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, 2001. [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER: 0-22994 GUNTHER INTERNATIONAL, LTD. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) DELAWARE 51-0223195 (STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.) ORGANIZATION) ONE WINNENDEN ROAD NORWICH, CONNECTICUT 06360 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) ISSUER'S TELEPHONE NUMBER: (860) 823-1427 SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- None SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT: COMMON STOCK, $.001 PAR VALUE (TITLE OF CLASS) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The Registrant's revenues for the most recent fiscal year were $24.4 million. The aggregate market value of voting stock held by non-affiliates of the Registrant, based upon the average of the reported closing bid and asked prices of such stock on July 24, 2001, as reported by the OTC Bulletin Board, was $1.6 million. The number of shares of the Registrant's Common Stock outstanding as of July 24, 2001 was 4,291,769. DOCUMENTS INCORPORATED BY REFERENCE. None. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS PART I Item 1. Description of Business..................................... 1 General................................................... 1 Development of the Business............................... 1 Finishing Systems......................................... 2 Strategy.................................................. 3 Systems................................................... 4 Inc.jet................................................... 6 Marketing and Sales......................................... 7 Customers................................................... 7 Manufacturing............................................... 8 Installation and Customer Service........................... 8 Research and Development.................................... 9 Competition................................................. 9 Patents and Proprietary Rights.............................. 9 Employees................................................... 10 Item 2. Description of Property..................................... 10 Item 3. Legal Proceedings........................................... 10 Item 4. Submission of Matters to a Vote of Security Holders......... 11 PART II Item 5. Market for Common Equity and Related Stockholder Matters.... 12 Item 6. Management's Discussion and Analysis or Plan of Operation... 13 Summary Financial Data.................................... 13 Results of Operations..................................... 14 Liquidity and Capital Resources........................... 15 Inflation................................................. 16 Forward Looking Statements................................ 16 Item 7. Financial Statements........................................ 16 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 16 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act....................................................... 17 Item 10. Executive Compensation...................................... 19 Item 11. Security Ownership of Certain Beneficial Owners and Management................................................ 21 Item 12. Certain Relationships and Related Transactions.............. 23 PART IV Item 13. Exhibits and Reports on Form 8-K............................ 26 Signatures............................................................ 30 Index to Financial statements......................................... F-1 (i) 3 The Registrant hereby amends its Annual Report on Form 10-KSB for the fiscal year ended March 31, 2001 to amend Items 9, 10, 11 and 12 of Part III as set forth in this amendment. PART I ITEM 1. DESCRIPTION OF BUSINESS. GENERAL The Company designs, develops, assembles, markets and services high-speed systems that automatically assemble printed documents, fold, staple or bind the documents, as required, and insert completed documents into appropriate envelopes for mailing or other distribution. The Company's systems are modular, and may be reconfigured in accordance with customer specifications, and are controlled by Company developed software. The Company also designs, manufactures and markets high-speed ink-jet printers to original equipment manufacturers (OEM), who incorporate the printers into tabletop inserters and folders, copiers, stand alone printers and other applications. In connection with these sales, the Company sells ink to the end-users of the printers. DEVELOPMENT OF THE BUSINESS The Company was incorporated under the laws of the State of Delaware on March 22, 1978. After an initial period of inactivity, the Company engaged, between 1981 and 1985, with a joint venture partner, in a program to develop an automated system for packaging for distribution of Federal food stamps. Although the Company was unsuccessful in its efforts to obtain a Federal Government contract, the technology it developed was applicable to other uses. In 1985, Aetna Life and Casualty Company requested the Company to develop finishing systems for use in the insurance business and purchased the first systems produced by the Company in 1986. In 1992, the Company completed a restructuring that resulted in the infusion of approximately $2,257,500 in equity financing in exchange for shares of common stock, warrants to purchase common stock and convertible preferred stock. The convertible preferred stock was fully converted into common stock upon completion of the initial public offering of the Company, which was completed during December 1993 and January 1994. The initial public offering generated net proceeds of $4.6 million. In fiscal 1999, the Company entered into a $5.7 million comprehensive financing transaction with its then-existing senior lender (the "Bank"), the Estate of Harold S. Geneen (the "Estate") and Gunther Partners LLC, the proceeds of which were utilized to restructure and replace the Company's then-existing senior line of credit, fund a full settlement with the Company's third-party service provider and provide additional working capital to fund the Company's ongoing business operations. Under the terms of the transaction, Gunther Partners LLC loaned an aggregate of $4 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, bearing interest at 5.44% per annum, in favor of the Estate evidencing the Company's obligation to repay the amount of the collateral that was liquidated by the Bank. To induce Gunther Partners LLC to enter into the financing transaction, the Company granted Gunther Partners LLC a stock purchase warrant entitling Gunther Partners LLC, 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. 1 4 In addition, the Company, Gunther Partners LLC, the Estate and certain shareholders (Park Investment Partners, Inc. ("Park"), 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 Gunther Partners LLC constituting a majority of the Board of Directors, (ii) one person nominated by the Estate and (iii) one person nominated by Park. Through June 30, 1999, the Company had made principal payments to Gunther Partners LLC aggregating $800,000, plus interest. In September 1999, the Company experienced a deficiency in operating cash flow and Gunther Partners LLC agreed to lend the Company an additional $800,000 and to otherwise restructure the payment terms of the note. As amended, the outstanding balance due Gunther Partners LLC is due in principal installments of $200,000 commencing on October 1, 2001 through April 1, 2002; $100,000 on May 1, 2002; and $2,500,000 on October 1, 2003. If, at any time prior to October 1, 2001, the accumulated deficit of the Company improves by $1.0 million or more compared to the amount at June 30, 1999 of $14.4 million (a "Triggering Event"), then the principal payments otherwise due from October 1, 2001 through May 1, 2002 shall be become due in consecutive monthly installments beginning on the first day of the second month following the Triggering Event. On April 4, 2000, the Company borrowed an additional $500,000 from Gunther Partners LLC. In June 2001, the Company entered into a recapitalization agreement (the "Recapitalization Agreement") with the Estate, Gunther Partners LLC and certain other stockholders. The Recapitalization Agreement provides that the Company will effectuate a registered public offering ("Rights Offering") of up to 16,000,000 shares of its Common Stock (the "Offered Shares") to its existing stockholders by subscription right on a pro-rata basis at a subscription price of $0.50 per share. The rights to subscribe to the Offered Shares will be granted at a ratio to be determined by the Board of Directors of the Company (the "Basic Subscription Right"). In addition, the Company's stockholders will be granted the right to "oversubscribe" for additional shares not purchased by other stockholders, up to the total amount of the Offered Shares (the "Oversubscription Right"). In the event that the Company's stockholders, other than Gunther Partners LLC, do not subscribe for and purchase all 16,000,000 of the Offered Shares, Gunther Partners LLC will subscribe for and purchase from the Company in the Rights Offering a number of shares equal to 16,000,000 less the number of shares subscribed for stockholders other than Gunther Partners LLC, up to a maximum of 14,000,000 shares. The net proceeds of the Rights Offering (a minimum of $7 million less offering expenses), will be used to repay in full the notes payable to Gunther Partners LLC ($4.5 million) and a stockholder and director ($500,000), to purchase all notes payable to the Estate for a total of $500,000 and to purchase 919,568 shares of the Company's Common Stock held by the Estate for $137,935 (or $0.15 per share). The balance of the net proceeds from the Rights Offering will be used for general working capital purposes. FINISHING SYSTEMS Advances in computer technology have produced alternatives to the traditional offset printing presses for printing of large quantities of documents. Laser printers take data from computers and transfer the data onto a print drum with a laser beam. Non-impact laser printing allows for variations in the text of each document to be printed. The documents can be personalized and modified as desired. Computer-directed printers are employed, in conjunction with mainframe or personal computers, to produce documents. The largest printers most often are placed in centralized print centers that are near mainframe computers. More recently developed non-impact laser printers that print five to 25 sheets per minute can be placed in any location within offices where personal computers are concentrated. The availability of non-impact laser printers has enabled many businesses that generate large quantities of documents to create "in-house" printing centers. There is a large concentration of non-impact laser printers in the insurance, finance, and banking industries, and government. The ability to generate large quantities of documents has created a new need to automate the assembly, sorting, and distribution of documents, a process referred to as "finishing". Most of these functions have been performed "off line", that is, without intelligent or computer directed machines. This requires substantial labor, and documents cannot be assembled with the same degree of accuracy, completeness, and speed as 2 5 allowed by intelligent machines. The output, or finishing of documents, is referred to as post processing and includes such functions as folding, stapling, binding, booklet making and packaging assembled documents for mailing and other distribution. Automated processing systems also permit quicker turnaround of documents, improve the accuracy and completeness of assembled documents, facilitate the elimination of large inventories of pre-printed forms and enable the operator to make changes in the type of documents being assembled without stopping the assembly process and without incurring the expense of designing special mainframe computer programs. STRATEGY The Company's objective is to capitalize on its position as a pioneer and technology leader in the design and sale of intelligent document finishing and mailing systems and leading edge, high quality, low cost ink jet solutions for end user and OEM applications. The Company's goal is to broaden the range of markets, applications, and customers utilizing these unique technologies while continuing to increase its leadership position in insurance and financial markets. Further, it is the Company's objective to leverage both its well known customer base and the strength of its relationships/alliances with partners like Hewlett-Packard into a dominant position in the growing marketplaces, both end user and OEM, for low cost, high resolution ink jet printing at document processing speeds. The Company has also targeted aggressive expansion of its system service and consumables/supplies businesses. Expanded Marketing Efforts. The Company initially relied principally on contacts within the insurance industry, particularly among large property and casualty insurers, and on the growing reputation of its products to generate sales. More recently, the Company's sales and marketing efforts have actively targeted a far broader range of applications and industries including other types of insurance companies and customers in the banking, finance and health care industries. The Company has continued to experience success in expanding into other markets including government, retail distribution, outsourcing, service bureaus, and others. The Company also continues to generate additional sales to its existing customer base. As much as 50% of the Company's system sales in a given year have been to previous purchasers of the Company's systems and the Company believes that repeat sales and upgrades of existing systems will continue to be an important source of revenue. The Company organizes user group seminars to allow customers to discuss their system requirements with each other and the Company and to collaborate on system design. System Flexibility. The Company remains committed to the objective of providing modular systems to meet customer needs. The Company's systems' modularity offers customers the ability to have a custom designed system assembled from standard components using software written for specific requirements. Such systems are highly flexible and easily upgraded. Focus on Accuracy of Document Assembly. The swift, accurate assembly of documents is critical to customer satisfaction. The Company's systems incorporate technology, including the ability to read various methods of coding on each sheet included in documents, that check for proper page sequence, detect duplicate or missing pages and verify recipients as each document moves down a conveyor. Systems can verify that a given document has been processed properly and maintain a record of the document. The Company continues to emphasize document integrity in all its research, development, and marketing efforts. Focus on Customer Productivity and Costs. The Company focuses its product development efforts on further increasing customer productivity and the reduction of system costs while maintaining the document integrity customers require. Collaborative Development. The Company will continue to collaborate with customers (including organizing and conducting user seminars) in order to develop a better understanding of customer needs and to offer comprehensive solutions. The Company's newest product, the inc.jet imager, was developed as a result of this collaborative effort. 