<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
FORM 10-KSB/A
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended March 31, 1998.
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________to
____________________________.
Commission file number: 0-22994
GUNTHER INTERNATIONAL, LTD.
(Name of small business issuer in its charter)
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<S> <C>
DELAWARE 51-0223195
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
One Winnenden Road
Norwich, Connecticut 06360
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number: (860) 823-1427
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
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<CAPTION>
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
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None
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SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, $.001 Par Value
Common Stock Purchase Warrants
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [ ]
No [ X ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Registrant's revenues for the most recent fiscal year were $15,084,819.
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of January 5, 1999, based upon the closing sale price of such
stock on that date as reported by the National Quotation Bureau, was $2,532,219.
The number of shares of the Registrant's Common Stock outstanding as of January
5, 1999 was 4,291,769.
DOCUMENTS INCORPORATED BY REFERENCE. NONE.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TABLE OF CONTENTS
PART II
Item 6. Management's Discussion and Analysis or Plan of Operations
Summary of Recent Events .......................... 1
Summary Financial Data ............................. 2
Results of Operations .............................. 3
Liquidity and Capital Resources .................... 4
Inflation .......................................... 5
Forward-Looking Statements ......................... 5
Year 2000 .......................................... 5
Item 7. Financial Statements .............................. 6
PART IV
Item 13. Exhibits and Reports on Form 8-K.................... 7
Signatures ......................................... 10
Index to Financial statements ...................... F-1
(i)
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The undersigned registrant hereby amends its Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1998 to amend Items 6 and 7 of
Part II and Item 13 of Part III, as set forth in this amendment.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
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.
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.
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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.
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.
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Year Ended Year Ended Year Ended
March 31, 1998 March 31, 1997 March 31, 1996
-------------- -------------- --------------
(As Restated) (As Restated)
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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)
============ ============ ============
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<CAPTION>
1998 1997
---- ----
(As Restated) (As Restated)
<S> <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
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2
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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 which
caused an increase in the labor and overhead cost components for each system.
There were also cost increases averaging approximately 4% for materials. The
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.
3
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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 was bifurcated into two separate
subfacilities (hereinafter referred to as "Facility A" and "Facility B").
Facility A had a maximum borrowing capacity of $1,750,000 and Facility B had 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 were 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 Executors
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 contained several affirmative and
negative covenants pursuant to which the Company, among other things, was
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 violated these covenants and constituted an event of default under the
Revolving Credit Facility.
As previously discussed, all obligations to the Bank and to the
Company's third party service provider were paid in connection with the October
2, 1998 $5.7 million comprehensive financing transaction.
4
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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 the 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 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.
5
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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.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this item are presented on pages
F-1 through F-20 immediately after the signature page of this report.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits required by Item 601 of Regulation S-B:
3.1 Restated Certificate of Incorporation of the Company (filed as
Exhibit 3(i)(a) to the Company's Registration Statement on
Form SB-2, Commission File No. 33-70052-B, and incorporated
herein by reference).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Company (filed as Exhibit 3(i)(b) to the
Company's Registration Statement on Form SB-2, Commission File
No. 33-70052-B, and incorporated herein by reference).
3.3 Certificate of Amendment of Restated Certificate of
Incorporation (the form of which was filed as Exhibit 3(i)(c)
to the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and is incorporated herein by
reference).
3.4 By-Laws of the Company, as amended (filed as Exhibit 3(ii) to
the Company's Registration Statement on Form SB-2, Commission
File No. 33-70052-B, and incorporated herein by reference).
10.1 Recapitalization Agreement dated September 4, 1992 (filed as
Exhibit 10(a) to the Company's Registration Statement on Form
SB-2, Commission File No. 33-70052-B, and incorporated herein
by reference).
10.2 Underwriting Agreement, dated December 20, 1993, by and among
the Company, JW Charles Securities, Inc. and Corporate
Securities Group, Inc. (the form of which was filed as Exhibit
1 to the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and is incorporated herein by
reference).
10.3 Stock Subscription Warrant, issued September 4, 1992,
entitling Park Investment Partners, Inc. to purchase 102,000
shares of the Company's Common Stock at $0.375 per share (the
"Warrant Price") (filed as Exhibit 10(h) to the Company's
Registration Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.4 Stock Subscription Warrant, issued September 4, 1992,
entitling Gerald H. Newman to purchase 13,333 shares of the
Company's Common Stock at the Warrant Price (filed as Exhibit
10(i) to the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by
reference).
