can separate particular sheets, such as banners or trailers, from the document
prior to collection on the conveyor.
F-2 Matched Document Feeder. The F-2 is a vacuum feeder that cycles at
more than 10,000 sheets per hour. Sheets to be processed are placed face down in
the sheet feeder input hopper. This "bottom-feed" design permits the operator to
load the hopper while the feeder is cycling. Each sheet is verified, and double
or misfeeds are instantly detected by a double feed detector and by analysis of
the bar code data by the System Control Module. After verification, each sheet
of a document is fed face-down until the document set is complete. Incomplete or
out of sequence sets stop the system, and the operator is informed of the
problem through the CRT located in the Operator Console.
F-2 Insert/Cover Feeders. These modules are vacuum feeders capable of
feeding a wide range of paper stocks, permitting the customization of processed
documents. Controlled by the System Control Module, these feeders are capable of
feeding inserts from three and one-half to eleven inches long and eight and
one-half to nine inches wide, and covers eight and one-half inches wide by
eleven inches long. The System Control Module initiates the proper feed cycle
upon receipt of bar code information from a Laser Reader or CCD Linear Image
Reader.
Two-Way Conveyor Module. 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.
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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 8-1/2 x 11
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 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. This module provides a means for automatically applying
postage to flat envelopes of varying thickness up to 180 sheets, thereby
avoiding the 0.25" thickness limitation of a standard postage meter. The module
applies postage to a self-stick label using a standard postage meter, after
which the label is fed to a transfer station and applied to the envelope. System
software calculates the weight of each package and automatically applies the
correct postage. The postage label can be applied in any corner of the envelope,
in either portrait or landscape orientation.
Folder. This module may be placed up-stream, mid-stream, or down-stream
in the conveyor path, depending on the application. The folder may be adjusted
to produce C-folds, half-folds, or Z-folds and will dynamically handle 1-15
sheets of paper.
Friction Feeder. The Friction Feeder is a versatile feeder which
separates and feeds material from the bottom of a stack of up to 24 inches. It
efficiently feeds 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. The inserter can be set for a variety of envelope
sizes ranging from Monarch to Bankers to 6"x9 1/2". The unusually large envelope
hopper allows for minimum operator interface. Dependent on envelope
construction, the inserter will handle up to a 0.25" thick folded package (the
maximum size allowed by the United States Postal Service). Provision is made for
diversion of oversize packages; all others are automatically sealed (standard
envelopes can be used) prior to exiting the module.
Ink Jet Printing. MS and EP systems may be configured with multi-head
ink jet printing capability to dynamically print envelope addresses, 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.
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Manifest Mail Software for Flat Mail. The most common technique used by
the Company systems to meet current United States Postal Service requirements
for flat manifest mail requires the manifest identification and postal zone
information to be passed to the system in the bar code. In addition, the
customer application prints the manifest identification on the address page,
above the first line of the address, so that it is visible through the envelope
window. The manifest mail software processes the information stored in single or
multiple log files and generates reports required by the United States Postal
Service. Other alternatives are available to print a manifest identification on
the envelopes if the customer cannot print the identification in the envelope
window.
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 10 x 13 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.
Inc.jet Imager. The Inc.jet product was initially targeted as an
envelope printer to complement Gunther's complete line of intelligent document
automation and mailing systems. The Inc.jet Imager provides a solution to a
problem that was voiced by Gunther customers and prospects: low-cost, high
quality personalized printing on envelopes at document automation speeds.
Secondary concerns were ease of use and maintenance, as well as the size of the
unit.
In response to this problem, Gunther International hosted the
development of such a product. The result is a highly user friendly product that
prints up to a 1.5 inch address at letter quality printing -- up to 600 dots per
inch (dpi) -- and at very high speeds (up to 50 inches per second or 12,000
envelopes per hour).
In addition, the Inc.jet Imager is a rugged, compact design that fits
in the palm of your hand (5.5" x 3.5" x 4.5") and weighs under 2 pounds. The
bulk ink supply consists of three 1 3/4" x 3 3/4" bladders attached to the unit
with a 3-foot hose which is housed on a 10" x 8" shelf. The print drivers and
electronics are all resident in the Imager. Commands to control the Imager are
communicated via the computer that comes with the Gunther system, or any
standard PC.
MARKETING AND SALES
The Company initially 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. More recently the
Company's sales and marketing efforts have actively targeted a far broader range
of applications and industries including other types of insurance companies and
customers in the banking, finance and health care industries. The Company has
continued to experience success in expanding into other markets including
government, retail distribution, outsourcing, service bureaus and others. The
Company also continues to generate additional sales to its existing customer
base. As much as 50% of the Company's system sales in a given year have been to
previous purchasers of the Company's system 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.
The Company is an approved Marketing Partner with each of the major
printing systems vendors (Xerox, Oce, and IBM). Gunther products offer a
significant portion of the total solution required by the customer base of these
vendors and as such Gunther products are often included in their sales
presentations and there is a growing amount of joint sales and marketing
activity with these vendors. In addition, the Company has other informal
marketing arrangements with other manufacturers and suppliers of related
hardware and software products.
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. Insurance
companies that have purchased the Company's systems include 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
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insurers in the United States. The Company's customers include 14 of the
top 15 insurance companies in the U.S. In addition, the Company's systems have
been purchased by Nike, U.S. Department of the Treasury, Census Bureau, Moore,
A.C. Nielsen, Electronic Data Systems, Nippon Telephone & Telegraph, the State
of Mississippi and Automatic Data Processing, USAA, Public Schools Employees
Retirement System and the Gartner Group to name just a few.
The Company has 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 one of these customers to
maintain that level of sales from year to year.
As of March 31, 1998, the Company has a backlog aggregating
approximately $4,652,000. 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.
NEW PRODUCTS
The ink jet industry is frequently segmented according to product type.
Some analysts spilt ink jet printers into type of ink used, medium being printed
on, types of designs, and so on. The following overviews a segmentation by
economics and buying patterns, incorporating some of the product type
differences.
OEM ink jet development for printing applications: Currently, the price per
imager for OEM agreements depends on volume and ranges from $5,000 to $1,500 per
imager. Pricing of OEM supply agreements also depends on potential for ink
consumption (based on projected volumes and speeds). The OEM supplier market
includes the following break-out:
- - Envelope Printing and Address Labeling: Tabletop and desktop addressers,
inserters and labelers.
- - Point of Sale (POS) Printing: Applications include ticket printing
(wagering, off-track-betting, lottery, transportation, sports and
entertainment) and receipts (cash register, credit card, automated teller
machines).
- - Box and Carton Labeling: Contents, bar codes.
- - Tag Printing: Merchandise tags, bar codes.
High Volume Inserter Market: Two potential subdivisions are recognized.
- - Accessory to Gunther Systems: Imagers and transports sold at $30,000 to
$45,000. Direct sales to Gunther customers as system accessories or
upgrades to installed systems. Gunther's sales force will add this as an
accessory to the existing product line. This market uses more ink than
imagers due to the high mailing volumes.
- - Non-Gunther Inserter Market: After the initial roll-out, the Company plans
on marketing the imager as an accessory to high-volume inserter companies.
This will be accomplished through multiple channels including OEM
arrangements directly with the manufacturers, with resellers of the
inserter equipment, or directly targeting the end users via mail order,
etc.
Spot Color and Anti-Fraud Marking on Originals. Spot color will be implemented
first, then enhanced with anti-fraud capabilities.
- - Spot Color: Partnering discussions are underway with commercial laser
printer manufacturers (IBM, Oce and Xerox) to provide inexpensive and
highly integratable alternatives to current forms of spot color (includes
sold ink jet and expensive toner and developer options).
- - Anti-Fraud: A new market and one that is still greatly unexplored is
anti-fraud marking using invisible inks. The potential of this market is
hard to calculate and currently is subject to ink availability. The list of
7
<PAGE> 11
applications could include original insurance documents, financial
documents, even currency.
Postage Applications: Two opportunities exist, internationally and in the U.S.
- - International Market: The international market, particularly the European
market, are already printing postage rather than franking it with a
mechanical meter and the ink jet implementation is a far superior solution.
The Company currently has the capability to service these markets.
- - U.S. Market: Electronic stamping or ESTAMP is already approved by the
United States Postal Service (USPS) for small volume mailers.
The Information Based Indicia Program (IBIP) is an initiative by the USPS to
move to a new method of applying postage information on mailpieces. The plan
involves getting away from the mechanical postage meter as we know it and
replace it with a combination of regulated "black box" technology and open
architecture, computer/printer technology. This arrangement will allow users to
print a newly designed indicia that includes some readable information, as well
as some encoded data, using most standard, office type printers. The advantages
to the user of this proposed method included better control of postage funds and
less costly, more efficient printing of postage information on the mailpiece.
Gunther's Ink.jet Imager fits nicely in to this program in that it will be
capable of printing the new indicia, including the encoded information.
Gunther's experience with high speed reading of 2-D codes is also an important
part of the overall solution. The Company, in conjunction with Hewlett-Packard,
is actively engaged with USPS on the project.
Because of the versatility of the Imager, the list of potential market grows
daily. Other potential opportunities under discussion with OEM's include
printing with different chemicals (non-ink applications) and on different
substrates.
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. Although the Company believes that other suppliers are available
to perform the services provided by the current suppliers, the termination of
the Company's relationship with one or more of these companies may result in a
temporary interruption in the supply, and potentially the manufacture and
shipment, of the Company's systems. While a number of the Company's suppliers
require cash on delivery, the Company is not aware of any material change in the
relationships with its suppliers during the past year, nor have any suppliers
indicated an intent to materially modify the terms on which they supply
materials to the Company. In the past, the Company has replaced certain
suppliers who have been unable to meet the Company's requirements with respect
to quality, delivery or pricing, and the Company in the future may replace
certain other suppliers for similar reasons.
The Company manufactures, assembles and tests each system at its
facilities in Norwich, Connecticut. Each system is further tested for hardware
and software compliance with each customer's unique application and media
requirements, using customer supplied materials. Upon satisfactory completion of
such tests and customer acceptance of the system, each system is disassembled
for shipment and reassembled 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 systems engineer, who plans
and carries 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 short notice. Each system has been designed to facilitate parts
replacements. The Company typically warrants each system for a period of 90 days
after installation.
8
<PAGE> 12
The Company maintains a 9 person customer service group to manage the
support of systems in the field. All Gunther customers have some form of
maintenance contract with the Company. Typically, this would take the form of
on-call service, although in larger installations on-site service is required.
Basic on-call coverage comes with a four hour response time guarantee; two hour
response time is available to customers for an additional charge.
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 manufacturing company
which maintains a variety of computer driven card embossing and assembly
equipment. DataCard has 87 base city service locations throughout the United
States. DataCard engineers currently perform remedial and preventive maintenance
on 149 Company systems across the country. The Company entered into a contract
with DataCard on October 13, 1992 in the form of a Third Party Product Service
Agreement, which was subsequently amended on July 2, 1993 and February 17, 1994.
The Agreement, which has a term of three years, or until satisfaction by the
Company of all outstanding obligations to DataCard, specifies the terms and
rates under which maintenance service is to be provided to the Company's
customers for various levels of maintenance support. The Agreement also
specifies support to be given by the Company to DataCard, including initial
training of DataCard personnel, product documentation, all required replacement
parts and technical support.
In September 1992, the Company issued a note in the principal amount of
$426,502 to DataCard as payment for services previously performed under the
contract with the Company. Under the original terms of the note, principal is
due and payable in quarterly installments of $35,541 beginning in September 1995
and continuing until 1998. Due to cash flow problems of the Company, payment of
principal did not actually begin until September 30, 1996. The outstanding
balance on this note at March 31, 1998 is $284,335.
Because of cash flow problems, the Company has fallen behind in its
payments to Datacard. In May of 1998, the Company reached an agreement with
DataCard whereby the past due balance of approximately $975,000 for services
would be repaid over 18 equal monthly payments of $60,593, including interest.
The Company also recommenced making monthly payments of $35,541 on the
outstanding balance of the note. Under the revised payment schedule, the note
will be paid in full at the end of January, 1999.
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, 1998, revenues from customer maintenance agreements
represented approximately 43% 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 and software components based upon
specifications developed by the Company.
For the fiscal years ended March 31, 1998 and 1997, the Company
incurred expenses of $143,871 and $163,517, respectively, for research and
development activities.
COMPETITION
The Company's principal competitors are Pitney-Bowes and Bell & Howell.
Although the Company's total revenue is small relative to these large
competitors, 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.
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,
9
<PAGE> 13
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.
Gunther's Inc.jet products include several important features that set
them apart from other products that may be considered competitive.
The Inc.jet accomplishes the high-speed printing of data (50 inches per
second) at very high resolution (up to 600 x 600 dots per inch). To date, no
other vendor of ink jet products has accomplished this.
Low cost initial investment. In both Gunther systems related and OEM
implementations the print quality/price ratio is unmatched. The compact modular
construction combined with injection molded plastic enable this product to be
produced at a fraction of the cost of the closest competitor.
The Gunther-Hewlett-Packard cross licensing agreement provides a
powerhouse of innovative technology, marketplace experience and marketing
potential.
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 ten patents in the United States, has two
pending patent applications in the United States, and intends to continue to
file patent applications on its products and systems. All patent applications
filed by the Company are directed to salient features of the Company's systems.
The Company regards certain computer software and service applications as
proprietary. The Company relies on nondisclosure agreements with its employees
and, where the Company regards it as necessary, with customers.
In connection with a development agreement with Connecticut
Innovations, Inc. (CII) and as partial consideration for loans made in
connection therewith, the Company has assigned all existing, and future 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 thereof, 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 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. 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
10
<PAGE> 14
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, 1998, the Company had 120 full-time employees, consisting
of 68 engaged in engineering and development and manufacturing support, 18 in
marketing and sales activities, 22 in customer services and 12 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 One Winnenden Road,
Norwich, Connecticut, where the Company leases approximately 75,000 square feet
of space. The Company leases its facility on a 3 year basis which requires
payment of monthly rent in the amount of $27,500 through September 30, 1999. Of
the Company's space in Norwich, approximately 15,000 square feet is devoted to
office and administrative uses, approximately 55,000 square feet to engineering,
development and assembly activities, and approximately 5,000 square feet to
marketing, sales and customer service functions. The Company believes that its
facilities are adequately equipped and maintained for present and planned
operations.
ITEM 3. LEGAL PROCEEDINGS.
On July 9, 1998, a purported class action lawsuit was filed against
the Company, James H. Whitney and Frederick W. Kolling III asserting claims
under the federal securities laws. The action was filed in the United States
District Court for the District of Connecticut and purports to be brought on
behalf of the named plaintiff, Ms. Arlene Greenberg, and all other persons and
entities who purchased shares of Company Common Stock during the period from
August 14, 1997 through June 23, 1998. Among other things, the complaint
alleges that the Company's financial statements for the first three quarters of
fiscal 1998 were materially false and misleading in violation of Section 10(b)
of the Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule 10b-5
promulgated thereunder, and Section 20(a) of the Exchange Act. The prayer for
relief requests compensatory damages and reimbursement for the reasonable costs
and expenses, including attorney's fees and expert fees, of the plaintiff and
the class incurred in connection with the action. Although the Company believes
the complaint is without merit and will vigorously defend the action, it is not
possible to predict with certainty the final outcome of this proceeding.
