==========================================START OF PAGE 1====== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37073 \ April 5, 1996 Admin. Proc. File No. 3-8792 _________________________________________________ : In the Matter of the Application of : : GUNTHER INTERNATIONAL LTD. : 5 Wisconsin Ave. : Norwich, CT 06360 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : _________________________________________________ : ==========================================START OF PAGE 2====== OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- DELISTING FROM THE NASDAQ SMALLCAP MARKET Financial Condition Where registered securities association removed a security from its automated quotation system because the issuer of the security was not in compliance with the maintenance standards for capital and surplus, held, review proceeding dismissed. APPEARANCES: James T. Seery, of Reid & Priest, LLP, for Gunther International Ltd. T. Grant Callery and Carla J. Carloni, for the National Association of Securities Dealers, Inc. Appeal filed: August 28, 1995 Last brief filed: November 20, 1995 I. Gunther International Ltd. ("Gunther" or the "Company"), an issuer formerly listed on the Nasdaq SmallCap Market ("Nasdaq SmallCap"), appeals the decision of the National Association of Securities Dealers, Inc. ("NASD") to delist the Company's securities. The NASD found that Gunther was not in compliance with the requirement that the Company maintain $1 million in capital and surplus. -[1]- Our findings are based on an ---------FOOTNOTES---------- -[1]- See Section 1(c)(3) of Part II of Schedule D to the NASD's By-Laws, NASD Manual (CCH) 1803. Section 7 of Part I of Schedule D to the NASD's By-Laws defines capital and surplus as "total stockholders' equity as presented in accordance with generally accepted accounting principles as reflected on the issuer's statement of financial condition or comparable statement." Id. at 1802. When an issuer does not comply with this standard, it can be "delisted," that is, the issuer's security will no longer be quoted on the automated quotation system. See Biorelease Corp., (continued...) ==========================================START OF PAGE 3====== independent review of the record. II. Gunther develops and markets high speed systems that assemble printed documents for mailing or other distribution. The Company's securities became listed on Nasdaq SmallCap on December 31, 1993. At that time, Gunther had capital and surplus of at least $2 million in order to meet the listing requirement for initial inclusion on Nasdaq SmallCap. -[2]- Gunther filed a Form 10-QSB for the period ended December 31, 1994, which reported that the Company had $797,839 in capital and surplus. On February 16, 1995, the NASD notified Gunther that the Company's capital and surplus, as reflected in that Form 10-QSB, was below the amount required for continued inclusion in Nasdaq SmallCap. At the NASD's invitation, on March 1, 1995, the Company requested a temporary exception to the maintenance requirement. -[3]- In support of its request, Gunther asserted that the NASD should have included certain non-current convertible notes payable ("convertible notes payable") in its calculation of Gunther's capital and surplus. Gunther argued that these convertible notes payable should be considered equity because the holders of those notes made an irrevocable investment decision on December 30, 1994 to convert those notes to shares of common stock ("First Conversion Agreement"). Gunther contended that including that amount of equity would have increased the Company's capital and surplus by $585,000. -[4]- By giving ---------FOOTNOTES---------- -[1]-(...continued) Securities Exchange Act Rel. No. 35575 (Apr. 6, 1995), 59 SEC Docket 84, 85 n.1. -[2]- See Section 1(c)(2) of Part II of Schedule D to the NASD's By-Laws, NASD Manual (CCH)  1803. -[3]- See Section 3 of Part II of Schedule D to the NASD's By-Laws, NASD Manual (CCH)  1805 (stating that the NASD may make exceptions to the application of criteria for the continued inclusion of a particular security). -[4]- Gunther had failed to make a periodic payment due on September 4, 1994 on two unsecured promissory notes for the principal amount of $551,000. This delinquency gave the noteholders the right to accelerate the payment of all principal and interest, which aggregated $585,000. The $585,000 (continued...) ==========================================START OF PAGE 4====== retroactive effect to the First Conversion Agreement, Gunther calculated that the Company had a pro forma net worth of $1,382,595 at December 31, 1994. As discussed below, however, the