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GUNTHER INTERNATIONAL, LTD.
1998
ANNUAL REPORT
<PAGE> 2
COMPANY PROFILE
Gunther International, Ltd. builds intelligent, efficient document mailing and
finishing solutions that bring accuracy and integrity to the mailroom, while
eliminating costly, labor-intensive tasks. The mailing systems automatically
assemble printed documents, fold, staple or bind the documents as required, and
insert the correct documents into appropriate envelopes. Each system is
controlled by Company-developed software that enables customers to run a wide
variety of applications with documented accuracy. All the systems are modular
and can be reconfigured in accordance with changing customer specifications.
An optional inc.jet printing module enables customers to perform high-quality
ink jet printing of addresses, return addresses, message lines, company logos
and postal indicia without slowing down the system. The new technology is
available for both flat and folded mail applications across the full range of
the Company's finishing systems. It is also available as an OEM application for
other manufacturers.
TABLE OF CONTENTS
<TABLE>
<C> <S>
1 Letter to shareholders
2 Business philosophy
2 Customers
2 Strategy
3 Product line
3 New product line
4 Special inc.jet postal application
4 Marketing and sales
5 Stock information
6 Management's discussion and analysis
13 Financial statements
</TABLE>
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TO OUR SHAREHOLDERS:
Gunther International, Ltd. is back and it is brand new. Thank you for your
patience.
After suffering numerous setbacks from issues such as accounting, cash flow and
production, among others, your company has been recapitalized and is now on the
road to recovery. All of our problems have not been solved, but I believe that
all of the major ones have been identified and solutions are being implemented.
After six months as the CEO of Gunther International, I can assure you of two
things that you probably already know. Without question, we have the best
products in the document finishing industry, as well as the best people. The
changes that we are implementing are being received enthusiastically by the
Gunther employees. They are giving their full cooperation to our effort to build
our company into a major supplier of products to the document finishing
industry.
Among the projects that are making Gunther International a new company are:
1. Redesigning the shop floor so that systems are easier to build and take
less time, increasing productivity and reducing costs.
2. Installing an entirely new record keeping and reporting system that
will automate our accounting and reporting to a much greater extent,
which will allow us to manage the company with more timely and accurate
information.
3. We are terminating our relationship with our third party service
provider and will perform all service ourselves. This will not only
improve cash flow, but will allow us much more flexibility in running
the company.
4. We are outsourcing a significant amount of assembly work, reducing
costs and increasing our ability to meet production schedules.
Most importantly, we are responding to our customers' needs better than ever.
I am certain that many of you are curious about the status of our inc.jet
printer. We have sold several hundred units and they have become a regular
fixture on Gunther International inserters. At this time, the United States
Postal Service is moving forward with IBIP, the new system for putting postage
on an envelope using a two dimensional bar code. We believe that no company in
America is as experienced or as qualified as Gunther International in the use of
such bar codes, and no ink jet printer can print those codes like a Gunther
International inc.jet. As the Postal Service proceeds with this project, we are
hopeful that Gunther International will be included as an integral part.
Thank you very much for your support as shareholders. If you have any questions
about our company, please feel free to give me a call.
Sincerely,
LOGO
Marc I. Perkins
Chief Executive Officer
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BUSINESS PHILOSOPHY
The Company has been an innovator within the post-processing, or finishing,
industry since its beginning in 1977. Its unique concept of software-driven
designs, tailored to the needs of the customer, caused a paradigm shift within
the industry towards intelligent mail finishing. The Company ushered in a new
era of customer-centric system designs that provided intelligence, integrity and
audit trails which redefined the focus of the industry then, and it continues
that tradition today.
The Company has developed a wide array of innovative modules to meet each
customer's requirements. Each system is tailored to the customer's specific
application needs, with built-in flexibility for upgrades and enhancements
should those needs change. The Company's focus has always been upon development
of products that enhance customer productivity, while maintaining the document
integrity that customers require.
The newest innovation, an inc.jet printer, provides the final step in automating
the finishing process by allowing customers to perform high-quality and low-cost
printing either on a Gunther system or as an OEM application by other
manufacturers.
The Company's reputation for close collaboration with its clients is further
enhanced by a biennial Users' Conference that encourages the open exchange of
information, and a Customer Assistance Program that is designed to provide
dedicated consultation from the initial design through installation and ongoing
performance meetings.
The Company's customer-oriented philosophy has resulted in a dedicated and
growing client base that includes leading names within the insurance, mutual
fund, retail, service bureau and healthcare industries where package accuracy
and integrity are essential.
CUSTOMERS
The Company's principal customers have been property and casualty insurance
companies, which required accurate, high-speed preparation and distribution of
personalized policies and insurance certificates. The Company's customers
comprise the top insurance companies in the United States including Chubb & Son
Insurance, Fireman's Fund, GEICO, The Hartford, Metropolitan Life, Mutual of
Omaha, SAFECO and The Travelers. In addition, the Company's systems have been
purchased by Gartner Group, Hewitt & Associates, Moore Business Communications,
Nike, Public Schools Employees Retirement System, USAA, U.S. Census Bureau, U.S.