3 6 SYSTEMS The Company's current principal products are the Series III Billing System, the EP-4000 Electronic Publishing System and the MS-6000 Mailing System. The Series III is a high-speed statement and billing system. Up to nine inserts may be added to the primary document prior to envelope insertion. The system features a high-speed primary document feeder/accumulator and an up-stream folder. The EP-4000 processes flat mail and allows documents to be processed in a series of individually processed subgroups. These subgroups can be stapled, bound, matched with other documents and combined for insertion into a large, flat envelope by the EP-4000. The MS-6000 processes folded documents. The MS-6000 can tri-fold up to eight sheets and insert the documents into a No. 10 envelope, and can half-fold up to fifteen sheets and insert the documents into a 6-by-9-inch envelope. Postage is then automatically applied. These systems are typically comprised of some or all of the following component modules: System Control Module, Operator Console and Reading Technology. The System Control Module incorporates an IBM-compatible Pentium CPU with a 2 Gigabyte hard drive, and a ZIP drive for back-up. It performs the system's control functions and operates the system as defined by the customized application program created by the Company after consultations with the customer. The System Control Module communicates with microprocessors located in each module in the system, monitoring all system functions. Upon initiation of operation, the System Control Module triggers the operation of a Laser Reader or a CCD (Charged Coupled Device) Image Reader. After the resulting information is checked against parameters contained in the system's software, a signal is sent to the Feed Module so that the sheet can be fed into the finishing system. A laser reader is a scanning device which uses a laser light source to read bar-code or OMR (Optical Mark Recognition) information. A CCD Image Reader is a scanning device which is used to read bar-code or two dimensional information. In the CCD Image Reader, the code being read is illuminated with ambient light rather than a laser light source. OMR is a paper marking technology used with mailing systems to indicate to the main system how to process the sheets that are assembled into an envelope. The Company was the first to develop processing systems utilizing Laser Readers to scan a bar code to identify each sheet of paper processed. Reading the bar code at over 200 times per second, the System Control Module requires three consecutive identical reads from the Laser Reader before the sheets are fed into the system. Each document set is given a sequence and completeness check from the information in the bar code prior to feeding ("read before feed"). Corrective action, if needed, is taken prior to the assembly or packaging of the document. Systems also may incorporate CCD two dimensional (2D) Image Readers. This reading technology returns a very precise copy of the bar code or 2D image being scanned. The CCD Linear Image Reader transmits the image to be processed by the System Control Module approximately 25 times a second. With this reading technology, large amounts of data can be stored on the page, with reading accuracy and speed the equal of laser reading technology. Microprocessors monitor the sensors in each module and carry out the instructions from the System Control Module, validating that each action initiated has been completed. If an error occurs, i.e., an operation is not completed, a message is sent back to the Operator Console for operator action. The Operator Console communicates all messages from the system's modules to the operator through the use of a CRT (Cathode Ray Tube). Bar code or OMR information, scanned by the Laser Reader or CCD Image Reader, is stored on the System Control Module's hard disk for retrieval and auditing with the system's performance information for reporting purposes. A printer is included with each system to provide a hard copy audit trail and postage reports. Communications software and a modem are provided with each system to permit remote system diagnosis and software updates. 2-D Code. 2-D is an improved method of coding documents, replacing more traditional means such as bar-code or OMR. Unlike linear or one-dimensional bar codes, 2-D code has the ability to represent large 4 7 amounts of information in a small area, thereby making the code less obtrusive and more aesthetic. Data integrity is maintained through the use of 16 or 32 bit Cyclic Redundancy Check (CRC), which is far more powerful than the self-checking within traditional bar codes. F-300 Feeder. The F-300 is a high speed, vacuum fed system. The first stage of the feeder "shingle-feeds" the sheets from the bottom of the bin to the second stage of the feeder. Optimum stack height in the second stage is maintained by microprocessor control of the first stage. A Laser Reader or CCD Linear Image Reader is located in the second stage, where the sheets are read and fed individually at rates of up to 30,000 sheets per hour. In the final stage, the sheets are collected on a conveyor and document set accumulator, which is connected to the next module. Through the use of a diverter, the F-300 can separate particular sheets, such as banners or trailers, from the document prior to collection on the conveyor. Binding Methods. The systems can utilize a variety of binding options, including stitching, stapling, VeloBind and Slip & Grip. Stitching and stapling offers an inexpensive way to fasten from 2 to 100 sheets of paper. VeloBind and Slip & Grip provide the recipient with a recloseable binding and a professional look. Gunther system configurations commonly feature both stitching/stapling and binding modules and make the type of binding decision based on preset application parameters, such as document size or recipient. Folder. This module may be placed up-stream, mid-stream, or down-stream in the conveyor path, depending on the application. The folder may be adjusted to produce C-folds, half-folds, or Z-folds and will dynamically handle 1-15 sheets of paper. Friction Feeder. The Friction Feeder is a versatile feeder which separates and feeds material from the bottom of a stack of up to 24 inches. It efficiently feeds a wide range of material from 20 lb. sheets up to 1/2 inch thick booklets. The single knob separator gate adjustment allows for quick and easy set up and material change over. Inc.jet(TM) Printing. The Series III, EP-4000 and MS-6000 may be configured with multi-head ink jet printing capability to dynamically print envelope addresses, return addresses, specialized messages and bar codes in a variety of font styles and sizes. Flat Enveloper Module. The 10 x 13 Enveloper places the document sets in flat pocket envelopes (flap along short side). The envelopes can range in size from 8 to 10 inches wide to 11 1/4 inches to 13 inches long. The pre-glued, self-sealing envelopes are placed on their short ends, open side up. They are fed one at a time to the insertion station. The envelope is opened, and a receiving shoe is slid into the envelope to form an easy entry for the material. After insertion, the envelope is moved to the sealing station where the flap is sealed. The completed package is then placed onto a conveyor. This module is also capable of exception and oversize document processing. Exception documents can be inserted into the envelope without sealing the flap. Oversize documents can be accumulated and placed directly onto the output conveyor. Flat Metering. This module provides a means for automatically applying postage to flat envelopes of varying thickness up to 180 sheets, thereby avoiding the 0.25" thickness limitation of a standard postage meter. The module applies postage to a self-stick label using a standard postage meter, after which the label is fed to a transfer station and applied to the envelope. System software calculates the weight of each package and automatically applies the correct postage. The postage label can be applied in any corner of the envelope, in either portrait or landscape orientation. Dual Postage Software, Interface, and Meter with Divert. This system component provides two postage meters for intermixed document weight groups. The System Control Modules calculates the amount of postage for each document set using a formula based on sheet count and insert weight previously supplied to the system. The System Control Module transmits directions to the meters for controlling which meter is to be used. If the postage amount is different than the amount set on either meter, the product is deflected into the divert bin. Manifest Mail Software. The most common technique used by the Company systems to meet current United States Postal Service requirements requires the manifest identification and postal zone information to be passed to the system in the bar code. In addition, the customer application prints the manifest identification 5 8 on the address page, above the first line of the address, so that it is visible through the envelope window. The manifest mail software processes the information stored in single or multiple log files and generates reports required by the United States Postal Service. Other alternatives are available to print a manifest identification on the envelopes if the customer cannot print the identification in the envelope window. Convertible Systems. EP and MS systems can be configured to work in both flat and folded modes, using a quick-connect and disconnect 10 x 13 flat enveloper or folded mail enveloper. This feature allows a user to specify either an EP or MS system, depending on the dominant applications, but still retain the ability to run in both flat and folded mode. INC.JET(TM) inc.jet, Inc. is a wholly owned subsidiary of Gunther International, Ltd. that produces an exclusive, environmentally safe letter quality (600 dot-per-inch, or dpi) ink jet printer (Imager) that is designed specifically for high resolution, high speed, low cost industrial printing applications. Initially targeted as an envelope printer to complement the Company's line of intelligent document automation and mail processing systems, the inc.jet(TM) Imager provides a solution to problems that were voiced by current and prospective customers -- high quality personalized printing on envelopes at document automation speeds for a low cost. Secondary concerns were ease of use and maintenance, as well as the size and packaging. The inc.jet(TM) Imager can be integrated into mail processing systems or other Original Equipment Manufacturer (OEM's) devices for applications such as envelope printing, web printing, carton marking, etc. The inc.jet technology is the result of a strategic partnership between the Company and the Hewlett-Packard Company's (HP) Specialty Printing Systems Operation (SPS). The agreement allows for cross licensing and marketing of HP's thermal ink jet technology and the Company's inc.jet Imagers, providing customers with a printing process that is cleaner and more reliable than current methods, at significant cost savings. SPS was formed to develop industrial printing markets for its 45 Series Thermal Ink Jet Printing Cartridges (cartridges). As part of this initiative SPS initially licensed a select group of companies to use their technology to develop printers specifically for industrial printing applications. The primary development task was to create the technology to fire the cartridges in such a way that they could remain stationary, while the product passed by at a high rate of speed. This was in contrast to the HP desktop printers, which move the cartridge back and forth across the page to print. The inc.jet Imager is a compact modular printer that fits in the palm of a hand (5.5" x 3.5" x 4.5") and weighs under 2 pounds. The print drivers and electronics all reside in the Imager. Commands to control the Imager are communicated via a standard personal computer. These features are very important in that they make for a printer that lends itself to integration into a wide range of OEM products, such as small tabletop envelope-addressing machines. Although the Imager originally started as peripheral device for the Company's finishing systems, the vast majority of inc.jet's revenue stream is now derived from non-Company applications and customers (i.e., OEMs and end-user ink customers). It was decided early on that inc.jet would be the print engine supplier, while OEMs would be responsible for building complete systems for the end user. This would allow inc.jet to exploit its high-margin Imager product without the additional overhead required to service thousands of end users. In addition to the mail addressing market, inc.jet sells its Imager to OEM customers in the commercial printing and packaging markets. The inc.jet Imager markets include: - Postage printing - Envelop printing and address labeling - Box and carton labeling - Printing of variable data on commercial web press applications - Tag printing 6 9 - Spot color and anti-fraud marking of originals In addition to Imagers, inc.jet(TM) is a reseller of the consumables (cartridges) that are manufactured for industrial printing applications by SPS. The inc.jet business model is based, in part, on creating a significant revenue stream from annuity ink sales. In theory, ink revenues should continue to increase monthly with the installed base of Imagers, eventually outpacing Imager revenue. The consumables that inc.jet sells to the commercial and industrial printing market include the following: - Bulk Ink Supplies (cartridges with a high capacity ink reservoir) - Fast-Dry-Black cartridges - Spot Color (red, blue, green, & yellow) - Versatile Black (specifically formulated for coated stocks) MARKETING AND SALES The Company initially relied principally on contacts within the insurance industry, particularly among large property and casualty insurers, and on the growing reputation of its products to generate sales. More recently the Company's sales and marketing efforts have actively targeted a far broader range of applications and industries including other types of insurance companies and customers in the banking, finance and healthcare industries. The Company has continued to experience success in expanding into other markets including government, retail distribution, outsourcing, service bureaus, and others. The Company also continues to generate additional sales to its existing customer base. As much as 50% of the Company's system sales in a given year have been to previous purchasers of the Company's system and the Company believes that repeat sales and upgrades of existing systems will continue to be an important source of revenue. The Company organizes user group seminars to allow customers to discuss their system requirements with each other and the Company, and to collaborate on system design. The Company is an approved Marketing Partner with major printing systems vendors (Xerox, Oce, and IBM). Gunther products offer a strategic portion of the total solution required by the customer base of these vendors and as such Gunther products are often included in their sales presentations and there is a growing amount of joint sales and marketing activity with these vendors. In addition, the Company has other informal marketing arrangements with other manufacturers and suppliers of related hardware and software products. CUSTOMERS To date, the Company's principal customers have been property and casualty insurance companies, which require accurate, high-speed preparation and distribution of personalized policies and insurance certificates. The Company's customers include many of the top insurance companies in the United States including Allstate Insurance Co., Chubb & Son Insurance, Fireman's Fund, GEICO, The Hartford, Metropolitan Life, Mutual of Omaha, SAFECO and The Travelers. In addition, the Company's systems have been purchased by Gartner Group, Moore Business Communication Systems, Nike, Public Schools Employees Retirement System, USAA, U.S. Census Bureau, U.S. Department of the Treasury, and Nippon Telephone & Telegraph in Japan. The Company has expanded into the mutual fund, pharmaceutical and outsource provider markets with sales to customers in each of these industries. Despite reliance on sales in the insurance industry, the development of the business has not been dependent upon any single or few customers. Due to the relatively high sales price of the Company's systems, customers who place multiple machine orders within a single year may account for more than 10% of the Company's revenues for that year. However, the Company has not relied on any one of these customers to maintain its level of sales from year to year. As of March 31, 2001, the Company has a backlog of high-speed assembly systems aggregating approximately $1.3 million. Backlog consists of total contract price less revenue recognized to date for all signed orders on hand. Typically, approximately 50% of the purchase price of each system is received by the Company at the time an order is placed by a customer and machine specifications are completed, 40% of the 7 10 purchase price is paid when the system is approved for shipment and the last installment (typically 10% of the purchase price) is paid within 30 days of installation. The Company recognizes revenues on the percentage of completion method over the production period of the system. MANUFACTURING The Company does not fabricate most of the hardware components of its finishing systems and is largely dependent upon third party suppliers to fabricate and, in some cases, assemble components and/or sub-assemblies of a typical system. Although the Company believes that other suppliers are available to perform the services provided by the current suppliers, the termination of the Company's relationship with one or more of these companies may result in a temporary interruption in the supply, and potentially the manufacture and shipment, of the Company's systems. While several of the Company's suppliers require cash on delivery, the Company is not aware of any material change in the relationships with its suppliers during the past year, nor have any suppliers indicated an intent to materially modify the terms on which they supply materials to the Company. In the past, the Company has replaced certain suppliers who have been unable to meet the Company's requirements with respect to