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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
[ ] Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________ to __________
Commission File Number: 0-22994
GUNTHER INTERNATIONAL, LTD.
(Exact name of small business issuer as specified in its charter)
Delaware 51-0223195
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Winnenden Road, Norwich, Connecticut 06360
(Address of principal executive offices) (Zip Code)
860-823-1427
(Issuers Telephone Number)
Not Applicable
(Former name, former address and former fiscal year,if changed since last year)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES [X] NO [ ]
The number of shares of the Registrant's Common stock outstanding as of October
31, 1999 was 4,291,769.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
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GUNTHER INTERNATIONAL, LTD.
Index
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Page
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PART I - CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Balance Sheets as of September 30, 1999
and March 31, 1999 3
Condensed Statements of Operations for the three
and six months ended September 30, 1999 and 1998 4
Condensed Statements of Cash Flows for the six
months ended September 30, 1999 and 1998 5
Notes to Condensed Financial Statements 6-7
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<TABLE>
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Item 2. Management's Discussion and Analysis or Plan of Operation 8-12
PART II - OTHER INFORMATION
<S> <C> <C>
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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PART I. CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
Gunther International, Ltd.
Condensed Balance Sheets
As of September 30, 1999 and March 31, 1999
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
------------------ --------------
(unaudited)
Assets
Current Assets:
<S> <C> <C>
Cash $ 431,092 $ 731,943
Restricted cash 150,000 150,000
Accounts receivable, net 1,193,026 1,520,201
Costs and estimated earnings in excess
of billings on uncompleted contracts 340,682 864,525
Inventories 1,211,637 1,506,554
Prepaid expenses 164,078 95,263
----------- -----------
Total current assets 3,490,515 4,868,486
----------- -----------
Property and Equipment:
Machinery and equipment 1,633,302 1,370,552
Furniture and fixtures 372,759 320,262
Leasehold improvements 257,824 255,017
----------- -----------
2,263,885 1,945,831
Less - accumulated depreciation and
amortization (1,254,134) (1,079,954)
----------- -----------
1,009,751 865,877
----------- -----------
Other Assets:
Excess of costs over fair value of net
assets acquired, net 2,886,625 2,998,357
Other 66,727 73,927
----------- -----------
2,953,352 3,072,284
----------- -----------
$ 7,453,618 $ 8,806,647
=========== ===========
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Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
<S> <C> <C>
Current maturities of long-term debt - related parties $ -- $ 1,000,000
Current maturities of long-term debt - other 10,911 13,440
Accounts payable 1,891,221 2,436,430
Accrued expenses 1,043,678 1,151,518
Billings in excess of costs and estimated
earnings on uncompleted contracts 282,205 1,211,673
Deferred service contract revenue 1,607,554 1,521,204
Note payable to stockholder 150,000 150,000
------------ ------------
Total current liabilities 4,985,569 7,484,265
------------ ------------
Long-term debt, less current maturities:
Related parties 5,140,367 3,521,931
Other 8,533 12,319
------------ ------------
Total long-term debt 5,148,900 3,534,250
------------ ------------
Commitments and contingencies (Note 4)
Stockholders' Equity (Deficit):
Common stock 4,292 4,292
Additional paid-in capital 12,188,556 12,188,556
Accumulated deficit (14,873,699) (14,404,716)
------------ ------------
Total Stockholders' Equity (Deficit) (2,680,851) (2,211,868)
------------ ------------
$ 7,453,618 $ 8,806,647
============ ============
</TABLE>
See accompanying notes to Condensed Financial Statements.
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Gunther International, Ltd.
Condensed Statements of Operations
For the three and six months ended September 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Systems $ 2,477,180 $ 2,494,326 $ 5,895,324 $ 4,461,184
Maintenance 2,374,258 2,074,922 4,651,455 4,232,793
--------- --------- ---------- ---------
Total sales 4,851,438 4,569,248 10,546,779 8,693,977
--------- --------- ---------- ---------
Cost of sales:
Systems 1,688,306 1,696,904 4,041,776 3,528,922
Maintenance 2,213,586 1,621,677 4,225,362 3,056,796
--------- --------- --------- ---------
Total cost of sales 3,901,892 3,318,581 8,267,138 6,585,718
--------- --------- --------- ---------
Gross profit 949,546 1,250,667 2,279,641 2,108,259
--------- --------- --------- ---------
Operating expenses:
Selling and marketing 360,466 687,278 737,942 1,357,503
Research and development 322,528 99,617 705,848 303,057
General and administrative 541,289 634,988 1,043,578 1,171,022
--------- --------- --------- ---------
Total operating expenses 1,224,283 1,421,883 2,487,368 2,831,582
--------- --------- --------- ---------
Operating loss (274,737) (171,216) (207,727) (723,323)
Interest expense, net (134,771) (116,377) (261,255) (221,387)
---------- --------- --------- -----------
Loss before accounting change (409,508) (287,593) (468,982) (944,710)
Cumulative effect of accounting change -- -- -- (622,953)
---------- --------- --------- -----------
Net loss (409,508) (287,593) (468,982) (1,567,663)
========== ======== ======== ==========
Basic and Diluted Loss per share:
Loss before cumulative effect of
change in accounting principle $ (0.10) $ (0.07) $ (0.11) $ (0.22)
Cumulative effect of accounting change -- -- -- (0.15)
------------ ------------ ------------ -----------
Loss per share $ (0.10) $ (0.07) $ (0.11) $ (0.37)
============ ============ ============ ===========
Weighted average number of common
shares outstanding 4,291,769 4,291,269 4,291,769 4,291,269
========= ========= ========= =========
</TABLE>
See accompanying notes to Condensed Financial Statements.
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Gunther International, Ltd.
Condensed Statements of Cash Flows
For the six months ended September 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (468,982) $(1,567,663)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 293,112 269,324
Provision for doubtful accounts -- 40,000
Related party note payable interest accrual 118,500 --
Cumulative effect of accounting change -- 622,953
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 327,175 (265,756)
Decrease in inventories 294,917 203,572
Increase in prepaid expenses (68,815) (14,878)
Decrease in accounts payable (545,209) (540,950)
Decrease in accrued expenses (107,840) (3,189)
Increase (decrease) in deferred service contract revenue 86,350 (276,052)
Increase (decrease) in billings in excess of costs and
estimated earnings on uncompleted contracts, net (405,625) 1,176,067
-------- ---------
Net cash used for operating activities (476,417) (356,572)
-------- --------
Cash flows from investing activities:
Acquisitions of property and equipment (318,054) (49,175)
Other assets -- 18,017
Proceeds from sale of investment -- 20,000
----------- -----------
Net cash used for investing activities (318,054) (11,158)
----------- -----------
Cash flows from financing activities:
Repayment of notes payable and long-term debt (306,380) (65,931)
Proceeds from notes payable and long-term debt 800,000 --
----------- -----------
Net cash provided by (used for) financing activities 493,620 (65,931)
----------- -----------
Net decrease in cash (300,851) (433,661)
Cash, beginning of period 731,943 572,368
----------- -----------
Cash, end of period $ 431,092 $ 138,707
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 152,977 $ 46,701
Cash paid for income taxes 5,062 2,635
</TABLE>
See accompanying notes to Condensed Financial Statements.
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GUNTHER INTERNATIONAL, LTD.
Notes to Condensed Financial Statements
1. BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited interim condensed
financial statements have been prepared in accordance with generally accepted
accounting principles and contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position and
the results of operations for the interim periods. These financial statements
should be read in conjunction with the financial statements and related notes
included in the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1999. The results of operations for the interim periods are not
necessarily indicative of results to be expected for the full year.