Department of the Treasury, and Nippon Telephone & Telegraph in Japan.
STRATEGY
The Company's goal is to expand on its position as a pioneer and technology
leader in the design and sale of intelligent document mailing and finishing
systems while it develops leading-edge, high-quality, low-cost ink jet solutions
for end user and OEM applications. Company objectives include the following:
-- MARKET EXPANSION. The Company continues to leverage both its blue-chip
customer base and growing partner relationships into a dominant position
in the marketplace.
-- NEW SERVICE DIVISION. The Company has targeted aggressive expansion of
its system service and consumables/supplies businesses by transitioning
away from reliance on a third party service organization to direct control
and management within the Company at strategic field locations.
-- SYSTEM FLEXIBILITY. The Company remains committed to the objective of
providing modular systems to meet customer needs. The 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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-- CLIENT COLLABORATION. The Company continues to collaborate with customers
(including organizing and conducting user conferences and symposiums) in
order to develop a better understanding of customer needs and to offer
comprehensive solutions that meet those needs.
-- VALUE-ADDED PARTNERSHIPS. The Company is devoting increased efforts
towards developing partner alliances with printers and software companies
that broaden the Company's options for its customer base and allow clients
to work with one vendor vs. multiple vendors.
-- ACCURACY OF DOCUMENT ASSEMBLY. The Company continues to emphasize
document integrity in all its research, development and marketing efforts.
The systems include the ability to read various methods of coding on each
sheet that check for proper page sequence, detect duplicate or missing
pages, and verify recipients as each document moves down a conveyor. The
systems verify that a given document has been processed properly and
maintains a record of each document.
-- INTELLIGENT SOFTWARE. The systems utilize the Company's patented
"Read-before-Feed" technology that provides error-free packages and true
100% accuracy. The company continues to research new reading technologies,
such as Two-Dimensional codes. For maximum anti-fraud, the systems now
read invisible codes.
-- CUSTOMER PRODUCTIVITY AND COSTS. The Company focuses its product
development efforts on further increasing customer productivity and
improving return on investment while maintaining the document integrity
customers require.
PRODUCT LINE
The Company's product line provides intelligent, efficient document mailing and
finishing solutions that bring accuracy and integrity to the mailroom, while
eliminating costly, labor-intensive tasks. The modular, upgradable components
create flexibility for processing mail needs now -- and in the future -- thereby
protecting the client's investment. The basic product line consists of the
following finishing systems:
-- THE SERIES III is a high-speed statement and billing system. Up to nine
inserts can 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.
-- 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
9.5-inch envelope. Postage is then automatically applied inline.
-- 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 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.
NEW PRODUCT LINE
The Company's new inc.jet printing division now offers a compact, high-speed,
high resolution inc.jet(TM) printer that can be used inline on the Company's
finishing systems for flat or folded mail. The inc.jet imager prints information
on envelopes such as the return address, recipient address, graphics, messages
and postal indicia. The new technology offers print quality resolution of 600 x
600 dpi (depending on application) at extraordinary high speed -- up to 12,000
pieces per hour. The inc.jet imager is environmentally safe and incredibly
efficient, with a very low net cost-per-image.
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In addition, the inc.jet imager is available for OEM licensing to printing and
postage system manufacturers for incorporation into desk and tabletop inserters,
copiers, address printers, postage meters, security encryptors and more. OEM
applications are unlimited. Some markets includes the following:
-- Postage/ESTAMP applications
-- Envelope printing and addressing labeling
-- Point of sales printing
-- Box and carton labeling
-- Tag printing
-- Spot color and anti-fraud marking of originals
SPECIAL INC.JET POSTAL APPLICATION
The Information Based Indicia Program (IBIP) is an initiative by the United
States Postal Service (USPS) to move to a new method of applying postage
information on mail pieces. 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 mail piece.
The Company's inc.jet imager is capable of printing the new indicia, including
the encoded information. The Company'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.
MARKETING AND SALES
The Company initially relied principally on contacts within the insurance
industry, particularly among large property and casualty insurers. This was
primarily due to the Company's ability to deliver systems that provided 100%
accuracy and integrity. 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, mutual funds, healthcare and retail industries.
The Company has experienced success in expanding into other markets including
government, retail distribution, outsourcing, service bureaus and others. The
Company continues to generate additional sales to its existing customers. 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 conferences 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, IBM and Hewlett-Packard), as well as software
vendors including Firstlogic (Postalsoft) and Dataline Systems. A special
Marketing Agreement with Hewlett-Packard facilitated development of the new
inc.jet system by incorporating Hewlett-Packard cartridges in the Company's
printer, and a new partnership with Mail-Gard provides insurance options for
Gunther clients should disaster recovery become necessary. Gunther and its
partners provide the total solution required for its customer base. Gunther
products are often included in vendor sales presentations, and there is a
growing amount of joint sales and marketing activity with these partners.