10.5 Stock Subscription Warrant, issued September 4, 1992,
entitling Harold S. Geneen to purchase 13,333 shares of the
Company's Common Stock at the Warrant Price (filed as Exhibit
10(k) to the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by
reference).
10.6 Stock Subscription Warrant, issued September 4, 1992,
entitling Howard Alper to purchase 26,667 shares of the
Company's Common Stock at the Warrant Price (filed as Exhibit
10(l) to the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by
reference).
10.7 Stock Subscription Warrant, issued September 4, 1992,
entitling Mark Fisher to purchase 6,667 shares of the
Company's Common Stock at the Warrant Price (filed as Exhibit
10(m) to the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by
reference).
10.8 Stock Subscription Warrant, issued September 4, 1992,
entitling Caren Barness to purchase 13,333 shares of the
Company's Common Stock at the Warrant Price (filed as Exhibit
10(n) to the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by
reference).
10.9 Royalty Agreement, dated September 3, 1992, between the
Company and William H. Gunther, Jr. (filed as Exhibit 10(s) to
the Company's Registration Statement on Form SB-2, Commission
File No. 33-70052-B, and incorporated herein by reference).
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10.10 Royalty Agreement, dated September 3, 1992, between the
Company and William H. Gunther III (filed as Exhibit 10(t) to
the Company's Registration Statement on Form SB-2, Commission
File No. 33-70052-B, and incorporated herein by reference).
10.11 Royalty Agreement, dated September 3, 1992, between the
Company and Joseph E. Lamborghini (filed as Exhibit 10(u) to
the Company's Registration Statement on Form SB-2, Commission
File No. 33-70052-B, and incorporated herein by reference).
10.12 Royalty Agreement, dated September 3, 1992, between the
Company and Rufus V. Smith (filed as Exhibit 10(v) to the
Company's Registration Statement on Form SB-2, Commission File
No. 33-70052-B, and incorporated herein by reference).
10.13 Royalty Agreement, dated September 3, 1992, between the
Company and Christine E. Gunther (filed as Exhibit 10(w) to
the Company's Registration Statement on Form SB-2, Commission
File No. 33-70052-B, and incorporated herein by reference).
10.14 Royalty Agreement, dated September 3, 1992, between the
Company and Susan G. Hotkowski (filed as Exhibit 10(x) to the
Company's Registration Statement on Form SB-2, Commission File
No. 33-70052-B, and incorporated herein by reference).
10.15 Letter Agreement, dated September 1, 1992, between the Company
and DataCard (filed as Exhibit 10(ee) to the Company's
Registration Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.16 Promissory Note of the Company, dated September, 1992, to
DataCard, in the amount of $426,501.99 (filed as Exhibit
10(ff) to the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by
reference).
10.17 Third Party Product Service Agreement, dated October 13, 1992,
between the Company and DataCard (filed as Exhibit 10(gg) to
the Company's Registration Statement on Form SB-2, Commission
File No. 33-70052-B, and incorporated herein by reference).
10.18 First Amendment to the Third Party Product Service Agreement,
dated July 2, 1993, between the Company and DataCard. (Filed
as Exhibit 10.31 to the Company's Annual Report on Form
10-KSB/A dated June 26, 1995, and incorporated herein by
reference.)
10.19 Second Amendment to the Third Party Product Service Agreement,
dated February 17, 1994, between the Company and DataCard
(filed as Exhibit 10.32 to the Company's Annual Report on Form
10-KSB/A dated June 26, 1995, and incorporated herein by
reference.).
10.20 Form of Employee Stock Option Plan and Founders Option Plan
(filed as Exhibit 10(kkk) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.21 Warrant, dated October 20, 1993, to purchase 40,000 shares of
Common Stock issued to Mark Fisher (filed as Exhibit 10(vvv)
to the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by
reference).
10.22 Warrant, dated January 9, 1995, to purchase 13,333 shares of
Common Stock issued to Mark Fisher (filed as Exhibit 10.49 to
the Company's Annual Report on Form 10-KSB/A dated June 26,
1995, and incorporated herein by reference).
10.23 Warrant, dated January 12, 1995, to purchase 10,000 shares of
Common Stock issued to Michael Jesselson and Linda Jesselson
Trustees UIT 3/27/84 FOB Samuel Joseph Jesselson (filed as
Exhibit 10.51 to the Company's Annual Report on Form 10-KSB/A
dated June 26, 1995, and incorporated herein by reference).