2. ACCOUNTING CHANGE:
In the first quarter of fiscal 1999, the Company changed its method of
accounting for deferred preproduction costs, in accordance with AICPA Statement
of Position No. 98-5, "Reporting on the Costs of Start-Up Activities", which
requires costs of start-up activities and organization costs to be expensed as
incurred, rather than capitalizing and subsequently amortizing such costs. The
cumulative effect of the change in accounting principle was to increase the net
loss for the three and six months ended September 30, 1998 by $622,953, or $0.15
per share.
3. LONG - TERM DEBT:
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 originally was 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 was to
be due on October 1, 2003. Interest is 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. Through June 30, 1999, the Company made principal payments
of $800,000 to the New Lender. In September 1999, the Company and the New Lender
agreed to modify the terms of the borrowing to defer payment of the $700,000 due
from July 1999 through October 1999 and to relend the Company the $800,000 of
principal that was previously repaid, thereby restoring the aggregate principal
amount of the indebtedness to the original principal amount of $4.0 million. As
amended, the total balance due of $4 million is to be repaid in nine payments as
follows: (a) $200,000 shall be paid on the first day of each month commencing on
October 1, 2001 and continuing and including April 1, 2002; (b) $100,000 shall
be paid on May 1, 2002; and (c) the balance shall be paid on October 1, 2003.
If, at any time prior to October 1, 2001, the accumulated deficit of the
Company, calculated in accordance with generally accepted accounting principles,
improves by $1.0 million or more above the Company's accumulated deficit at June
30, 1999 (a "Triggering Event"), then the principal payments due on October 1,
2001 through May 1, 2002 shall be accelerated and become due in consecutive
monthly installments beginning on the first day of the second month following
the Triggering Event.
To induce the New Lender to enter into the original 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. The warrant was valued at $345,000 at the time of
the lending and was included in additional paid-in capital, reducing the debt
value to $3,655,000. The effective interest rate for
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the loan is 9.8%. The imputed interest between the face value of the note and
the note value based on the effective interest rate will be added to the
principal loan balance until the full face value is recorded.
In addition, the Company, the New Lender, the Estate and certain 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 the Company's 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
personal property and is subordinated to all rights of the New Lender. The
Company has recorded the promissory note at an effective interest rate of 10.5%,
reducing the principal balance to $1.3 million. The balance of $453,000 was
recorded as additional paid-in capital. The imputed interest between the face
value of the note and the note value based on the effective interest rate will
be added to the principal loan balance until the full face value is recorded.
4. COMMITMENTS AND CONTINGENCIES:
On July 9, 1998, a purported class action lawsuit was filed against the
Company, its then-current Chief Executive Officer and its then-current Chief
Financial Officer, 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, its then-current Chief Executive Officer and its then-current Chief
Financial Officer, 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
plaintiffs filed an amended consolidated complaint on May 28, 1999. The
defendants, including the Company, have been given until November 19, 1999 to
file a response.
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 plaintiffs are seeking compensatory damages and
reimbursement for the reasonable costs and expenses, including attorney's fees,
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
5. SUBSEQUENT EVENT:
On November 8, 1999, the Company entered into a revolving loan agreement
with a bank pursuant to which the bank has agreed to loan the Company up to
$500,000 based on a borrowing base of eligible accounts receivable. Eligible
accounts receivable include accounts receivable under 60 days past due,
excluding receivables from agencies of the United States. Interest is to be paid
monthly at the annual rate of prime plus 1.5%. The loan agreement contains
certain covenants including a debt service coverage ratio of not less than 1.25
to 1. Unless extended by the bank, the loan agreement expires on August 30,
1999.
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Item 2. Management's Discussion and Analysis or Plan of Operation
RESULTS OF OPERATIONS
SALES: Systems sales include sales of high-speed assembly systems, upgrades to
previously sold systems and inc.jet imager systems and ancillary products. Sales
for high-speed assembly systems and upgrades are recorded on the percentage of
completion basis. Sales for the inc.jet imager systems and ancillary products
are recorded as systems are shipped.
Total sales for the three and six months ended September 30, 1999 were $4.9
million and $10.5 million, respectively, an increase of 6% and 21% over the
comparable periods of the prior year. Systems sales for the three and six months
ended September 30, 1999 were $2.5 million and $5.9 million, respectively, a
decrease of 1% and an increase of 32% over the comparable periods of the prior
year. The decrease in systems sales for the three months ended September 30,
1999 was primarily due to a decrease of 15% in high speed assembly systems and
related upgrades offset by a $346,000 increase in inc.jet sales. Inc.jet sales
comprised 16% of total systems sales for the three months ended September 30,
1999 as compared to 2% over the comparable period of the prior year. The
increase in system sales for the six months ended September 30, 1999 as compared
to the six months ended September 30, 1998 was due to a 14% increase in
high-speed assembly systems and a $812,000 increase in inc.jet sales. The
increase in sales for high-speed assembly systems was primarily due to a
decrease in manufacturing time of systems in progress. While the number of
systems in progress during the periods was stable, the average revenue
recognized on a system was greater in 1999 than in 1998. In addition, system
revenues in 1998 had a greater volume of upgrades than in 1999. Upgrades have an
average selling price less than a full system. Inc.jet sales comprised 15% of
total systems sales for the six months ended September 30, 1999 as compared to
2% over the comparable period of the prior year. Maintenance sales for the three
and six months ended September 30, 1999 were $2.4 million and $4.7 million,
respectively, an increase of 14% and 10% over the comparable periods of the
prior year. The increase was primarily due to an increase in contract services
on a larger installed base of systems. At September 30, 1999 and 1998, backlog
for high-speed assembly system and upgrade orders, consisting of total contract
price less revenue recognized to date for all signed orders on hand, was $2.0
million and $5.6 million, respectively. The September 30, 1999 backlog,
expected to be completed by March 31, 2000, has remained stable over the last
two quarters but decreased from the prior year as a result of less orders
received as the backlog was released. The backlog at September 30, 1998
was higher than normal due to the cash flow difficulties the Company was
experiencing prior to the October 2, 1998 financing which made obtaining parts
for systems in process more difficult. As a result, the Company was unable to
complete its outstanding orders in a timely manner and the backlog increased to
abnormal levels.
GROSS PROFIT: Gross profit as a percentage of total sales for the three months
ended September 30, 1999 decreased to 20% from 27% for the comparable period of
the prior year. Gross profit as a percentage of total sales for the six months
ended September 30, 1999 decreased to 21% from 24% for the comparable period of
the prior year. Gross profit as a percentage of systems sales for the three
months ended September 30, 1999 remained stable at 32% as compared to the
comparable period of the prior year. Gross profit as a percentage of systems
sales for the six months ended September 30, 1999 increased to 31% from 21% for
the comparable period of the prior year. The increase in the gross profit
percentage was a result of an increase in inc.jet imager sales, which carry a
higher gross margin percentage, and less overhead to be allocated to systems.