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STOCK INFORMATION
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 Common Stock was delisted
again as of August 17, 1998. Effective since January, 1999, the Company has been
trading on the OTC Bulletin Board.
The following table sets forth the high and low closing bid prices of the
Company's Common Stock for each quarter of fiscal 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 March 12, 1999, the closing bid price quotation for the Company's Common
Stock was $2.00, as reported by the OTC Bulletin Board.
As of March 12, 1999, there were approximately 90 record owners of the Company's
Common Stock. The Company believes there are 1,077 beneficial owners of 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
SUMMARY OF RECENT EVENTS
On June 23, 1998, the Company announced that, during the course of completing
its year-end audit, certain errors had been discovered in the way in which the
Company accounted for the accumulation of contract costs. In addition, certain
items of expense were not properly accounted for. As a result, the Company
announced that the previously issued interim financial statements for the fiscal
year ended March 31, 1998 should not be relied upon. The Company subsequently
announced that similar deficiencies were discovered during the course of
preparing its accounts for the first quarter of fiscal 1999 and that, as a
result, the financial statements and corresponding audit report for the fiscal
year ended March 31, 1998 also should not be relied upon. At that time, the
Audit Committee initiated a review into the accuracy of prior financial
statements. The Audit Committee's review has since been completed and it has
been determined that accounts receivable were overstated and accounts payable
and deferred service revenues were understated at March 31, 1997 and costs and
estimated earnings in excess of billings on uncompleted contracts were
overstated at March 31, 1998. As a result, the accompanying financial statements
and management's discussion and analysis of financial condition and results of
operations include restated results as of and for the years ended March 31, 1997
and 1998. Also, certain amounts were reclassified between selling and
administrative expenses, cost of sales, and research and development expenses to
more appropriately reflect the results of operations. The effect of the
restatement for the year ended March 31, 1997 was to reduce operating results to
a net loss of $(1,334,690), or $(0.32) per share, from net income of $258,889,
or $0.06 per share. The effect of the restatement for the year ended March 31,
1998 was to decrease the net loss to $(2,632,115), or $(0.61) per share, from a
net loss of $(2,701,819), or $(0.63) per share.
On October 2, 1998, the Company entered into a $5.7 million comprehensive
financing transaction with the Bank of Boston, Connecticut, N.A. (the "Bank"),
the Estate of Harold S. Geneen (the "Estate") and Gunther Partners LLC (the "New
Lender"), the proceeds of which have been utilized to restructure and replace
the Company's pre-existing senior line of credit, fund a full settlement with
the Company's third party service provider and provide additional working
capital to fund the Company's ongoing business operations. Under the terms of
the transaction, the New Lender loaned an aggregate of $4.0 million to the
Company. At the same time, the Bank reached an agreement with the Estate, which
had guaranteed a portion of the Company's senior line of credit, whereby the
Estate consented to the liquidation of approximately $1.7 million of collateral
and the application of the proceeds of such collateral to satisfy and repay in
full a like amount of indebtedness outstanding under the senior credit facility.
The balance of the indebtedness outstanding under the senior credit facility,
approximately $350,000, was repaid in full from the proceeds of the new
financing. The Company executed a new promissory note in favor of the Estate
evidencing the Company's obligation to repay the amount of the collateral that
was liquidated by the Bank. The Company's obligations to the Estate are
subordinated to the Company's obligations to the New Lender.
The principal balance of the $4.0 million debt is to be repaid in monthly
installments of $100,000 from November 1, 1998 and continuing to and including
September 1, 1999, $400,000 on October 1, 1999 and the balance shall be due on
October 1, 2003. Interest shall be paid quarterly, at the rate of 8% per annum,
beginning January 1, 1999 and continuing until the principal and interest due is
paid in full. The debt is secured by a first priority interest in all tangible
and intangible property and a secondary interest in patents and trademarks.
To induce the New Lender to enter into the financing transaction, the Company
granted the New Lender a stock purchase warrant entitling the New Lender, at any
time during the period commencing on January 1, 1999 and ending on the fifth
anniversary of the transaction, to purchase up to 35% of the pro forma, fully
diluted number of shares of the Common Stock of the Company, determined as of
the date of exercise. The exercise price of the warrant is $1.50 per share.
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In addition, the Company, the New Lender, the Estate and certain shareholders
(Park Investment Partners, Gerald H. Newman, Four Partners and Robert Spiegel)
entered into a separate voting agreement, pursuant to which they each agreed to
vote all shares of Gunther stock held by them in favor of (i) that number of
persons nominated by the New Lender constituting a majority of the Board of
Directors, (ii) one person nominated by the Estate and (iii) one person
nominated by Park Investment Partners.
The promissory note in favor of the Estate for approximately $1.7 million is to
be repaid at the earlier of one year after the Company's obligations to the New
Lender are paid in full or on October 2, 2004. Interest, at 5.44% per annum,
shall accrue on principal and unpaid interest, which is added to the outstanding
balance and is due at the time of principal payments. The indebtedness is
secured by all tangible and intangible personal property of the Company but is
subordinated to all rights of the New Lender.