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. On December 20, 1996, the
NASD relisted the Company's stock on the NASDAQ SmallCap Market. The Company has
received notice from NASD that the Company has failed to meet the requirements
for continued listing on The NASDAQ SmallCap Market(TM). The Company is
appealing the decision and a hearing is scheduled at the end of July, 1998.
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<PAGE> 15
The following table sets forth the high and low closing bid prices of
the Company's Common Stock for each quarter of fiscal 1997 and fiscal 1998, 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 - 1997 $6 7/8 $4 7/8
(April 1 - June 30, 1996)
Second Fiscal Quarter - 1997 5 3/4 4 1/2
(July 1 - September 30, 1996)
Third Fiscal Quarter - 1997 6 1/4 4 1/8
(October 1 - December 31, 1996)
Fourth Fiscal Quarter - 1997 8 3/4 5 7/8
(January 1 - March 31, 1997)
First Fiscal Quarter - 1998 6 7/8 5 3/8
(April 1 - June 30, 1997)
Second Fiscal Quarter - 1998 7 13/16 6
(July 1 - September 30, 1997)
Third Fiscal Quarter - 1998 8 7/8 5 1/4
(October 1 - December 31, 1997)
Fourth Fiscal Quarter - 1998 7 1/16 3 7/8
(January 1 - March 31, 1998)
</TABLE>
On July 6, 1998, the high and low bid price quotations for the
Company's Common Stock were $2 1/2 and $2 7/16, respectively, as reported on
NASDAQ.
As of July 6, 1998 there were approximately 1,245 record owners of
the Company's Common Stock. 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.
SALES OF UNREGISTERED SECURITIES
In August 1995, the registrant issued and sold an aggregate of 333,335
shares of its Common Stock to nine accredited investors for an aggregate
offering price of $1,000,000. Also in 1995, the Company sold 203,659 shares of
common stock to individuals which were paid for through the conversion of
outstanding notes payable with an outstanding balance of $569,160. In September
1996, the registrant issued and sold an aggregate of 150,000 shares of its
Common Stock to ten accredited investors for an aggregate offering price of
$525,000. In fiscal 1998, the Company sold 8,000 shares to an accredited
inventor for aggregate proceeds of $15,000 in connection with the exercise of
outstanding warrants.
No underwriters were used in connection with either of these private
placements, and accordingly, there were no underwriting discounts or
commissions. The issuance of these securities were exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) of the Securities
Act of 1933 and the rules and regulations promulgated thereunder as transactions
by an issuer not involving any public offering.
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<PAGE> 16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
UPDATE CONCERNING RECENT DEVELOPMENTS
On June 23, 1998, the Company announced that, during the course of the
year-end audit, the Company's auditors, Arthur Andersen LLP, identified errors
in the accumulation of contract costs and the way in which certain additional
items of expense were accounted for. As a result, the Company announced that it
did not expect to release its final results for the fourth quarter and the full
fiscal year ended March 31, 1998 until later in July. The Company also
announced that, although it was continuing to review the nature and extent of
these matters, it expected to report a net loss for the fiscal year ended March
31, 1998 of approximately $2.4 to $3.0 million. Finally, the Company announced
that it expects to restate its results for each of the first three quarters of
fiscal 1998 and that previously issued financial statements for the interim
periods of fiscal 1998 should not be relied upon.
Since June 23, 1998, the Company, with the assistance of Arthur
Andersen LLP, has continued to review the nature and extent of the issues
identified during the year-end audit. The Company has determined that the
errors were primarily attributable to the use of a job cost software system that
was first in use in April 1997. The software did not relieve capitalized costs
as systems were shipped. The software errors have been corrected in the first
quarter fiscal 1999. Further, the Company has engaged Arthur Andersen LLP to
perform quarterly reviews for fiscal year 1999.
The Company is continuing to assess the impact these issues may have
on the previously announced results of the first three quarters of fiscal 1998.
The Company expects that its review will be completed by the middle of August,
1998, at which time it expects to amend the quarterly reports relating to such
fiscal quarters previously filed with the Securities and Exchange Commission.
As previously announced, the net loss reported by the Company for the
fiscal year ended March 31, 1998 violates certain financial covenants set
forth in the Company's senior credit facility. The Company has met with
representatives of its senior lender, Bank of Boston Connecticut, N.A. (the
"Bank"), to discuss a potential course of action. During a meeting held on July
10, 1998, the Bank's representative verbally advised the Company that, although
it would not permit the Company to make any additional borrowings under the
senior credit facility, it would not take any actions before August 10, 1998 to
collect the outstanding indebtedness currently existing under the credit
facility or to foreclose on the collateral securing the credit facility. The
parties currently are in the process of negotiating a definitive forbearance
agreement, but as of the date of this report, no such definitive forbearance
agreement has been executed. Although the Company expects to negotiate a
definitive forbearance agreement extending beyond August 10, 1998, there can be
no assurance that it will be able to do so.
On July 9, 1998, a purported class action lawsuit was filed against the
Company, James H. Whitney and Frederick W. Kolling III asserting claims under
the federal securities laws. The action was filed in the United States District
Court for the District of Connecticut and purports to be brought on behalf of
the named plaintiff, Ms. Arlene Greenberg, and all other persons and entities of
who purchased shares of Company Common Stock during the period from August 14,
1997 through June 23, 1998, Among other things, the complaint alleges that the
Company's financial statements for the first three quarters of fiscal 1998 were
materially false and misleading in violation of Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and SEC Rule 10b-5 promulgated
thereunder, and Section 20(a) of the Exchange Act. See Item 3 below. The Company
believes the complaint is without merit and will vigorously defend the action.
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<PAGE> 17
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, 1998 March 31, 1997 March 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Sales:
Systems $ 8,630,103 $ 8,716,473 $ 8,458,700
Maintenance 6,606,085 5,736,230 4,022,562
--------------- --------------- --------------
Total Sales 15,236,188 14,452,703 12,481,262
--------------- --------------- --------------
Cost of Sales:
Systems 6,557,317 4,797,526 4,895,387
Maintenance 4,458,055 3,166,419 2,826,853
--------------- --------------- --------------
Total Cost of Sales 11,015,372 7,963,945 7,722,240
--------------- --------------- --------------
Gross Profit 4,220,816 6,488,758 4,759,022
Operating Expenses:
Selling and Administrative 6,533,212 5,881,926 5,330,807
Research and Development 143,871 163,517 64,407
--------------- --------------- --------------
Total Operating Expenses 6,677,083 6,045,443 5,395,214
--------------- --------------- --------------
Operating Income (Loss) (2,456,267) 443,315 (636,192)
Other Expenses:
Interest Expense, Net (245,552) (184,426) (243,363)
--------------- --------------- --------------
Net Income (Loss) $(2,701,819) $ 258,889 $ (879,555)
========= ========= ========
Basic Net Income (Loss) Per Share $(0.63) $0.06 $(0.23)
===== ==== =====
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current Assets $4,410,892 $4,317,146
Total Assets 9,329,435 9,363,693
Current Liabilities 9,586,006 4,768,874
Long-Term Debt, less current maturities 49,047 2,213,618
Stockholders' Equity (Deficit) (305,618) 2,381,201
</TABLE>
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<PAGE> 18
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 1998
COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
In anticipation of substantial sales increases in fiscal 1998, the
Company committed funds to increasing its production and service capacity.
During fiscal 1998, order levels were insufficient to fully absorb these cost
increases and to provide the necessary cash flow to fund operating needs. As a
result, the Company experienced additional production inefficiencies due to
uncertain parts deliveries and high levels of overtime needed to complete
contracted orders. As a result of the foregoing, the Company realized a net
loss of $2,702,000 for the fiscal year ended March 31, 1998 as compared to a
net profit of $259,000 for fiscal 1997.
System sales for fiscal year 1998 decreased $86,370, or 1%, from
fiscal year 1997. At March 31, 1998 system order backlog, consisting of total
order price less revenue recognized to date for all signed orders on hand, was
$4,152,000 as compared to $3,276,000 at March 31, 1997.
Service revenue increased $869,855, or 15% from fiscal year 1997 as a
result of a larger number of systems under service contract from shipments
during the year and inflationary price increases in service contracts between
the periods.
Gross profit decreased to $4,220,816 in fiscal year 1998 from
$6,488,758 in fiscal year 1997. The gross margin on systems sales decreased to
24% in fiscal year 1998 from 45% in fiscal year 1997. The decrease in gross
margin on system sales is attributable to manufacturing inefficiencies which
caused an increase in the labor and overhead cost components for each system.
There were also cost increases averaging approximately 4% for materials. The
service gross margin decreased from 45% in fiscal year 1997 to 33% in fiscal
year 1998. The decrease in gross profit margin for service sales is
attributable to training and start-up expenses related to the Company's adding
eleven field engineers throughout the year to begin servicing sites where
previously there had been no systems installed. Additional costs were incurred
at headquarters to increase staffing to support a greater number of systems
installed.
Selling and administrative expenses increased $651,000, or 11% from
fiscal year 1997 to fiscal 1998.
Research and development expenses decreased $20,000 from fiscal 1997
to fiscal 1998.
Interest expense increased $61,000 during the year. The increase was
due to an increased amount of the Company's debt carrying a higher rate of
interest than in fiscal 1997.
FISCAL YEAR ENDED MARCH 31, 1997
COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996
Systems sales for fiscal 1997 increased $257,000, or 3%, from fiscal
1996. The Company received a substantial number of orders in the fourth quarter
of the fiscal year. At March 31, 1997, the systems order backlog, consisting of
total order price less revenue recognized to date for all signed orders on hand,
was $3,276,000 (or 16 systems) as compared to $1,085,000 (or 6 systems) at March
31, 1996.
Maintenance revenues increased $1,730,000 or 36%, 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 $6,489,000 in fiscal 1997. The gross margin
on system sales increased from 42% in fiscal 1996 to 45% in fiscal 1997. The
increase in gross margin is due to increased manufacturing and purchasing
efficiencies. The maintenance gross profit percentage increased from 30% in
fiscal 1996 to 45% in fiscal 1997, reflecting an increase in requests for
special services and multiple shift maintenance which yields a higher gross
margin than the services covered by the Company's standard maintenance contract.
Selling and administrative expenses increased $551,000, or 10%, from
fiscal 1996 to fiscal 1997. The increased level of expenses primarily reflects
the costs associated with the increased sales staff in fiscal year 1997 over
fiscal year 1996.
Research and development expenses increased $100,000, or 154%, from
fiscal 1996 to fiscal 1997. This increase resulted from additional efforts to
develop inkjet printing products and faster, more functional document handling
equipment.
Interest expense for fiscal 1997 decreased $59,000, or 24%, from fiscal
1996, decreasing from $243,000 to $184,000. This decrease was directly
attributable to one time interest charges in 1996.
As a result of the foregoing, the Company realized a net profit of
$259,000 for the fiscal year ended March 31, 1997, as compared to a net loss of
$880,000 for the fiscal year ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for liquidity is to fund operations while
it endeavors to increase sales and achieve consistent profitability.
Historically, the Company has derived liquidity through systems and maintenance
sales (including customer deposits), bank borrowings, financing arrangements
with third parties and, from time to time, sales of its equity securities.
During the fiscal year ended March 31, 1998, the Company had a
positive cash flow from operations of $893,604, compared to a positive cash
flow from operations of $148,922 for the fiscal year ended March 31, 1997 and a
negative cash flow from operations of $655,496 for the fiscal year ended March
31, 1996. The positive cash flow recorded during fiscal 1998 resulted from,
among other things, a $972,637 decrease in accounts receivable, a $1,301,913
increase in accounts payable and a $590,254 increase in deferred service
contract revenue. The significant increase in accounts payable reflects the
ongoing shortage of cash necessary to fund adequately the Company's business
operations. The increase in accounts payable primarily relates to increases in
amounts due Datacard, the Company's third party service provider and other
service providers. The Company has entered into an agreement with Datacard for
the payment of these obligations.
The Company and the Bank of Boston Connecticut, N.A. (the "Bank") have
entered into Revolving Loan and Security Agreement, originally dated as of June
4, 1996 (as amended, the "Revolving Credit Facility"), with an aggregate
borrowing capacity of $2,250,000. The Revolving Credit Facility is bifurcated
into two separate subfacilities (hereinafter referred to as "Facility A" and
"Facility B"). Facility A has a maximum borrowing capacity of $1,750,000 and
Facility B has a maximum borrowing capacity of $500,000. See Note 6 to the
Financial Statements for additional information.
In order to induce the Bank to enter into the Revolving Credit
Facility, Mr. Harold S. Geneen, then the Chairman of the Board and a
stockholder of the Company, agreed to provide the Bank with sufficient cash
collateral to secure all borrowings outstanding under Facility A. The
borrowings under Facility B are secured by all of the tangible and intangible
assets of the Company. Mr. Geneen passed away on November 21, 1997, and his
death constituted a technical event of default under the Revolving Credit
Facility. The Executor of Mr. Geneen's estate affirmed Mr. Geneen's obligations
to the Bank with respect to the Revolving Credit Agreement, and the Bank waived
the technical event of default and extended the maturity date of the Revolving
Credit Facility to April 1, 1999.
The Revolving Credit Facility contains several affirmative and
negative covenants pursuant to which the Company, among other things, is
required to have Operating Profits (as defined in the Revolving Credit
Facility). The net loss reported by the Company for the fiscal year ended March
31, 1998 violates these covenants and constitutes an event of default under the
Revolving Credit Facility.
The Company has met with representatives of the Bank to discuss a
potential course of action. During a meeting held on July 10, 1998, the Bank's
representatives verbally advised the Company that, although it would not permit
the Company to make any additional borrowings under the senior credit facility,
it would not take any actions before August 10, 1998 to collect the outstanding
indebtedness currently existing under the credit facility or to foreclose on
the collateral securing the credit facility. The parties currently are in the
process of negotiating a definitive forbearance agreement, but as of the date
of this report, no such definitive forbearance agreement has been executed.
Although the Company expects to negotiate a definitive forbearance agreement
extending beyond August 10, 1998, there can be no assurance that it will be
able to do so. In any event, the Company does not currently have access to any
additional borrowings under the Revolving Credit Facility.
Except for the Revolving Credit Facility, the Company does not have any
commitments for outside funding of any kind. The Revolving Credit Facility also
expressly prohibits the Company from incurring any additional indebtedness from
any person or entity other than the Bank. It must depend, therefore, upon the
generation of sufficient internally generated funds to finance its operations
during the balance of fiscal 1999.
Under the Company's current pricing policy, approximately 50% of the
purchase price of each system is received by the Company at the time an order
is placed by a customer, approximately 40% of the purchase price is received at
the time the system is shipped to the customer and the remaining 10% of the
purchase price is received approximately 30 days after delivery of the system.
As a result, the Company receives a significant cash flow benefit from the
receipt of new orders.
During the fiscal quarter ended June 30, 1998, the Company received
orders for six additional systems, aggregating approximately $3,371,000, all of
which is expected to be shipped during fiscal 1999. Although there can be no
assurances in this regard, management is cautiously optimistic that the Company
will be able to generate sufficient additional sales to meet the Company's cash
needs for the balance of the year.