quality, delivery or pricing, and the Company in the future may replace certain other suppliers for similar reasons. The Company assembles and tests each system at its facility in Norwich, Connecticut. Each system is tested for hardware and software compliance with each customer's unique application and media requirements, using customer supplied materials. Upon satisfactory completion of such tests and customer acceptance of the system, each system is disassembled for shipment and reassembled at customer facilities, which is followed by less stringent site acceptance testing and operator training. INSTALLATION AND CUSTOMER SERVICE The Company's systems usually can be installed at a customer's facilities in one day. The Company typically uses a systems engineer, who plans and carries out the installation and programming of the systems. A Company employee will remain at the customer's facilities for approximately two weeks to monitor the initial operation of the system. As part of the installation, the Company trains one to two operators for one week at either the Company's or the customer's facilities in the operation and maintenance of the system. The Company has monthly meetings with customers to evaluate the performance of systems. All systems are now installed with a modem and diagnostic software that enable the Company to monitor system performance from a remote location. As part of each installation, the Company includes a supply of spare parts which can be resupplied on short notice. Each system has been designed to facilitate parts replacements. The Company typically warrants each system for a period of 90 days after installation. All Gunther customers have some form of maintenance contract with the Company. Typically, this would take the form of on-call service, although in larger installations on-site service is required. Basic on-call coverage comes with a four hour response time guarantee; two hour response time is available to customers for an additional charge. Historically, the Company had contracted with a third-party service provider to perform the Company's service obligations under the maintenance agreements with its customers. During the third quarter of fiscal 1999, the Company made a strategic decision to assume the maintenance services on predominantly all current and future maintenance contracts. By assuming the maintenance services, management believes that, once an appropriate infrastructure has been developed, gross profit as a percentage of maintenance sales will increase by eliminating certain duplicate costs inherent in a third-party servicing relationship. The transition of maintenance services was completed during the year ended March 31, 2000. Alternatively, customers can elect to have the Company train its personnel to maintain their systems. Such training is provided for up to three qualified technicians for three weeks at the Company's facility prior to delivery of the system. Under this program, a spare parts kit is purchased, and as parts are used, they are replaced at a charge to the customer. Along with the maintenance program, the Company also provides maintenance support of the system's software, monthly performance meetings and telephone support for a monthly charge. 8 11 The typical cost to a customer of an annual maintenance contract is equal to approximately 10% of the cost of the customer's system. For the fiscal year ended March 31, 2001, revenues from customer maintenance agreements represented approximately 41.6% of the Company's net sales. The Company believes that, as it places more systems in service, maintenance revenues will represent an increasing percentage of its net sales. RESEARCH AND DEVELOPMENT The Company's principal research and development efforts have been conducted through software and hardware development groups located at its facility in Norwich, Connecticut. These groups focus on improving upon and creating new applications of the Company's technology. The Company's engineering staff also generates the functional specifications and development schedules for each of the Company's customers. The Company performs all material development and engineering functions internally. The Company from time to time engages third parties to design hardware and software components based upon specifications developed by the Company. For the fiscal years ended March 31, 2001 and 2000, the Company incurred expenses of $1.6 million and $1.2 million, respectively, for research and development activities. COMPETITION The Company's principal competitors are Pitney-Bowes and Bell & Howell. Although the Company's total revenue is small relative to these large competitors, the Company is nonetheless successful in many situations, primarily due to the unique capabilities of Gunther equipment to handle effectively more complex mailing system applications. The principal competitive factors in the Company's business are product functionality, price/performance and reliability. The Company believes that it competes favorably on the basis of each of these factors. The Company also believes that it competes effectively in sales to its existing customer base because of, among other things, its emphasis on document integrity, its focus on customer needs and the flexibility of its systems resulting from the application of its proprietary technology. Gunther's inc.jet products include several important features that set them apart from competitive products. The inc.jet imager accomplishes the high-speed printing of data (50 inches per second) at very high resolution (up to 600 x 600 dots per inch). The compact modular construction combined with injection molded plastic enable this product to be produced at low cost with a low level of maintenance. PATENTS AND PROPRIETARY RIGHTS The Company has pursued an intellectual property rights strategy to protect its proprietary product developments. The Company's policy is to file patent applications to protect its technology, and the inventions and improvements that may be important to the development of its business. As a further precaution, the Company licenses, rather than sells, its proprietary system software to customers. The Company also relies upon trade secrets, know-how, continuing technological innovation and licensing opportunities to protect its intellectual property rights. However, the Company does not consider its patent and other intellectual property rights as material to its competitive position, which, it believes, depends on the ability to adapt technology to customer needs and in particular to modify software that controls system functions, and, to a lesser extent, to combine modules. The Company has been issued eleven patents in the United States, has two pending patent applications in the United States, and intends to continue to file patent applications on its products and systems. All patent applications filed by the Company are directed to salient features of the Company's systems. The Company regards certain computer software and service applications as proprietary. The Company relies on nondisclosure agreements with its employees and, where the Company regards it as necessary, with customers. In connection with a development agreement with Connecticut Innovations, Inc. ("CII") and as partial consideration for loans made in connection therewith, the Company has assigned all existing, and future patents to CII as security for the Company's performance under the development agreement. Title to the patents will be transferred back to the Company upon the fulfillment of its obligations under the development 9 12 agreement. The Company has also granted certain additional security interests in its patents in connection with the financing transactions consummated on October 2, 1998. Although the Company believes that patents and other intellectual property rights may be important to its business, there can be no assurance that patents will issue from any applications thereof, or if patents issue, that the claims allowed will be of adequate scope to protect the Company's technology or the issued patents or other technology rights will not be challenged or invalidated. The Company's business could be adversely affected by increased competition in the event that any patent granted to it is adjudicated to be invalid or is inadequate in scope to protect the Company's operations, or if any of the Company's other arrangements related to technology are breached or violated. Although the Company believes that its products and technology do not infringe the proprietary rights of others, there can be no assurance that third parties will not assert infringement claims in the future or that such claims will not be successful. Furthermore, the Company could incur substantial costs in defending itself in patent infringement suits brought by others and in prosecuting suits against patent infringments. In connection with the restructuring completed by the Company in September 1992, the Company granted to Bell & Howell a nonexclusive license for read and feed technology developed and patented by the Company. The technology previously had been licensed by the Company to one of its component suppliers, Ascom Holding, Inc. ("Ascom"), but was not transferable by Ascom. The license granted to Bell & Howell was in consideration for the forgiveness of indebtedness of the Company to Ascom and the payment by Ascom of $250,000 to CII on behalf of the Company. The Company believes that Bell & Howell purchased the business and assets of Ascom in 1992. The license granted to Bell & Howell is royalty-free and coterminous with the patents with respect to the licensed technology. The Company does not believe that the license granted to Bell & Howell has affected the Company's competitive position. The Company does not regard the technology itself as material to its competitive position, which depends on the Company's ability to adapt technology to customer needs and, in particular, to modify software that controls system functions and, to a lesser extent, to combine modules. However, the development by Bell & Howell of a software driven system based in part on the technology could adversely affect the Company's competitive position. EMPLOYEES At March 31, 2001, the Company had 181 (178 at March 31, 2000) full-time employees, consisting of 65 (62 at March 31, 2000) engaged in engineering, development and manufacturing, 15 (16 at March 31, 2000) in marketing and sales activities, 100 (91 at March 31, 2000) in customer services and 12 (9 at March 31, 2000) in general administrative and executive functions. The Company does not have a collective bargaining agreement with any of its employees and considers its relationship with its employees to be good. ITEM 2. DESCRIPTION OF PROPERTY. The Company's principal facilities are located at One Winnenden Road, Norwich, Connecticut, where the Company leases approximately 75,000 square feet of space. The Company lease requires payment of monthly rent in the amount of $23,917 through April 30, 2006. Of the Company's space in Norwich, approximately 15,000 square feet is devoted to office and administrative uses, approximately 55,000 square feet to engineering, development and assembly activities, and approximately 5,000 square feet to marketing, sales and customer service functions. The Company believes that its facilities are adequately equipped and maintained for present and planned operations. ITEM 3. LEGAL PROCEEDINGS. As previously reported, a purported class action lawsuit was filed against the Company, its then-current chief executive officer and its then-current chief financial officer asserting claims under the federal securities laws. The action was filed in the United States District Court for the District of Connecticut. Among other things, the complaint alleged 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 Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. The plaintiffs were seeking compensatory damages and reimbursement for the reasonable costs and expenses, 10 13 including attorney's fees' incurred in connection with the action. In February 2001, the Company reached an out-of-court settlement, which the Court approved in May 2001. Under the terms of the settlement, the Company and the other defendants agreed to pay $595,000 to the plaintiffs, $380,000 of which was paid by the Company's directors' and officers' liability insurance carrier and $215,000 of which was paid by the Company. In a related matter, the Company announced that it has reached an agreement in principle to conclude a nonpublic, informal investigation conducted by the Division of Enforcement (the "SEC Staff") of the Securities and Exchange Commission ("Commission") with regard to the circumstances surrounding the Company's restatement of its fiscal year 1998 and 1997 financial statements. Under the Company's offer of settlement, the Company will consent to the entry by the Commission of an Order Instituting Public Administrative Proceedings Pursuant to Section 21C of the Exchange Act. Making Findings and Imposing a Cease and Desist Order (the "Order"). In the proposed Order, the Company will agree, without admitting or denying the Commission's findings, to cease and desist from committing or causing violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act pertaining generally to the preparation and filing of accurate financial reports, the maintenance of adequate books and records and the maintenance of adequate internal accounting controls. The Order will find that the Company improperly recognized revenue for service contracts that should have been deferred, improperly included accounts receivables in the Company's assets when contracts for the sale of systems had not been signed by the end of the fiscal year, failed to record a significant invoice from its largest vendor at year-end and improperly reversed a liability. The Order will note that the Company cooperated fully with the investigation and will impose no monetary penalties or fines against the Company. Although the SEC Staff has recommended that the Commission accept the Company's offer of settlement, the proposed Order has not yet been formally approved by the Commission. SEC Staff recommendations to the Commission customarily undergo review by the various Commission divisions and are subject to the Commission's final approval. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 11 14 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock of the Company is traded on the OTC Bulletin Board. The Company had previously traded in the NASDAQ SmallCap market under the symbol "SORT" until it was delisted on August 17, 1998 due to the Company's failure to maintain capital and surplus of at least $1,000,000. The following table sets forth the high and low bid prices of the Company's Common Stock for each quarter of fiscal 2000 and fiscal 2001, as reported by the OTC Bulletin Board. These quotations represent prices between dealers and do not include retail mark-ups, mark-downs or other fees or commissions and may not represent actual transactions. BID PRICES ------------------ FISCAL QUARTER HIGH LOW -------------- ---- --- First Fiscal Quarter - 2000.............................. $3 3/4 $2 1/32 (April 1 - June 30, 1999) Second Fiscal Quarter - 2000............................. 2 15/16 2 7/16 (July 1 - September 30, 1999) Third Fiscal Quarter - 2000.............................. 2 5/8 1 7/8 (October 1 - December 31, 1999) Fourth Fiscal Quarter - 2000............................. 3 2 3/8 (January 1 - March 31, 2000) First Fiscal Quarter - 2001.............................. 2.5625 2.1875 (April 1 - June 30, 2000) Second Fiscal Quarter - 2001............................. 2.625 2.25 (July 1 - September 30, 2000) Third Fiscal Quarter - 2001.............................. 2.25 0.5625 (October 1 - December 31, 2000) Fourth Fiscal Quarter - 2001............................. 