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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
-------------- -------------- --------------
(As Restated) (As Restated)
<S> <C> <C> <C>
Sales:
Systems $ 8,630,103 $ 8,716,473 $ 8,458,700
Maintenance 6,454,716 4,911,794 4,022,562
----------- ----------- -----------
Total sales 15,084,819 13,628,267 12,481,262
----------- ----------- -----------
Cost of Sales:
Systems 7,030,092 5,573,323 5,821,526
Maintenance 4,771,692 4,088,858 2,826,853
----------- ----------- -----------
Total cost of sales 11,801,784 9,662,181 8,648,379
----------- ----------- -----------
Gross profit 3,283,035 3,966,086 3,832,883
Operating expenses:
Selling and administrative 5,050,863 4,680,946 4,213,832
Research and development 618,735 435,404 255,243
----------- ----------- -----------
Total operating expenses 5,669,598 5,116,350 4,469,075
----------- ----------- -----------
Operating loss (2,386,563) (1,150,264) (636,192)
Other expenses:
Interest expense, net (245,552) (184,426) (243,363)
----------- ----------- -----------
Net loss $(2,632,115) $(1,334,690) $ (879,555)
=========== =========== ===========
Net loss per share $(0.61) $(0.32) $(0.23)
-------- -------- --------
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
(As Restated) (As Restated)
<S> <C> <C> <C>
Current assets $ 3,118,386 $3,616,493
Total assets 8,036,929 8,663,040
Current liabilities 7,981,871 5,661,800
Long-term debt, less current maturities 1,884,551 2,213,618
Stockholders' equity (deficit) (1,829,493) 787,622
</TABLE>
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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. In addition, 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 $2,632,000 for
fiscal 1998 as compared to a net loss of $1,335,000 for fiscal 1997.
Systems sales for fiscal year 1998 decreased $86,000, or 1%, from fiscal year
1997. At March 31, 1998 system order backlog, consisting of total contract price
less revenue recognized to date for all signed orders on hand, was $4,437,000 as
compared to $3,276,000 at March 31, 1997.
Maintenance sales increased $1,543,000 or 31% 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 $3,283,000 in fiscal year 1998 from $3,966,000 in
fiscal year 1997. The gross margin on systems sales decreased to 19% in fiscal
year 1998 from 36% in fiscal year 1997. The decrease in gross margin on system
sales is attributable to manufacturing inefficiencies that caused an increase in
the labor and overhead cost components for each system. There were also cost
increases averaging approximately 4% for materials. The gross margin on
maintenance sales increased to 26% in fiscal year 1998 from 17% in fiscal year
1997. The increase in the gross margin percentage was a result of an increase in
the number of systems being directly serviced by the Company rather than a third
party service provider.
Selling and administrative expenses increased $370,000, or 8%, from fiscal year
1997 to fiscal 1998. The increased costs primarily reflect expenses associated
with expanding the sales and marketing staff throughout the year.
Research and development expenses increased $183,000 from fiscal 1997 to fiscal
1998, primarily due to costs of developing a new inkjet imager.
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 $258,000, 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 as compared to $1,085,000 at March 31, 1996.
Maintenance sales increased $889,000 or 22%, 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 $3,966,000 in fiscal 1997. The gross margin on system
sales increased from 34% in fiscal 1996 to 44% in fiscal 1997. The increase in
gross margin is due to more efficient use of manufacturing resources. The gross
profit percentage on maintenance sales decreased from 30% in fiscal 1996 to 17%
in fiscal 1997, reflecting a decrease 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.
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Selling and administrative expenses increased $467,000, or 11%, 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 $180,000, or 71%, 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 loss of $1,335,000 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 $894,000, compared to a positive cash flow from
operations of $149,000 for the fiscal year ended March 31, 1997 and a negative
cash flow from operations of $655,000 for the fiscal year ended March 31, 1996.
The positive cash flow recorded during fiscal 1998 resulted from, among other
things, a $272,000 decrease in accounts receivable, a $935,000 increase in
accounts payable and accrued expenses and a $295,000 increase in deferred
service contract revenue. The increase in accounts payable primarily relates to
increases in amounts due DataCard, the Company's third party service provider,
and other service providers.
Until October 2, 1998, the Company maintained a 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. As of March 31, 1998, an aggregate of $1,701,169 of
indebtedness was outstanding under Facility A. There was no additional borrowing
capacity under Facility B as of March 31, 1998.
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.
As previously discussed, all obligations to the Bank and to the third party
service provider were paid in connection with the October 2, 1998 $5.7 million
comprehensive financing transaction.
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Except for the financing transaction with the New Lender described above, the
Company does not have commitments for outside funding of any kind. The Loan and
Security Agreement entered into between the Company and the New Lender also
expressly prohibits the Company from incurring any additional indebtedness from
any person or entity other than the New Lender. The Company must depend,
therefore, upon the generation of sufficient internally generated funds to
finance its operations during the balance of fiscal 1999 and thereafter. 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.