The Company does not plan to make any significant capital
expenditures. The Company is also currently evaluating other potential
strategic alternatives, including the extent to which significant cost savings
can be achieved and the possible issuance of additional equity securities.
It is possible that the Company's business may require larger amounts
of capital than the Company currently anticipates. There can be no assurance
that the Company will be able to obtain the capital it requires to enable it to
continue in existence as an independent entity.
15
<PAGE> 19
RECENT STRATEGIC INITIATIVES
Marketing Strategy. Historically, the Company has enjoyed considerable
success in penetrating the insurance industry with its line of finishing
systems. This segment will continue to be an important and growing source of
future revenues. At the same time, however, the Company has begun to see the
returns from its efforts to move into a number of other application/market
areas.
Initial orders have already been received from mutual funds, HMO's,
federal and state governments, pharmaceutical companies, and retail distribution
centers among others. The Company expects to see its marketing base continue to
expand as the market clearly is driving toward greater personalization of
documents and mail. This market direction will produce increasing requirements
for the unique, patented capabilities of Gunther's technologies.
With the introduction and subsequent enhancement of the Series III
product line, the Company effectively opened up a complete new application area
for both new and existing customers. These high speed systems (12,000 packages
per hour) have now made the Company competitive in the large billing and
statement market, as well as a wide range of applications that simply demand the
higher output rates.
The Company's new ink jet products and consumables are expected to
evolve quickly into a significant contributor to the Company's revenue and
profitability. The ink jet products are targeted at current and new finishing
system users, but even more so toward the growing OEM marketplace for these
products. This business will also help to smooth out both revenue and cash flow.
The Company will begin to see revenue from ink jet products in August of 1998.
The transitioning of a greater percentage of service coverage from third party
to Gunther-direct will also serve to smooth cash flow.
The Company is also taking steps to increase its geographic penetration
on a worldwide basis. Approximately 50% of the market for both the finishing
systems and the ink jet products and technologies is outside of North America.
From a pricing standpoint the Company plans to keep finishing system
prices at a sufficient level to insure adequate margins. It is believed to be a
viable strategy considering the number of key technological advantages the
Company's systems continue to have when compared with competition. With regard
to the ink jet business, pricing is targeted at a level that will insure high
margins (given its low cost to manufacture). On the OEM side of this business,
the pricing will produce excellent margins while allowing the Company to pursue
a position as a dominant supplier in the industry.
Cost Reduction. A number of cost reduction plans have been or are in the
process of being implemented that expect to have significant impact on margins.
The Company implemented a layoff effective June 30, 1998. Additional changes are
under way to improve processes and controls in the purchasing and assembly
scheduling of systems. These changes will result in improved efficiencies with
decreased headcount and a significant reduction in overtime expense. A further
positive impact on margins will result from overhead expense being spread over a
greater number of systems for the year. The Company's first fiscal quarter 1999
order rate is substantially ahead of first quarter fiscal 1998.
INFLATION
The effect of inflation on the Company has not been significant during
the last two fiscal years.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. In general, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements with the meaning of Section 21E.
Without limiting the generality of the foregoing, the words "believes,"
"anticipates," "plans," "expects," and other similar expressions are intended to
identify forward-looking statements. Investors should be aware that such
forward-looking statements are based on the current expectations of management
and are inherently subject to a number of risks and uncertainties that could
cause the actual results of the Company to differ materially from those
reflected in the forward-looking statements. Some of the important factors which
could cause actual results to differ materially from those projected include,
but are not limited to, the following: 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; the ramp-up and expansion of manufacturing capacity; the continued
availability of financing; and the expenses associated with Year 2000
16
<PAGE> 20
compliance. The Company does not undertake to update any forward-looking
statement made in this report or that may from time-to-time be made by or on
behalf of the Company.
YEAR 2000
The Company recognizes that it must ensure that its products and
internal computerized operations will not be adversely impacted by various
so-called "Year 2000" systems and software failures which can arise in certain
time sensitive functions. None of the Company's products have time sensitive
applications. As a result, management believes that all of the Company's
products are currently Year 2000 compliant, and management does not expect the
Company to undertake additional research and development efforts in this regard.
Management is currently in the process of identifying costs, problems and
uncertainties associated with making its internal operating systems Year 2000
compliant. In general, management expects to resolve the Year 2000 issue with
respect to its internal computer systems and software applications through
upgrade, conversion, modification or replacement of noncompliant system and
applications. Management currently believes that the costs associated with this
issue will not have a material impact on the Company's ongoing results of
operations. There can be no assurance, however, that the systems of other
parties upon which the Company's business also relies will be Year 2000
compliant. The failure of such other parties to become Year 2000 compliant could
have a material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this item are presented on pages
F-1 through F-19 immediately after the signature page of this report.
17
<PAGE> 21
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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
1998 Annual Meeting of Stockholders, which is currently scheduled to be held in
August 1998. 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 Item 10 is hereby incorporated by reference
to the Company's Proxy Statement that will be distributed in connection with the
1998 Annual Meeting of Stockholders, which is currently scheduled to be held in
August 1998. 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
1998 Annual Meeting of Stockholders, which is currently scheduled to be held in
August 1998. 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
1998 Annual Meeting of Stockholders, which is currently scheduled to be held in
August 1998. 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.
18
<PAGE> 22
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. 33-70052-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 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
19
<PAGE> 23
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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.)
10.19 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.).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 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).
10.26 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).
20
<PAGE> 24
10.27 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).
10.28 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).
10.29 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).
10.30 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).
10.31 Building lease between the Company and UNC Incorporated, dated
July 31, 1996 (filed as Exhibit 10.3) to the Company's
Quarterly Report on Form 10-QSB dated November 12, 1996 and
incorporated herein by reference).
10.32 Promissory Note dated September 9, 1996 between James H.
Whitney, CEO, Gunther International, Ltd. and the Company
(filed as Exhibit 10.4 to the Company's Quarterly Report on
Form 10-QSB dated November 12, 1996 and incorporated herein
by reference).
10.33 Revolving Loan and Security Agreement (filed as Exhibit 10.1
to the Company's Quarterly Report in Form 10-QSB dated August
13, 1996 and incorporated herein by reference).
10.34 Subordination Agreement (filed as Exhibit 10.2 to the
Company's Quarterly Report in Form 10-QSB dated August 13,
1996 and incorporated herein by reference).
10.35 Second Amendment to the Revolving Loan and Security Agreement
dated June 26, 1997.
10.36 Second Reaffirmation of Limited Guaranty.
10.37 Amended and Restated Pledge Agreement.
10.38 Non-exclusive License Agreement By and Between The
Hewlett-Packard Company and Gunther International,
Incorporated for Envelope Printing Technology dated May 6,
1997.
24 Power of Attorney pursuant to which this report has been
executed.
b. Reports on Form 8-K.
On June 23, 1998, the Company filed a Current Report on Form 8-K
reporting that it did not expect to release its financial results for the fiscal
year ended March 31, 1998 until later in July 1998. During the course of the
year-end audit, the Company's auditors, Arthur Andersen LLP, identified errors
in the accumulation of contract costs and certain items of expense that were not
properly accounted for. The Company also reported that it expects to restate its
results for each of the first three quarters of fiscal 1998 and cautioned
investors not to rely on the previously issued financial statements for those
periods.
21
<PAGE> 25
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 14, 1998
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 14, 1998
James H. Whitney Officer (Principle Executive
Officer)
/s/ Frederick W. Kolling III July 14, 1998
- ----------------------------
Frederick W. Kolling III
Attorney-in-Fact for:
Guy W. Fiske Director
J. Kenneth Hickman Director
Frederick W. Kolling III Director
Alan W. Morton Director
Gerald H. Newman Director
Marc I. Perkins Director
James H. Whitney Director
</TABLE>
22
<PAGE> 26
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheets as of March 31, 1998 and 1997 F-3
Statements of Operations for the Years Ended March 31, 1998,
1997 and 1996 F-5
Statements of Stockholders' Equity (Deficit) for the Years Ended
March 31, 1998, 1997 and 1996 F-6
Statements of Cash Flows for the Years Ended March 31, 1998,
1997 and 1996 F-7
Notes to Financial Statements F-8
</TABLE>
F-1
<PAGE> 27
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, 1998
and 1997, and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended March
31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1998 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses from operations, is in
default of its primary credit facility and has a working capital deficit. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
July 6, 1998 (except with respect to the matters discussed
in the last paragraph of Note 6 and Note 14, as to which the date
is July 10, 1998)
F-2
<PAGE> 28
GUNTHER INTERNATIONAL, LTD.
BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Assets
Current Assets:
Cash $ 572,368 $ 261,700
Accounts Receivable, Net 326,128 1,298,765
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts 2,230,208 1,403,715
Inventories 1,180,369 1,262,435
Prepaid Expenses 61,819 90,531
Note Receivable From Stockholder 40,000 --
----------- -----------
Total Current Assets 4,410,892 4,317,146
----------- -----------
Property and Equipment:
Machinery and Equipment 1,224,856 1,099,208
Furniture and Fixtures 249,581 187,294
Leasehold Improvements 240,541 229,804
----------- -----------
1,714,978 1,516,306
Less - Accumulated Depreciation
and Amortization (764,934) (483,069)
----------- -----------
950,044 1,033,237
----------- -----------
Other Assets:
Excess of Cost Over Fair Value of Net
Assets Acquired, Net 3,221,821 3,445,293
Deferred Preproduction Costs, Net 622,953 457,189
Investment, at Lower of Cost or Market 20,000 30,000
Note Receivable from Stockholder -- 40,000
Other 103,725 40,828
----------- -----------
3,968,499 4,013,310
----------- -----------
$ 9,329,435 $ 9,363,693
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 29
GUNTHER INTERNATIONAL, LTD.
BALANCE SHEETS (CONTINUED)
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Notes Payable and Current Maturities of
Other Long-Term Debt $ 2,350,058 $ 401,866
Accounts Payable 2,843,468 2,059,506
Accrued Expenses 996,994 479,043
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 1,597,789 771,016
Deferred Service Contract Revenue 1,647,697 1,057,443
Note Payable to Stockholder 150,000 --
------------ ------------
Total Current Liabilities 9,586,006 4,768,874
------------ ------------
Long-Term Debt, Less Current Maturities 49,047 2,213,618
------------ ------------
Commitments and Contingencies (Notes 2 and 13)
Stockholders' Equity (Deficit):
Common stock, $.001 Par Value; 16,000,000
Shares Authorized; 4,291,269 and 4,283,269
Shares Issued and Outstanding at March 31,
1998 and 1997, respectively 4,291 4,283
Series B Common Stock, $.001 Par Value; 500
Shares Authorized, Issued and Outstanding
at March 31, 1998 and 1997 1 1
Additional Paid-in Capital 11,390,818 11,375,826
Accumulated Deficit (11,700,728) (8,998,909)
------------ ------------
Total Stockholders' Equity (Deficit) (305,618) 2,381,201
------------ ------------
$ 9,329,435 $ 9,363,693
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 30
GUNTHER INTERNATIONAL, LTD.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Sales:
Systems $ 8,630,103 $ 8,716,473 $ 8,458,700
Maintenance 6,606,085 5,736,230 4,022,562
------------ ------------ ------------
Total Sales 15,236,188 14,452,703 12,481,262
------------ ------------ ------------
Cost of Sales:
Systems 6,557,317 4,797,526 4,895,387
Maintenance 4,458,055 3,166,419 2,826,853
------------ ------------ ------------
Total Cost of Sales 11,015,372 7,963,945 7,722,240
------------ ------------ ------------
Gross Profit 4,220,816 6,488,758 4,759,022
------------ ------------ ------------
Operating Expenses:
Selling and Administrative 6,533,212 5,881,926 5,330,807
Research and Development 143,871 163,517 64,407
------------ ------------ ------------
Total Operating Expenses 6,677,083 6,045,443 5,395,214
------------ ------------ ------------
Operating Income (Loss) (2,456,267) 443,315 (636,192)
Other Expenses:
Interest Expense, Net (245,552) (184,426) (243,363)
------------ ------------ ------------
Net Income (Loss) $ (2,701,819) $ 258,889 $ (879,555)
============ ============ ============
Net Income (Loss) Per Share:
Basic and Diluted $ (0.63) $ 0.06 $ (0.23)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 31
GUNTHER INTERNATIONAL, LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Series B
Common Stock Common Stock
$.001 Par Value $.001 Par Value Additional
------------------- ------------------ Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1995 3,596,275 $ 3,596 500 $ 1 $ 8,884,010 $ (8,378,243) $ 509,364
Conversion of notes payable
to stockholders to common
stock 203,659 204 -- -- 568,956 -- 569,160
Private placement of common
stock 333,335 333 -- -- 999,667 -- 1,000,000
Retirement of Class B senior
preferred stock -- -- -- -- 412,817 -- 412,817
Net loss -- -- -- -- -- (879,555) (879,555)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 1996 4,133,269 4,133 500 1 10,865,450 (9,257,798) 1,611,786
Private placement of common
stock 150,000 150 -- -- 510,376 -- 510,526
Net income -- -- -- -- -- 258,889 258,889
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 1997 4,283,269 4,283 500 1 11,375,826 (8,998,909) 2,381,201
Exercise of warrants 8,000 8 -- -- 14,992 -- 15,000
Net loss -- -- -- -- -- (2,701,819) (2,701,819)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 1998 4,291,269 $ 4,291 500 $ 1 $ 11,390,818 $(11,700,728) $ (305,618)
============ ============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 32
GUNTHER INTERNATIONAL, LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(2,701,819) $ 258,889 $ (879,555)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 681,623 577,663 344,866
Royalties forgiven -- -- (81,084)
Loss on investment and abandonment of leasehold
improvements 10,000 39,319 --
Decrease (increase) in accounts receivable, net 972,637 (111,683) (545,685)
Decrease (increase) in inventories, net 82,066 49,972 503,480
(Increase) decrease in prepaid expenses and other assets (43,350) (26,313) 117,182
(Increase) decrease in accounts and notes receivable
from stockholder -- (20,823) 73,762
Increase (decrease) in accounts payable and
accrued expenses 1,301,913 (7,091) 410,854
Increase (decrease) in deferred service contract revenue 590,254 (66,585) (52,777)
Increase in billings in excess of costs and estimated
earnings, net 280 (544,426) (546,539)
----------- ----------- -----------
Net cash provided by (used for)
operating activities 893,604 148,922 (655,496)
----------- ----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment (198,672) (633,566) (207,179)
Increase in deferred preproduction costs (332,885) (201,525) (280,202)
----------- ----------- -----------
Net cash used for investing activities (531,557) (835,091) (487,381)
----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from notes payable and long-term debt 171,515 2,217,729 1,030,114
Repayments of notes payable and long-term debt (237,894) (2,233,279) (813,014)
Decrease (increase) in restricted cash and
short-term investments -- 325,834 (25,834)
Net proceeds from sale of common stock and
warrants 15,000 510,526 1,000,000
Closing costs in connection with conversion of
notes payable to common stock and retirement
of Class B preferred stock -- -- (229,926)
----------- ----------- -----------
Net cash provided by (used for)
financing activities (51,379) 820,810 961,340
----------- ----------- -----------
Net Increase (Decrease) in Cash 310,668 134,641 (181,537)
Cash, beginning of year 261,700 127,059 308,596
----------- ----------- -----------
Cash, end of year $ 572,368 $ 261,700 $ 127,059
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 220,123 $ 280,967 $ 169,223
Cash paid for income taxes -- -- 12,700
Common stock issued for notes payable and
accrued interest -- -- 711,903
Retirement of Class B Preferred Stock -- -- 500,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 33
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
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 shares of the Company's no par value
common stock for 190,000 shares of newly issued $.001 par value common stock.