0.8125 0.4375 (January 1 - March 31, 2001) On June 18, 2001, the high and low bid prices for the Company's Common Stock were $0.93, as reported. As of June 10, 2001, there were approximately 74 record owners of the Company's Common Stock. The Company believes there are approximately 900 beneficial owners of Common Stock. The Company has not paid dividends on its Common Stock and intends for the foreseeable future to retain earnings, if any, to finance the expansion and development of its business. SALES OF UNREGISTERED SECURITIES During fiscal 2001, the Company granted two key employees stock options covering an aggregate of 9,000 shares of Common Stock at exercise prices ranging from $0.875 to $2.25 per share. The options vest ratably over a five-year period and have a maximum duration of ten years. During fiscal 2001 the Company also credited an aggregate of 48,758 shares of Common Stock to the accounts of five directors who were participating in the Gunther International, Ltd. Directors' Equity Plan (the "Plan"). In accordance with the terms of the Plan, each participating director is entitled to receive grants of Common Stock in lieu of a quarterly cash retainer. The number of shares which each director is entitled to receive each fiscal quarter is equal to (a) $2,500, divided by (b) the fair market value of a share of Common Stock as of the last business day of the quarter. Based upon this formula, 4,878 shares of Common Stock were credited in respect of the fiscal quarter ended June 30, 2000 (the fair market value of the Common Stock on the last business day of the quarter being $2.5625 per share), 5,882 shares of Common Stock were credited in respect of the fiscal quarter ended September 30, 2000 (the fair market value of the Common Stock on the last business day of the quarter being $2.125 per share), 16,667 shares of Common Stock were credited in 12 15 respect of the fiscal quarter ended December 31, 2000 (the fair market value of the Common Stock on the last business day of the quarter being $0.75 per share) and 21,331 shares of Common Stock were credited in respect of the fiscal quarter ended March 31, 2001 (the fair market value of the Common Stock on the last business day of the quarter being $0.4688 per share). Each director elected to defer receipt of the shares credited to his account. No underwriters were used in connection with any of the foregoing transactions and, accordingly, there were no underwriting discounts or commissions. The issuance of these securities was exempt from registration under the Securities Act of 1933 in reliance upon Section 4(2) thereof and the rules and regulations promulgated thereunder. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. SUMMARY FINANCIAL DATA The summary financial data presented below should be read in conjunction with the information set forth in the consolidated financial statements and notes thereto included elsewhere herein. YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 2001 2000 1999 ----------- ----------- ----------- Sales: Systems........................................... $14,250,642 $12,052,692 $11,896,553 Maintenance....................................... 10,161,333 9,533,778 8,847,082 ----------- ----------- ----------- Total sales............................... 24,411,975 21,586,470 20,743,635 ----------- ----------- ----------- Cost of sales: Systems........................................... 9,537,248 8,094,029 8,521,585 Maintenance....................................... 8,105,760 8,289,268 6,684,135 ----------- ----------- ----------- Total cost of sales....................... 17,643,008 16,383,297 15,205,720 ----------- ----------- ----------- Gross profit........................................ 6,768,967 5,203,173 5,537,915 ----------- ----------- ----------- Operating expenses: Selling and administrative........................ 4,555,441 4,143,774 4,581,853 Research and development.......................... 1,639,385 1,227,626 1,046,569 ----------- ----------- ----------- Total operating expenses.................. 6,194,826 5,371,400 5,628,422 ----------- ----------- ----------- Operating income (loss)............................. 574,141 (168,227) (90,507) Interest expense, net............................... (679,717) (554,156) (466,653) Litigation expense.................................. (178,500) (36,500) -- ----------- ----------- ----------- Loss before cumulative effect of change in accounting principle.............................. (284,076) (758,883) (557,160) Cumulative effect of change in accounting principle......................................... -- -- (622,953) ----------- ----------- ----------- Net loss............................................ $ (284,076) $ (758,883) $(1,180,113) =========== =========== =========== Per share: Operating income (loss)............................. $ 0.13 $ (0.04) $ (0.02) Interest expense, net............................... (0.16) (0.13) (0.11) Litigation expense.................................. (0.04) (0.01) -- ----------- ----------- ----------- Loss before cumulative effect of change in accounting principle.............................. (0.07) (0.18) (0.13) Cumulative effect of change in accounting principle......................................... -- -- (0.14) ----------- ----------- ----------- Net loss............................................ $ (0.07) $ (0.18) $ (0.27) =========== =========== =========== 2001 2000 ----------- ----------- Current assets...................................... $ 5,553,949 $ 5,682,690 Total assets........................................ 9,554,164 9,616,566 Current liabilities................................. 6,072,998 7,310,139 Long-term debt, less current maturities............. 6,735,993 5,277,178 Stockholders' equity (deficit)...................... (3,254,827) (2,970,751) 13 16 RESULTS OF OPERATIONS Fiscal Year ended March 31, 2001 Compared to Fiscal Year ended March 31, 2000 The net loss for fiscal year 2001 was $(284,000), or $(0.07) per share, compared to $(759,000), or $(0.18) per share, for fiscal year 2000. Operating income for fiscal year 2001 was $574,000, or $0.13 per share, compared to an operating loss of $(168,000), or $(0.04) per share for fiscal year 2000. Systems sales include sales of high-speed assembly systems, upgrades to previously sold systems and inc.jet imager systems, ink and ancillary products. Systems sales for fiscal year 2001 increased $2.2 million, or 18.2%, to $14.3 million from $12.1 million in fiscal year 2000. The increase in systems sales was due to an increase in both high-speed assembly systems and inc.jet imager sales. Sales of high speed assembly systems for fiscal year 2001 increased to $11.9 million, or 16.5%, from $10.2 million in fiscal year 2000. Backlog consists of total contract price less revenue recognized to date for all signed orders on hand. A summary of orders, sales and backlog for the each of the last four fiscal quarters for the high speed assembly systems and related upgrades is as follows: MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, 2001 2000 2000 2000 --------- ------------ ------------- -------- (IN MILLIONS) Backlog, beginning of period.......... $ 3.7 $ 5.6 $ 3.4 $ 4.2 Orders................................ 1.3 .9 4.9 1.9 Sales................................. (3.7) (2.8) (2.7) (2.7) ----- ----- ----- ----- Backlog, end of period................ $ 1.3 $ 3.7 $ 5.6 $ 3.4 ===== ===== ===== ===== Inc.jet sales in fiscal year 2001 increased to $2.4 million, or 27.6%, from $1.9 million in fiscal year 2000. Inc.jet sales comprised 16.6% of total systems sales in fiscal year 2001 compared to 15.4% in fiscal year 2000. The increase in sales is primarily due to an increased market acceptance for the imager and an increase in ink sales to end users. Maintenance sales increased $628,000, or 6.6%, to $10.2 million in fiscal year 2001 from $9.5 million in fiscal year 2000 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 increased by $1.6 million, or 30.1%, to $6.8 million in fiscal year 2001 from $5.2 million in fiscal year 2000. The gross margin on systems sales increased to 33.1% in fiscal year 2001 from 32.8% in fiscal year 2000. The gross margin as a percentage of sales of systems remained relatively stable at 28%. The gross margin on maintenance sales increased to 20.2% in fiscal year 2001 from 13.1% in fiscal year 2000. The increase in the gross margin on maintenance sales is primarily attributable to a decrease in overall maintenance costs of 2.2% while revenues increased by 6.6%. During fiscal year 2000, the Company was transitioning from using a third party service provider to providing maintenance services with Company employees. During the transition, the Company incurred certain costs necessary to build a service department infrastructure, including the hiring of additional support personnel, while still incurring costs from the third party service provider. The Company's transition expenses were higher than expected because the number of customer service engineers transitioning from the third party service provider were less than anticipated. This resulted in the Company having to recruit and train more personnel than anticipated and to incur additional expenses to provide customer support from the Connecticut location to customer sites. The Company also incurred an increase in service parts costs during the transition period. These increased costs followed preventive maintenance reviews by Company personnel at various sites. The Company found that in certain sites a substantial amount of time and materials were required to bring the systems to a higher level of operation the Company considers appropriate for those sites. All sites were transitioned as of March 31, 2000. Selling and administrative expenses increased $411,000, or 10%, to $4.6 million in fiscal year 2001 from $4.1 million in fiscal year 2000. Selling and administrative expenses, as a percentage of total revenues, for fiscal years 2001 and 2000 were 18.7% and 19.2%, respectively. The increase in selling and administrative 14 17 expenses is primarily attributable to an increase in commissions and royalties, both of which are based on revenues, an increase in costs associated with the Company's Quality Initiative Program and the Company's biennial Users' Conference. Research and development expenses increased $412,000, or 33.5%, to $1.6 million in fiscal year 2001 from $1.2 million in fiscal year 2000. The increase in the research and development expenses was primarily attributable the new Series W system introduced at the industry trade show during the third fiscal quarter. Interest expense increased $126,000 to $680,000 in fiscal year 2001 from $554,000 in fiscal year 2000. The increase was due to an increase in debt. LIQUIDITY AND CAPITAL RESOURCES For fiscal 2001 and 2000, the Company incurred net losses of $(284,076) and $(758,883), respectively. For fiscal year 2001, cash of $744,304 was provided by operations while in fiscal year 2000 cash used for operations was $1,083,901. At March 31, 2001, the Company has a deficiency in working capital of $519,049 and a stockholders' deficit of $3,254,827. At March 31, 2001, backlog for high-speed assembly system and upgrade orders, consisting of total contract price less revenue recognized to date for all signed orders on hand, was $1.3 million as compared to $4.2 million at March 31, 2000. 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), financing arrangements with banks and other third parties and, from time to time, sales of its equity securities. Under the Company's normal sales pricing policy, approximately 50% of the sales price of each system is received by the Company within 30 days from the time an order is placed by a customer; approximately 40% is received at the time the system is shipped to the customer and the remaining 10% is received approximately 30 days after delivery of the system. As a result, the Company receives a significant cash flow benefit from the receipt of new orders. As noted above, in June 2001, the Company entered into the Recapitalization Agreement. The Recapitalization Agreement provides that the Company will effectuate a registered public offering ("Rights Offering") of up to 16,000,000 shares of its Common Stock (the "Offered Shares") to its existing stockholders by subscription right on a pro-rata basis at a subscription price of $0.50 per share. The net proceeds of the Rights Offering (a minimum of $7 million less offering expenses), will be used to repay in full the notes payable to Gunther Partners LLC ($4.5 million) and to the Stockholder and Director ($500,000), to purchase all notes payable to the Estate for a total of $500,000 and to purchase 919,568 shares of the Company's Common Stock held by the Estate for $137,935 (or $0.15 per share). The balance of the net proceeds from the Rights Offering will be used for general working capital purposes. In connection with the Recapitalization Agreement, the Company will recognize an extraordinary gain of $1.3 million on the purchase of the notes payable to the Estate. If the Recapitalization Agreement were fully 15 18 implemented at March 31, 2001 and the minimum proceeds of $6.8 million, net of expenses, were received, the pro forma capitalization would be as follows: RECAPITALIZATION AS REPORTED ADJUSTMENTS PRO FORMA ------------ ---------------- ------------ Long-term debt, including current maturities............................. $ 6,753,038 $(6,676,593) $ 76,445 ------------ ----------- ------------ Stockholders' equity (deficit): Common Stock............................. 4,292 14,000 18,292 Treasury Stock........................... -- (137,935) (137,935) Additional paid-in capital............... 12,188,556 6,613,500 18,802,056 Accumulated deficit...................... (15,447,675) 1,349,093 (14,098,582) ------------ ----------- ------------ (3,254,827) 7,838,658 4,583,831 ------------ ----------- ------------ Total capitalization..................... $ 3,498,211 $ 1,162,065 $ 4,660,276 ============ =========== ============ The proceeds from the Rights Offering will eliminate principal payments of $1.7 million and interest payments of $400,000 that would have been due in the next twelve months on existing debt. On a going forward basis, management believes that the working capital provided by the Rights Offering and cash generated from operations will be sufficient to meet the Company's cash flow needs for the next fiscal year. The Company's cash needs may be affected by a number of factors, however, many of which are beyond the control of management. See "Forward Looking Statements," below. Thus, there can be no assurance that the Company will not need significantly more cash than is presently forecasted by management or that the Company's current and expected sources of cash will be sufficient to fund the Company's ongoing operations. INFLATION The effect of inflation on the Company has not been significant during the last two fiscal years. 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; and the continued availability of financing. 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. ITEM 7. FINANCIAL STATEMENTS. The financial statements required by this item are presented on pages F-1 through F-14 immediately after the signature page of this report. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 16 19 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The following table sets forth certain information with respect to all nominees for election as directors of the Company at the Company's Annual Meeting of Stockholders to be held on September 6, 2001, including those persons who currently serve in such capacity: DIRECTOR NAME AGE PRINCIPAL OCCUPATION SINCE ---- --- -------------------- -------- James A. Cotter, Jr.............. 61 Managing Member in a Broker- 2001 Dealer J. Kenneth Hickman............... 73 Independent Business and 1994 Financial Consultant Steven S. Kirkpatrick............ 46 Vice President United States 1999 Trust Company of New York Gerald H. Newman................. 60 Private Investor 1993 Marc I. Perkins.................. 56 President and Chief Executive 1998 Officer of the Company Robert Spiegel................... 65 Private Investor 1998 Thomas M. Steinberg.............. 45 President Tisch Family Interests 1998 JAMES COTTER, JR. Mr. Cotter has been a managing member of Capital Market Investment LLC, a broker-dealer, since June 1999. Prior to that he was a vice president of H.C. Wainwright & Co., a broker-dealer, from January 1994 until June 1999. J. KENNETH HICKMAN. Mr. Hickman is a certified public accountant. He has been an independent business consultant since January 1991. For twenty-seven years prior to that, he was a partner of Arthur Andersen LLP and its predecessors, with various responsibilities including managing partner of the firm's New Jersey office and director of its international business practice program. He is a trustee of Fordham University and has served as a director and officer of a number of not-for-profit organizations, primarily those concerned with international trade and foreign affairs. STEVEN S. KIRKPATRICK. Mr. Kirkpatrick is a Vice President of the United States Trust Company of New York, where he is the manager of the Real Estate, Closely Held Business and Oil & Gas Departments. He joined the United States Trust Company of New York in 1986. Prior to that, he was a financial analyst for Schupak & Company, a merchant banking firm specializing in private placements of debt and equity securities for the leisure and hospitality industries. Mr. Kirkpatrick is a member of the American Society of Appraisers in the discipline of Business Valuation. GERALD H. NEWMAN. Mr. Newman has been a private investor and consultant to various high technology companies since 1971. Following the death of Harold S. Geneen in November of 1997, he served as Chairman of the Board of Directors of the Company until Mr. Steinberg was elected to that position in October 1998. MARC I. PERKINS. Mr. Perkins has been the Chief Executive Officer of the Company since October 1998 and has been the President of the Company since April 12, 1999. He was Vice Chairman of the Company from October 2, 1998 until April 12, 1999. Since 1995, he has also served as a registered principal of PMK Securities and Research, Inc., a securities broker-dealer and a member of the National Association of Securities Dealers Inc. He served as the Chairman and Chief Executive Officer of Perkins Capital Advisers, Inc., a registered investment adviser, from 1992 to 1998, and the President of Crown Financial Associates, Inc., a securities broker-dealer, from 1992 to 1995. From 1987-1992, he was a Vice President and shareholder of Private Capital Management, Inc., a registered investment adviser. 