Although there can be no assurance in this regard, management believes that the
Company will be able to generate sufficient additional sales to meet the
Company's cash needs for the balance of the fiscal year.
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 within the meaning of Section
21E. Without limiting the generality of the foregoing, the words "believes,"
"anticipates," "plans," "expects," and other similar expressions are intended to
identify forward-looking statements. Investors should be aware that such
forward-looking statements are based on the current expectations of management
and are inherently subject to a number of risks and uncertainties that could
cause the actual results of the Company to differ materially from those
reflected in the forward-looking statements. Some of the important factors which
could cause actual results to differ materially from those projected include,
but are not limited to, the following: 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
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 is continuing to assess the potential impact of the Year 2000 on its
internal business systems, products and operations. The Company's Year 2000
initiatives include (i) testing and upgrading internal business systems and
facilities; (ii) testing and developing necessary upgrades for the Company's
products; (iii) contacting key suppliers, vendors and customers to determine
their year 2000 compliance status; and (iv) developing contingency plans.
The Company's State of Readiness. The Company is in the process of testing and
evaluating its critical information-technology systems for year 2000 compliance,
including its significant computer systems, software applications and related
equipment. Important computer systems used by the Company include those used in
developing products and in communicating and servicing customers. Important
computer systems used in financial and administrative management include the
general ledger, inventory control and purchasing. As of the date of this report,
the Company believes that substantially all of its internal operating systems
are year 2000 compliant. The remaining noncompliant systems are expected to be
upgraded or replaced by the end of
11
<PAGE> 14
the fiscal quarter ended June 30, 1999, at which time the Company expects that
all of its material information-technology systems will be year 2000 compliant.
None of the Company's products have time sensitive applications. Thus, the
Company believes that all of the material products that it currently sells are
year 2000 compliant. However, as many of the Company's products are complex,
interact with third-party products, and operate on computer systems that are not
under the Company's direction and control, there can be no assurance that the
Company has identified all of the year 2000 problems with its current products.
The Company is in the process of identifying and contacting suppliers, vendors
and customers that are believed to be significant to the Company's business
operations in order to assess their year 2000 readiness. As part of this effort,
the Company is developing and plans to distribute questionnaires relating to
year 2000 compliance to its significant suppliers, vendors and customers during
the fourth quarter of fiscal 1999. The Company also intends to follow-up and
monitor the year 2000 compliance progress of significant suppliers, vendors and
customers that indicate that they are not year 2000 compliant or that do not
respond to the Company's questionnaires.
The Company is currently in the process of evaluating the potential year 2000
impact on its facilities, including its building and utility systems. Any
problems that are identified will be prioritized and remediated based on their
assigned priority. The Company will continue periodic testing of its critical
internal business systems and facilities in an effort to minimize operating
disruptions due to year 2000 issues.
Estimated Costs to Address the Company's Year 2000 Issues. To date, the costs
incurred by the Company in connection with the year 2000 issue have not been
material. The Company does not expect total year 2000 remediation costs to be
material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. The Company does
not track internal costs incurred in its year 2000 compliance project. Such
costs are principally for related payroll costs for information systems
employees.
Contingency Plans. The Company intends to develop a contingency plan that will
allow its primary business operations to continue despite potential disruptions
due to year 2000 issues. These plans may include identifying and securing other
suppliers, increasing inventories and modifying production facilities and
schedules. As the Company continues to evaluate year 2000 readiness of its
business systems and facilities, products, and significant suppliers, vendors
and customers, it will modify and adjust its contingency plan as may be
required.
Risks of the Company's Year 2000 Issues. While the Company is attempting to
minimize any negative consequences arising from the year 2000 issue, there can
be no assurance that year 2000 issues will not have a material adverse impact on
the Company's business, operations or financial condition. While the Company
expects that the remaining upgrades to its internal business systems will be
completed in a timely fashion, there can be no assurance that the Company will
not encounter unexpected costs or delays. Despite the Company's efforts to
ensure that its material current products are year 2000 compliant, the Company
may see an increase in warranty and other claims, especially those related to
company products that incorporate, or operate using, third-party hardware or
software. If any of the Company's significant suppliers, vendors or customers
experience business disruptions due to year 2000 issues, the Company might also
be materially adversely affected. The Company's research and development,
production, distribution, financial, administrative and communications
operations might be disrupted. There is expected to be a significant amount of
litigation relating to the year 2000 issue and there can be no assurance that
the Company will not incur material costs in defending or bringing lawsuits. Any
unexpected costs or delays arising from the year 2000 issue could have a
significant adverse impact on the Company's business, operations and financial
condition.
12
<PAGE> 15
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 (1998 and 1997
restated -- See Note 1). 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.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 6, 1999
13
<PAGE> 16
GUNTHER INTERNATIONAL, LTD.
BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(As Restated (As Restated
See Note 1) See Note 1)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 572,368 $ 261,700
Accounts receivable, net 326,128 598,112
Costs and estimated earnings in excess of billings on
uncompleted contracts 861,219 1,403,715
Inventories 1,256,852 1,262,435
Prepaid expenses 61,819 90,531
Note receivable from stockholder 40,000 --
---------- ----------
Total current assets 3,118,386 3,616,493
---------- ----------
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
---------- ----------
$8,036,929 $8,663,040
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 17
GUNTHER INTERNATIONAL, LTD.
BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(As Restated (As Restated
See Note 1) See Note 1)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes -- payable and current maturities of long-term debt $ 514,554 $ 401,866
Accounts payable 2,923,468 2,505,569
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 1,799,066 1,504,306
Note payable to stockholder 150,000 --
------------ ------------
Total current liabilities 7,981,871 5,661,800
------------ ------------
Long-term debt, less current maturities 1,884,551 2,213,618
------------ ------------
Commitments and Contingencies (Note 11)
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 (13,224,603) (10,592,488)
------------ ------------
Total Stockholders' Equity (Deficit) (1,829,493) 787,622
------------ ------------
$ 8,036,929 $ 8,663,040
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 18
GUNTHER INTERNATIONAL, LTD.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(As Restated (As Restated
See Note 1) See Note 1)
<S> <C> <C> <C>
Sales:
Systems $ 8,630,103 $ 8,716,473 $ 8,458,700
Maintenance 6,454,716 4,911,794 4,022,562
----------- ----------- -----------
Total Sales 15,084,819 13,628,267 12,481,262
----------- ----------- -----------
Cost of Sales:
Systems 7,030,092 5,573,323 5,821,526
Maintenance 4,771,692 4,088,858 2,826,853
----------- ----------- -----------
Total Cost of Sales 11,801,784 9,662,181 8,648,379
----------- ----------- -----------
Gross Profit 3,283,035 3,966,086 3,832,883
----------- ----------- -----------
Operating Expenses:
Selling and Administrative 5,050,863 4,680,946 4,213,832
Research and Development 618,735 435,404 255,243
----------- ----------- -----------
Total Operating Expenses 5,669,598 5,116,350 4,469,075
----------- ----------- -----------
Operating Loss (2,386,563) (1,150,264) (636,192)
Other Expenses:
Interest Expense, Net (245,552) (184,426) (243,363)
----------- ----------- -----------
Net Loss $(2,632,115) $(1,334,690) $ (879,555)
=========== =========== ===========
Net Loss Per Share:
Basic and Diluted $ (0.61) $ (0.32) $ (0.23)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 19
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
$.001 Par Value 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 Loss (As Restated, See
Note 1) -- -- -- -- -- (1,334,690) (1,334,690)
--------- ------ --- --- ----------- ------------ -----------
Balance, March 31, 1997 (As
Restated See Note 1) 4,283,269 4,283 500 1 11,375,826 (10,592,488) 787,622
Exercise of warrants 8,000 8 -- -- 14,992 -- 15,000
Net Loss (As Restated, See
Note 1) -- -- -- -- -- (2,632,115) (2,632,115)
--------- ------ --- --- ----------- ------------ -----------
Balance, March 31, 1998 (As
Restated, See Note 1) 4,291,269 $4,291 500 $ 1 $11,390,818 $(13,224,603) $(1,829,493)
========= ====== === === =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 20
GUNTHER INTERNATIONAL, LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(As Restated (As Restated
See Note 1) See Note 1)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(2,632,115) $(1,334,690) $(879,555)
Adjustments to reconcile net 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 271,984 588,970 (545,685)
Decrease in inventories, net 5,583 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 in accounts payable and accrued expenses 935,850 438,972 410,854
Increase (decrease) in deferred service contract
revenue 294,760 380,278 (52,777)
(Increase) decrease in billings in excess of costs
and estimated earnings, net 1,369,269 (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.
18
<PAGE> 21
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
1. RESTATEMENT:
On June 23, 1998, Gunther International, Ltd. (the "Company") announced that,
during the course of completing its year-end audit, certain errors had been
discovered in the way in which the Company accounted for the accumulation of
contract costs. In addition, certain items of expense were not properly
accounted for. As a result, the Company announced that the previously issued
interim financial statements for the fiscal year ended March 31, 1998 should not
be relied upon. The Company subsequently announced that similar deficiencies
were discovered during the course of preparing its accounts for the first
quarter of fiscal 1999 and that, as a result, the financial statements and
corresponding audit report for the fiscal year ended March 31, 1998 also should
not be relied upon. At that time, the Audit Committee initiated a review into
the accuracy of prior financial statements. The Audit Committee's review has
since been completed and it has been determined that accounts receivable were
overstated and accounts payable and deferred service revenues were understated
at March 31, 1997 and costs and estimated earnings in excess of billings on
uncompleted contracts were overstated at March 31, 1998. As a result, the
Company's financial statements as of and for the years ended March 31, 1997 and
1998 have been restated. Also, certain amounts were reclassified between selling
and administrative, cost of sales, and research and development expenses to more
appropriately reflect the results of operations. The effect of the restatement
for the year ended March 31, 1997 was to reduce operating results to a net loss
of $(1,334,690), or $(0.32) per share, from net income of $258,889, or $0.06 per
share. The effect of the restatement for the year ended March 31, 1998 was to
decrease the net loss to $(2,632,115), or $(0.61) per share, from a net loss of
$(2,701,819), or $(0.63) per share.