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. 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:
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 meet customer
needs. The Company's products also face competition from other products and
companies with greater financial resources than the Company. From inception
through fiscal 1996, the Company incurred losses from operations. Operating
results improved significantly during the fiscal years ended March 31, 1996 and
1997 and, the Company achieved operating earnings in fiscal 1997. During fiscal
year 1998, operating results declined significantly due primarily to increased
spending in anticipation of volume increases and other operational
inefficiencies. As a result, the Company incurred a loss from operating
activities of $2,456,267 for the year ended March 31, 1998.
As a result of these losses, the Company is in default of the terms of
its principal credit facility under which the Company had borrowings outstanding
at March 31, 1998 totaling $2,051,169 (see Note 6). Although the parties have
not executed a definitive forbearance agreement, the lender has verbally
indicated that it will not foreclose on the Company or guarantee until August
10, 1998, however, they have the right to demand repayment of these borrowings
at any time after August 10, 1998. In addition, the Company has a working
capital deficit and many of its suppliers have required cash on delivery for raw
materials and parts required for the assembly of the Company's products. These
factors indicate the Company may be unable to continue without obtaining
additional debt or equity capital.
Management is addressing the above matters by taking the following
actions:
- Emphasizing sales of systems to existing and new customers to
generate the order level needed to return to profitability.
- Implementing cost reduction efforts, including personnel
lay-offs, in the production and administrative operations to
lower the Company's break-even point.
F-8
<PAGE> 34
- Streamlining the production process to focus on decreasing the
total time required to complete a system.
- Working with the lender and vendors to arrange for repayment
terms which provide adequate liquidity for the Company to
continue in operation.
The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets or the
amounts and classification of liabilities that might be necessary in the event
the Company cannot continue in existence.
3. Significant Accounting Policies:
Revenue recognition -
The Company recognizes systems sales using the percentage of completion
method. Systems sales include a percentage of the earnings expected to be
realized based on costs incurred compared with estimated total costs. Changes to
total estimated contract costs are recognized in the period they are determined.
Revenues recognized in excess of amounts billed are included in current assets.
Amounts billed in excess of revenues recognized to date are included in current
liabilities.
Cash and short-term investments -
For purposes of cash flow information, the Company considers cash and
short-term investments purchased with a maturity of three months or less to be
highly liquid investments.
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, 1998 and 1997, the Company had recorded an allowance of approximately
$23,000 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 7 years
Leasehold improvements Life of lease
</TABLE>
F-9
<PAGE> 35
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, 1998 and 1997,
accumulated amortization was $1,247,747 and $1,024,275, respectively. 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.
Deferred preproduction costs -
Certain preproduction costs incurred subsequent to determining the
feasibility of new product introductions are capitalized and are amortized over
a three-year period. As of March 31, 1998 and 1997, accumulated amortization was
$336,799 and $169,678, respectively. See "Recently Issued Accounting Standards"
for additional information.
Research and development -
Expenses associated with research and development activities are
expensed as incurred.
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. Warranty expense for the years ended March 31, 1998, 1997
and 1996, totaled approximately $215,000, $85,000, and $123,000, respectively.
Income taxes -
The Company accounts for income taxes using the provisions of the
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes". As of March 31, 1998 and 1997, 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
$4,400,000 and $3,200,000, 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. Provisions for minimum state taxes are provided
through a charge to operating expenses and are not material in all periods
presented.
At March 31, 1998, the Company has net operating loss carryforwards of
approximately $9,125,000 available to be applied against both future federal and
state taxable income. The federal and state loss carryforwards expire at various
dates from 1999 through 2012.
The Company's ability to utilize tax loss carryforwards is dependent
upon many factors including the ability of the Company to achieve profitability
and avoiding a fifty percent "ownership change" as defined in Section 382 of the
Internal Revenue Code. If there is an "ownership change", the tax loss
carryforwards available to the Company may be significantly reduced or
eliminated.
F-10
<PAGE> 36
Royalty expense -
The Company has royalty agreements with Connecticut Innovations, Inc.
and with certain stockholders (see Note 11). Royalties due under these
agreements are expensed as incurred.
Net income (loss) per share -
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share (EPS)", which established new standards
for computing and presenting earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997.
Accordingly, all period earnings per share data presented is in accordance with
SFAS No. 128.
For purposes of computing basic EPS, weighted average common shares for
fiscal 1998, 1997 and 1996 were 4,288,380, 4,220,769 and 3,897,367,
respectively. For fiscal years 1998 and 1996, the effect of conversion of the
underlying securities would have been antidilutive for the diluted EPS
calculation. In 1997, the dilutive effect of underlying securities increased the
weighted average common shares outstanding to 4,486,003 shares which results in
diluted EPS of $0.06 per share.
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.
Recently Issued Accounting Standards:
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income (net income (loss) together with other non-owner changes in equity) and
its components in a full set of general purpose financial statements. SFAS No.
130 is effective for financial statements issued for periods beginning after
December 15, 1997 and earlier application is permitted. The adoption of this
standard has no effect on the financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which requires disclosures
for each segment of an enterprise that are similar to those required under
current standards with the addition of quarterly disclosure requirements and a
finer partitioning of geographic disclosures. SFAS No. 131 is effective for
financial statements issued for periods beginning after December 15, 1997 and
earlier application is encouraged. The Company is evaluating how it will
implement SFAS 131.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities," which requires costs of start-up
activities and organizational costs to be expensed as incurred. Initial
application of SOP 98-5 will be reported as the cumulative effect of a change in
accounting principle. SOP 98-5 is effective for financial statements for fiscal
years beginning after December 15, 1998. The adoption of this standard will
require the Company to expense of approximately $622,953 in capitalized deferred
preproduction costs as of March 31, 1998. Had this SOP been adopted in fiscal
1998, the Company would have reported a loss before the cumulative effect of
this change in accounting of $2,867,583 or $0.67 per share.
F-11
<PAGE> 37
4. Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Raw materials $ 1,349,301 $ 1,261,274
Work-in-process -- 101,161
----------- -----------
1,349,301 1,362,435
Less: Valuation reserve (168,932) (100,000)
----------- -----------
$ 1,180,369 $ 1,262,435
=========== ===========
</TABLE>
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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 3,252,164 $ 2,496,666
Estimated earnings 2,381,249 2,180,561
----------- -----------
5,633,413 4,677,227
Less: Billings to date (5,000,994) (4,044,528)
----------- -----------
$ 632,419 $ 632,699
=========== ===========
Included in the accompanying balance
sheets under the following captions:
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 2,230,208 $ 1,403,715
Billings in excess of costs and
estimated earnings on uncompleted
contracts (1,597,789) (771,016)
----------- -----------
$ 632,419 $ 632,699
=========== ===========
</TABLE>
F-12
<PAGE> 38
6. Financing Arrangements:
Notes payable and long-term debt at March 31, 1998 and 1997 consisted
of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Line of credit, maximum of $350,000 (see below) $ 350,000 $ 500,000
Line of credit, maximum of $1,750,000 (see below) 1,701,169 1,701,169
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, through
June 30, 1998, unsecured 284,335 319,876
Note payable to a vendor, non-interest bearing, payable
beginning September 1, 1995 from revenues on
maintenance contracts, unsecured -- 41,668
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 25,325 27,405
Other 38,276 25,366
----------- -----------
2,399,105 2,615,484
Less: Short-term notes payable and current maturities of
long-term debt (2,350,058) (401,866)
----------- -----------
$ 49,047 $ 2,213,618
=========== ===========
</TABLE>
As of March 31, 1998, maturities of notes payable and long-term debt,
were as follows:
<TABLE>
<CAPTION>
Fiscal year
Ending March 31, Amount
---------------- ------
<S> <C>
1999 $2,350,058
2000 16,220
2001 30,370
2002 2,457
----------
$2,399,105
==========
</TABLE>
During the year ended March 31, 1997 the Company established a line of
credit with a bank. This line of credit agreement allows the Company to borrow
$1,750,000 on facility A and $350,000 on facility B (the Company has an
additional $150,000 available on facility B which is being used to support a
letter of credit backing a performance bond - see Note 11). The Company must pay
an annual commitment fee equal to .75 percent of the average unused line of
credit. Facility A bears interest at prime (8.5% as of March 31, 1998) and the
facility B bears interest at prime plus one percent. Facility A is guaranteed
and secured by a stockholder. Both facilities are secured by all tangible and
intangible property of the Company and mature on April 1, 1999.
F-13
<PAGE> 39
The Company is in default of these lines of credit for noncompliance
with the net operating income covenants contained in the agreement. Although the
parties have not executed a definitive forbearance agreement, the lender has
verbally indicated that it will not foreclose on the Company's assets or
guarantee through August 10, 1998, however, the lender has not waived their
right to foreclose after that date.
In addition, the Company is also in default of the note payable to
vendor for nonpayment.
7. Capital Stock and Equity:
The Company has authorized two classes of stock; common stock and
Series B common stock. Both classes of stock have voting rights 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.
In 1993, the Company sold 1,000,000 units, comprised of one share of
common stock and one warrant, to purchase common stock in its initial public
offering. In addition, the underwriters exercised their option to purchase an
additional 150,000 units in 1994. The warrants issued in connection with the
sale of the units originally entitled the holders 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. During fiscal 1998, the expiration date was
extended to December 1998. 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.
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, subject to adjustment in certain events. 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 Company had outstanding 156,666 warrants to purchase one share of
the Company's common stock for $4.00 per share which expire December 1998.
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 10). 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, the noteholders received 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 remained outstanding at March 31, 1997. During 1998, 8,000 shares were
issued in connection with the exercise of these warrants. The warrants expire on
September 4, 1998 and are exercisable any time within this term.
8. 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 have been
granted under the plan in connection with the Acquisition.
In December 1993, the Company adopted a Stock Option Plan, which
authorizes the Executive Compensation/Stock Option Committee of the Board of
Directors to grant to key employees and directors of the Company incentive or
non-qualified stock options. Options to purchase up to 215,000 shares of common
stock may be granted under the plan. The Executive Compensation/Stock Option
Committee determines the prices
F-14
<PAGE> 40
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 five years from the date of grant.
In connection with stock option agreements entered into in fiscal 1995,
1996 and 1997 with four employees, the Company granted options under the above
plan to acquire up to an aggregate of 125,000, 35,000 and 20,000 shares,
respectively, of the Company's common stock at exercise prices of $3.25, $3.625
and $7.38 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, July 17, 2000 and May 27, 2002, respectively. No options were
granted in fiscal year 1998.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). SFAS 123 requires the measurement of the
fair value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to financial statements. The Company has
determined that it will continue to account for stock-based compensation for
employees under Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS 123. The Company has computed the pro
forma disclosures required under SFAS 123 for options granted in fiscal 1996 and
1997 using the Black-Scholes option pricing model prescribed by SFAS 123. The
weighted average assumptions used are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Risk free interest rate 6.58% 5.88%
Expected dividend yield None None
Expected lives 5 years 5 years
Expected volatility 64% 64%
</TABLE>
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates of awards under these
plans consistent with the method of SFAS 123, the Company's net income (loss)
applicable to common stockholders and pro forma net income (loss) per common
share would have been:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net income (loss) earnings applicable to common stockholders:
As reported $ (2,701,819) $ 258,889
Pro forma (2,761,820) 233,689
Pro forma basic net income (loss) per share:
As reported (0.63) 0.06
Pro forma (0.64) 0.06
</TABLE>
Because SFAS 123 method of accounting has not been applied to options
granted prior to April 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
F-15
<PAGE> 41
A summary of the status of the Company's two stock option plans at
March 31, 1998, 1997 and 1996 and changes during the years then ended is
presented in the table below:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------------- --------------------------- ---------------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price Shares Ex Price
------- ------------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 220,000 $ 2.66 255,000 $ 2.79 275,000 $ 3.12
Granted 35,000 3.63 20,000 7.38 -- --
------- ------------ ------- ------------ ------- ------------
Outstanding at end of year 255,000 $ 2.79 275,000 $ 3.12 275,000 $ 3.12
======= ============ ======= ============ ======= ============
Exercisable at end of year 136,666 $ 2.29 190,000 $ 2.59 250,000 $ 2.87
======= ============ ======= ============ ======= ============
Weighted average fair value
of options granted $ 2.16 $ 4.45 N/A
======= ======= =======
</TABLE>
9. Class B Senior, Non-Convertible, Redeemable Preferred Stock:
The Company's certificate of incorporation previously authorized 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 11). 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 were legally available funds for such purpose, upon
the occurrence of certain events. 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 were to be carried forward and redeemed to the
full extent the Company had funds legally available for such purpose.
In the event of any liquidation, dissolution or winding up of the
affairs of the Company, each share of Class B preferred stock 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.
Effective December 31, 1995, the Company entered into a new agreement
with the holder of the Class B preferred stock whereby the stockholder agreed to
surrender all outstanding shares of Class B preferred stock (see Note 11). The
Company recorded this surrender net of related expenses, as additional paid-in
capital.
10. Related Party Transactions:
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
holders' 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 borrowing, the Company also issued
F-16
<PAGE> 42
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.
During the year ended 1997, the Company loaned $40,000 to an officer of
the Company. The note requires simple interest at 8.75% per year and the
maturity date is September 9, 1998. This loan is included in accounts and notes
receivable from stockholders at March 31, 1998 and 1997.
During the year ended 1998, the Company borrowed $150,000 from a
stockholder. The note does not have a stated interest rate or maturity date.
This loan is included in Note Payable to Stockholder at March 31, 1998.
11. 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.
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.
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
cumulatively and provides for minimum payments for each fiscal year as follows:
<TABLE>
<CAPTION>
Total Minimum
Fiscal Year Payments for the Year
----------- ---------------------
<S> <C>
1999 $100,000
2000 106,250
2001 125,000
2002 137,500
2003 131,250
--------
$600,000
=======
</TABLE>
F-17
<PAGE> 43
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.
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 and current agreements. The Company recorded $55,000 and $25,000 as
royalty expense for fiscal 1998 and 1997, respectively.
Contingencies -
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.
As of March 31, 1998, the Company had a performance bond with a
customer requiring the Company to deliver its product and meet the terms of the
contract. The Company has issued $150,000 letter of credit backing the
performance bond.
Other commitments -
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. For the years ended March 31, 1998, 1997 and 1996, royalties
expensed under this agreement totaled $155,526, $147,567 and $125,332,
respectively.
During fiscal 1998, the Company entered into an agreement related to
the development and use of certain inkjet technology. This agreement will
require the Company to pay royalties of 1% of inkjet sales up to a maximum of
$5,000,000 over the next ten years.