The reduction in overhead was due to a shift in under utilized resources to the
maintenance department to aid in the transition from the third party service
provider to the Company's own personnel. This shift in resources is reflected in
the maintenance gross margin. Gross profit as a percentage of maintenance sales
for the three and six months ended September 30, 1999 decreased to 7% and 9%,
respectively, from 22% and 28%, respectively, for the comparable periods of the
prior year. The decrease in the gross profit percentage is primarily a result of
an increase the cost of sales of maintenance. The increase in the maintenance
expenses related to the transition of the service function from the third party
service provider to the Company's own internal maintenance personnel. The
transition of maintenance services began on April 1, 1999 and is expected to be
completed by March 31, 2000. During the six months ended September 30, 1999, the
Company's transition expenses were higher than expected because the number of
customer service engineers expected to transition from the third party service
provider to the Company was less than anticipated. This resulted in the Company
having to recruit and train more personnel than anticipated and to incur
additional expenses to provide customer support from the Connecticut location to
customer sites. The Company has also incurred an increase in service parts costs
during this transition period. As sites are transitioned, Company personnel are
performing preventive maintenance reviews on the systems at the various sites.
The Company has found that in certain sites a
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substantial amount of time and materials were required to bring the systems to
the higher level of operation the Company considers appropriate for that site.
The Company expects that until the transition is completed, maintenance costs
will be abnormally high, resulting in lower than normal gross margins.
OPERATING EXPENSES: Selling and marketing expenses, as a percentage of total
revenues, for the three and six months ended September 30, 1999 were 7% and 7%,
respectively, as compared to 15% and 16%, respectively, for the comparable
periods of the prior year. For the three and six months ended September 30,
1999, these expenses decreased by 48% and 46%, respectively, as compared to the
comparable periods of the prior year. The decrease was primarily due to a
decrease in personnel costs, including wages and commissions, related benefits
and travel costs, as well as a shift in personnel in the inc.jet department back
to research and development. During the 1998 period, inc.jet personnel were
concentrating on bringing the new imager to market. After the introduction of
the inc.jet imager to the market, a majority of the inc.jet personnel have
concentrated their efforts on enhancements to the inc.jet imager.
Research and development expenses, as a percentage of total revenues, for the
three and six months ended September 30, 1999 were 7% and 7%, respectively, as
compared to 2% and 3%, respectively, for the comparable periods of the prior
year. For the three and six months ended September 30, 1999, these expenses
increased by 224% and 133% as compared to the comparable periods of the prior
year. The primary focus of the research and development in the three months
ended September 30, 1999 was the further development of enhancements to the
current product line of systems and the inc.jet imager.
General and administrative expenses, as a percentage of total revenues, for the
three and six months ended September 30, 1999 were 11% and 10%, respectively, as
compared to 14% and 13%, respectively, for the comparable periods of the prior
year. For the three and six months ended September 30, 1999, these expenses
decreased by 15% and 11% as compared to the comparable periods of the prior year
primarily due to a decrease in the number of executive officers and a reduction
in normal operating expenses.
Interest expense, net, in the three and six months ended September 30, 1999
increased to $135,000 and $261,000, respectively, from $116,000 and $221,000 in
the three and six months ended September 30, 1998, respectively, due to the
interest on the debt from the October 2, 1998 financing transaction described
below.
In the first quarter of fiscal 1999, the Company changed its method of
accounting for deferred preproduction costs, in accordance with AICPA Statement
of Position No. 98-5, "Reporting on the Costs of Start-Up Activities", which
requires costs of start-up activities and organization costs to be expensed as
incurred, rather than capitalizing and subsequently amortizing such costs. The
effect of the change in accounting principle was to increase the net loss for
the six months ended September 30, 1998 by approximately $623,000, or $0.15 per
share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for liquidity is to fund operations while it
endeavors to increase sales and achieve profitability. Historically, the Company
has derived liquidity through system 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 six months ended September 30, 1999 and 1998, the Company had a
negative cash flow from operations of $476,000 and $357,000, respectively. The
decrease in the cash flow from operations from the prior year is primarily due
to a decrease in the backlog of orders, resulting in fewer deposits received for
contract systems. Under the Company's normal 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 and machine specifications are completed,
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. In a
period when costs incurred on contracts are greater than the billings and
subsequent receipts, there will be a negative impact on the period's cash flows
from operating activities. In a period when billings and their subsequent
receipts are greater than the costs incurred on contracts, there will be a
positive impact on the period's cash flows from operating activities. During the
six months ended September 30, 1999, costs on contracts exceeded billings and
subsequent receipts and had a negative impact of
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$406,000 on cash flows from operating activities. During the six months ended
September 30, 1998, billings and subsequent receipts exceeded costs on
contracts, having a positive impact of $1.2 million on cash flows from operating
activities.
During the six months ended September 30, 1999 and 1998, the Company used cash
for investing activities of $318,000 and $11,000, respectively, to purchase
machinery and equipment. Machinery and equipment purchased during 1999 includes
the construction of a training system to train incoming customer service
engineers.
During the six months ended September 30, 1999, the Company used cash for
financing activities of $306,000 to pay down long-term debt. The Company also
received an additional $800,000 from a related party (see below).
As previously reported, the Company completed a $5.7 million comprehensive
financing transaction on October 2, 1998, the proceeds of which have been
utilized to restructure and replace the Company's then-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. See Note 3 to the financial statements. In September 1999, the
Company and the New Lender agreed to modify the terms of the borrowing to defer
payment of the $700,000 due from July 1999 through October 1999 and to relend
the Company the $800,000 of principal that was previously repaid, thereby
restoring the aggregate principal amount of the indebtedness to the original
principal amount of $4.0 million. As amended, the total balance due of $4
million is to be repaid in nine payments as follows: (a) $200,000 shall be paid
on the first day of each month commencing on October 1, 2001 and continuing and
including April 1, 2002; (b) $100,000 shall be paid on May 1, 2002; and (c) the
balance shall be paid on October 1, 2003. If, at any time prior to October 1,
2001, the accumulated deficit of the Company, calculated in accordance with
generally accepted accounting principles, improves by $1.0 million or more above
the Company's accumulated deficit at June 30, 1999 (a "Triggering Event"), then
the principal payments due on October 1, 2001 through May 1, 2002 shall be
accelerated and become due in consecutive monthly installments beginning on the
first day of the second month following the Triggering Event.
On November 8, 1999, the Company entered into a revolving loan agreement with a
bank pursuant to which the bank has agreed to loan the Company up to $500,000
based on a borrowing base of eligible accounts receivable. Eligible accounts
receivable include accounts receivable under 60 days past due, excluding
receivables from agencies of the United States. Interest is to be paid monthly
at the annual rate of prime plus 1.5%. The loan agreement contains certain
covenants including a debt service coverage ratio of not less than 1.25 to 1.
Unless extended by the bank, the loan agreement expires on August 30, 2000.
Except for the financing transaction with the New Lender and the revolving line
of credit with the bank, the Company does not have commitments for outside
funding of any kind. In addition, the Loan and Security Agreement entered into
between the Company and the New Lender expressly prohibits the Company from
incurring any additional indebtedness from any person or entity other than the
New Lender. The Company must depend, therefore, on current cash balances, the
generation of sufficient internally generated funds and the revolving line of
credit to finance its operations during the balance of fiscal 2000 and
thereafter. At September 30, 1999, the Company had cash and cash equivalents of
approximately $581,000, as well as approximately $1.2 million of accounts
receivable.
On a going forward basis, management believes that the Company has sufficient
cash and cash equivalents, together with the cash expected to be derived from
additional sales and maintenance revenues, to meet the Company's cash needs for
the remainder of fiscal 2000. The Company's cash needs may be affected by a
number of factors, however, many of which are beyond the control of management.
See "Forward Looking Statements," below. Thus, there can be no assurance that
the Company will not need significantly more cash than is presently forecasted
by management or that the Company's current and expected sources of cash will be
sufficient to fund the Company's ongoing operations.
INFLATION
The effect of inflation on the Company has not been significant during the last
two fiscal years.