2. BUSINESS:
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.
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.
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
19
<PAGE> 22
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
20
<PAGE> 23
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 $10,649,000 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.
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 earnings per share data presented is in accordance with SFAS No.
128.
For purposes of computing basic and diluted EPS, weighted average common shares
for fiscal 1998, 1997 and 1996 were 4,288,380, 4,220,769 and 3,897,367,
respectively.
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
21
<PAGE> 24
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 fiscal years beginning after December 15, 1997 and earlier
application is encouraged. The Company is evaluating how it will implement SFAS
No. 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 any deferred preproduction costs as of the adoption date. Had this SOP
been adopted as of April 1, 1997, the Company would have reported a loss before
the cumulative effect of this change in accounting of $2,797,879 or $0.65 per
share.
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 76,483 101,161
---------- ----------
1,425,784 1,362,435
Less: Valuation reserve (168,932) (100,000)
---------- ----------
$1,256,852 $1,262,435
========== ==========
</TABLE>
22
<PAGE> 25
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 (6,369,983) (4,044,528)
----------- -----------
$ (736,570) $ 632,699
=========== ===========
Included in the accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 861,219 $ 1,403,715
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,597,789) (771,016)
----------- -----------
$ (736,570) $ 632,699
=========== ===========
</TABLE>
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 (514,554) (401,866)
---------- ----------
$1,884,551 $2,213,618
========== ==========
</TABLE>
23
<PAGE> 26
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of March 31, 1998, maturities of notes payable and long-term debt, during the
next five years were as follows:
<TABLE>
<CAPTION>
Fiscal year
Ending March 31, Amount
- ---------------- ------
<S> <C>
1999 $ 514,554
2000 1,016,220
2001 30,370
2002 2,457
2003 --
</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.
The Company, at March 31, 1998, was in default of these lines of credit for
noncompliance with the net operating income covenants contained in the
agreement. In addition, the Company was in default on the note payable to a
vendor for nonpayment.
As discussed in the following paragraphs, subsequent to March 31, 1998, certain
current maturities of long-term debt were refinanced on a long-term basis.
Therefore, these amounts have been classified as long-term in the accompanying
financial statements.
On October 2, 1998, the Company entered into a $5.7 million comprehensive
financing transaction by and among the Bank of Boston, Connecticut, N.A. (the
"Bank") the Estate of Harold S. Geneen (the "Estate") and Gunther Partners LLC
(the "New Lender"), the proceeds of which have been utilized to restructure and
replace the Company's pre-existing senior line of credit, fund a full settlement
with the Company's third party service provider and provide additional working
capital to fund the Company's ongoing business operations. Under the terms of
the transaction, the New Lender loaned an aggregate of $4.0 million to the
Company. At the same time, the Bank reached an agreement with the Estate, which
guaranteed a portion of the Company's senior line of credit, whereby the Estate
consented to the liquidation of approximately $1.7 million of collateral and the
application of the proceeds of such collateral to satisfy and repay in full a
like amount of indebtedness outstanding under the senior credit facility. The
balance of the indebtedness outstanding under the senior credit facility,
approximately $350,000, was repaid in full from the proceeds of the new
financing. The Company executed a new promissory note in favor of the Estate
evidencing the Company's obligation to repay the amount of the collateral that
was liquidated by the Bank. The Company's obligations to the Estate are
completely subordinated to the Company's obligations to the New Lender. In
addition, approximately $1.4 million of the new financing was utilized to pay a
major vendor all amounts that were due for performing maintenance on Company
systems.
The principal balance of the $4.0 million debt is to be repaid in monthly
installments of $100,000 from November 1, 1998 and continuing to and including
September 1, 1999, $400,000 on October 1, 1999 and the balance shall be due on
October 1, 2003. Interest shall be paid quarterly, at the rate of 8% per annum
beginning January 1, 1999 and continuing until the principal and interest due is
paid in full. The debt is
24
<PAGE> 27
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
secured by a first priority interest in all tangible and intangible (excluding
patents and trademarks) personal property and a secondary interest in patents
and trademarks.
To induce the New Lender to enter into the financing transaction, the Company
granted the New Lender a stock purchase warrant entitling the New Lender, at any
time during the period commencing on January 1, 1999 and ending on the fifth
anniversary of the transaction, to purchase up to 35% of the pro forma, fully
diluted number of shares of the Common Stock of the Company, determined as of
the date of exercise. The exercise price of the warrant is $1.50 per share.