Leases -
The Company leases its office and manufacturing facility under an
operating lease which provides for monthly rental of $27,875 through September
1998 and $30,000 from September 1998 through September 1999. The Company is
leasing the facility on a three year agreement through September 30, 1999. Under
this agreement, the Company is responsible for paying all operating costs 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, 1998, 1997 and 1996, totaled approximately $374,000, $308,000
and $258,000, respectively. Future minimum rental payments for equipment total
$19,000 per year until fiscal year 1999.
12. Employee Benefit Plans:
The Company has 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.
F-18
<PAGE> 44
13. Significant Customers and Business Concentration:
Due to the nature of the Company's products, a significant portion of
the Company's revenues in all periods are derived from a few customers. The
majority of the Company's customers are property and casualty insurance
companies. During the years ended March 31, 1998, 1997 and 1996, sales to one
customer accounted for 21%, 26% and 17% of net sales, respectively.
14. Subsequent Event
On July 9, 1998 a purported class action lawsuit was filed against the
Company, its President and Chief Financial Officer on behalf of purchasers of
the Company's securities during the period August 14, 1997 through and including
June 23, 1998. The complaint alleges that the Company, it's President and Chief
Financial Officer violated sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 by concealing accounting irregularities which resulted in
overstatements of the Company's earnings. The suit seeks compensatory damages
plus reimbursement of costs and expenses incurred by the plaintiffs in
connection with the complaint. The Company believes the complaint is without
merit and will vigorously defend the action.
F-19
<PAGE> 45
BANK OF BOSTON CONNECTICUT
GUNTHER INTERNATIONAL
1. Second Amendment to the Revolving Loan and Security Agreement -- Exhibit
10.35
2. Second Reaffirmation of Limited Guaranty -- Exhibit 10.36
3. Amended and Restated Pledge Agreement -- Exhibit 10.37
4. Non-exclusive License Agreement By and Between the Hewlett-Packard
Company and Gunther International, Incorporated for Envelope Printing
Technology -- Exhibit 10.38
5. Power of Attorney -- Exhibit 24.
<PAGE> 1
Exhibit 10.35
SECOND AMENDMENT AGREEMENT
THIS SECOND AMENDMENT is entered into this 26th day of June, 1997 by and
between Gunther International, Ltd., whose principal place of business is 5
Wisconsin Avenue, Norwich, Connecticut (the "Debtor"), and Bank of Boston
Connecticut, a Connecticut savings bank having an address and place of business
at 127 Church Street, New Haven, Connecticut 06510 (the "Bank").
W I T N E S S E T H:
WHEREAS, Debtor and Bank entered into a Revolving Loan and Security
Agreement as of the 31st day of May, 1996, which was amended by Amendment
Agreement dated as of the 17th day of March, 1997 (collectively, the "Loan
Agreement"); and
WHEREAS, Debtor and Bank desire to extend the termination dates of the
Revolving Loans under Facility A and Facility B referred to in the Loan
Agreement from January 10, 1998 to July 31, 1998 and to amend the Loan
Agreement to reflect certain amendments by Bank and the Guarantor to the Pledge
Agreement referred to in the Loan Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency are hereby acknowledged, the parties hereto agree as follows:
1. LOAN AGREEMENT.
(a) Section 1 of the Loan Agreement is amended:
(1) By deleting the reference to "January 10, 1998" in the first
sentence of subsection (h) and substituting "July 31, 1998" therefor as the
termination date of the Revolving Loans under Facility A and Facility B.
1
<PAGE> 2
(2) By deleting subsection (i)(i) thereof in its entirety and inserting
the following in its place and stead:
"(i) "Maximum Amount of Facility A" shall mean the lesser of the amount of
(A) One Million Seven Hundred Fifty Thousand Dollars ($1,750,000) and (B) the
Eligible Collateral Value."
(3) By deleting subsection (i)(ii) thereof in its entirety and inserting
the following in its place and stead:
"(ii) "Eligible Collateral" shall mean the collected funds of bank account
#154681816 and all municipal bonds rated BAA or higher by Standard & Poors
contained in custody account #____________, specifically pledged by Harold S.
Geneen to Secured Party pursuant to a Pledge Agreement dated as of May 31, 1996
as amended by Amendment to Pledge Agreement dated July 24, 1996 and as further
amended by an Amended and Restated Pledge Agreement dated June , 1997, in
which Bank has a perfected, first-priority security interest. "Eligible
Collateral Value" shall mean the aggregate of (i) 100% of the value of all
Eligible Collateral constituting collected funds in bank account #154681816 and
(ii) 85% of the fair market value, as determined by Bank in its commercially
reasonable judgment, of all Eligible Collateral constituting municipal bonds
rated BAA or higher by Standard & Poors, in custody account #___________. The
pledge of Harold S. Geneen shall be evidenced by a pledge agreement
substantially in the form of Exhibit D attached hereto (the"Pledge Agreement")."
(b) Section 4 and Section 14 of the Loan Agreement are amended by
deleting the references to "Cash Collateral" therein and substituting
"Eligible Collateral" therefor.
(c) Exhibit A-1 of the Loan Agreement is amended by adding a copy of
the an Allonge annexed hereto as Exhibit A, as part of the $500,000 Revolving
Loan Note attached as Exhibit A-1 of the Loan Agreement.
2
<PAGE> 3
(d) Exhibit A-2 of the Loan Agreement is amended by adding a copy of
the Allonge annexed hereto as Exhibit B, as part of the $1,750,000 Revolving
Loan Note attached as Exhibit A-2 of the Loan Agreement.
(e) Exhibit D of the Loan Agreement is amended by substituting a
copy of the Amended and Restated Pledge Agreement annexed hereto as Exhibit C
in place of the existing Pledge Agreement attached as Exhibit D of the Loan
Agreement.
2. OTHER DOCUMENTS. On the date hereof, Debtor shall, in addition to
this Second Amendment deliver the following fully executed documents to Bank:
(a) Allonge to $500,000 Revolving Loan Note in the form of Exhibit A
attached hereto;
(b) Allonge to $1,750,000 Revolving Loan Note in the form of Exhibit
B attached hereto;
(c) Fully executed Amended and Restated Pledge Agreement in the form
of Exhibit C attached hereto;
(d) Corporate resolutions of Debtor authorizing the execution and
delivery of the amendment documents;
(e) Affidavit Regarding Taxes in the form of Exhibit D attached
hereto; and
(f) Opinion of Counsel in the form of Exhibit E attached hereto.
3. RIGHTS, REMEDIES. Except as otherwise expressly provided for herein,
nothing in this Second Amendment shall extend to or affect in any way any of
the Debtor's
3
<PAGE> 4
Obligations or the Bank's rights and remedies arising under the Financing
Agreements, and the Bank shall not be deemed to have waived any or all of its
rights or remedies with respect to any Event of Default or event or condition
which, with notice or the lapse of time, or both would become an Event of
Default and which upon the Debtor's execution and delivery of this Second
Amendment might otherwise exist or which might hereafter occur.
4. OBLIGATIONS. The rights, privileges, duties and obligations of the
parties under the Financing Agreements shall, except as modified above, remain
unchanged and in full force and effect, and nothing contained herein shall
operate to release the Debtor from its liability to pay the indebtedness under
the Financing Agreements and to keep and perform the other terms, conditions
and obligations and agreements contained therein except as expressly modified
in writing herein. Debtor agrees to pay the indebtedness evidenced and secured
by the Financing Agreements with interest and all other payments required to be
made, in accordance with the provisions of the respective agreements with Bank,
except as herein modified. Debtor represents and warrants that no counterclaim,
right of set off or defense of any kind now exists or is outstanding with
respect to their respective obligations to Bank.
5. GOVERNING LAW. This Second Amendment is intended to take effect
under, and shall be construed according to and governed by, the laws of the
State of Connecticut, without giving effect to its principles of conflicts of
law.
6. DEFINITIONS. Capitalized terms not otherwise defined herein shall
have the meanings given to them in the Loan Agreement.
7. COUNTERPARTS. This Second Amendment may be executed in any number of
counterparts, but all such counterparts shall together constitute but one
instrument. In making proof of this Second Amendment it shall not be necessary
to produce or account for more than one counterpart signed by each party hereto
by and against which enforcement hereof is sought.
4
<PAGE> 5
8. SUCCESSORS, ASSIGNS. The modifications and agreements herein
contained are expressly made binding upon and shall inure to the benefit of the
successors and assigns of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment
on the date first written above.
GUNTHER INTERNATIONAL, LTD.
By: /s/ Fred Kolling
------------------------------------
VP & Chief Financial Officer
BANK OF BOSTON CONNECTICUT
By: /s/ Steven M. Moran
-------------------------------------
Vice President
Read and agreed to this 26th day
of June, 1997 by Harold S. Geneen
as Guarantor (as defined in the
Loan Agreement)
/s/ Harold S. Geneen
- ----------------------------------
Harold S. Geneen
5
<PAGE> 1
Exhibit 10.36
SECOND REAFFIRMATION OF LIMITED GUARANTY
The undersigned executed a Limited Guaranty Agreement ("Guaranty") in favor
of Bank of Boston Connecticut ("Bank"), as of May 31, 1996 unconditionally
guaranteeing full and prompt payment of any and all Liabilities, as defined in
the Guaranty, owed by Gunther International, Ltd. ("Borrower") to the Bank,
including without limitation, amounts advanced to Borrower by Bank under
Facility A pursuant to Revolving Loan and Security Agreement dated as of May 31,
1996, which was amended by Amendment Agreement dated as of the 17th day of
March, 1997 (collectively, the "Loan Agreement"). The undersigned pursuant to a
Reaffirmation of Limited Guaranty dated March 17, 1997 reaffirmed his
obligations under the Guaranty.
1. The undersigned acknowledges and agrees that Borrower and Bank have
entered into a Second Amendment Agreement dated as of June 26, 1997, a copy of
which is attached hereto ("Second Amendment"), whereby the Bank agreed to extend
the termination dates of the Revolving Loans under Facility A and Facility B
referred to in the Loan Agreement from January 10, 1998 to July 31, 1998 and to
amend the Loan Agreement to reflect certain amendments by Bank and the
undersigned to the Pledge Agreement referred to in the Loan Agreement.
2. The undersigned acknowledges and reaffirms his obligations under the
Guaranty. The undersigned warrants that, to the best of his knowledge, no
condition that would constitute an Event of Default under the Loan Agreement
exists on the date hereof.
3. The undersigned hereby acknowledges that his obligations under the
Guaranty are not subject to a right of setoff, counterclaim or rights which may
reduce or eliminate his obligations thereunder. The undersigned hereby promises
to pay amounts when required under the Guaranty to the Bank.
4. The undersigned hereby acknowledges that the Bank has relied upon this
Reaffirmation of Limited Guaranty in entering into the Second Amendment
Agreement.
1.
<PAGE> 2
5. Capitalized terms not otherwise defined herein shall have the same
definitions as provided in the Loan Agreement.
Dated at Norwich, Connecticut this 26 day of June, 1997.
/s/ Harold S. Geneen
-----------------------------------
WITNESSES: HAROLD S. GENEEN
- -------------------------------
- -------------------------------
2.
<PAGE> 1
Exhibit 10.37
AMENDED AND RESTATED
PLEDGE AGREEMENT
AMENDED AND RESTATED PLEDGE AGREEMENT made as of this 26 day of June, 1997,
amending and restating a certain Pledge Agreement made as of the 31st day of
May, 1996 and amended by Amendment to Pledge Agreement dated July 24, 1996,
between Harold S. Geneen whose address is 2 East 67th Street, Apartment 1W, New
York, New York 10021 (the "Pledgor") and Bank of Boston Connecticut having an
office at 127 Church Street, New Haven, Connecticut 06510 (the "Pledgee").
In consideration of the mutual agreements made herein and for other good
and valuable consideration, receipt of which is hereby acknowledged, it is
hereby agreed as follows:
1. Pledgor hereby pledges and grants to Pledgee a security interest in:
(a) bank account #154681816 on deposit with Pledgee; and
(b) custody account #0003382 held with Pledgee, and all cash,
securities (certificated and uncertificated), commodities, contracts,
instruments, documents and agreements contained therein, and all general
intangibles associated therewith;
together, in each instance, with all dividends, interest, earnings, profits
and proceeds thereof, and all renewals, replacements and substitutes therefor
and all other property acquired with the proceeds thereof, (collectively, the
"Collateral") as security for the due payment and performance of (i) all
indebtedness, obligations and liabilities of Pledgor to Pledgee arising under
this Agreement and Pledgor's Limited Guaranty Agreement dated as of May 31, 1996
guaranteeing certain obligations of Gunther International, Ltd. ("Borrower"),
and (ii) all costs, expenses and reasonable attorneys' fees incurred in the
enforcement or administration of the Limited Guaranty Agreement or in the
defense or enforcement of this Agreement (collectively, the "Obligations").
Account #154681816 and Account #0003382 shall be blocked accounts from
which Pledgor shall be able to withdraw collateral only with the consent of
Pledgee, as herein provided. Pledgor grants Pledgee the right and option to
register Collateral in the
1.
<PAGE> 2
name of Pledgee for purposes of securing Pledgee's lien in the Collateral on the
condition that upon payment and final satisfaction of the Obligations, the
Collateral shall be reconveyed to Pledgor, at his option.
2. Pledgor hereby irrevocably grants Pledgee a power of attorney, coupled
with an interest, with respect to the Collateral for all purposes consistent
with this Agreement. Said power of attorney shall include, but shall not be
limited to, the power to withdraw, transfer, renew and reinvest securities
constituting Collateral, to execute instruments in Pledgor's name, to register
securities constituting Collateral in Pledgee's name and to take such other
action to enforce any of Pledgee's rights with respect to the Collateral.
3. Pledgor represents, warrants and covenants to Pledgee that (a) he has
good title to all the Collateral, free and clear of all claims, mortgages,
pledges, liens, security interests and other encumbrances of every nature
whatsoever, except the pledge evidenced hereby, (b) the Collateral is duly and
validly pledged with Pledgee in accordance with law, (c) he has the unrestricted
right to make this pledge, and (d) he will defend Pledgee's right and security
interest in and to the Collateral against the claims and demands of all persons
whomsoever.
4. Upon the stated maturity date of any debt instruments constituting
Collateral, Pledgee may, at its option and with no liability for failure to do
so, invest the proceeds thereof, including both principal and interest, in
short-term debt instruments or certificates of deposit of its choice, bearing
interest at the then prevailing market rates, unless Pledgor notifies Pledgee to
the contrary not less than ten (10) business days prior to such maturity date.
The proceeds of all such debt instruments may be continuously reinvested by
Pledgee on the aforesaid basis, unless Pledgor give the aforesaid notification.
5. Unless Pledgee otherwise agrees in writing, if Pledgor receives any
dividend, or other distribution in connection with the Collateral, whether in
cash, or otherwise, the same shall constitute Collateral, and Pledgor agrees to
accept the same in trust for Pledgee and to forthwith deliver the same to
Pledgee, or its designee, in the exact form received, with Pledgor's endorsement
and/or assignment when necessary, to be held by Pledgee, or its designee, as
Collateral security for the Obligations.