10
<PAGE> 11
YEAR 2000
The Company has completed its assessment of 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 has completed 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 with 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 all of its
critical internal operating systems are year 2000 compliant. The remaining
noncompliant systems are noncritical in nature and have readily available
solutions.
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 systems and 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. While the Company's products will continue to function through
the year 2000, the Company has offered to test all systems in the field to
determine if the computers associated with those systems are year 2000
compliant. The Company has completed its testing and has notified customers of
its findings. If a computer or the software is not year 2000 compliant and the
customer desires to upgrade his system, there are various low cost solutions
offered by the Company. However, it is not necessary for a system to be updated
in order to be able to process the customer's applications.
The Company has identified key suppliers and vendors 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 has distributed
questionnaires relating to year 2000 compliance to its significant suppliers and
vendors. The Company is monitoring the responses to the year 2000 compliance
questionnaires and will follow-up with those significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. To date, all returned questionnaires indicate
those suppliers are Year 2000 compliant.
The Company has evaluated the potential year 2000 impact on its facilities,
including its building and utility systems and the Company does not believe
there are any significant issues that could seriously disrupt operations. Any
problems that are identified before or after December 31, 1999 will be
prioritized and remediated based on their assigned priority.
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 and the Company does not expect any remaining year
2000 remediation costs to be material. 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 has completed its assessment of the need to develop contingency
plans in various operating areas 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
11
<PAGE> 12
as may be required. To date, the Company has determined that it has limited
exposure to potential year 2000 issues and no contingency plans have been
established.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
While the Company has attempted 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. 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.
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 such 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.
12
<PAGE> 13
GUNTHER INTERNATIONAL, LTD.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On July 9, 1998, a purported class action lawsuit was filed against the
Company, its then-current Chief Executive Officer and its then-current Chief
Financial Officer, 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, its then-current Chief Executive Officer and its then-current Chief
Financial Officer, 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 plaintiffs filed an amended consolidated complaint on May 28, 1999. The
defendants, including the Company, have been given until November 19, 1999 to
file a response.
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 plaintiffs are seeking compensatory damages and
reimbursement for the reasonable costs and expenses, including attorney's fees,
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.
A. The 1999 Annual Meeting of Shareholders was held on
September 9, 1999 at Loew's New York Hotel in New York, New
York.
B. The following individuals were elected as directors at the
Annual Meeting:
<TABLE>
<CAPTION>
Votes For Votes Withheld
<S> <C> <C>
1. J. Kenneth Hickman 3,731,529 46,850
2. Steven S. Kirkpatrick 3,731,529 46,850
3. Gerald H. Newman 3,731,529 46,850
4. Marc I. Perkins 3,730,529 47,850
5. Robert Spiegel 3,731,529 46,850
6. George A. Snelling 3,731,529 46,850
7. Thomas M. Steinberg 3,731,529 46,850
</TABLE>
C. The Gunther International, Ltd. Directors' Equity Plan was
ratified by a vote of 3,671,601 for, 89,883 against and
16,895 abstentions.
D. Arthur Andersen LLP, independent certified public
accountants, were ratified as independent auditors for the
fiscal year ending March 31, 2000 by a vote of 3,681,319
for, 82,760 against and 14,300 abstentions.
13
<PAGE> 14
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits required by Item 601 of Regulation S-B:
10.1 Letter Agreement to Amend Lease, dated July 22, 1999,
between the registrant and UNC Incorporated.
10.2 Substitute Term Note, dated as of September 15, 1999, made
by the Registrant to the order of Gunther Partners, LLC
10.3 Amendment and Confirmation of Subordination Agreement,
dated as of September 15, 1999, between Gunther Partners,
LLC and Connecticut Innovations, Inc.
10.4 Amendment to Loan and Security Agreement and
Term Note, dated as of September 15, 1999, between
Gunther Partners, LLC and the Registrant.
10.5 Amendment and Confirmation of Subordination and
Intercreditor Agreement, dated as of September 15, 1999,
between Gunther Partners LLC and June H. Ceneen, Phil E.
Gilbert, Jr., Thomas W. Keesee and the United States Trust
Company of New York, as Co-Executors of the Estate of
Harold S. Geneen, late of New York, New York.
27.1 Financial Data Schedule
B. Reports on Form 8-K.
None.
14
<PAGE> 15
GUNTHER INTERNATIONAL, LTD.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GUNTHER INTERNATIONAL, LTD.
(Registrant)
/s/ Michael M. Vehlies Date:November 15, 1999
----------------------------
Michael M. Vehlies
Chief Financial Officer and Treasurer
(On behalf of the Registrant and as
Principal Financial and Accounting Officer)
15
<PAGE> 1
UNC
THE AVIATION COMPANY NAVAL PRODUCTS
P.O. Box 981
Uncasville, Connecticut 06382-0981
(860) 444-6008 FAX (860) 444-6450
Robert F. Bonito
General Manager
July 22, 1999
Mr. Michael M. Vehlies
Chief Financial Officer
Gunther International, Ltd.
One Winnenden Road
Norwich, Connecticut 06360-1570
Re: Amendment of Lease
Dear Mr. Vehlies:
This letter sets forth an amendment to the Lease dated July 31, 1996
between UNC INCORPORATED, as landlord, and GUNTHER INTERNATIONAL, LTD., as
tenant. This amendment is as follows:
Section 1.2 of the Lease is amended to provide that the term of the Lease shall
end on September 30, 2000.
Section 2.1 of the Lease is amended to provide that the Rent payable during the
period from October 1, 1999 through September 30, 2000, shall be $360,000
payable in equal monthly installments of $30,000 each, payable on the first day
of each calendar month.
Section 21.2 of the Lease is hereby deleted and Landlord shall have the right to
post "for sale" and "for lease" signs on the Premises at any time on and after
the date of this amendment.
Except as specifically modified by this amendment, all other terms and
conditions set forth in the Lease shall remain the same.
Please countersign this letter in the space provided below indicating Tenant's
acceptance of this amendment.
Very truly yours,
UNC INCORPORATED
By:/S/ Robert F. Bonito
--------------------
Title:General Manager of Operations
-----------------------------
ACCEPTED AND AGREED TO BY GUNTHER INTERNATIONAL, LTD.:
By: /S/ Michael M. Vehlies
-------------------------
Title: Chief Financial Officer
-----------------------
16
<PAGE> 1
EXHIBIT A
SUBSTITUTE TERM NOTE
$4,000,000 September 15, 1999
Norwich, Connecticut
For value received, the undersigned, Gunther International, Ltd. (the
"Borrower") promises to pay to the order of GUNTHER PARTNERS, LLC ("Lender")
at the office of its agent, c/o Thomas M. Steinberg, Tisch Family Interests,
667 Madison Avenue, New York, New York, 10021 or at such other place as
Lender may designate, the principal sum of FOUR MILLION DOLLARS ($4,000,000),
together with interest on the unpaid balance of this Note at the rate of
eight percent (8%) per annum, beginning on the date hereof, before or after
maturity or judgment, which interest shall be computed on the basis of a
360-day year and actual days elapsed, together with all taxes levied or
assessed on this Note or the debt evidenced hereby against Lender, and
together with all costs, expenses and reasonable attorneys' fees incurred in
the collection of this Note, or to enforce or foreclose any security
agreement or other document including, without limitation, the Agreement (as
hereinafter defined), securing or relating to this Note, or in protecting or
defending the lien of said security agreement or other document, or in any
<PAGE> 2
litigation or matter arising from or connected with said security agreement,
other document, or this Note. This Note is the Term Note referred to in, and
is entitled to the benefits of, that certain Loan and Security Agreement
dated October 2, 1998 between Borrower and Lender as amended by that certain
Amendment to Loan Agreement and Term Note dated the date hereof (such Loan
and Security Agreement as so modified and as the same may be further amended
from time to time, the "Agreement"). Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to them in the
Agreement. The Agreement, among other things, contains provisions for (i)
acceleration of the maturity of this Note upon the happening of certain
stated events, (ii) for prepayments on account of principal hereof prior to
the maturity of this Note upon the terms and conditions specified in the
Agreement and (iii) the payment of interest at the Default Rate under certain
circumstances. The Agreement and all other instruments either relating to or
securing the indebtedness evidenced hereby are made a part of this Note and
deemed incorporated in full.