10.24 Warrant, dated January 12, 1995, to purchase 10,000 shares of
Common Stock issued to Michael Jesselson and Linda Jesselson
Trustees UIT 3/27/84 FOB Roni Aron Jesselson (filed as Exhibit
10.52 to the Company's Annual Report on Form 10-KSB/A dated
June 26, 1995, and incorporated herein by reference).
10.25 Warrant, dated January 12, 1995, to purchase 10,000 shares of
Common Stock issued to Michael Jesselson and Linda Jesselson
Trustees UIT 3/27/84 FOB Jonathan Judah Jesselson (filed as
Exhibit 10.53 to the Company's Annual Report on Form 10-KSB/A
dated June 26, 1995, and incorporated herein by reference).
10.26 Warrant, dated January 12, 1995, to purchase 10,000 shares of
Common Stock issued to Michael Jesselson and Linda Jesselson
Trustees UIT 3/27/84 FOB Maya Ariel Ruth Jesselson (filed as
Exhibit 10.54 to the Company's Annual Report on Form 10-KSB/A
dated June 26, 1995, and incorporated herein by reference).
8
<PAGE> 11
10.27 Warrant, dated January 12, 1995, to purchase 13,333 shares of
Common Stock issued to Michael Jesselson and Linda Jesselson
Trustees UIT 3/27/84 FOB Maya Ariel Ruth Jesselson (filed as
Exhibit 10.55 to the Company's Annual Report on Form 10-KSB/A
dated June 26, 1995, and incorporated herein by reference)..
10.28 Non-exclusive License Agreement between the Company and Bell &
Howell (filed as Exhibit 10(.qaii) to the Company's
Registration Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.29 Xerox Worldwide Printing Systems Partners Program Partnership
Guide dated August 1990 (filed as Exhibit 10.64 to the
Company's Annual Report on Form 10-KSB/A dated June 26, 1995,
and incorporated herein by reference).
10.30 Amendment and Restatement of Development Agreement made as of
December 31, 1995 between the Company and CII (filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB
dated February 12, 1996 and incorporated herein by reference).
10.31 Building lease between the Company and UNC Incorporated, dated
July 31, 1996 (filed as Exhibit 10.3) to the Company's
Quarterly Report on Form 10-QSB dated November 12, 1996 and
incorporated herein by reference).
10.32 Promissory Note dated September 9, 1996 between James H.
Whitney, CEO, Gunther International, Ltd. and the Company
(filed as Exhibit 10.4 to the Company's Quarterly Report on
Form 10-QSB dated November 12, 1996 and incorporated herein
by reference).
10.33 Revolving Loan and Security Agreement
(filed as Exhibit 10.1 to the Company's Quarterly Report in
Form 10-QSB dated August 13, 1996 and incorporated herein by
reference).
10.34 Subordination Agreement (filed as Exhibit 10.2 to the
Company's Quarterly Report in Form 10-QSB dated August 13,
1996 and incorporated herein by reference).
10.35 Second Amendment to the Revolving Loan and Security Agreement
dated June 26, 1997 (previously filed as Exhibit 10.35 to the
Company's Annual Report on Form 10-KSB dated July 14, 1998
and incorporated herein by reference).
10.36 Second Reaffirmation of Limited Guaranty (previously filed as
Exhibit 10.36 to the Company's Annual Report on Form 10-KSB
dated July 14, 1998 and incorporated herein by reference).
10.37 Amended and Restated Pledge Agreement (previously filed as
Exhibit 10.37 to the Company's Annual Report on Form 10-KSB
dated July 14, 1998 and incorporated herein by reference).
10.38 Non-exclusive License Agreement By and Between the
Hewlett-Packard Company and Gunther International Incorporated
for Envelope Printing Technology dated May 6, 1997 (previously
filed as Exhibit 10.38 to the Company's Annual Report on Form
10-KSB dated July 14, 1998 and incorporated herein by
reference).
24.1 Power of Attorney pursuant to which the Company's Annual
Report on Form 10-KSB dated July 14, 1998 was executed
(previously filed as Exhibit 24.1 to the Company's Annual
Report on Form 10-KSB dated July 14, 1998 and incorporated
herein by reference).
24.2 Power of Attorney pursuant to which Amendment No. 1 has been
executed.
b. Reports on Form 8-K.
On June 23, 1998, the Company filed a Current Report on Form 8-K
reporting that it did not expect to release its financial results for the fiscal
year ended March 31, 1998 until later in July 1998. During the course of the
year-end audit, the Company's auditors, Arthur Andersen LLP, identified errors
in the accumulation of contract costs and certain items of expense that were not
properly accounted for. The Company also reported that it expects to restate its
results for each of the first three quarters of fiscal 1998 and cautioned
investors not to rely on the previously issued financial statements for those
periods.