2.
<PAGE> 3
6. Pledgor covenants that he will not sell, convey or otherwise dispose of
any of the Collateral, or create, incur or permit to exist any pledge, mortgage,
lien, charge, encumbrance or any security interest whatsoever with respect to
any of the Collateral or the proceeds thereof other than the lien and security
interest granted to the Pledgee hereunder. Notwithstanding the foregoing,
Pledgor shall have the right to require Pledgee to sell Collateral consisting of
municipal bonds provided (i) no Event of Default shall exist or would exist but
for the passage of time, the service of notice or both and (ii) the proceeds of
such sale shall continue as Collateral, subject to release pursuant to Section 8
below.
7. In the event of failure of payment or performance of the Obligations (an
"Event of Default"), Pledgee shall have the right to withdraw the Collateral and
apply the Collateral to the Obligation and, in addition, Pledgee shall have all
of the rights and remedies of a secured party under the Uniform Commercial Code
of Connecticut ("Code") or other applicable law, and Pledgee may cause any of
the Collateral to be transferred into Pledgee's name or the name of its nominee
and shall receive the income thereon and hold the same as Collateral security
for the Obligations, or apply it to any Obligations in such proportions as
Pledgee shall determine in its sole discretion, and shall have the right, for
and in the name and place of Pledgor, to execute endorsements, assignments, or
other instruments of conveyance or transfer with respect to any of the
Collateral.
8. So long as no Event of Default shall exist or would exist but for the
passage of time, the serving of notice or both, Pledgor shall be entitled to
request from time to time that Pledgee release Collateral to Pledgor as follows:
a. Pledgor shall at all times maintain Eligible Collateral Value equal
to or greater than the amount outstanding under a certain $1,750,000 Revolving
Promissory Note dated as of May 31, 1996 from Borrower to Pledgee ("Note").
b. In the event Eligible Collateral Value exceeds the amount outstanding
under the Note and Pledgor has requested a release of Collateral, Pledgee shall
release the requested amount of Collateral to Pledgor within three (3) business
days following such request; provided, however, that the condition of
subparagraph (a) above must be met at all times.
3.
<PAGE> 4
c. For purposes of the Agreement, "Eligible Collateral Value" shall mean
the aggregate of (i) 100% of the value of all Collateral constituting cash and
(ii) 85% of the fair market value, as determined by Pledgee in its commercially
reasonable judgment, of all Collateral constituting municipal bonds rated BAA
or higher by Standard & Poors, in which Pledgee has a perfected, first priority
security interest.
Until written notification from Pledgor is received by Pledgee, Pledgee shall
release Collateral only upon the written request of Fred Kolling, Chief
Financial Officer of Borrower. Provided the conditions of this paragraph 8 are
met, Pledgee hereby agrees to comply with such request.
9. In the event of a sale or assignment by Pledgee of all or any of the
Obligations held by it, Pledgee may assign or transfer its rights and interest
under this Agreement in whole or in part to the purchaser or purchasers of such
Obligations, whereupon such purchaser or purchasers shall become vested with all
of the powers and rights given to Pledgee hereunder, and Pledgee shall
thereafter be forever released and fully discharged from any liability or
responsibility hereunder with respect to the rights and interest so assigned.
10. Beyond the exercise of reasonable care to assure the safe custody of
the Collateral while held hereunder, Pledgee shall have no duty or liability to
collect any sums due in respect thereof or to protect or preserve rights
pertaining thereto, and shall be relieved of all responsibility for the
Collateral upon surrendering the same to Pledgor.
11. No course of dealing between Pledgor and Pledgee, nor any failure to
exercise, nor any delay in exercising, on the part of Pledgee, any right, power
or privilege hereunder or under any of the Obligations, shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder or thereunder preclude any other or further exercise thereof
or the exercise of any other right, power or privilege. The rights and remedies
provided herein and under any of the Obligations are cumulative and are in
addition to, and not exclusive of, any rights or remedies provided by law,
including without limitation, the rights and remedies of a secured party under
the Code.
4.
<PAGE> 5
12. Notice to or demand upon Pledgor or Pledgee hereunder shall be
deemed sufficient and commercially reasonable notice and shall be effective
when delivered in hand, or one (1) day after delivery to an overnight mail or
messenger service or three (3) days after being deposited in the mails, first
class, postage prepaid, registered or certified mail, return receipt requested,
to the address stated in the first paragraph of this Agreement and to Pledgor
at Suite 1919, 301 Park Avenue, New York, New York 10022, or to such other
address as the party to whom such notice is directed may have designated by
written notice similarly given to the other party hereto.
13. Pledgor hereby waives notice of acceptance of this Agreement as
well as presentment, demand, payment, notice of dishonor or protest and all
other notices of any kind in connection with any of the Obligations. Pledgee
may amend, modify, alter, extend, renew or otherwise change any terms of the
revolving loans ("Revolving Loans") extended by Pledgee to Borrower pursuant to
a certain Revolving Loan and Security Agreement dated as of May 31, 1996
between Pledgee and Borrower, or any agreements and documents evidencing,
securing or in any way relating to the Revolving Loans, without giving Pledgor
notice, and Pledgor hereby consents to the same. In addition, Pledgee may
release, substitute, supersede, exchange or modify any other collateral
security it may from time to time hold, and release, substitute, surrender or
modify the liability of any third party, without giving Pledgor notice, and
Pledgor hereby consents to the same. Pledgee shall be under no duty to first
exhaust its rights against any such collateral security or any such third
party before realizing on the Collateral. Such modifications, extensions,
changes, renewals, releases, substitutions or other actions shall in no way
affect Pledgor's obligations hereunder. PLEDGOR FURTHER WAIVES ANY RIGHT TO
NOTICE AND HEARING UNDER CHAPTER 903A OF THE CONNECTICUT GENERAL STATUTES, OR
AS OTHERWISE ALLOWED BY ANY STATE OR FEDERAL LAW WITH RESPECT TO ANY
PREJUDGMENT REMEDY WHICH PLEDGEE MAY DESIRE TO USE. PLEDGOR HEREBY WAIVES
TRIAL BY JURY IN ANY COURT AND IN ANY SUIT ACTION OR PRECEDING ON ANY MATTER
ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE
ENFORCEMENT OF ANY OF PLEDGEE'S RIGHT AND REMEDIES. PLEDGOR'S WAIVER UNDER THIS
SECTION HAS BEEN
5.
<PAGE> 6
MADE VOLUNTARILY AND KNOWINGLY AND AFTER CONSIDERATION OF THE RAMIFICATIONS
THEREOF WITH HIS ATTORNEYS.
14. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, executors, administrators,
successors and assigns, and the term "Pledgee" shall be deemed to include any
other holder or holders of any of the Obligations. As used herein, plural or
singular include each other, and pronouns of any gender are to be construed as
masculine, feminine or neuter, as context requires.
15. This Agreement shall be construed in accordance with and governed
by the internal laws of the State of Connecticut. Pledgor hereby consents to
service of process, and to be sued, in the State of Connecticut and consents to
the exclusive jurisdiction of the courts of the State of Connecticut and the
United States District Court for the District of Connecticut, for the purpose of
any suit, action or other proceeding arising hereunder, and expressly waives
any and all objections it may have to venue in any such courts. Pledgee may, in
writing specifically referring to this paragraph of this Agreement, waive the
exclusive jurisdiction provision of this paragraph 15.
16. This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument. This Agreement shall be effective as of May 31,
1996, notwithstanding the actual date of execution.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
/s/ Harold S. Geneen
-------------------------------
HAROLD S. GENEEN
WITNESSES:
- ---------------------------
- ---------------------------
6.
<PAGE> 7
BANK OF BOSTON CONNECTICUT
BY /s/ Steven M. Moran
-------------------------
Its: Vice President
WITNESSES:
/s/ Cristina L. Apuzzo
- ----------------------
Cristina L. Apuzzo
/s/ Kori O. Kaercher
- ---------------------
Kori O. Kaercher
7.
<PAGE> 8
STATE OF CONNECTICUT )
) ss NORWILL
COUNTY OF NEW CONDOR ) June 26, 1997
Personally appeared HAROLD S. GENEEN, signer and sealer of the
foregoing instrument, and acknowledged the same to be his free act and deed,
before me.
/s/ JEFFERY WEISS
----------------------
COMMISSIONER OF THE
SUPERIOR COURT
STATE OF CONNECTICUT )
) ss NEWHAVEN
COUNTY OF NEW HAVEN ) June 26, 1997
Personally appeared, Steven M. Moran, of BANK OF BOSTON CONNECTICUT,
signer and sealer of the foregoing instrument, and acknowledged the same to
be his/her free act and deed as such officer and the free act and deed of
said Corporation, before me.
/s/ Kori O. Kaercher
----------------------------------
COMMISSIONER OF THE SUPERIOR COURT
NOTARY PUBLIC
My Comm. exp. 12/31/00
8.
<PAGE> 9
AFFIRMATION OF LIMITED GUARANTY AGREEMENT AND
PLEDGE AGREEMENT
WITNESSETH:
Affirmation Of Limited Guaranty Agreement and Pledge Agreement dated this
_____ day of February, 1998, by and among JUNE H. GENEEN, PHIL E. GILBERT, JR.,
THOMAS W. KEESEE, JR. and the UNITED STATES TRUST COMPANY OF NEW YORK, as
co-executors of the ESTATE OF HAROLD S. GENEEN, Late of New York, NY ("Geneen")
and BankBoston, N.A., successor by merger to Bank of Boston Connecticut
("Bank").
WHEREAS, Geneen executed a Limited Guaranty Agreement in favor of Bank as
of May 31, 1996 (as reaffirmed by Reaffirmation of Limited Guaranty dated March
17, 1997 and Second Reaffirmation of Limited Guaranty dated June 26, 1997, the
"Guaranty") unconditionally guaranteeing full and prompt payment of any and all
Liabilities, as defined in the Guaranty, owed by Gunther International, Ltd.
("Borrower") to the Bank, including without limitation, amounts advanced to
Borrower by Bank pursuant to a Revolving Loan and Security Agreement dated as
of May 31, 1996 (as amended by Amendment Agreement dated as of the 17th day of
March, 1997, Second Amendment Agreement dated June 26, 1997 and Third Amendment
Agreement dated September 30, 1997, the "Loan Agreement").
WHEREAS, to secure his obligations under the Guaranty, Geneen executed and
delivered to the Bank a Pledge Agreement dated as of May 31, 1996 (as amended
and restated by Amended and Restated Pledge Agreement dated as of June 26,
1997, the "Pledge Agreement").
WHEREAS, Geneen died at New York, New York, on November 21, 1997;
1
<PAGE> 10
WHEREAS, Geneen's death constitutes an Event of Default under the Loan
Agreement; and
WHEREAS, the Bank has agreed to forebear from declaring a default under
the Loan Agreement by reason of Geneen's death on the condition that the Estate
of Harold S. Geneen acknowledge, confirm and allow the claim of the Bank under
the Guaranty and Pledge and affirm its obligations under said Guaranty and
Pledge, as permitted under Section 1806 of the New York Surrogate's Court
Procedure Act ("SCPA");
NOW, THEREFORE, the undersigned hereto agrees as follows:
1. The undersigned hereby acknowledge and affirm its obligations under
the Guaranty and Pledge and hereby agree and acknowledge that its obligations
under the Guaranty and Pledge are not subject to a right of setoff,
counterclaim on rights which may reduce or eliminate its obligations
thereunder. The undersigned hereby promises to pay amounts when required under
the Guaranty to the Bank. The undersigned further confirm and allow the claim
of the Bank under the Guaranty and Pledge pursuant to SCPA Section 1806.
2. The undersigned hereby acknowledge that the Bank is entitled to
declare an event of default by reason of Geneen's death and has relied upon this
Affirmation of Limited Guaranty Agreement and Pledge Agreement in not declaring
a default under the Loan Agreement.
3. Except as otherwise expressly provided for herein, nothing in this
Affirmation of Limited Guaranty Agreement and Pledge Agreement shall extend to
or affect in any way
2
<PAGE> 11
any of the Borrower's or Geneen's or his Estate's obligations to the Bank or the
Bank's rights and remedies arising under the Financing Agreements, and the Bank
shall not be deemed to have waived any of its rights or remedies with respect to
any Event of Default (other than an Event of Default arising under the Loan
Agreement by reason of the death of Geneen) or event or condition which, with
notice or the lapse of time, or both would become an Event of Default.
Notwithstanding any provision in the Guaranty to the contrary, the undersigned
will have against the Borrower full rights of indemnity, reimbursement,
contribution and subrogation, and the right to prove claims in bankruptcy or
insolvency proceedings, only upon full and final payment of all obligations of
the borrower to the Bank.
4. The rights, privileges, duties and obligations of the parties under the
Financing Agreements shall remain unchanged and in full force and effect, and
nothing contained herein shall operate to release the Borrower from its
liability to pay the indebtedness under the Financing Agreements and to keep
and perform the other terms, conditions and obligations and agreements
contained therein.
5. Capitalized terms not otherwise defined herein shall have the same
definitions as provided in the Loan Agreement.
6. This Affirmation Of Limited Guaranty Agreement and Pledge Agreement may
be executed in any number of counterparts, but all such counterparts shall
together constitute but one instrument. In making proof of this Affirmation Of
Limited Guaranty Agreement and Pledge Agreement, it shall not be necessary to
produce or account for more than one counterpart signed by each party hereto by
and against which enforcement hereof is sought.
3
<PAGE> 12
IN WITNESS WHEREOF, the undersigned has executed this Affirmation Of
Limited Guaranty Agreement and Pledge Agreement on this __day of February, 1998.
WITNESSES: THE ESTATE OF HAROLD S. GENEEN
Robert Burns II By: /s/ June H. Geneen
- -------------------------------- ---------------------------------------
June H. Geneen, Its Co-Executor
Lori H. Roon
- --------------------------------
By:
- -------------------------------- ---------------------------------------
Phil E. Gilbert, Jr., Its Co-Executor
- --------------------------------
By: /s/ Thomas W. Keesee
- -------------------------------- ---------------------------------------
Thomas W. Keesee, Jr., Its Co-Executor
- --------------------------------
By: UNITED STATES TRUST COMPANY
- -------------------------------- OF NEW YORK, Its Co-Executor
/s/ Steven Kirkpatrick
------------------------------------------
Its
ACKNOWLEDGED AND AGREED:
BANKBOSTON, N.A.
By:
------------------------------------------
Its
4
<PAGE> 13
STATE OF ) SS:
COUNTY OF)
FEBRUARY 13, 1998
On the day of February, 1998, before me, the undersigned officer, personally
appeared JUNE H. GENEEN, personally known to me (or satisfactorily proven) who
acknowledged herself to be the person whose name subscribed to the within
instrument and acknowledged that she executed the same for the purposes therein
contained.
In witness whereof I hereunto set my hand.
/s/ Annette L. Hicks
--------------------
Notary Public
My Commission Expires
ANNETTE L. HICKS, NOTARY PUBLIC
MY COMMISSION EXPIRES APRIL 2, 2002
STATE OF ) SS:
COUNTY OF)
, 1998
On the day of February, 1998, before me, the undersigned officer, personally
appeared PHIL E. GILBERT, JR., personally known to me (or satisfactorily proven)
who acknowledged himself to be the person whose name subscribed to the within
instrument and acknowledged that he executed the same for the purposes therein
contained.