Interest shall be paid on the first day of each calendar quarter
beginning October 1, 1999, and continuing on the first day of each April,
July, October and January thereafter, until the principal balance with
accrued interest thereon is paid in full. Principal shall be paid in nine
payments as follows:
-2-
<PAGE> 3
(a) Two Hundred Thousand Dollars ($200,000) shall be paid on the first day of
each month commencing on October 1, 2001 and continuing to and including April
1, 2002; (b) One Hundred Thousand Dollars ($100,000) shall be paid on May 1,
2002 and (c) the balance together with all accrued and unpaid interest and all
other unpaid amounts due hereunder or under the Financing Agreements, shall be
due and payable on October 1, 2003 or on such earlier date that this Note
becomes due and payable as a result of acceleration as provided in the Agreement
(the "Maturity Date"). Notwithstanding the foregoing, if at any time prior to
October 1, 2001, the Retained Earnings of the Borrower, calculated in accordance
with generally accepted accounting principals, increase to One Million Dollars
($1,000,000) or more above the Borrower's Retained Earnings as of June 30, 1999
(such event herein called the "Triggering Event") then the principal payments
set forth above as being due on October 1, 2001 through May 1, 2002 shall be
accelerated and become due in consecutive monthly installments as set forth
above payable on the 1st day of each month commencing on the 1st day of the
second (2nd) month following the month in which the Triggering Event shall
occur.
Upon the occurrence of an Event of Default under and as defined in the
Agreement, the entire indebtedness, with accrued interest thereon, due under
this Note, shall, at the option of
-3-
<PAGE> 4
Lender, become immediately due and payable without demand or notice of any kind.
If any amount due hereunder is not paid within ten (10) days after the date
it is due, without in any way affecting Lender's right to accelerate this Note,
a late charge equal to five percent (5%) of said amount shall be assessed
against Borrower for each month that said amount is late, and shall be
immediately due and payable without demand or further notice of any kind.
Borrower hereby grants to Lender a lien and right of setoff for all of
Borrower's liabilities to Lender under this Note and the Agreement upon and
against all the deposits, credits, collateral and property of Borrower, now or
hereinafter in the possession or control of Lender or in transit to it. Lender
may, at any time after the occurrence, and during the continuance, of an Event
of Default, apply or set off the same, or any part thereof, to any liability of
Borrower, whether or not matured or demanded.
Notwithstanding any provisions of this Note to the contrary, the rate of
interest to be paid by Borrower to Lender under this Note shall not exceed the
highest or the maximum rate of interest permitted to be charged by Lender under
applicable laws. Any amounts paid by Borrower to Lender in excess of such
-4-
<PAGE> 5
rate shall be deemed to be partial prepayments of principal hereunder.
No delay or omission by Lender in exercising any right hereunder, nor
failure by Lender to insist upon the strict performance of any terms herein,
shall operate as a waiver of such right, any other right hereunder, or any terms
herein. No waiver of any right shall be effective unless in writing and signed
by Lender, nor shall a waiver on one occasion be constituted as a bar to, or
waiver of, any such right on any future occasion.
BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY SUIT,
ACTON OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY
RELATED TO THE FINANCING TRANSACTIONS OF WHICH THIS NOTE IS A PART AND/OR THE
ENFORCEMENT OF ANY OF LENDER'S RIGHTS AND REMEDIES. BORROWER ACKNOWLEDGES THAT
IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY AND ONLY AFTER EXTENSIVE
CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEYS. NO PARTY
TO THIS NOTE HAS AGREED WITH OR REPRESENTED TO ANY OTHER PARTY HERETO THAT THE
PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
BORROWER ACKNOWLEDGES THAT THE LOAN EVIDENCED BY THIS NOTE IS A
COMMERCIAL TRANSACTION AND WAIVES ITS RIGHTS TO NOTICE AND HEARING UNDER CHAPTER
903a OF THE CONNECTICUT GENERAL STATUTES, OR AS OTHERWISE ALLOWED BY ANY STATE
OR FEDERAL LAW WITH RESPECT
-5-
<PAGE> 6
TO ANY PREJUDGMENT REMEDY WHICH BANK MAY DESIRE TO USE, and further waives
diligence, demand, presentment for payment, notice of nonpayment, protest, and
notice of protest, and notice of any renewals or extensions of this Note, and
all rights under any statute of limitations.
This Note shall be governed by and construed in accordance with the
laws of the State of Connecticut.
This Note is delivered in substitution for that certain $4,000,000 Term
Note dated October 2, 1998 made by the Borrower to the order of the Lender.
GUNTHER INTERNATIONAL, LTD.
By:
---------------------------
Name:
Title:
-6-
<PAGE> 1
AMENDMENT AND CONFIRMATION OF SUBORDINATION AGREEMENT
THIS AMENDMENT AND CONFIRMATION OF SUBORDINATION AGREEMENT dated as of
the 15th of September, 1999 between GUNTHER PARTNERS, LLC ("GP"), and
Connecticut Innovations, Inc. ("CII").
W I T N E S S E T H:
WHEREAS, GP and CII are parties to a Subordination Agreement (the
"Subordination Agreement") dated as of October 2, 1998, pursuant to which CII
agreed to subordinate its security interest and lien in and to the Subordinated
Collateral, as defined in the Subordination Agreement, granted to it by Gunther
International, Ltd. ("Gunther") to the lien and security interest of GP in and
to the Subordinated Collateral granted to it by Gunther International, Ltd., as
security for the Priority Loan, as defined in the Subordination Agreement; and
WHEREAS, GP has agreed to (i) relend to Gunther $800,000 which Gunther had
previously repaid under the Priority Loan bringing the outstanding principal
balance of the Priority Loan back to $4,000,000 and (ii) modify the repayment
terms of the Priority Loan as provided in the Amendment to Loan and Security
Agreement and Term Note dated as of the date hereof between GP and Gunther (the
"Priority Loan Amendment") (a copy of which Priority Loan Amendment has been
delivered to CII); and
WHEREAS, in connection with GP's entering into the Priority Loan
Amendment, GP and CII have agreed to amend and confirm the Subordination
Agreement as herein provided.
NOW, THEREFORE, GP, CII and, by its consent and acknowledgement hereto,
Gunther hereby agree as follows:
1. Definitions. All capitalized terms used herein which are not
otherwise defined herein shall have the meanings ascribed to them in the
Subordination Agreement.
2. Amendments to Subordination Agreement.
(i) The term "Priority Loan Agreement" as used in the Subordination
Agreement shall mean the Priority Loan Agreement as modified by the Priority
Loan Amendment and as may be further modified from time to time.
(ii) The term "Priority Note" as used in the Subordination Agreement
shall mean the Priority Note as modified
<PAGE> 2
by the Priority Loan Amendment and as may be further modified from time to time.