In addition, the Company, the New Lender, the Estate and other shareholders
(Park Investment Partners, Gerald H. Newman, Four Partners and Robert Spiegel)
entered into a separate voting agreement, pursuant to which they each agreed to
vote all shares of Gunther stock held by them in favor of (i) that number of
persons nominated by the New Lender constituting a majority of the Board of
Directors, (ii) one person nominated by the Estate and (iii) one person
nominated by Park Investment Partners.
The promissory note in favor of the Estate for approximately $1.7 million is to
be repaid at the earlier of one year after the Company's obligations to the New
Lender are paid in full or on October 2, 2004. Interest, at 5.44% per annum,
shall accrue on principal and unpaid interest, which is added to the outstanding
balance and is due at the time of principal payments. The indebtedness is
secured by a security interest in all tangible and intangible person property
and is subordinated to all rights of the New Lender.
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. See Note 6 for new voting
agreement.
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, at which time they expired.
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 were
non-callable and expired in December 1998.
As of March 31, 1998, the Company had outstanding 156,666 warrants to purchase
one share of the Company's common stock for $4.00 per share. These warrants
expired in 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 2), 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.
25
<PAGE> 28
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 1998, 8,000 shares were issued in connection with the exercise of these
warrants. The remaining warrants expired on September 4, 1998.
In connection with the October 2, 1998 $5.7 million comprehensive financing
transaction, additional warrants were issued (see Note 6).
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 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>
26
<PAGE> 29
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 loss applicable to common stockholders
and pro forma net loss per common share would have been:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss earnings applicable to common
stockholders:
As reported $(2,632,115) $(1,334,690) $(879,555)
Pro forma (2,692,116) (1,359,890) (879,555)
Pro forma basic net loss per share:
As reported (0.61) (0.32) (0.23)
Pro forma (0.61) (0.32) (0.23)
</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.
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.
27
<PAGE> 30
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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%
per annum 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 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 annum 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.
See Note 6 for related party participation in the October 2, 1998 $5.7 million
comprehensive financing transaction.
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
28
<PAGE> 31
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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. CII agreed to subordinate its security
interest in all tangible and intangible personal property to the New Lender. See
Note 6.
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 -
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.
On August 12, 1998, a second purported class action was filed against the
Company, James H. Whitney and Frederick W. Kolling, III asserting similar claims
under the federal securities laws. The second action also was filed in the
United States District Court for the District of Connecticut and purports to be
brought on behalf of the named plaintiff Mr. Mark Abrams for the same class
period.
On January 4, 1999, the Court consolidated the two actions into one. The court
also granted the plaintiffs until February 18, 1999 in which to file an amended
complaint. The defendants, including the Company, were given 45 days after the
filing of the amended complaint in which to file a response.
The present complaints allege 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 prayers for relief request compensatory damages and
reimbursement of the reasonable costs and expenses, including attorney's fees
and expert fees, incurred in connection with the action.
29
<PAGE> 32
GUNTHER INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Although the Company believes the claims are without merit and will vigorously
defend the action, it is not possible to predict with certainty the final
outcome of this proceeding.
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.
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 is 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%, 28% and 17% of net sales, respectively.
30
<PAGE> 33
GUNTHER INTERNATIONAL
CORPORATE INFORMATION
BOARD OF DIRECTORS
THOMAS M. STEINBERG, CHAIRMAN
President, Tisch Family Interests
J. KENNETH HICKMAN
Independent Business and Financial
Consultant
GERALD H. NEWMAN
Private Investor
MARC I. PERKINS
Vice Chairman and Chief Executive Officer
Gunther International, Ltd.
ROBERT SPIEGEL
Private Investor
ADDITIONAL NOMINEES FOR DIRECTOR
STEVEN S. KIRKPATRICK
Vice President, United States Trust Company
of New York
GEORGE A. SNELLING
Independent Business Consultant
Common Stock
OTC-Bulletin Board
Symbol: SORT
Transfer Agent
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
CORPORATE OFFICERS
MARC I. PERKINS
Vice Chairman, Chief Executive Officer
MICHAEL M. VEHLIES
Senior Vice President, Chief Financial Officer
DANIEL J. CHEVALIER
Vice President, Sales and Marketing
JOSEPH E. LAMBORGHINI
Vice President, Service
Field Offices
Tallahassee, Florida
Minneapolis, Minnesota
Reynoldsburg, Ohio
Georgetown, Texas
Oakton, Virginia
Independent Auditors
Arthur Andersen LLP
One Financial Plaza
Hartford, CT 06103
Legal Counsel
Murtha, Cullina, Richter and Pinney LLP
185 Asylum Avenue
Hartford, CT 06103
<PAGE> 34
GUNTHER INTERNATIONAL ONE WINNENDEN ROAD NORWICH, CT 06360
PHONE: (800) 864-1427 FAX: (860) 886-0135
WEBSITE: HTTP://WWW.GUNTHERINTL.COM E-MAIL: [email protected]