In witness whereof I hereunto set my hand.
--------------------
Notary Public
My Commission Expires
5
<PAGE> 14
STATE OF ) SS:
COUNTY OF )
, 1998
On the day of February, 1998, before me, the undersigned officer, personally
appeared THOMAS W. KEESEE, JR., personally known to me (or satisfactorily
proven) who acknowledged himself to be the person whose name subscribed to the
within instrument and acknowledged that he executed the same for the purposes
therein contained.
In witness whereof I hereunto set my hand.
--------------------
Notary Public
My Commission Expires
STATE OF ) SS:
COUNTY OF )
, 1998
On the day of February, 1998, before me, the undersigned officer, personally
appeared of UNITED STATES TRUST COMPANY OF NEW YORK,
personally known to me (or satisfactorily proven) who acknowledged
himself/herself to be the person whose name subscribed to the within instrument
and acknowledged that he/she executed the same for the purposes therein
contained.
In witness whereof I hereunto set my hand.
--------------------
Notary Public
My Commission Expires
6
<PAGE> 15
STATE OF ) SS:
COUNTY OF )
, 1998
On the day of February, 1998, before me, the undersigned officer, personally
appeared of BANKBOSTON, N.A., personally known to me (or
satisfactorily proven) who acknowledged himself/herself to be the person whose
name subscribed to the within instrument and acknowledged that he/she executed
the same for the purposes therein contained.
In witness whereof I hereunto set my hand.
---------------------
Notary Public
My Commission Expires
7
<PAGE> 1
Exhibit 10.38
NON-EXCLUSIVE LICENSE AGREEMENT
BY AND BETWEEN
THE HEWLETT-PACKARD COMPANY
AND
GUNTHER INTERNATIONAL, INCORPORATED
FOR
ENVELOPE PRINTING TECHNOLOGY
Effective Date: May 6, 1997
<PAGE> 2
TABLE OF CONTENTS
1 SCOPE AND BACKGROUND OF AGREEMENT
1.1 General
1.2 Related Agreements
2 DEFINITIONS
2.1 "Licensed Patents"
2.2 "Licensed Products"
2.3 "Licensed Method"
2.4 "Subsidiary"
2.5 "Party"
3 GRANT TO LICENSEE
3.1 Non-exclusive US License
3.2 Field of
3.3 No Sublicense
3.4 Limitation on License
4 GRANT TO HP
4.1 Non-exclusive World-Wide License for Ink-Jet and Laser Printers
4.2 No Field of Use
4.3 No Sublicense
5 SUBSIDIARIES
5.1 Bound as a Party
6 FEES AND ROYALTIES
6.1 None
6.2 Sales of Cartridges
7 PRODUCT TERMS
7.1 Warranty Costs
7.2 Separate Product Integrity
<PAGE> 3
8 REPORTS
8.1 First Commercial Sale
8.2 Quarterly Reports
9 DISCLAIMER OF WARRANTIES
9.1 DISCLAIMER
9.2 Lack of Warranty
10 TRADEMARKS
10.1 No License
11 PUBLICITY
11.1 Limited Right
12 CONFIDENTIAL INFORMATION
12.1 Confidential Information
12.2 Exclusions
13 LIMITATION OF LIABILITY
13.1 Disclaimer
14 EVENTS OF DEFAULT
14.1 Notice of Breach
14.2 Causes Of Breach
14.3 Notice of Termination for Breach
15 TERM AND TERMINATION
15.1 Term of the Agreement
15.2 Term of Licensee's License
15.4 Contingent Termination
15.5 Termination on Breach
16 EVENTS ON TERMINATION
16.1 Return Of Property
16.2 Surviving Provisions
<PAGE> 4
17 DISPOSITION OF LICENSED PRODUCTS ON HAND UPON
TERMINATION
17.1 One Hundred and Twenty Days to Dispose
18 MISCELLANEOUS
18.1 Notices
18.2 Exhibits
18.3 Independent Contractors
18.4 No Assignment
18.5 Waiver
18.6 Headings
18.7 Severability
18.8 Entire Agreement
18.9 Governing Law
EXHIBIT A Addresses for Notices...........................Page 1 of Exhibit A
EXHIBIT B Confidential Disclosure Agreement...............Page 1 of Exhibit B
EXHIBIT C Licensee's Designated Mechanisms................Page 1 of Exhibit C
EXHIBIT D Designated HP Ink-Jet Print Cartridges..........Page 1 of Exhibit D
<PAGE> 5
NON-EXCLUSIVE LICENSE AGREEMENT FOR ENVELOPE PRINTING TECHNOLOGY
THIS LICENSE AGREEMENT is entered into between HEWLETT-PACKARD COMPANY, a
California corporation ("HP") through its Speciality Printing Systems Operation,
and Gunther International, Incorporated, a Delaware corporation ("Licensee"),
effective as of May 6, 1997 (the "Effective Date").
1 SCOPE AND BACKGROUND OF AGREEMENT
1.1 General. This Agreement sets forth the terms and conditions under
which HP will license Licensee to develop certain products, i.e.
Licensed Products, for document finishing and envelope printing under
HP's patents. In consideration for such license, Licensee will license
HP under its patents so that HP will obtain design freedom from the
Licensee.
1.2 Related Agreements. The Parties have previously or contemporaneously
entered into the following agreements: Confidential Disclosure
Agreement dated August 22, 1996, and attached hereto as Exhibit B.
2 DEFINITIONS
The following capitalized terms will have these meanings throughout
this Agreement.
2.1 "Licensed Patents" means all utility patents and all utility models
throughout the world issued or issuing on patent applications entitled
Page 1 of 17
<PAGE> 6
to a first effective filing date (i) prior to eighteen (18) months
after termination of this Agreement for patents licensed to HP and
(ii) prior to termination of this agreement for patents licensed to
Licensee (hereinafter collectively referred to as the "Capture
Period"), under which either Party and/or its Subsidiaries have, or
hereafter obtain, the right to grant a license to the other Party and
its Subsidiaries, without such grant or the exercise of rights
thereunder resulting in the payment of royalties or other financial
consideration by the granting Party or its Subsidiaries to third
parties (except for payments to Subsidiaries and payments to third
parties for inventions made by said parties while employed by the
granting Party or its Subsidiaries). The term "Licensed Patents" shall
include any patent reissuing on any of the above patents and all
corresponding foreign counterparts, but does not include industrial
designs, design patents or design registrations.
2.2 "Licensed Products" means any one or more of the following products or
parts thereof, the manufacture, use, sale or lease of which is covered
by an issued, unexpired Licensed Patent, and nothing else:
(a) apparatus, including control electronics and mechanisms, for
driving and/or controlling the operation of an ink-jet print head;
(b) apparatus, including control electronics and mechanisms, for
controlling the environment around the print media or print zone
during ink-jet printing;
Page 2 of 17
<PAGE> 7
(c) apparatus, including control electronics and mechanisms, for
transporting print media through an ink-jet printing mechanism,
including selecting and inputting print media from one or more
sources of supply, driving print media through a print zone, and
outputting print media;
(d) apparatus, including control electronics and mechanisms, for
positioning either the print head with respect to the print media or
print zone, or the print media or print zone with respect to the
print head, during ink-jet printing;
(e) apparatus, including control electronics and mechanisms, for
servicing or maintaining an ink-jet print head, including but not
limited to capping stations, priming mechanisms, wipers, etc.;
(f) imaging algorithms and devices, including but not limited to
processes, methods and/or systems, for monochrome or multi-color
ink-jet printing;
(g) ink-jet printer/plotter mechanisms;
(h) parts and components (including replacement, repair and service
parts) designated for incorporation in any of the foregoing; and
(i) equipment employed in the manufacture, repair, and/or use of any of
the foregoing.
The term "Licensed Products" does not include the following:
(a) ink-jet print heads;
(b) ink-jet print head units, including print cartridges;
Page 3 of 17
<PAGE> 8
(c) consumables for use in ink-jet printing; including media, ink,
and ink reservoirs; and
(d) refillable ink-jet head units and processes and equipment for
refilling these units.
2.3 "Licensed Method" means any method, procedure, or process which is
covered by an issued, unexpired Licensed Patent and is employed in
either the manufacture, use or repair of a Licensed Product, including
ink-jet recording or printing methods or processes.
2.4 "Subsidiary" means any corporation or other business entity in which a
Party shall own or control, directly or indirectly, now or hereafter,
at least fifty percent (50%) of the outstanding stock or other voting
rights entitled to elect directors; provided, however, that in any
country where the local law shall not permit foreign equity
participation of at least fifty percent (50%), then a subsidiary shall
include any corporation or other business entity in which a Party
shall own or control, directly or indirectly, the maximum percentage
of such outstanding stock or voting rights permitted by law. But such
corporation or other business entity shall be deemed to be a
Subsidiary only so long as such ownership or control exists.
2.5 "Party" means Licensee or HP, as the case may be, and "Parties" means
Licensee and HP.
3 GRANT TO LICENSEE
Page 4 of 17
<PAGE> 9
3.1 Non-exclusive US License. Subject to the terms and conditions herein
contained, HP and its Subsidiaries hereby grant to Licensee and its
Subsidiaries a non-transferable, royalty-free, non-exclusive license
under HP's Licensed Patents to make, have made, use, offer for sale,
sell, lease, and otherwise transfer Licensed Products worldwide and to
practice the Licensed Method worldwide.
3.2 Field of Use. The license specified in Section 3.1 is limited solely
to those mechanisms designated in Exhibit C, for document finishing,
envelope printing, and postal franking machines.
3.3 No Sublicense. No right to sublicense HP's Licensed Patents to third
parties is included herein and such right is expressly withheld.
3.4 Limitation on License. The license granted in Section 3.1 is for use
exclusively and solely with Licensed Products which utilize the
standard HP ink-jet print cartridges, designated in Exhibit D, without
modifications, including modifications for refilling. HP expressly
withholds the license right to use HP's Licensed Patents with Licensed
Products which utilize non-HP print cartridges.
4 GRANT TO HP
4.1 Non-exclusive World-Wide License for Ink-Jet and Laser Printers. In
partial consideration for the license granted by HP and its
Subsidiaries in Section 3.1, Licensee and its Subsidiaries hereby
grant to HP and its Subsidiaries a non-transferable, royalty-free,
world-wide, non-exclusive license under Licensee's Licensed Patents to
make, have made, use,
Page 5 of 17
<PAGE> 10
offer for sale, sell, lease, import, export and otherwise transfer
Licensed Products, laser printer mechanisms, control algorithms
and electronics, and print media transport mechanisms and to practice
Licensed Methods.
4.2 No Field of Use. The license specified in Section 4.1 is not limited
to any field of use.
4.3 No Sublicense. No right to sublicense Licensee's Licensed Patents to
third parties is included herein and such right is expressly withheld.
5. SUBSIDIARIES
5.1 Bound as a Party. Each Subsidiary shall be bound by the terms and
conditions of this Agreement as if it were named herein as one of
the Parties. If a Subsidiary ceases to be a Subsidiary and holds any
patents or patent applications under which a Party hereto is licensed,
such licenses will continue in the same manner as the corresponding
licenses set forth in this Agreement for the respective Parties.
6. FEES AND ROYALTIES
6.1 None. No fee, royalty, or cost will be required of either Party as a
result of this Agreement.
6.2 Sales of Cartridges. The Parties acknowledge that HP is issuing a
license in this Agreement to Licensee for HP's very substantial
portfolio of ink-jet printer patents so that, in addition to other
consideration,
Page 6 of 17
<PAGE> 11
Licensee will develop products that will result in a substantial
increase in sales of HP's ink-jet cartridge.
7 PRODUCT TERMS
7.1 Warranty Costs. Prior to the first commercial sale or lease of a
Licensed Product, Licensee will establish a program satisfactory to HP
to insure that HP and its Subsidiaries will not be subjected to
warranty / replacement costs for its ink-jet print cartridges due to
Licensee's products. This program must be approved by HP before the
first commercial sale or lease by Licensee of a Licensed Product.
7.2 Separate Product Integrity. Each Party is concerned about maintaining
its reputation in the market and being judged independently of the
other. In addition, each Party wishes to maintain the integrity of its
own products and its own quality control. For these reasons each Party
will market, package, and deliver its products to its customers and
end-users in a manner that differentiates each Party's products from
the other's and that allows customers and end-users to judge each
Party's products independently of the other's.
8 REPORTS
8.1 First Commercial Sale. Licensee will report to HP the date of first
commercial sale of a Licensed Product within thirty (30) days of its
occurrence.
Page 7 of 17
<PAGE> 12
8.2 Quarterly Reports. Unless otherwise stated in a supply agreement
between the parties, for each calendar quarter after the date of first
commercial sale of a Licensed Product, the Licensee will provide HP
with a written report showing all sales or use made of Licensed
Products during the preceding calendar quarter. If no sales or use of
Licensed Products has been made during any reporting period, a
statement to this effect shall be required. The report will indicate
the quantity and part number of each HP print cartridge utilized in
each Licensed Product. These reports shall be made no later than
forty-five (45) days following each calendar quarter.
9 DISCLAIMER OF WARRANTIES
9.1 DISCLAIMER. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, HP MAKES
NO OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, REGARDING ANY OF ITS
PRODUCTS, OR REGARDING THEIR MERCHANTABILITY OR THEIR FITNESS FOR ANY
PARTICULAR PURPOSE.
9.2 Lack of Warranty. Nothing in this Agreement shall be construed as:
(a) a warranty or representation by either Party as to the validity or
scope of any Licensed Patents;
(b) a warranty or representation that anything made, used, sold or
otherwise disposed of under any license granted in this Agreement is
or will be free from infringement of patents of third parties;
Page 8 of 17
<PAGE> 13
(c) an obligation to bring or prosecute actions or suits against third
parties for patent infringement;
(d) conferring by implication, estoppel or otherwise any license or
rights under any patents of either Party other than those Licensed
Patents as defined herein, regardless of whether such patents are
dominant or subordinate to those Licensed Patents; or
(e) an obligation to furnish any know-how not provided in the Licensed
Patents.
10 TRADEMARKS
10.1 No License. Nothing contained in this Agreement will be construed as
conferring any right or license to use in advertising, publicity, or
other promotional activities, any trade name or trademark of either
Party.
11 PUBLICITY
11.1 Limited Right. The Parties will maintain the terms, but not the
existence of this Agreement in confidence, except as may be required
by law.
12 CONFIDENTIAL INFORMATION
12.1 Confidential Information. During the term of this Agreement, a Party
(the "Recipient") may receive or have access to certain information
of the other Party (the "Discloser") that is marked as "Confidential
Information," including, though not limited to, information or data
concerning the Discloser's products or product plans, business
Page 9 of 17
<PAGE> 14
operations, strategies, customers and related business information.