3. Ratification. Except as modified hereby, all of the terms, covenants
and conditions of the Subordination Agreement are hereby confirmed, ratified and
approved in all respects and shall continue in full force and effect.
4. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5. Manner of Execution. Telefacsimile transmissions of any executed
original document and/or retransmission of any executed telefacsimile
transmission shall be deemed to be the same as the delivery of an executed
original. At the request of any party hereto, the other parties shall confirm
telefacsimile transmissions by executing duplicate original documents and
delivering the same to the requesting party or parties.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Confirmation of Subordination Agreement to be duly executed as of the day and
year first above written.
GUNTHER PARTNERS, LLC
By: ________________________
Name:
Title:
Hereunto Duly Authorized
CONNECTICUT INNOVATIONS, INC.
By: ________________________
Name:
Title:
Hereunto Duly Authorized
-2-
<PAGE> 3
The undersigned acknowledges and accepts the foregoing as of the 1st day
of July, 1999.
GUNTHER INTERNATIONAL, LTD.
By: ________________________
Name:
Title:
Hereunto Duly Authorized
STATE OF CONNECTICUT :
: SS. October ___, 1999
COUNTY OF :
Personally appeared ____________________, signer and sealer of the
foregoing instrument, personally known to me (or satisfactorily proven) who
acknowledged that he as __________________ of Gunther Partners, LLC, is duly
authorized to execute said instrument and further acknowledged the same to be
his free act and deed as _____________ of Gunther Partners, LLC, and the free
act and deed of said Gunther Partners, LLC, before me, the undersigned officer.
------------------------------------
Name:
Commissioner of the Superior Court
Notary Public
My Commission Expires:
-------------
-3-
<PAGE> 4
STATE OF CONNECTICUT :
: SS. Rocky Hill, October ___, 1999
COUNTY OF :
Personally appeared ____________________, signer and sealer of the
foregoing instrument, personally known to me (or satisfactorily proven) who
acknowledged that he as __________________ of Connecticut Innovations, Inc., is
duly authorized to execute said instrument and further acknowledged the same to
be his free act and deed as _____________ of Connecticut Innovations, Inc. and
the free act and deed of said Connecticut Innovations, Inc., before me, the
undersigned officer.
----------------------------------
Name:
Commissioner of the Superior Court
Notary Public
My Commission Expires:
STATE OF CONNECTICUT :
: SS. , October ___, 1999
COUNTY OF :
Personally appeared ____________________, signer and sealer of the
foregoing instrument, personally known to me (or satisfactorily proven) who
acknowledged that he as __________________ of Gunther International, Ltd., is
duly authorized to execute said instrument and further acknowledged the same to
be his free act and deed as _____________ of Gunther International, Ltd., and
the free act and deed of said Gunther International, Ltd., before me, the
undersigned officer.
-----------------------------------
Name:
Commissioner of the Superior Court
Notary Public
My Commission Expires:
------------
-4-
<PAGE> 1
AMENDMENT TO LOAN AND SECURITY AGREEMENT AND TERM NOTE
THIS AMENDMENT TO LOAN AND SECURITY AGREEMENT AND TERM NOTE made as of
September 15, 1999 by and among GUNTHER PARTNERS, LLC, a New York limited
liability company, having a mailing address c/o Thomas M. Steinberg, President,
Tisch Family Interests, 667 Madison Avenue, New York, New York 10021 (the
"Secured Party") and GUNTHER INTERNATIONAL, LTD., a Delaware corporation having
its principal office at One Winnendon Road, Norwich, Connecticut 06360 (the
"Debtor").
W I T N E S S E T H:
WHEREAS, the Secured Party and the Debtor are parties to a certain Loan
and Security Agreement dated October 2, 1998 (the "Agreement"); and
WHEREAS, as evidence of the Debtor's obligation to repay the Secured Party
the $4,000,000 borrowed by the Debtor from the Secured Party pursuant to the
terms of the Agreement (the "Loan"), the Debtor executed and delivered to the
Secured Party the Debtor's $4,000,000 Term Note dated October 2, 1998 (the
"Original Note"); and
WHEREAS, as of September 14, 1999 the Debtor had repaid $800,000 of
principal to the Secured Party leaving a then outstanding principal balance of
the Loan of $3,200,000; and
WHEREAS, the Secured Party has on the date hereof advanced an additional
$800,000 to the Debtor and agreed to modify the repayment terms of the Loan as
herein set forth; and
WHEREAS, the Secured Party and the Debtor desire to document (i) the
aforesaid additional $800,000 advance to the Debtor and (ii) the modification of
the repayment terms of the Loan by amending the Agreement as herein provided and
having the Debtor execute and deliver a Substitute Term Note in the form of
Exhibit A attached hereto which would take the place of the Original Note.
<PAGE> 2
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Secured Party and the Debtor
agree as follows:
1. Definitions. All capitalized terms used and not otherwise
defined herein shall have the meanings ascribed to them in the Agreement.
2. Amendment to the Agreement.
A. Interest. Section 1(a) of the Agreement is modified by adding the
following at the end thereof:
(iii) Notwithstanding anything contained herein to the
contrary, the Secured Party and the Debtor confirm that as of September
14, 1999, the accrued and outstanding interest on the Loan was $53,304.11
which shall be paid to the Secured Party on October 1, 1999. Interest on
the outstanding principal balance of the Loan ($4,000,000 as of September
15, 1999) shall be payable as provided in the Agreement with all interest
which shall accrue thereon from September 15, 1999 through September 30,
1999 being due and payable on October 1, 1999 together with the aforesaid
outstanding interest which accrued on the Loan prior to September 15,
1999.
B. Term Note; Installment Payments. From and after September 15,
1999 the provisions of Section 1(b) of the Agreement shall be replaced by the
following:
(b) Term Note; Installment Payments.
(i) From and after September 15, 1999, the Debtor's
obligations to repay the Loan shall be evidenced by that certain
$4,000,000 Substituted Term Note dated as of September 15, 1999 made by
the Debtor to the order of the Secured Party which shall be delivered to
the Secured Party in substitution for the original $4,000,000 Term Note
made by the Debtor to the order of the Secured Party on October 2, 1998.
The defined term "Term Note" as used in the Agreement shall mean the
aforesaid $4,000,000 Substituted Term Note.
(ii) The principal of the Loan will be repaid in nine
(9) payments as follows: (a) Two Hundred Thousand Dollars ($200,000) shall
be paid on the first (1st) day of each month commencing on October 1, 2001
and
-2-
<PAGE> 3
continuing to and including April 1, 2002; (b) One Hundred Thousand
Dollars ($100,000) shall be paid on May 1, 2002; and (c) the balance,
together with all unpaid amounts due hereunder or under the Financing
Statements, as herein defined, shall be paid on October 1, 2003 or on such
earlier date that the Loan becomes due and payable as a result of
acceleration as provided herein (the "Maturity Date"). Notwithstanding the
foregoing, if at any time prior to October 1, 2001, the Retained Earnings
of the Debtor, calculated in accordance with generally accepted accounting
principals, increase to One Million Dollars ($1,000,000) or more above the
Debtor's Retained Earnings as of June 30, 1999 (such event herein called
the "Triggering Event") then the principal payments set forth above as
being due on October 1, 2001 through May 1, 2002 shall be accelerated and
become due in consecutive monthly installments as set forth above payable
on the 1st day of each month commencing on the 1st day of the second (2nd)
month following the month in which the Triggering Event shall occur.