9
<PAGE> 12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
GUNTHER INTERNATIONAL, LTD.
By: /s/ Michael M. Vehlies
----------------------
Michael M. Vehlies
Chief Financial Officer and Treasurer
(On Behalf of the Registrant and as Principal
Financial and Accounting Officer)
Date: January 13, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and dates indicated.
<TABLE>
<CAPTION>
Signature: Title: Date:
- ---------- ------ -----
<S> <C> <C>
/s/ Marc I. Perkins Vice Chairman, Chief Executive January 13, 1999
- ------------------- Officer (Principle Executive
Marc I. Perkins Officer)
/s/ Michael M. Vehlies January 13, 1999
- ----------------------
Michael M. Vehlies
Attorney-in-Fact for:
J. Kenneth Hickman Director January 13, 1999
Gerald H. Newman Director January 13, 1999
Robert Spiegel Director January 13, 1999
Thomas M. Steinberg Director January 13, 1999
</TABLE>
10
<PAGE> 13
INDEX TO FINANCIAL STATEMENTS
Page No.
--------
<TABLE>
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheets as of March 31, 1998 and 1997 F-3
Statements of Operations for the Years Ended March 31, 1998,
1997 and 1996 F-5
Statements of Stockholders' Equity (Deficit) for the Years Ended
March 31, 1998, 1997 and 1996 F-6
Statements of Cash Flows for the Years Ended March 31, 1998,
1997 and 1996 F-7
Notes to Financial Statements F-8
</TABLE>
F-1
<PAGE> 14
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
F-2
<PAGE> 15
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.
F-3
<PAGE> 16
Gunther International, Ltd.
Balance Sheets (continued)
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.
F-4
<PAGE> 17
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.
F-5
<PAGE> 18
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 Additional
$.001 Par Value $.001 Par Value 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.
F-6
<PAGE> 19
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.
F-7
<PAGE> 20
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 a 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 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.
F-8
<PAGE> 21
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.
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.
F-9
<PAGE> 22
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.
F-10
<PAGE> 23
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
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.
F-11
<PAGE> 24
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>
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>
F-12
<PAGE> 25
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>
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> <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.
F-13
<PAGE> 26
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 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 personal 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.
F-14
<PAGE> 27
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 entitled 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. 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.
F-15
<PAGE> 28
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). SFAS 123 requires the measurement of the
fair value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to financial statements. The Company has
determined that it will continue to account for stock-based compensation for
employees under Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS 123. The Company has computed the pro
forma disclosures required under SFAS 123 for options granted in fiscal 1996 and
1997 using the Black-Scholes option pricing model prescribed by SFAS 123. The
weighted average assumptions used are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Risk free interest rate 6.58% 5.88%
Expected dividend yield None None
Expected lives 5 years 5 years
Expected volatility 64% 64%
</TABLE>
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates of awards under these
plans consistent with the method of SFAS 123, the Company's net 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 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.
F-16
<PAGE> 29
A summary of the status of the Company's two stock option plans at
March 31, 1998, 1997 and 1996 and changes during the years then ended is
presented in the table below:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- ------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price Shares Ex Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 220,000 $2.66 255,000 $2.79 275,000 $3.12
Granted 35,000 3.63 20,000 7.38 -- --
-------- ----- -------- ----- ------- -----
Outstanding at end of year 255,000 $2.79 275,000 $3.12 275,000 $3.12
======== ===== ======== ===== ======= =====
Exercisable at end of year 136,666 $2.29 190,000 $2.59 250,000 $2.87
======== ===== ======== ===== ======= =====
Weighted average fair value
of options granted $ 2.16 $ 4.45 N/A
======== ======== =======
</TABLE>
9. Class B Senior, Non-Convertible, Redeemable Preferred Stock:
The Company's certificate of incorporation previously authorized the
issuance of 500 shares of Class B senior, non-convertible, redeemable preferred
stock. The Class B senior, non-convertible, redeemable preferred stock (Class B
preferred stock) was issued to Connecticut Innovations, Inc. in connection with
the Development Agreement (see Note 11). The holder of Class B preferred stock
was not entitled to receive dividends nor to vote upon any matter submitted to
stockholders, except (i) as required by applicable law and (ii) the number of
authorized or terms of Class B preferred stock could not be changed without the
consent of the holders of all such shares.