The Recipient will protect the confidentiality of Confidential
Information with the same degree of care as the Recipient uses for its
own similar information, but no less than a reasonable degree of care,
under the terms of the Confidential Disclosure Agreement attached as
Exhibit B (the "CDA"). To the extent any term of this Agreement
conflicts with any term in the CDA, the terms of this Agreement will
control and take precedence. Confidential Information may be used only
by those employees of the Recipient who have a need to know such
information for the purposes related to this Agreement. The Parties
acknowledge that all technical information and forecasts are deemed
Confidential Information to be protected for a term of five (5) years
from the date of disclosure.
12.2 Exclusions. The foregoing confidentiality obligations will not apply
to any information that is (i) already known by the Recipient prior to
disclosure, (ii) independently developed by the Recipient either prior
to or independent of the disclosure, (iii) publicly available through
no fault of the Recipient, (iv) rightfully received from a third party
with no duty of confidentiality, (v) disclosed by the Recipient with
the Discloser's prior written approval, or (vi) disclosed under
operation of law.
13 LIMITATION OF LIABILITY
Page 10 of 17
<PAGE> 15
13.1 Disclaimer.
TO THE FULLEST EXTENT PERMITTED BY LAW, NEITHER PARTY WILL BE LIABLE FOR
ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF THE OTHER
(INCLUDING BUT NOT LIMITED TO LOSS OF PROFITS) ARISING OUT OF ANY
PERFORMANCE OF THIS AGREEMENT OR IN FURTHERANCE OF THE PROVISIONS OR
OBJECTIVES OF THIS AGREEMENT, REGARDLESS OF WHETHER SUCH DAMAGES ARE
BASED ON TORT, WARRANTY, CONTRACT OR ANY OTHER LEGAL THEORY, EVEN IF
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
14 EVENTS OF DEFAULT
14.1 Notice of Breach. If either Party is in breach of any provision of this
Agreement, the non-breaching Party may, by written notice of breach to
the breaching Party, except as otherwise prohibited by the United States
bankruptcy laws, terminate the whole or any part of this Agreement,
unless the breaching Party cures the breach within sixty (60) days after
receipt of the notice of breach.
14.2 Causes of Breach. For purposes of Section 14.1 above, the term "breach"
includes without limitation any:
Page 11 of 17
<PAGE> 16
(a) Proceeding, whether voluntary or involuntary, in bankruptcy or
insolvency by or against a Party;
(b) Appointment, with or without a party's consent, of a receiver or an
assignee for the benefit of creditors; or
(c) Failure by a Party to comply with any material provision of this
Agreement with additional failure to provide the non-breaching Party,
upon request, with reasonable assurances of future complying
performance.
14.3 Notice of Termination for Breach. If the breaching Party should fail to
repair the breach within sixty (60) days after receipt by it of such
notice, the non-breaching Party shall have the right to terminate this
Agreement by written notice of termination to the breaching Party. Upon
delivery of such notice of termination to the breaching Party, this
Agreement will automatically terminate. Such termination shall not
impair any accrued right of the non-breaching Party.
15 TERM AND TERMINATION
15.1 Term of the Agreement. This Agreement will commence as of the
Effective Date and continues for two (2) years unless otherwise
terminated as set forth herein. Unless otherwise so terminated the
Agreement will be automatically extended every two (2) years for two
(2) year periods unless either Party shall advise the other Party by
notice at least forty-five (45) days before the expiration of the then
current Agreement of its desire not to extend the Agreement. In case of
such
Page 12 of 17
<PAGE> 17
notice, the Agreement will terminate at the end of that period for which
notice is given.
15.2 Term of Licensee's License. The license specified in Section 3.1 will
terminate on termination of this Agreement.
15.3 Term of HP's License. The license specified in Section 4.1 is irrevocable,
will survive this Agreement and will terminate on the expiration or lapse
of the last patent licensed to HP under this Agreement.
15.4 Contingent Termination. In the event that any purchaser, user or reseller
of any Licensed Products manufactured by the Licensee under Section 3.1
hereof shall be involved in any adverse litigation or adverse
administrative proceeding with HP and/or its Subsidiaries at any time
during the term of this Agreement, then HP or its Subsidiaries may
terminate the license under Section 3.1 insofar as such Section conveys any
license to any such purchaser, user or reseller. Such termination will be
effective upon notice as set forth in Section 18.1.
15.5 Termination on Breach. See Events of Default, Article 14.
16 EVENTS ON TERMINATION
16.1 Return of Property. Each Party must return all property owned by the other
Party upon expiration or termination. All such property must be in good
condition, normal wear and tear excepted. The receiving Party will
determine the manner and procedure for return. The returning Party will
bear all returned freight costs.
Page 13 of 17
<PAGE> 18
16.2 Surviving Provisions. Notwithstanding the expiration or early termination
of this Agreement, the provisions regarding Capture Period in Section 2.1,
Grant to HP in Article 4, Subsidiaries in Article 5, Disposition of
Licensed Products in Article 17, Disclaimer of Warranties in Article 9,
Publicity in Article 11, Confidential Information in Article 12,
Limitation of Liability in Article 13, Events on Termination in Article 16,
and the Miscellaneous provisions below will each survive in accordance
with their terms.
17 DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION
17.1 One Hundred and Twenty Days to Dispose. Upon termination of this
Agreement the Licensee will provide HP with a written inventory of all
unsold Licensed Products manufactured prior to termination, in process of
manufacture, in use or in stock and shall have the privilege of disposing
of such Licensed Products, but no more, within a period of one hundred and
twenty (120) days.
18 MISCELLANEOUS
18.1 Notices. All notices to be given under this Agreement must be in writing
addressed to the receiving Party's designated recipient specified in
Exhibit A. Notices are validly given upon the earlier of confirmed receipt
by the receiving Party or three days after dispatch by courier or
Page 14 of 17
<PAGE> 19
certified mail, postage prepaid, properly addressed to the receiving
party. Notices may also be delivered by telefax and will be validly given
upon oral or written confirmation of receipt. Either Party may change its
address for purposes of notice by giving notice to the other Party in
accordance with these provisions.
18.2 Exhibits. Each Exhibit attached to this Agreement is deemed a part of this
Agreement and incorporated herein wherever reference to it is made.
18.3 Independent Contractors. The relationship of the Parties established under
this Agreement is that of independent contractors and neither Party is a
partner, employee, agent or joint venturer of or with the other.
18.4 No Assignment. Neither this Agreement nor any right, license, privilege or
obligation provided herein may be assigned, transferred or shared by
either Party without the other Party's prior written consent, and any
attempted assignment or transfer is void. Any merger, consolidation,
reorganization, transfer of substantially all assets of a Party, or other
change in control or ownership will be considered an assignment for the
purposes of this Agreement.
18.5 Waiver. The waiver of any term, condition, or provision of this Agreement
must in writing and signed by an authorized representative of the waiving
Party. Any such waiver will not be construed as a waiver of any other
term, condition, or provision except as provided in writing, nor as a
waiver of any subsequent breach of the same term, condition, or provision.
Page 15 of 17
<PAGE> 20
18.6 Headings. All headings used in this Agreement are for convenience of
reference only. They will not limit or extend the meaning of any provision
of this Agreement, and will not be relevant in interpreting any provision
of this Agreement.
18.7 Severability. If any provision in this Agreement is held invalid or
unenforceable by a body of competent jurisdiction, such provision will be
construed, limited or, if necessary, severed to the extent necessary to
eliminate such invalidity or unenforceability. The Parties agree to
negotiate in good faith a valid, enforceable substitute provision that
most nearly effects the Parties' original intent in entering into this
Agreement or to provide an equitable adjustment in the event no such
provision can be added. The other provisions of this Agreement will remain
in full force and effect.
18.8 Entire Agreement. This Agreement comprises the entire understanding
between the Parties with respect to its subject matter and supersedes any
previous communications, representations, or agreements, whether oral or
written. For purposes of construction, this Agreement will be deemed to
have been drafted by both Parties. No modification of this Agreement will
be binding on either Party unless in writing and signed by an authorized
representative of each Party.
18.9 Governing Law. This Agreement will be governed by the laws of the State of
California without reference to any choice of laws provisions.
Page 16 of 17
<PAGE> 21
APPROVED AND AGREED TO:
GUNTHER INTERNATIONAL: HEWLETT-PACKARD COMPANY
By:/s/ J. Whitney By:/s/ Douglas R. Watson
- ------------------------------- -------------------------
Typed Name: J. WHITNEY Typed Name: DOUGLAS R. WATSON
Title: CEO Title: GENERAL MANAGER
SPECIALTY PRINTING SYSTEMS
PAGE 17 of 17
<PAGE> 22
EXHIBIT A
ADDRESSES FOR NOTICES
NOTICES:
If sent to HP, address to:
Hewlett-Packard Company
3000 Hanover St., MS 20BO
Palo Alto, CA 93404-1181
Attn: Director of Intellectual Property
cc: Hewlett-Packard Company
Ink-Jet Products Group
16339 West Bernardo Drive
San Diego, CA 92127-1899
Attn: Site General Manager
cc: Hewlett-Packard Company
Ink-Jet Supplies Business Unit
1000 NE Circle Boulevard
Corvallis, OR 97330-4239
Attn: SPS, Account Manager
Page 1 of Exhibit A
<PAGE> 23
If sent to Licensee, address to:
______________________________
______________________________
______________________________
______________________________
Page 2 of Exhibit A
<PAGE> 24
[HEWLETT PACKARD LOGO]
CONFIDENTIAL DISCLOSURE AGREEMENT
- -----------------------------------------------------------------------------
Effective Date: August 22, 1996
-----------------------------------------------
In order to protect certain confidential information, Hewlett-Packard Company
and its corporate affiliates ("HP"), and the "Participant" identified below,
agree that:
1. Disclosing Party: The party disclosing confidential information
("Discloser") is both parties
-----------------------------------
(Note: Fill in "HP", Participant", or "both parties".)
2. Primary Representative: Each party's representative for coordinating
disclosure or receipt of confidential information is:
HP: Jim Bye
----------------------------
Participant: Bill Gunther and Brian Mogel
----------------------------
3. Description of Confidential Information: The confidential information
disclosed under this Agreement is described as:
HP: Technical information related to HP inkjet print cartridges.
------------------------------------------------------------
Participant: Technical & customer information related to the design and
marketing of new inkjet printing devices.
------------------------------------------------------------
(Note: Be specific; for example, individually list materials provided. Attach
additional sheets if needed.)
4. Use of Confidential Information: The party receiving confidential
information ("Recipient") shall make use of the confidential information
only for the following purpose (e.g., "evaluation and testing for a make/buy
decision on project xyz."):
HP: To assist in providing information to design printing devices
that use HP inkjet cartridges.
---------------------------------------------------------------
Participant: To enable the design of printing devices that use HP inkjet
cartridges.
---------------------------------------------------------------
5. Confidentiality Period: This Agreement and Recipient's duty to hold
confidential information in confidence expire on:
January 1, 2002
- -----------------------------------------------------------------------------
Note: This is the period of protection of confidential information.)
6. Disclosure Period: This Agreement pertains to confidential information
that is disclosed between the Effective Date and
January 1, 2000
- -----------------------------------------------------------------------------
Note: This is the period during which confidential information is going to be
disclosed.)
7. Standard of Care: Recipient shall protect the disclosed confidential
information by using the same degree of care, but no less than a reasonable
degree of care, to prevent the unauthorized use, dissemination, or publication
of the confidential information as Recipient uses to protect its own
confidential information of a like nature.
8. Marking: Recipient's obligations shall only extend to confidential
information that is described in paragraph 3, and that: (a) comprises specific
materials individually listed in paragraph 3; or, (b) is marked as confidential
at the time of disclosure; or, (c) is unmarked (e.g. orally disclosed) but
treated as confidential at the time of disclosure, and is designated as
confidential in a written memorandum sent to Recipient's primary representative
within thirty days of disclosure, summarizing the confidential information
sufficiently for identification.
9. Exclusions: This Agreement imposes no obligation upon Recipient with respect
to information that: (a) was in Recipient's possession before receipt from
Discloser; (b) is or becomes a matter of public knowledge through no fault of
Recipient; (c) is rightfully received by Recipient from a third party without a
duty of confidentiality; (d) is disclosed by Discloser to a third party without
a duty of confidentiality on the third party; (e) is independently developed by
Recipient; (f) is disclosed under operation of law; or (g) is disclosed by
Recipient with Discloser's prior written approval.
10. Warranty: Each Discloser warrants that it has the right to make the
disclosures under this Agreement. NO OTHER WARRANTIES ARE MADE BY EITHER PARTY
UNDER THIS AGREEMENT. ANY INFORMATION EXCHANGED UNDER THIS AGREEMENT IS
PROVIDED "AS IS".
11. Rights: Neither party acquires any intellectual property rights under this
Agreement except the limited rights necessary to carry out the purposes set
forth in paragraph 4. This Agreement shall not restrict reassignment of
Recipient's employees.
Miscellaneous
12. This Agreement imposes no obligation on either party to purchase, sell,
license, transfer or otherwise dispose of any technology, services or products.
13. Both parties shall adhere to all applicable laws, regulations and rules
relating to the export of technical data, and shall not export or reexport any
technical data, any products received from Discloser, or the direct product of
such technical data to any proscribed country listed in such applicable laws,
regulations and rules unless properly authorized.
14. This Agreement does not create any agency or partnership relationship.
15. All additions or modifications to this Agreement must be made in writing
and must be signed by both parties.
16. This Agreement is made under, and shall be construed according to, the laws
of the State of California, U.S.A.
HEWLETT-PACKARD COMPANY
Inkjet Supplies Business Unit
- -----------------------------------
(Entity Name)
1000 NE Circle Blvd
- -----------------------------------
Corvallis, OR 97330
- -----------------------------------
(Address)
/s/ Ken Crangle
- -----------------------------------
(Functional Manager's Signature)
Ken Crangle
- -----------------------------------
(Name)
IJBU Marketing Manager
- -----------------------------------
(Title)
PARTICIPANT
Gunther International
- ------------------------------------
(Company Name)
5 Wisconsin Avenue
- ------------------------------------
Norwich, CT 06360-1570
- ------------------------------------
(Address)
/s/ Brian N. Mogel
- ------------------------------------
(Authorized Signature)
Brian N. Mogel
- -------------------------------------
(Name)
Director, New Business Development
- -------------------------------------
(Title)
<PAGE> 25
EXHIBIT C
LICENSEE'S DESIGNATED MECHANISMS
<TABLE>
<CAPTION>
<S> <C> <C>
Name Part Number
---- -----------
1.
2.
3.
4.
</TABLE>
Page 1 of Exhibit C
<PAGE> 26
EXHIBIT D
DESIGNATED HP INK-JET PRINT CARTRIDGES
HP 51645A
HP 51640A
Page 1 of Exhibit D
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does hereby
appoint and constitute Gerald H. Newman, 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, 1998 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
13th day of July, 1998.
/s/ Guy W. Fiske /s/ J. Kenneth Hickman
- --------------------------------- -----------------------------
Guy W. Fiske J. Kenneth Hickman
/s/ Frederick W. Kolling III /s/ Alan W. Morton
- --------------------------------- -----------------------------
Frederick W. Kolling III Alan W. Morton
/s/ Gerald H. Newman /s/ Marc I. Perkins
- --------------------------------- -----------------------------
Gerald H. Newman Marc I. Perkins
/s/ James H. Whitney
- ---------------------------------
James H. Whitney