3. Substitute Term Note. Simultaneously with the execution of this
Amendment to Loan and Security Agreement and Term Note, the Debtor has executed
and delivered to the Secured Party the Debtor's $4,000,000 Substitute Term Note
(the "Substitute Term Note") which shall be substituted for the Original Note.
Notwithstanding the aforesaid substitution of the Substitute Term Note for the
Original Note, the Debtor agrees to pay to the Secured Party on October 1, 1999
the $53,304.11 of interest which accrued and remains unpaid on the outstanding
principal balance of the Original Note through September 14, 1999.
4. Cross Reference in Financing Agreements. All references in the
Financing Agreements to the "Agreement: and the "Term Note" shall be deemed to
mean and refer to the Agreement, and the Substitute Term Note, as amended hereby
and as may be further amended from time to time.
5. Ratification of Obligations; No Defaults. As modified hereby, the
Agreement and the Note and all of the Financing Agreements are hereby ratified
and confirmed by the Borrower and the Lender and every provision, covenant,
warranty, representation, condition, obligation, right and power contained in
and under the Agreement, the Note and the other Financing Agreements, as amended
hereby, shall continue in full force and
-3-
<PAGE> 4
effect. Without limiting the generality of the foregoing, Borrower hereby
represents and warrants that as of the date hereof, after giving effect to this
Amendment (i) there exists no Default or Event of Default and (ii) there exists
no right of offset, defense, counterclaim, claim or objection in its favor as
against the Lender with respect to the Agreement, the Note or any of the other
Financing Agreements.
6. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7. Manner of Execution. Telefacsimile transmissions of any executed
original document and/or retransmission of any executed telefacsimile
transmission shall be deemed to be the same as the delivery of an executed
original. At the request of any party hereto, the other parties shall confirm
telefacsimile transmissions by executing duplicate original documents and
delivering the same to the requesting party or parties.
IN WITNESS WHEREOF, the Lender and the Borrower have caused this Amendment
to Loan and Security Agreement and Note to be duly executed by their respective
duly authorized officers as of the date first above written.
GUNTHER PARTNERS, LLC GUNTHER INTERNATIONAL, LTD.
By: By:
--------------------------- -------------------------------
Name: Name:
Title: Title:
Hereunto Duly Authorized Hereunto Duly Authorized
-4-
<PAGE> 5
EXHIBIT A
---------
SUBSTITUTE TERM NOTE
--------------------
$4,000,000 September 15, 1999
Norwich, Connecticut
For value received, the undersigned, Gunther International, Ltd. (the
"Borrower") promises to pay to the order of GUNTHER PARTNERS, LLC ("Lender") at
the office of its agent, c/o Thomas M. Steinberg, Tisch Family Interests, 667
Madison Avenue, New York, New York, 10021 or at such other place as Lender may
designate, the principal sum of FOUR MILLION DOLLARS ($4,000,000), together with
interest on the unpaid balance of this Note at the rate of eight percent (8%)
per annum, beginning on the date hereof, before or after maturity or judgment,
which interest shall be computed on the basis of a 360-day year and actual days
elapsed, together with all taxes levied or assessed on this Note or the debt
evidenced hereby against Lender, and together with all costs, expenses and
reasonable attorneys' fees incurred in the collection of this Note, or to
enforce or foreclose any security agreement or other document including, without
limitation, the Agreement (as hereinafter defined), securing or relating to this
Note, or in protecting or defending the lien of said security agreement or other
document, or in any
-5-
<PAGE> 6
litigation or matter arising from or connected with said
security agreement, other document, or this Note. This Note is the Term Note
referred to in, and is entitled to the benefits of, that certain Loan and
Security Agreement dated October 2, 1998 between Borrower and Lender as amended
by that certain Amendment to Loan Agreement and Term Note dated the date hereof
(such Loan and Security Agreement as so modified and as the same may be further
amended from time to time, the "Agreement"). Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to them in the
Agreement. The Agreement, among other things, contains provisions for (i)
acceleration of the maturity of this Note upon the happening of certain stated
events, (ii) for prepayments on account of principal hereof prior to the
maturity of this Note upon the terms and conditions specified in the Agreement
and (iii) the payment of interest at the Default Rate under certain
circumstances. The Agreement and all other instruments either relating to or
securing the indebtedness evidenced hereby are made a part of this Note and
deemed incorporated in full.
Interest shall be paid on the first day of each calendar quarter beginning
October 1, 1999, and continuing on the first day of each April, July, October
and January thereafter, until the principal balance with accrued interest
thereon is paid in
-6-
<PAGE> 7
full. Principal shall be paid in nine payments as follows:
(a) Two Hundred Thousand Dollars ($200,000) shall be paid on the first day of
each month commencing on October 1, 2001 and continuing to and including April
1, 2002; (b) One Hundred Thousand Dollars ($100,000) shall be paid on May 1,
2002 and (c) the balance together with all accrued and unpaid interest and all
other unpaid amounts due hereunder or under the Financing Agreements, shall be
due and payable on October 1, 2003 or on such earlier date that this Note
becomes due and payable as a result of acceleration as provided in the Agreement
(the "Maturity Date"). Notwithstanding the foregoing, if at any time prior to
October 1, 2001, the Retained Earnings of the Borrower, calculated in accordance
with generally accepted accounting principals, increase to One Million Dollars
($1,000,000) or more above the Borrower's Retained Earnings as of June 30, 1999
(such event herein called the "Triggering Event") then the principal payments
set forth above as being due on October 1, 2001 through May 1, 2002 shall be
accelerated and become due in consecutive monthly installments as set forth
above payable on the 1st day of each month commencing on the 1st day of the
second (2nd) month following the month in which the Triggering Event shall
occur.
Upon the occurrence of an Event of Default under and as defined in the
Agreement, the entire indebtedness, with accrued
-7-
<PAGE> 8
interest thereon, due under this Note, shall, at the option of Lender, become
immediately due and payable without demand or notice of any kind.
If any amount due hereunder is not paid within ten (10) days after the
date it is due, without in any way affecting Lender's right to accelerate this
Note, a late charge equal to five percent (5%) of said amount shall be assessed
against Borrower for each month that said amount is late, and shall be
immediately due and payable without demand or further notice of any kind.
Borrower hereby grants to Lender a lien and right of setoff for all of
Borrower's liabilities to Lender under this Note and the Agreement upon and
against all the deposits, credits, collateral and property of Borrower, now or
hereinafter in the possession or control of Lender or in transit to it. Lender
may, at any time after the occurrence, and during the continuance, of an Event
of Default, apply or set off the same, or any part thereof, to any liability of
Borrower, whether or not matured or demanded.
Notwithstanding any provisions of this Note to the contrary, the rate of
interest to be paid by Borrower to Lender under this Note shall not exceed the
highest or the maximum rate of interest permitted to be charged by Lender under
applicable
-8-
<PAGE> 9
laws. Any amounts paid by Borrower to Lender in excess of such rate shall be
deemed to be partial prepayments of principal hereunder.
No delay or omission by Lender in exercising any right hereunder, nor
failure by Lender to insist upon the strict performance of any terms herein,
shall operate as a waiver of such right, any other right hereunder, or any terms
herein. No waiver of any right shall be effective unless in writing and signed
by Lender, nor shall a waiver on one occasion be constituted as a bar to, or
waiver of, any such right on any future occasion.
BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY SUIT, ACTON
OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO
THE FINANCING TRANSACTIONS OF WHICH THIS NOTE IS A PART AND/OR THE ENFORCEMENT
OF ANY OF LENDER'S RIGHTS AND REMEDIES. BORROWER ACKNOWLEDGES THAT IT MAKES THIS
WAIVER KNOWINGLY, VOLUNTARILY AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE
RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEYS. NO PARTY TO THIS NOTE HAS
AGREED WITH OR REPRESENTED TO ANY OTHER PARTY HERETO THAT THE PROVISIONS OF THIS
SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
BORROWER ACKNOWLEDGES THAT THE LOAN EVIDENCED BY THIS NOTE IS A COMMERCIAL
TRANSACTION AND WAIVES ITS RIGHTS TO NOTICE AND
-9-
<PAGE> 10
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
BANK MAY DESIRE TO USE, and further waives diligence, demand, presentment for
payment, notice of nonpayment, protest, and notice of protest, and notice of any
renewals or extensions of this Note, and all rights under any statute of
limitations.
This Note shall be governed by and construed in accordance with the laws
of the State of Connecticut.
This Note is delivered in substitution for that certain $4,000,000 Term
Note dated October 2, 1998 made by the Borrower to the order of the Lender.
GUNTHER INTERNATIONAL, LTD.
By:
------------------------
Name:
Title:
-10-
<PAGE> 1
AMENDMENT AND CONFIRMATION OF SUBORDINATION AND
INTERCREDITOR AGREEMENT
THIS AMENDMENT AND CONFIRMATION OF SUBORDINATION AND INTERCREDITOR
AGREEMENT dated as of the 15th day of September, 1999 between GUNTHER
PARTNERS, LLC ("GP"), and JUNE H. GENEEN, PHIL E. GILBERT, JR., THOMAS W.
KEESEE and the UNITED STATES TRUST COMPANY OF NEW YORK, as Co-Executors of
the Estate of Harold S. Geneen, Late of New York, New York (collectively, the
"Estate").
W I T N E S S E T H:
WHEREAS, GP and the Estate are parties to a Subordination and
Intercreditor Agreement (the "Subordination Agreement") dated as of October 2,
1998, pursuant to which the Estate agreed to subordinate its security interest
and lien in and to the Collateral, as defined in the Subordination Agreement,
granted to it by Gunther International, Ltd. ("Gunther") to the lien and
security interest of GP in and to the Collateral granted to it by Gunther
International, Ltd., as security for the Primary Obligations, as defined in the
Subordination Agreement; and
WHEREAS, GP has agreed to (i) relend to Gunther $800,000 which Gunther had
previously repaid under the Priority Loan bringing the outstanding principal
balance of the Property Loan back to $4,000,000 and (ii) modify the repayment
terms of the Priority Loan as provided in the Amendment to Loan and Security
Agreement and Term Note dated as of the date hereof between GP and Gunther (the
"Priority Loan Amendment") (a copy of which Priority Loan Amendment has been
delivered to the Estate); and
WHEREAS, in connection with GP's entering into the Priority Loan
Amendment, GP and the Estate have agreed to amend and confirm the Subordination
Agreement as herein provided.
NOW, THEREFORE, GP, the Estate and, by its consent and acknowledgement
hereto, Gunther hereby agree as follows:
1. Definitions. All capitalized terms used herein which are not
otherwise defined herein shall have the meanings ascribed to them in the
Subordination Agreement.
<PAGE> 2
2. Amendments to Subordination Agreement.
(i) The term "Loan Agreement" as used in the Subordination Agreement
shall mean the Loan Agreement as modified by the Priority Loan Amendment and as
may be further modified from time to time.
(ii) The term "Priority Note" as used in the Subordination Agreement
shall mean the Priority Note as modified by the Priority Loan Amendment and as
may be further modified from time to time.
3. Ratification. Except as modified hereby, all of the terms, covenants
and conditions of the Subordination Agreement are hereby confirmed, ratified and
approved in all respects and shall continue in full force and effect.
4. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5. Manner of Execution. Telefacsimile transmissions of any executed
original document and/or retransmission of any executed telefacsimile
transmission shall be deemed to be the same as the delivery of an executed
original. At the request of any party hereto, the other parties shall confirm
telefacsimile transmissions by executing duplicate original documents and
delivering the same to the requesting party or parties.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Confirmation of Subordination Agreement to be duly executed as of the day and
year first above written.
GUNTHER PARTNERS, LLC
By:
- ---------------------------- -------------------------------
Name: Thomas J. Tisch
Manager
- ----------------------------
Name:
-2-
<PAGE> 3
THE ESTATE OF
HAROLD S. GENEEN
By:
- ---------------------------- -----------------------------
Name: June H. Geneen,
Its Co-Executor
- ----------------------------
Name:
- ---------------------------- By: _____________________________
Name: Phil E. Gilbert, Jr.
Its Co-Executor
- ----------------------------
Name:
By: _____________________________
- ----------------------------
Name: Thomas W. Keesee,
Its Co-Executor
- ----------------------------
Name:
By: UNITED STATES TRUST
COMPANY OF NEW YORK,
Its Co-Executor
- ---------------------------- By: _____________________________
Name: Name:
Title:
- ----------------------------
Name:
The undersigned acknowledges and accepts the foregoing as of the 15th day
of September, 1999.
GUNTHER INTERNATIONAL, LTD.
By: ______________________________
Name:
Title:
Hereunto Duly Authorized
-3-
<PAGE> 4
STATE OF NEW YORK )
) ss. October __, 1999
COUNTY OF )
Personally appeared _______________, signer and sealer of the foregoing
instrument personally known to me (or satisfactorily proven) who acknowledged
that he is the __________ of GUNTHER PARTNERS LLC, is duly authorized to execute
said instrument and further acknowledged the same to be his free act and deed as
___________ of GUNTHER PARTNERS, LLC, and the free act and deed of said limited
liability company, before me, the undersigned officer.
Name:
Notary Public
My Commission Expires:
-------------------
STATE OF NEW YORK )
) ss:
COUNTY OF )
On this __ day of October, 1999, 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.
----------------------------------------
Name:
Notary Public
My Commission Expires: _________________
-4-
<PAGE> 5
STATE OF NEW YORK )
) ss:
COUNTY OF )
On this __ day of October, 1999, 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.
----------------------------------------
Name:
Notary Public
My Commission Expires: _________________
STATE OF NEW YORK )
) ss:
COUNTY OF )
On this __ day of October, 1999, before me, the undersigned officer,
personally appeared THOMAS W. KEESEE, 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.
----------------------------------------
Name:
Notary Public
My Commission Expires: _________________
-5-
<PAGE> 6
STATE OF NEW YORK )
) ss:
COUNTY OF )
On this __ day of October, 1999, 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 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.
----------------------------------------
Name:
Notary Public
My Commission Expires: _________________
STATE OF CONNECTICUT )
) ss. October __, 1999
COUNTY OF )
Personally appeared _________________________, signer and sealer of the
foregoing instrument personally known to me (or satisfactorily proven) who
acknowledged that he/she as ___________________ of GUNTHER INTERNATIONAL, LTD.,
is duly authorized to execute said instrument and further acknowledged the same
to be his/her free act and deed as ___________________ of GUNTHER INTERNATIONAL,
LTD., and the free act and deed of said GUNTHER INTERNATIONAL, LTD., before me,
the undersigned officer.
----------------------------------------
Name:
Notary Public
My Commission Expires: _________________
-6-
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<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 431,092
<SECURITIES> 0
<RECEIVABLES> 1,216,426
<ALLOWANCES> 23,400
<INVENTORY> 1,211,637
<CURRENT-ASSETS> 3,490,515
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0
0
<COMMON> 4,292
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