17 20 ROBERT SPIEGEL. Mr. Spiegel has been a private investor since May 1995. Prior to that, he was the Chairman and President of RJR Drug Distributors, a pharmaceutical distribution company, from May 1985 to May 1995. He also serves as a director of Hoenig Group, Inc., a NASDAQ-listed company whose subsidiaries engage in asset management and brokerage activities. THOMAS M. STEINBERG. Mr. Steinberg is the President of Tisch Family Interests, a position he has held since 1997. In this capacity, he manages and supervises investments for members of the Laurence A. Tisch and Preston R. Tisch families. From 1991 to 1997, he was the Managing Director of Tisch Family Interests. He is also a director of Catellus Development Corporation, a Delaware corporation engaged in investment activities which is listed on the New York Stock Exchange. Mr. Steinberg has been Chairman of the Board of the Company since October 1998. The current executive officers of the Company are as follows: NAME AGE POSITIONS WITH THE COMPANY ---- --- -------------------------- Marc I. Perkins....................... 56 President and Chief Executive Officer Michael M. Vehlies.................... 40 Senior Vice President, Chief Financial Officer, Treasurer and Secretary A. Evan Haag.......................... 52 Senior Vice President, Operations Theodore J. Langevin.................. 46 Senior Vice President, Design & Manufacturing Jeremy H. Greshin..................... 42 Vice President -- Sales and Marketing Per J. Hellsund....................... 37 President -- inc.jet, Inc. For the biography of Mr. Perkins, see the biography set forth above. MICHAEL M. VEHLIES. Mr. Vehlies has held the positions of Senior Vice President, Chief Financial Officer, Treasurer and Secretary since he rejoined the Company in October 1998. Prior to that, he was the Controller of SS&C Technologies, Inc., a computer software company, from June 1995 to October 1998. He was the Controller of Digital Graphix, Inc. from February 1995 to June 1995. He was previously a Vice President and the Chief Financial Officer of the Company from September 1992 to February 1995. He is a Certified Public Accountant and was employed by Arthur Andersen & Co. from 1988 to 1992. A. EVAN HAAG. Mr. Haag has held the position of Senior Vice President of Operations since he joined the Company in February 2000. Prior to that, he was Director, Strategic Supply Management of Moore Corporation (formerly) from October 1998 to February 2000 and Operations Manager of Moore Corporation's Systems Fabrication Moore Business Forms Research Venture from May 1996 to September 1998. From 1989 to 1995, he was Operations Vice President for Metscan, Incorporated, a manufacturer of remote data acquisition equipment for the natural gas industry. THEODORE J. LANGEVIN. Mr. Langevin has held the position of Senior Vice President -- Design and Manufacturing since May 2001. Prior to that, he had been Director of Engineering from July 1999 until May 2001 and an electrical engineer from May 1999 until July 1999. Prior to joining the Company, Mr. Langevin was the manager of software engineering at Roll Systems Inc., a manufacturer of pre- and post-processing systems for commercial laser printers, from January 1994 until May 1999. JEREMY H. GRESHIN. Mr. Greshin has held the position of Vice President -- Sales and Marketing of the Company since February 2001. Prior to that, he had been the Director of European Sales for John Frieda Professional Hair Care from March 1999 until February 2001. He had been President of Greshin International Trade, a trade consulting firm specializing in Latin America, from 1992 - 2001. PER J. HELLSUND. Mr. Hellsund has held the position of President of inc.jet, Inc., a wholly-owned subsidiary of the Company, since March 2001. Prior to that, he was Vice President -- Operations of the Company from September 1999 until March 2001 and Director of Engineering of the Company from 1993 to 1999. 18 21 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers, directors and persons who beneficially own more than 10% of the Company's Common Stock to file initial reports of beneficial ownership and reports of changes in beneficial ownership with the Securities and Exchange Commission (the "SEC"). Such persons are required by the SEC regulations to furnish the Company with copies of all Section 16(a) forms filed by such persons. Based solely on its copies of forms received by it, or written representations from certain reporting persons that no Form 5 were required for those persons, the Company believes that during the fiscal year ended March 31, 2001, its executive officers, directors, and greater than 10% beneficial owners complied with all applicable filing requirements, except that Forms 5 were not timely filed for Messrs. Hickman, Steinberg, Spiegel and Newman with regard to the Directors' Equity Plan. These forms were filed in July 2001. ITEM 10. EXECUTIVE COMPENSATION. The following Summary Compensation Table sets forth information concerning compensation for services in all capacities to the Company or subsidiaries of the Company for the periods indicated of (i) each person who served as the chief executive officer of the Company during the fiscal year ended March 31, 2001, and (ii) the other most highly compensated executive officers of the Company whose total salary and bonus for the fiscal year ended March 31, 2001 exceeded $100,000, for services in all capacities to the Company during such fiscal year (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION AWARDS ANNUAL --------------------- COMPENSATION(1) RESTRICTED OPTIONS/ ALL OTHER -------------------- STOCK SARS COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($) (#) ($) --------------------------- ---- --------- -------- ---------- -------- ------------ Marc I. Perkins, President 2001 $172,000 0 0 0 0 and Chief Executive Officer(2) 2000 $167,000 0 0 30,000 0 1999 $ 72,000 0 0 150,000 0 Michael M. Vehlies, Senior 2001 $110,000 0 0 0 0 Vice President, Chief Financial 2000 $105,962 0 0 0 Officer, Treasurer and Secretary(2) 1999 $ 39,231 0 0 35,000 0 A. Evan Haag, Senior Vice -- 2001 $110,000 0 0 0 0 President, Operations(3) 2000 $ 14,808 0 0 10,000 0 Daniel J. Chevalier, Vice -- 2001 $122,283 0 0 0 0 President, Sales and Marketing(4) 2000 $122,025 0 0 7,500 0 1999 $130,223 0 0 20,000 0 --------------- (1) Perquisites and other personal benefits are not included because they do not exceed the lesser of $50,000 or 10% of the total of base salary and annual bonus for each of the Named Executive Officers. (2) Mr. Perkins and Mr. Vehlies joined the Company in October 1998. (3) Mr. Haag joined the Company in February 2000. (4) Mr. Chevalier terminated employment in December 2000. Salary includes severance of $6,538. 19 22 Option Exercises and Fiscal Year-End Values. The following table sets forth certain information with respect to option exercises in fiscal year 2001 by the individuals listed and unexercised options to purchase the Company's Common Stock held by the individuals listed. AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SAR AT OPTIONS/SARS SHARES FY-END(#) AT FY-END($)(1) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ----------- ----------- ------------- ----------- ------------- Marc I. Perkins............. 0 0 160,000 20,000 0 0 Michael M. Vehlies.......... 0 0 23,333 11,667 0 0 A. Evan Haag................ 0 0 2,000 8,000 0 0 Daniel J. Chevalier......... 0 0 0 0 0 0 --------------- (1) Represents the difference between the fair market value of the Common Stock on March 31, 2001 and the exercise price. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement with Mr. Vehlies, pursuant to which he is employed as the Chief Financial Officer of the Company at an initial base salary of $100,000 per annum. The employment agreement may be terminated by either party, with or without cause, on ninety days' prior written notice. The employment agreement may be terminated immediately by the Company for "cause" and by Mr. Vehlies for "good reason," as those terms are defined in the employment agreement. In the event that the employment agreement is terminated by the Company for "cause," Mr. Vehlies will not be entitled to any additional compensation. In the event that the employment agreement is terminated by Mr. Vehlies for "good reason," the Company generally must pay Mr. Vehlies his base salary for the remainder of the calendar month during which the termination is effective and for six consecutive calendar months thereafter. STOCK OPTION PLAN In December 1993, the Company adopted the Gunther International, Ltd. 1993 Stock Option Plan (the "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 and subsidiaries of the Company incentive or non-qualified stock options. The Stock Option Plan also authorized the grant of non-qualified stock options to certain then-current key employees of the Company who were designated as "founders" of the Company. These options expired unexercised in December 1999. Currently, options to purchase up to 310,000 shares of Common Stock may be granted under the Stock Option 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 ten years from the date of grant. The purpose of the Stock Option Plan is to encourage stock ownership by persons instrumental to the success of the Company, in order to give them a greater personal interest in the Company's business. The exercise price of any incentive stock option granted to an eligible employee may not be less than 100% of the fair market value of the shares underlying such option on the date of grant, unless such employee owns more than 10% of the outstanding Common Stock or stock of any subsidiary or parent of the Company, in which case the exercise price of any incentive stock option may not be less than 110% of such fair market value. No option may be exercisable more than ten years after the date of grant and, in the case of an incentive stock option granted to an eligible employee owning more than 10% of the Common Stock or stock of any subsidiary or parent of the Company, no more than five years from its date of grant. Payment for shares purchased upon exercise of any option may be in cash or in shares of the Company's Common Stock. Options are not 20 23 transferable, except upon the death of the optionee. In general, upon termination of employment of an optionee, all options granted to such person which are not exercisable on the date of such termination immediately expire, and any options that are exercisable expire 30 days following termination of employment, if such termination is not the result of death or retirement, and one year following such termination if such termination was because of death or retirement under the provisions of any retirement plan that may be established by the Company, or with the consent of the Company. As of March 31, 2001, options covering an aggregate of 137,500 shares of Common Stock were outstanding under the Stock Option Plan. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. As of July 13, 2001, with the exception of the persons listed below and the persons listed under "Stock Ownership of Directors and Executive Officers" below, no person was known by the Company to own more than 5% of the outstanding Common Stock. NUMBER OF PERCENT SHARES(1)(2)(3) OF CLASS --------------- --------- Gunther Partners, LLC(3).................................... 919,569 21.4% c/o Thomas J. Tisch 667 Madison Avenue New York, NY 10021 Executors of the Estate of Harold S. Geneen(4).............. 1,613,313 37.6% c/o United States Trust Company of New York 114 West 47th Street New York, NY 10036 Four-Fourteen Partners, LLC(5).............................. 2,559,598 40.3% c/o Thomas J. Tisch 667 Madison Avenue New York, NY 10021 Park Investment Partners, Inc.(6)........................... 1,387,489 32.3% c/o Gerald H. Newman 17161 Coral Cove Way Boca Raton, FL 33496 --------------- (1) Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock owned by them. (2) Assumes that shares which the named person or group has a contractual right to acquire within 60 days have been acquired and are outstanding. (3) Based on information set forth in Amendment No. 7 to Schedule 13D, filed on July 11, 2001 ("Amendment No. 7") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), by Thomas J. Tisch, Robert Spiegel and Thomas M. Steinberg. Shares shown in the table include 919,569 shares purchased by Gunther Partners from the Estate of Harold S. Geneen on July 25, 2001, pursuant to the recapitalization agreement dated as of June 25, 2001 (the "Recapitalization Agreement") by and among the Company, Gunther Partners, the Estate of Harold S. Geneen (the "Estate") Park Investment Partners, Inc. and certain other stockholders (see items 1 and 6). Under the Recapitalization Agreement, Gunther Partners will resell the 919,569 shares to the Company within 30 days after the closing of the Rights Offering on the same terms and conditions that were applicable to the Estate's sale of such shares to Gunther Partners. The shares shown in the table represent the number of shares which the filing persons believed were held by persons other than the filing persons and were covered by the Voting Agreement as of the date of filing (including 105,734 shares of Common Stock issuable upon the exercise of outstanding stock purchase warrants). As noted above, the Company believes that, as of July 13, 2001, the parties to the Voting Agreement, including such filing persons, 21 24 beneficially owned an aggregate of 2,255,704 shares, or 52.6% of the outstanding shares, of Common Stock. See "Certain Relationships and Related Transactions." (4) Based on information set forth in Amendment No. 3 to Schedule 13D, filed on July 13, 2001 under the Exchange Act by June H. Geneen, Phil E. Gilbert, Jr. and the United States Trust Company of New York, as co-executors of the Estate of Harold S. Geneen, the former Chairman of the Company. The shares shown in the table include 1,387,489 shares of Common Stock held by Park Investment Partners, Inc., a Delaware corporation which is 50% owned by the Estate. Of these 1,387,489 shares, 919,569 shares were sold by the Estate to Gunther Partners on July 25, 2001 for the benefit of the Company. The shares shown in the table exclude the shares of Common Stock beneficially owned by other parties to the Voting Agreement. See note 3 above and "Certain Relationships and Related Transactions." (5) Based on information set forth in Amendment No. 7. Accordingly, the shares shown in the table include an aggregate of 2,065,409 shares of Common Stock that may be acquired upon the exercise of the stock purchase warrants which have been distributed to Four-Fourteen Partners, LLC. The shares shown in the table exclude the shares of Common Stock beneficially owned by Gunther Partners and the shares of Common Stock beneficially owned by other parties to the Voting Agreement. See note 3 above and "Certain Relationships and Related Transactions." (6) Based on information set forth in Amendment No. 1 to Schedule 13D, filed on July 2, 2001 under the Exchange Act by Park Investment Partners, Inc. and Gerald H. Newman. The shares shown in the table include (i) 693,744 shares to be distributed to Gerald H. Newman and (ii) 693,745 shares to be distributed to the Estate which were sold by the Estate to Gunther Partners on July 25, 2001 for the benefit of the Company. The shares shown in the table exclude the shares of Common Stock beneficially owned by the other parties to the Voting Agreement. See note 3 above and "Certain Relationships and Related Transactions." STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS The following table reflects shares of Common Stock beneficially owned (or deemed to be beneficially owned pursuant to the rules of the Securities and Exchange Commission) as of July 13, 2001 by each director of the Company, each of the Named Executive Officers and the current directors and executive officers of the Company as a group. AMOUNT OF BENEFICIAL PERCENTAGE OF NAME(1) OWNERSHIP(2)(3) SHARES ------- --------------- ------------- James A. Cotter, Jr.(4)..................................... 25,660 * J. Kenneth Hickman(5)....................................... 26,413 * Steven S. Kirkpatrick(6).................................... 0 * Gerald H. Newman(7)......................................... 