Each share of Class B preferred stock was required to be redeemed by
the Company at a redemption price of $1,000 per share ($500,000 at March 31,
1995), to the extent there were legally available funds for such purpose, upon
the occurrence of certain events. The Company was required to pay the redemption
price in three equal installments due on the third, sixth and ninth month
following the redemption event. If sufficient funds were not legally available
to redeem all of the shares of Class B preferred stock then due to be redeemed,
any and all unredeemed shares were to be carried forward and redeemed to the
full extent the Company had funds legally available for such purpose.
In the event of any liquidation, dissolution or winding up of the
affairs of the Company, each share of Class B preferred stock had a preference
of $1,000 per share ($500,000 at March 31, 1995) to any distribution of any of
the assets or surplus funds of the Company to the holders of any class or series
of preferred stock ranking junior to the Class B preferred stock, or the common
stock of the Company.
Effective December 31, 1995, the Company entered into a new agreement
with the holder of the Class B preferred stock whereby the stockholder agreed to
surrender all outstanding shares of Class B preferred stock (see Note 11). The
Company recorded this surrender net of related expenses, as additional paid-in
capital.
10. Related Party Transactions:
During the year ended March 31, 1996, the Company borrowed $100,000
from an individual who is a stockholder of the Company. The note bears interest
at 8.5% 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.
F-17
<PAGE> 30
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 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> <C>
1999 $100,000
2000 106,250
2001 125,000
2002 137,500
2003 131,250
--------
$600,000
========
</TABLE>
F-18
<PAGE> 31
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.
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.
F-19
<PAGE> 32
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 are derived from a few customers. The
majority of the Company's customers are property and casualty insurance
companies. During the years ended March 31, 1998, 1997 and 1996, sales to one
customer accounted for 21%, 28% and 17% of net sales, respectively.
F-20
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does hereby
appoint and constitute Marc I. Perkins and Michael M. Vehlies and each of them
as his agent and attorney-in-fact to execute in his name, place and stead
(whether on behalf of the undersigned individually or as an officer or director
of Gunther International, Ltd. or otherwise) Amendment No. 1 to the Annual
Report on Form 10-KSB/A of Gunther International, Ltd. respecting its fiscal
year ended March 31, 1998 and any and all further amendments thereto and to
file such report and any further amendments thereto with the Securities and
Exchange Commission. Each of the said attorneys shall have the power to act
hereunder with or without the other.
IN WITNESS WHEREOF, the undersigned have executed this instrument this 8th
day of January, 1999.
/s/ J. Kenneth Hickman
- --------------------------
J. Kenneth Hickman
/s/ Gerald H. Newman
- --------------------------
Gerald H. Newman
/s/ Marc Perkins
- --------------------------
Marc Perkins
/s/ Robert Spiegel
- --------------------------
Robert Spiegel
/s/ Thomas M. Steinberg
- --------------------------
Thomas M. Steinberg
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 572,368
<SECURITIES> 0
<RECEIVABLES> 349,528
<ALLOWANCES> 23,400
<INVENTORY> 1,256,852
<CURRENT-ASSETS> 3,118,386
<PP&E> 1,714,978
<DEPRECIATION> 764,934
<TOTAL-ASSETS> 8,036,929
<CURRENT-LIABILITIES> 7,981,871
<BONDS> 1,884,551
0
0
<COMMON> 4,292
<OTHER-SE> (1,833,785)
<TOTAL-LIABILITY-AND-EQUITY> 8,036,929
<SALES> 8,630,103
<TOTAL-REVENUES> 15,084,819
<CGS> 7,030,092
<TOTAL-COSTS> 11,801,784
<OTHER-EXPENSES> 618,735
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 245,552
<INCOME-PRETAX> (2,632,115)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,632,115)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 261,700
<SECURITIES> 0
<RECEIVABLES> 621,512
<ALLOWANCES> 23,400
<INVENTORY> 1,262,435
<CURRENT-ASSETS> 3,616,493
<PP&E> 1,516,306
<DEPRECIATION> 483,069
<TOTAL-ASSETS> 8,663,040
<CURRENT-LIABILITIES> 5,661,800
<BONDS> 2,213,618
0
0
<COMMON> 4,284
<OTHER-SE> 783,338
<TOTAL-LIABILITY-AND-EQUITY> 8,036,929
<SALES> 8,716,473
<TOTAL-REVENUES> 13,628,267
<CGS> 5,573,323
<TOTAL-COSTS> 9,662,181
<OTHER-EXPENSES> 435,404
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 184,426
<INCOME-PRETAX> (1,334,690)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,334,690)
<DISCONTINUED> 0
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</TABLE>