1,476,604 34.3% Marc I. Perkins(8).......................................... 170,000 3.8% Robert Spiegel(9)........................................... 593,270 12.5% Thomas M. Steinberg(10)..................................... 48,189 * Michael M. Vehlies(8)....................................... 23,000 * A. Evan Haag(8)............................................. 2,000 * Daniel J. Chevalier......................................... 0 * All Directors and Executive Officers as a group(11)......... 2,371,369 47.2% --------------- * Less than 1%. (1) The address of each of the directors and executive officers of the Company is c/o Gunther International, Ltd., One Winnenden Road, Norwich, Connecticut 06360. (2) Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock owned by them. 22 25 (3) Assumes that shares which the named person or group has a contractual right to acquire within 60 days have been acquired and are outstanding. (4) Includes 2,660 shares credited to the account of Mr. Cotter under the Directors' Equity Plan. (5) Includes 16,413 shares credited to the account of Mr. Hickman under the Directors' Equity Plan. (6) Mr. Kirkpatrick is a Vice President of the United States Trust Company of New York, which is the beneficial owner of 1,613,313 shares of Common Stock. See note 4 to the preceding table. (7) Based on information set forth in Amendment No. 1 to Schedule 13D, filed on July 2, 2001 under the Exchange Act by Park Investment Partners, Inc. and Gerald H. Newman. The shares shown in the table include 1,387,489 shares beneficially owned by Park Investment Partners, Inc., a Delaware corporation which is 50% owned by Mr. Newman. See "Stock Ownership of Certain Beneficial Owners." As discussed in Note 6 to the preceding table, 693,745 of the shares owned by Park Investment Partners, Inc. were distributed pro-rata to the Estate and sold to Gunther Partners on July 25, 2001 for the benefit of the Company. Includes 16,413 shares credited to the account of Mr. Newman under the Directors' Equity Plan. The shares shown in the table exclude the shares of Common Stock beneficially owned by the other parties to the Voting Agreement. See note 3 to the preceding table and "Certain Relationships and Related Transactions." (8) Includes the exercisable portion of stock options exercisable within 60 days of July 13, 2001. (9) Based on information set forth in Amendment No. 7. Accordingly, the shares shown as beneficially owned by Mr. Spiegel include 381,306 shares of Common Stock that may be acquired pursuant to the exercise of the stock purchase warrants which have been distributed to Mr. Spiegel. The shares shown in the table also include the following: (i) 40,000 shares of Common Stock held by Mr. Spiegel's wife; (ii) 1,500 shares of Common Stock held in an IRA account maintained for the benefit of Mr. Spiegel's wife; and (iii) 15,000 shares of Common Stock and warrants to purchase 63,531 shares of Common Stock held by a trust of which Mr. Spiegel is a trustee. Mr. Spiegel disclaims beneficial ownership as to each of the shares and warrants described in (i) through (iii) in the preceding sentence. The shares shown in the table also include 16,413 shares credited to the account of Mr. Spiegel under the Directors' Equity Plan. The shares shown in the table exclude the shares of Common Stock beneficially owned by Gunther Partners and the shares of Common Stock beneficially owned by the other parties to the Voting Agreement. See note 3 to the preceding table and "Certain Relationships and Related Transactions." (10) Based on information set forth in Amendment No. 7. Accordingly, the shares shown as beneficially owned by Mr. Steinberg represent the 31,776 shares of Common Stock that may be acquired by him pursuant to the exercise of the stock purchase warrants which have been distributed to him. The shares shown in the table also include 16,413 shares credited to the account of Mr. Steinberg under the Directors' Equity Plan. (11) Includes an aggregate of 735,679 shares issuable upon the exercise of outstanding options, warrants or other similar rights exercisable within 60 days of July 13, 2001 and excludes any shares of Common Stock beneficially owned by the other parties to the Voting Agreement. If the shares held by other parties to the Voting Agreement are included in the calculation, the directors and executive officers of the Company would be deemed to beneficially own an aggregate of 3,091,383 shares, or approximately 61.5% of the outstanding shares, of Common Stock. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 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 ("Gunther Partners"), the proceeds of which were utilized to restructure and replace the Company's then-existing revolving credit facility with the Bank (the "Revolving Credit Facility"), fund a full settlement with the Company's then-existing third-party service provider and provide additional working 23 26 capital to fund the Company's ongoing business operations. At the time of his death on November 21, 1997, Mr. Geneen was Chairman of the Board of Directors and a significant stockholder of the Company. Gunther Partners is a Delaware limited liability company, the members of which include Robert Spiegel, Thomas M. Steinberg and a partnership controlled by certain members of the Tisch family. See "Item 11 -- "Security Ownership of Certain Beneficial Owners and Management." Under the terms of the transaction, Gunther Partners loaned the Company an aggregate of $4.0 million. At the same time, the Bank reached an agreement with the Estate, pursuant to which the Estate consented to the liquidation of approximately $1.7 million of collateral which had been pledged by Mr. Geneen to secure the Company's obligations under the Revolving Credit Facility and the application of the proceeds of such collateral to satisfy and repay in full a like amount of indebtedness outstanding under the Revolving Credit Facility. The balance of the indebtedness outstanding under the Revolving 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 collateral that was liquidated by the Bank. The Company's obligations to the Estate are subordinate to the Company's obligations to Gunther Partners. The $4 million term note (the "Term Note") issued to Gunther Partners originally provided that the principal was to be repaid commencing as of November 1, 1998 through the payment of (i) eleven monthly installments of $100,000 from November 1, 1998 and continuing to and including September 1, 1999, (ii) a single installment of $400,000 due on October 1, 1999, and (iii) a single installment of $2,500,000 due on October 1, 2003. Interest was to be paid quarterly, at the rate of 8% per annum, beginning January 1, 1999 and was to continue until all principal and interest was paid in full. In September 1999, the Company and Gunther Partners agreed to modify the repayment provisions of the Term Note in light of the Company's then-current and projected cash flows. To induce Gunther Partners to enter into the financing transaction, the Company granted Gunther Partners a stock purchase warrant entitling Gunther Partners, 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. On or about November 17, 1998, Gunther Partners distributed all of its rights under the warrant to its members in proportion to their ownership interests in Gunther Partners. Thus, the warrants are now held by the members of Gunther Partners (and their transferees) in proportion to their ownership interests in Gunther Partners. As of July 13, 2001, the Company believes the warrants are exercisable for an aggregate of 2,542,042 shares of Common Stock. In addition, the Company, Gunther Partners, the Estate and certain shareholders (Park Investment Partners, Gerald H. Newman, Four Partners and Robert Spiegel) entered into a Voting Agreement, pursuant to which they agreed to vote all shares of Common Stock held by them in favor of (i) that number of persons nominated by Gunther Partners constituting a majority of the Board of Directors, (ii) one person nominated by the Estate and (iii) one person nominated by Park Investment Partners. As of July 13, 2001, the Company believes that the original parties to the Voting Agreement, together with any subsequent transferees (who are also subject to the Voting Agreement), hold an aggregate of approximately 2,255,704 shares, or approximately 52.6% of the outstanding shares, of Common Stock (excluding any shares of Common Stock issuable upon the exercise of options, warrants or other similar rights). The Voting Agreement will terminate upon the consummation of the Company's Rights Offering and the related repurchase transactions described in Items 1 and 6. 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 Gunther Partners 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 second priority interest in all tangible and intangible personal property of the Company (excluding patents and trademarks) and a third priority interest in patents and trademarks. Another entity, Connecticut Innovations, Inc. ("CII"), has a first priority security interest in certain specified patents and trademarks of the Company dating back to an earlier 24 27 financing transaction. The security interests of both Gunther Partners and the Estate in the Company's patents and trademarks are subordinate to the security interest of CII in this specified collateral. The security interest of the Estate is subordinate to all rights of Gunther Partners. Through June 30, 1999, the Company had made principal payments under the Term Note aggregating $800,000 and had paid all interest when it was due and payable (taking into account any applicable grace periods). In September 1999, the Company and Gunther Partners agreed to modify the Term Note to defer payment of the $700,000 in principal otherwise due and payable from July 1999 through October 1999 and to relend the Company the $800,000 in principal that was previously repaid, thereby restoring the aggregate principal amount of the Term Note to the original principal amount of $4.0 million. As amended, the $4 million principal amount of the Term Note is to be repaid in nine payments as follows: (a) $200,000 shall be paid on the first day of each calendar month commencing as of October 1, 2001 and continuing through April 1, 2002; (b) $100,000 shall be paid on May 1, 2002; and (c) the balance of $2,500,000 shall be paid on October 1, 2003. On December 16, 1999, the Company borrowed an additional $200,000 from Robert Spiegel, a director of the Company and a member of Gunther Partners, to alleviate a short-term cash-flow deficiency which the Company was experiencing. The loan was unsecured and earned interest at the rate of 8% per annum. All principal and accrued interest was repaid prior to December 31, 1999. On April 21, 2000, the Company borrowed an additional $150,000 from Mr. Spiegel to alleviate a subsequent cash-flow deficiency. This amount, together with interest at the rate of 8% per annum, was repaid in full on April 28, 2000. On April 4, 2000, the Company borrowed an additional $500,000 from Gunther Partners on an unsecured basis. The promissory note evidencing this indebtedness originally provided that the note was to be due and payable, together with interest at the rate of 8% per annum, on demand at any time after May 4, 2000. Subsequent to the execution and delivery of the original promissory note, however, Gunther Partners delivered a letter to the Company evidencing its agreement, in the event that the Company were to be unable to meet the payment obligation upon demand, to extend the payment date until such time as the Company's cash flows will permit payment, but no later than April 1, 2001. In addition, Gunther Partners agreed to lend the Company an additional $500,000 in the event the Company's cash flows, in the opinion of management and Gunther Partners, required such additional amount. On November 30, 2000, the Company borrowed $500,000 from a director, the proceeds of which were used to pay in full the Company's then-existing revolving loan agreement with a bank. The director acted on behalf of Gunther Partners to fulfill its prior commitment for additional funding, which expired on April 1, 2001. Prior to his death, Mr. Geneen loaned the Company $150,000 for working capital purposes. The loan is an unsecured demand loan. As of the date of this report, no portion of the loan has been repaid. On June 25, 2001, the Company entered into a recapitalization agreement with and among the Estate, Gunther Partners, Park Investment Partners, Inc. and two other stockholders. Messrs. Thomas Steinberg and Robert Spiegel, two of the Company's directors, are members of Gunther Partners. See the description of the Recapitalization Agreement herein at Items 1 and 6. 25 28 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. A. Exhibits required by Item 601 of Regulation S-B: 3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit 3(i) to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended December 31, 1998, Commission File No. 33-70052-B, and incorporated herein by reference). 3.2 By-Laws of the Company, as amended (filed as Exhibit 3(iv) to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended December 31, 1998, Commission File No. 33-70052-B, and incorporated herein by reference). 10.1 Royalty Agreement, dated September 3, 1992, between the Company and William H. Gunther, Jr. (filed as Exhibit 10(s) to the Company's Registration Statement on Form SB-2, Commission File No. 33-70052-B, and incorporated herein by reference). 10.2 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). 10.3 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). 10.4 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). 10.5 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). 10.6 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). 10.7 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). 10.8 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). 10.9 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). 10.10 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). 26 29 10.11 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). 10.12 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). 10.13 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). 10.14 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). 10.15 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). 10.16 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). 10.17 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). 10.18 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). 10.19 Non-exclusive License Agreement By and Between the Hewlett-Packard Company and Gunther International Incorporated for Envelope Printing Technology dated May 6, 1997 (filed as Exhibit 10.38 to the Company's Annual Report on Form 10-KSB dated July 14, 1998 and incorporated herein by reference). 10.20 Agreement, dated October 2, 1998, by and among the registrant, June H. Geneen, Phil E. Gilbert, Jr., Thomas W. Keesee and the United States Trust Company Of New York, as Co-Executors of the Estate of Harold S. Geneen, Late of New York, New York (the "Estate"), BankBoston, N.A. (successor by merger to Bank of Boston Connecticut ("BOB") and Gunther Partners, LLC (the "Lender") (filed as Exhibit 99.2 to the registrant's Current Report on Form 8-K dated October 7, 1998 and incorporated herein by this reference). 10.21 Promissory Note, dated October 2, 1998, made by the registrant to the order of the Estate (filed as Exhibit 99.3 to the registrant's Current Report on Form 8-K dated October 7, 1998 and incorporated herein by this reference). 10.22 Security Agreement, dated October 2, 1998, by and between the registrant and the Estate (filed as Exhibit 99.4 to the registrant's Current Report on Form 8-K dated October 7, 1998 and incorporated herein by this reference). 10.23 Loan and Security Agreement, dated October 2, 1998, by and between the registrant and Gunther Partners LLC (filed as Exhibit 99.5 to the registrant's Current Report on Form 8-K dated October 7, 1998 and incorporated herein by this reference). 27 30 10.24 $4,000,000 Term Note, dated October 2, 1998, made by the registrant to the order of the Lender (filed as Exhibit 99.6 to the registrant's Current Report on Form 8-K dated October 7, 1998 and incorporated herein by this reference). 10.25 Subordination Agreement dated as of October 2, 1998, between the Lender and Connecticut Innovations, Inc. ("CII") (filed as Exhibit 99.7 to the registrant's Current Report on Form 8-K dated October 7, 1998 and incorporated herein by this reference). 10.26 Subordination Agreement, dated as of October 2, 1998, between the Estate and CII (filed as Exhibit 99.8 to the registrant's Current Report on Form 8-K dated October 7, 1998 and incorporated herein by this reference). 10.27 Subordination and Intercreditor Agreement, dated October 2, 1998, between the Lender and the Estate (filed as Exhibit 99.9 to the registrant's Current Report on Form 8-K dated October 7, 1998 and incorporated herein by this reference). 10.28 Warrant Agreement, dated October 2, 1998, by and between the Lender and the registrant (filed as Exhibit 99.10 to the registrant's Current Report on Form 8-K dated October 7, 1998 and incorporated herein by this reference). 10.29 Registration Rights Agreement, dated October 2, 1998, by and between the registrant and the Lender (filed as Exhibit 99.11 to the registrant's Current Report on Form 8-K dated October 7, 1998 and incorporated herein by this reference). 10.30 Voting Agreement, dated October 2, 1998, by and among the Estate, Gerald H. Newman, Park Investment Partners, Inc., the Lender, Robert Spiegel, Four Partners and the registrant (filed as Exhibit 99.12 to the registrant's Current Report on Form 8-K dated October 7, 1998 and incorporated herein by this reference). 10.31 Non-Qualified Stock Option Agreement, dated as of October 5, 1998, between Marc I. Perkins and the registrant (filed as Exhibit 10.14 to the registrant's Quarterly Report on Form 10-QSB dated February 12, 1999 and incorporated herein by this reference). 10.32 Employment Agreement, dated as of October 7, 1998, between the registrant and Michael M. Vehlies (filed as Exhibit 10.15 to the registrant's Quarterly Report on Form 10-QSB dated February 12, 1999 and incorporated herein by this reference). 10.33 Non-Qualified Stock Option Agreement, dated as of October 29, 1998, between Michael M. Vehlies and the registrant (filed as Exhibit 10.16 to the registrant's Quarterly Report on Form 10-QSB dated February 12, 1999 and incorporated herein by this reference). 10.34 Employment Agreement, dated October 3, 1999, between the Registrant and Marc I. Perkins (filed as Exhibit 10.9 to the registrant's Quarterly Report on Form 10-QSB dated February 22, 2000, and incorporated herein by this reference). 10.35 Promissory Note, dated April 4, 2000, between the Registrant and Gunther Partners, LLC. (filed as Exhibit 10.46 to the registrant's Annual Report on Form 10-KSB dated June 29, 2000 and incorporated herein by reference). 10.36 Funding Letter, dated June 19, 2000 from Gunther Partners, LLC to the Registrant. (filed as Exhibit 10.47 to the registrant's Annual Report on Form 10-KSB dated June 29, 2000 and incorporated herein by reference). 10.37 Promissory Note Agreement dated November 30, 2000 between Robert Spiegel and the Registrant (filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-QSB dated February 14, 2001, and incorporated by reference). 28 31 10.38 Recapitalization Agreement, dated June 25, 2001, by and among the registrant, June H. Geneen, Phil E. Gilbert, Jr. and the United States Trust Company of New York, as Co-executors of Estate of Harold S. Geneen, late of New York, New York, Gunther Partners LLC, Park Investment Partners and Gerald H. Newman (filed as Exhibit 10.38 to the registrant's annual report on Form 10-KSB dated June 29, 2001 and incorporated herein by this reference). 21.1 List of Subsidiaries (filed as Exhibit 21.1 to the registrant's annual report on Form 10-KSB dated June 29, 2001 and incorporated herein by this reference). 24.1 Power of Attorney pursuant to which the registrant's Annual Report on Form 10-KSB dated June 29, 2001 was executed (filed as Exhibit 24.1 to the registrant's annual report on Form 10-KSB dated June 29, 2001 and incorporated herein by this reference). B. Reports on Form 8-K. None. 29 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report 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: July 30, 2001 30 33 INDEX TO FINANCIAL STATEMENTS PAGE NO. -------- Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Balance Sheets as of March 31, 2001 and 2000... F-3 Consolidated Statements of Operations for the Years Ended March 31, 2001 and 2000.................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended March 31, 2001 and 2000................ F-5 Consolidated Statements of Cash Flows for the Years Ended March 31, 2001 and 2000.................................... F-6 Notes to Consolidated Financial Statements.................. F-7 F-1 34 REPORT OF INDEPENDENT AUDITORS Stockholders of Gunther International, Ltd. We have audited the accompanying consolidated balance sheets of Gunther International, Ltd. and its subsidiary as of March 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. 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 auditing standards generally accepted in the United States. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gunther International, Ltd. and its subsidiary at March 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Hartford, Connecticut June 25, 2001 F-2 35 GUNTHER INTERNATIONAL, LTD. CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND 2000 2001 2000 ------------ ------------ Assets Current Assets: Cash...................................................... $ 759,393 $ 87,136 Accounts receivable, less allowance....................... 2,002,398 3,315,783 Costs and estimated earnings in excess of billings on uncompleted contracts................................... 601,068 200,691 Inventories............................................... 1,936,538 1,798,206 Prepaid expenses.......................................... 254,552 280,874 ------------ ------------ Total current assets.................................... 5,553,949 5,682,690 ------------ ------------ Equipment and Leasehold Improvements: Machinery and equipment................................... 1,811,895 1,485,369 Furniture and fixtures.................................... 469,737 378,852 Leasehold improvements.................................... 128,377 38,589 ------------ ------------ 2,410,009 1,902,810 Accumulated depreciation and amortization................. (1,006,350) (808,354) ------------ ------------ 1,403,659 1,094,456 ------------ ------------ Other Assets: Excess of costs over fair value of net assets acquired, net..................................................... 2,551,429 2,774,893 Other..................................................... 45,127 64,527 ------------ ------------ 2,596,556 2,839,420 ------------ ------------ $ 9,554,164 $ 9,616,566 ============ ============ Liabilities and Stockholders' Equity (Deficit) Current Liabilities: Current maturities of long-term debt -- other............. $ 17,045 $ 13,134 Note payable to related party............................. -- 150,000 Note payable to bank...................................... -- 350,000 Accounts payable.......................................... 2,440,437 2,502,231 Accrued expenses.......................................... 1,507,965 1,385,066 Billings in excess of costs and estimated earnings on uncompleted contracts................................... 325,085 1,052,734 Deferred service contract revenue......................... 1,782,466 1,856,974 ------------ ------------ Total current liabilities............................... 6,072,998 7,310,139 ------------ ------------ Long-term debt, less current maturities: Related parties........................................... 6,676,593 5,261,446 Other..................................................... 59,400 15,732 ------------ ------------ Total long-term debt............................... 6,735,993 5,277,178 ------------ ------------ Total liabilities....................................... 12,808,991 12,587,317 ------------ ------------ Commitments and contingencies (Note 8) Stockholders' Equity (Deficit): Common Stock, $.001 par value; 16,000,000 shares authorized; 4,291,769 shares issued and outstanding..... 4,292 4,292 Additional paid-in capital................................ 12,188,556 12,188,556 Accumulated deficit....................................... (15,447,675) (15,163,599) ------------ ------------ Total Stockholders' Equity (Deficit).................... (3,254,827) (2,970,751) ------------ ------------ $ 9,554,164 $ 9,616,566 ============ ============ See accompanying notes. F-3 36 GUNTHER INTERNATIONAL, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 2001 2000 ----------- ----------- Sales: Systems................................................... $14,250,642 $12,052,692 Maintenance............................................... 10,161,333 9,533,778 ----------- ----------- Total sales............................................ 24,411,975 21,586,470 ----------- ----------- Cost of sales: Systems................................................... 9,537,248 8,094,029 Maintenance............................................... 8,105,760 8,289,268 ----------- ----------- Total cost of sales.................................... 17,643,008 16,383,297 ----------- ----------- Gross profit......................................... 6,768,967 5,203,173 ----------- ----------- Operating expenses: Selling and administrative................................ 4,555,441 4,143,774 Research and development.................................. 1,639,385 1,227,626 ----------- ----------- Total operating expenses............................... 6,194,826 5,371,400 ----------- ----------- Operating income (loss).............................. 574,141 (168,227) Interest expense, net....................................... (679,717) (554,156) Litigation expense.......................................... (178,500) (36,500) ----------- ----------- Net loss............................................. $ (284,076) $ (758,883) =========== =========== Loss per share....................................... $ (0.07) $ (0.18) =========== =========== Weighted average number of common shares outstanding........ 4,291,769 4,291,769 =========== =========== See accompanying notes. F-4 37 GUNTHER INTERNATIONAL, LTD. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 COMMON STOCK $.001 PAR VALUE ADDITIONAL ------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL --------- ------ ----------- ------------ ----------- Balance, March 31, 1999........... 4,291,769 $4,292 $12,188,556 $(14,404,716) $(2,211,868) Net loss.......................... -- -- -- (758,883) (758,883) --------- ------ ----------- ------------ ----------- Balance, March 31, 2000........... 4,291,769 4,292 12,188,556 (15,163,599) (2,970,751) Net loss.......................... -- -- -- (284,076) (284,076) --------- ------ ----------- ------------ ----------- Balance, March 31, 2001........... 4,291,769 $4,292 $12,188,556 $(15,447,675) $(3,254,827) ========= ====== =========== ============ =========== See accompanying notes. F-5 38 GUNTHER INTERNATIONAL, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 2001 2000 ----------- ----------- Operating activities: Net loss.................................................. $ (284,076) $ (758,883) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization.......................... 693,043 568,295 Provision for doubtful accounts........................ 53,000 63,530 Interest accrued on related party note payable......... 265,144 239,518 Loss on disposal of equipment.......................... 10,248 -- Changes in operating assets and liabilities: Accounts receivable.................................. 1,260,385 (1,859,112) Inventories.......................................... (138,332) (291,652) Prepaid expenses..................................... 26,322 (185,611) Accounts payable..................................... (61,794) 65,801 Accrued expenses..................................... 122,899 233,548 Deferred service contract revenue.................... (74,508) 335,770 Billings, costs and estimated earnings on uncompleted contracts, net...................................... (1,128,026) 504,895 ----------- ----------- Net cash provided by (used for) operating activities..................................... 744,305 (1,083,901) ----------- ----------- Investing activities: Acquisitions of equipment and leasehold improvements...... (698,890) (564,009) ----------- ----------- Net cash used for investing activities............ (698,890) (564,009) ----------- ----------- Financing activities: Repayment of notes payable and long-term debt............. (673,158) (515,111) Proceeds from notes payable and long-term debt............ 1,300,000 1,368,214 Transfer from restricted cash............................. -- 150,000 ----------- ----------- Net cash provided by financing activities......... 626,842 1,003,103 ----------- ----------- Change in cash.............................................. 672,257 (644,807) Cash, beginning of year..................................... 87,136 731,943 ----------- ----------- Cash, end of year........................................... $ 759,393 $ 87,136 =========== =========== Supplemental Cash Flow Information: Cash paid for interest.................................... $ 436,771 $ 326,687 Cash paid for income taxes................................ 13,531 7,561 See accompanying notes. F-6 39 GUNTHER INTERNATIONAL, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 AND 2000 1. BUSINESS: Gunther International, Ltd. and its subsidiary (the "Company") operates as a single business segment. 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. These products are dependent upon proprietary technology and require specially skilled engineers and technicians to design, enhance and produce them to meet customer needs. The Company was incorporated in Delaware in 1978 and currently operates from leased facilities located in Norwich, Connecticut. 2. ACCOUNTING POLICIES: Principles of consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, inc.jet, Inc. All intercompany activity has been eliminated from the consolidated financial statements. Revenue recognition - The Company recognizes revenues under sales contracts for its high-speed assembly equipment using the percentage of completion method based on the ratio of incurred costs to total estimated costs. Changes in estimated earnings thereon are recognized in the period determined. Sales of inc.jet imagers and related consumables are recognized when the products are delivered. Service contract revenue is recognized over the term of the contract; amounts applicable to future periods are deferred. Allowance for doubtful accounts - The Company evaluates the collectibility of accounts receivable on an ongoing basis and makes allowances for credit losses ($58,500 at March 31, 2001 and $86,900 at March 31, 2000). Inventories - Inventories, consisting primarily of purchased parts used in the assembly and repair of the Company's products, are stated at the lower of cost, determined by the first-in, first-out method, or market. Equipment and leasehold improvements - Depreciation of equipment is computed using the straight-line method over the estimated useful lives of the respective assets as follows: machinery and equipment -- 3 - 7 years; and furniture and fixtures -- 7 years. Amortization of leasehold improvements is computed over the useful life of the improvement or lease term, whichever is shorter. Depreciation expense was $455,000 and $330,000 for fiscal 2001 and 2000, respectively. Excess of cost over fair value of net assets acquired - The excess of cost over the fair value of net assets acquired ("goodwill"), which resulted from a business acquisition, is being amortized over its estimated life of 20 years. As of March 31, 2001 and 2000, accumulated amortization thereon was $1,918,140 and $1,694,676, respectively. The realization of the carrying value of the Company's assets, including goodwill, 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 goodwill has been impaired, the Company will evaluate the carrying value based on undiscounted cash flows. F-7 40 Shipping and handling costs - Expenses associated with shipping and handling are included in cost of sales in the accompanying statements of operations. Research and development - Expenses associated with research and development activities are expensed as incurred. Product warranties - The Company provides a warranty on each high-speed system for a period of 90 days after installation. Warranty expense for fiscal 2001 and 2000, was approximately $297,000 and $255,000, respectively. Deferred income taxes - Deferred income taxes are provided on temporary differences between the financial statement and tax basis of assets and liabilities and on operating loss carryovers using enacted tax rates in effect in the years in which differences are expected to reverse. A valuation allowance is recorded for the amount of deferred income tax assets for which realization is uncertain (See Note 6.) Royalty expense - The Company has royalty agreements with Connecticut Innovations, Inc. and with certain stockholders (see Note 8). Royalties due under these agreements are expensed as incurred. Loss per share - The denominators used for purposes of computing the loss per share consist of the weighted average number of common shares outstanding of 4,291,769 for both fiscal 2001 and 2000. Common stock equivalents were not used because their effect would have been anti-dilutive. There were no common stock equivalents outstanding at March 31, 2001 and there were 1,178,071 common stock equivalents outstanding at March 31, 2000. Options and warrants are included as common stock equivalents if the fair market value of the underlying stock is greater than the exercise price of the related option or warrant. Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. 3. INVENTORIES: Inventories consist of: 2001 2000 ---------- ---------- Raw materials............................................... $1,820,402 $1,532,703 Work-in-process............................................. 374,666 625,719 ---------- ---------- 2,195,068 2,158,422 Valuation allowance......................................... (258,530) (360,216) ---------- ---------- $1,936,538 $1,798,206 ========== ========== F-8 41 4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS: The following schedule reflects the costs incurred, estimated earnings and billings to date on uncompleted contracts: 2001 2000 ----------- ----------- Costs incurred............................................ $ 1,831,150 $ 2,537,418 Estimated earnings........................................ 532,887 1,305,603 ----------- ----------- 2,364,037 3,843,021 Billings to date.......................................... (2,088,054) (4,695,068) ----------- ----------- $ 275,983 $ (852,043) =========== =========== Included in the accompanying balance sheets under the following captions: Costs and estimated earnings in excess of billings on uncompleted contracts................................... $ 601,068 $ 200,691 Billings in excess of costs and estimated earnings on uncompleted contracts................................... (325,085) (1,052,734) ----------- ----------- $ 275,983 $ (852,043) =========== =========== 5. LONG-TERM DEBT AND RECAPITALIZATION: Long-term debt consists of: 2001 2000 ---------- ---------- Notes payable to related parties (stockholders): Gunther Partners LLC, less unamortized debt discount of $172,500 and $241,500 at March 31, 2001 and 2000, respectively, at an effective interest rate of 9.8% due in various installments through October 2003........... $4,327,500 $3,758,500 Estate of Harold S. Geneen, less unamortized debt discount of $264,097 and $339,195 at March 31, 2001 and 2000, respectively, at an effective interest rate of 10.5% due in October 2004.................................... 1,678,637 1,502,946 Stockholder and Director, due and payable by November 2001 with interest payable quarterly at 8.5%................ 500,000 -- Estate of Harold S. Geneen, including accrued interest of $20,456, at an effective interest rate of 5.44% due in October 2004........................................... 170,456 150,000 ---------- ---------- 6,676,593 5,411,446 Other....................................................... 76,445 28,866 ---------- ---------- 6,753,038 5,440,312 Current maturities of long-term debt -- other............... (17,045) (163,134) ---------- ---------- $6,735,993 $5,277,178 ========== ========== In June 2001, the Company entered into a recapitalization agreement (the "Recapitalization Agreement") with and among the Estate of Harold S. Geneen (the "Estate"), Gunther Partners LLC and two other stockholders. The Recapitalization Agreement provides that the Company will effectuate a registered public offering ("Rights Offering") of up to 16,000,000 shares of its Common Stock (the "Offered Shares") to its existing stockholders by subscription right on a pro-rata basis at a price of $0.50 per share. The rights to subscribe to the Offered Shares will be granted at a ratio to be determined by the Board of Directors of the Company (the "Basic Subscription Right"). In addition, the Company's stockholders will be granted the right to "oversubscribe" for additional shares not purchased by other stockholders, up to the total amount of the Offered Shares (the "Oversubscription Right"). In the event that the Company's stockholders, other than Gunther Partners LLC, do not subscribe for and purchase all 16,000,000 of the Offered Shares, Gunther F-9 42 Partners LLC will subscribe for and purchase from the Company in the Rights Offering a number of shares equal to 16,000,000 less the number of shares subscribed for stockholders other than Gunther Partners LLC, up to a maximum of 14,000,000 shares. The net proceeds of the Rights Offering (a minimum of $7 million less offering expenses), will be used to repay in full the notes payable to Gunther Partners LLC ($4.5 million)and the Stockholder and Director ($500,000), to purchase all notes payable to the Estate for a total of $500,000 and to purchase 919,568 shares of the Company's Common Stock held by the Estate for $137,935 (or $0.15 per share). The balance of the net proceeds from the Rights Offering will be used for general working capital purposes. To facilitate the timely purchase of the notes payable and shares held by the Estate, Gunther Partners LLC has agreed to make the purchase for the benefit of the Company on or before July 25, 2001 on the terms and conditions set forth in the preceding paragraph. Following the consummation of the Rights Offering, Gunther Partners LLC has agreed to sell to the Company all the notes payable and shares of Common Stock of the Company formerly held by the Estate for the exact amount paid therefor by Gunther Partners LLC without interest, or a total purchase price of $637,935. As of March 31, 2001, aggregate annual maturities of long-term debt which retroactively reflect the Recapitalization Agreement for the next five fiscal years are: FISCAL YEAR ENDING MARCH 31, AMOUNT ---------------- ------- 2002........................................................ $17,045 2003........................................................ 17,493 2004........................................................ 19,476 2005........................................................ 16,146 2006........................................................ 1,507 In connection with the Recapitalization Agreement, the Company will recognize an extraordinary gain of $1.3 million on the purchase of the notes payable to the Estate. If the Recapitalization Agreement were fully implemented at March 31, 2001 and the minimum proceeds of $6.8 million, net of expenses, were received, the pro forma capitalization would be as follows: RECAPITALIZATION AS REPORTED ADJUSTMENTS PRO FORMA ------------ ---------------- ------------ Long-term debt, including current maturities............................. $ 6,753,038 $(6,676,593) $ 76,445 ------------ ----------- ------------ Stockholders' equity (deficit): Common Stock............................. 4,292 14,000 18,292 Treasury Stock........................... -- (137,935) (137,935) Additional paid-in capital............... 12,188,556 6,613,500 18,802,056 Accumulated deficit...................... (15,447,675) 1,349,093 (14,098,582) ------------ ----------- ------------ (3,254,827) 7,838,658 4,583,831 ------------ ----------- ------------ Total capitalization..................... $ 3,498,211 $ 1,162,065 $ 4,660,276 ============ =========== ============ Management believes that the working capital provided (a minimum of approximately $1.1 million) by the Recapitalization Agreement and cash generated from operations will be sufficient to meet the Company's cash flow needs for the next year. F-10 43 6. DEFERRED INCOME TAXES: Significant components of the Company's deferred income tax assets (liabilities) are: 2001 2000 ----------- ----------- Equipment and leasehold improvements...................... $ (76,853) $ (102,212) Accrued expenses.......................................... 226,116 222,301 Inventories............................................... 143,630 182,574 Allowance for doubtful accounts........................... 22,823 33,903 Research and development.................................. 97,181 204,226 Net operating loss carryforwards.......................... 3,995,100 4,158,792 ----------- ----------- Net total deferred income tax asset....................... 4,407,998 4,699,584 Valuation allowance....................................... (4,407,998) (4,699,584) ----------- ----------- Net deferred income tax asset............................. $ -- $ -- =========== =========== At March 31, 2001, the Company has federal and state net operating loss carryforwards of $11.2 million and $3.5 million, respectively, which are scheduled to expire in varying amounts from 2002 to 2021. The Company has entered into a Recapitalization Agreement, as more fully described in Note 5, which may limit the amount of federal net operating loss carryforwards that can be utilized in any given year to approximately $100,000 until 2021. As such, the Company may be unable to utilize up to $8 million of federal net operating loss carryforwards. 7. WARRANTS, COMMON STOCK PURCHASE OPTIONS AND CAPITAL STOCK: In October 1998, in connection with the Gunther Partners LLC debt, the Company granted Gunther Partners LLC a warrant to purchase up to 35% of the pro forma, fully diluted number of shares of the Company's Common Stock, determined as of the date of exercise, at any time through November 2003 at an exercise price of $1.50 a share, The Rights Offering will have no effect on the number of shares of the Company's Common Stock into which the Warrants are exercisable. In November 2000, the Company agreed to extend the expiration date of the warrant by one calendar day for each calendar day from and after April 1, 2001 that any principal or interest owed under the Stockholder and Director debt remains unpaid. In addition, at March 31, 2001, warrants were outstanding to purchase 106,666 shares of the Company's Common Stock for $4.00 a share. These warrants expire in October 2003. The Company has a stock option plan. The Executive Compensation/Stock Option Committee of the Board of Directors determines the prices and terms at which options may be granted. Options vest over periods ranging from three to five years and may be exercisable up to ten years from the date of grant. A summary of stock option activity follows: 2001 2000 -------------------------- --------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE -------- -------------- --------- -------------- Outstanding, beginning of year.... 345,000 $ 2.13 400,000 $ 1.98 Granted........................... 9,000 1.49 45,000 2.91 Cancelled......................... (31,500) (5.37) (100,000) (1.88) -------- ------ --------- ------ Outstanding, end of year.......... 322,500 $ 1.79 45,000 $ 2.13 ======== ====== ========= ====== Exercisable, end of year.......... 219,733 $ 1.65 193,999 $ 2.00 ======== ====== ========= ====== Weighted average fair value of options granted................. $1.79 $2.24 ======== ========= F-11 44 At March 31, 2001, exercise prices ranged from $0.88 to $3.22 and the weighted average remaining contractual life was 8 years. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations to recognize compensation expense under its stock option plan. As such, no expense is recognized if, at the date of grant, the exercise price of the option is at least equal to the fair market value of the Company's Common Stock. No compensation expense was recognized in fiscal 2001 or 2000. If compensation expense for the Company's stock option plan had been determined using the fair value method under SFAS 123, "Accounting for Stock Based Compensation", the Company would have reported a net loss of $430,000 ($.10 per share) in fiscal 2001 and $825,000 ($.19 per share) in fiscal 2000. In connection therewith, the Company used the Black-Scholes option pricing model with the following weighted average assumptions: 2001 2000 ------ ------ Risk free interest rate................................... 5.00% 5.00% Expected dividend yield................................... None None Expected lives............................................ 5 5 Years years Expected volatility....................................... 95-160% 68-199% In conjunction with the Recapitalization Agreement, the Company will increase its authorized shares to 32,500,000 shares of capital stock consisting of 32,000,000 shares of Common Stock and 500,000 shares of Preferred Stock, all with a par value of $.001 a share. The Board of Directors is authorized to determine the powers, preferences, rights and restrictions of the Preferred Stock. At March 31, 2001 and 2000, there were no issued and outstanding shares of Preferred Stock. At March 31, 2001, 3,068,803 shares of the Company's Common Stock were reserved for issuance. 8. COMMITMENTS AND CONTINGENCIES: Development Agreement - The Company has a development agreement with Connecticut Innovations, Inc. ("CII"), which requires the Company to pay CII a royalty equal to .67% (sixty-seven hundredths of a percent) of all systems sales and provides for minimum payments of $137,500 for fiscal 2002 and $131,250 for fiscal 2003. If, during any quarter, the royalty computation does not exceed the minimum payment referred to above, the minimum payment would be made instead of the actual computed royalty amount. Total royalty expense was $125,000 and $106,250 for fiscal 2001 and 2000, respectively. CII has 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. Until the transactions contemplated by the Recapitalization Agreement is effectuated, CII has subordinated its security interest in all tangible and intangible personal property to Gunther Partners LLC. Contingencies - In fiscal 1999, two purported class action lawsuits were filed against the Company, its then-current chief executive officer and its then-current chief financial officer asserting claims under the federal securities law. In February 2001, the Company reached an out-of-court settlement, agreeing to pay $215,000 towards the settlement. Of this amount, $178,500 was expensed in the first quarter of fiscal 2001 and $36,5000 was expensed in the fourth quarter of fiscal 2000. The Court approved the settlement in May 2001. Legal fees associated with the claim were expensed as incurred, net of insurance proceeds. No additional expenses are anticipated with respect to this matter. F-12 45 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, operating results or cash flows. Other commitments - The Company has a royalty agreement with certain founding stockholders whereby the Company pays an amount equal to 1% of all the Company's sales (as defined). 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 fiscal 2001 and 2000, royalties expensed under this agreement were $242,000 and $204,000, respectively. Total royalties expensed under this agreement were $1,160,000 through March 31, 2001. The Company has an agreement related to the development and use of certain inkjet technology. This agreement requires the Company to pay royalties of 1% of inkjet sales up to a maximum of $5,000,000 through fiscal 2008. For fiscal 2001 and 2000, royalties expensed under this agreement were approximately $24,000 and $22,000, respectively. Total royalties expensed under this agreement were $46,000 through March 31, 2001. Leases - The Company leases its office and manufacturing facility under an operating lease that provides for monthly rental of $23,917 through April 2006. Under this agreement, the Company is responsible for all operating costs, real estate taxes and maintenance. The Company also leases certain office equipment under operating lease agreements. Lease expense for fiscal 2001 and 2000, was approximately $435,000 and $380,000, respectively. Future minimum payments for non-cancelable operating leases follow: FISCAL YEAR ENDING MARCH 31, AMOUNT ---------------- ---------- 2002........................................................ $ 339,707 2003........................................................ 323,314 2004........................................................ 296,199 2005........................................................ 290,244 2006........................................................ 287,274 2007........................................................ 23,917 ---------- $1,560,655 ========== 9. EMPLOYEE BENEFIT PLANS: The Company has a defined contribution benefit plan (the "Plan") covering substantially all employees. 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. 10. SIGNIFICANT CUSTOMERS AND BUSINESS CONCENTRATION: Due to the nature of the Company's products, a significant portion of the Company's revenues in all periods is generally derived from a few customers. The majority of the Company's customers are property and casualty insurance companies. During fiscal 2001, sales to two customers were 31% of sales and during fiscal 2000, sales to one customer were 16% of sales. No other customers accounted for more than 10% of sales in either year. F-13 46 11. FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of long-term debt payable to related parties as of March 31, 2001 is $5,500,000 based on the Recapitalization Agreement; its carrying value is $6,676,593. Otherwise, the carrying value of financial instruments (accounts receivable, accounts payable and debt) as of March 31, 2001 and 2000 approximates fair value. Fair value was based on cash flows and current market conditions. F-14