conversion of the convertible notes payable into common stock did not occur until the shares were registered. Gunther represented that it had commenced the preparation of a Form S-1 registration statement and that the conversion of the convertible notes payable into common stock would occur within five days after the effective date of the registration statement, which it anticipated filing in early April 1995. The Company estimated that the registration statement would become effective, and the transaction would be completed, by the end of April 1995. -[5]- Gunther also noted that, in addition to the First Conversion Agreement, two principal stockholders holding Company debt aggregating approximately $455,000 had expressed a willingness to convert that debt into common stock in order to strengthen Gunther's financial condition. Gunther reasoned that such a conversion, if calculated as of December 31, 1994, would give the Company a pro forma net worth of $1,252,592. Gunther suggested that it would pursue such a conversion in support of its requested exception. -[6]- Gunther also reported that the same two stockholders had guaranteed the payment of the Company's bank debt in the principal amount of $850,000, and that, if the stockholders paid the bank debt, this debt would be convertible into common stock. On April 12, 1995, the Nasdaq Listing Qualifications Committee ("Qualifications Committee") rejected Gunther's request for an exception. The Qualifications Committee expressed the opinion that the Company's plan for compliance was speculative, ---------FOOTNOTES---------- -[4]-(...continued) was reflected on Gunther's balance sheet as of December 31, 1994 as non-current convertible notes payable. -[5]- Gunther filed the registration statement on April 28, 1995. The registration was declared effective by the Commission on September 28, 1995. -[6]- This conversion (the "Second Conversion Agreement") in fact took place on April 10, 1995. Gunther does not state when the shareholders had expressed willingness to convert. ==========================================START OF PAGE 5====== particularly in light of its demonstrated operating losses. -[7]- The Qualifications Committee deemed the Company's December 31, 1994 pro forma financial statements giving retroactive effect to the First and Second Conversion Agreements insufficient to demonstrate that the company was in compliance. Gunther's common stock was delisted from Nasdaq SmallCap on April 13, 1995. In appealing to the Nasdaq Hearing Review Committee ("Review Committee"), the Company argued that an exception should be granted because its internal projections indicated a positive trend and the registration statement for the convertible notes payable had been filed as of the date of the appeal. -[8]- Gunther's internal projections predicted a reduction in the rate of losses through the first two quarters of fiscal 1996, profitability for each of the third and fourth quarters, and overall profits for fiscal 1996. The Company claimed that its internal projections presented a realistic view of the Company's next fiscal year, and were based upon current work in progress, backlog, and other factors. Gunther also reported improvements in gross margins which resulted from cost savings through new purchasing programs and improved manufacturing systems initiated by new senior management in the fourth quarter of the fiscal year ended March 31, 1995. Gunther asserted that, giving effect to conversions of debt into common stock effected in the fourth quarter, the Company maintained a belief that at all times in fiscal 1996 its net worth would exceed $1 million. -[9]- Gunther also represented that two principal stockholders had indicated their intention to contribute an additional $200,000, if necessary, to ensure compliance with the $1 million capital and surplus requirement. ---------FOOTNOTES---------- -[7]- During the nine months ended December 31, 1994, the Company had lost approximately $940,000 per quarter. -[8]- In the registration statement, Gunther acknowledged that its auditors cautioned that certain factors raised substantial doubt about the Company's ability to continue as a going concern. -[9]- This reference to fourth quarter conversions by the Company is obscure. Gunther's fourth quarter runs from January 1 to March 31. The First Conversion Agreement, according to Gunther, occurred on December 30, 1994. The registration was not declared effective until September 28, 1995. The Company has represented to us that the Second Conversion Agreement occurred on April 10, 1995. ==========================================START OF PAGE 6====== Gunther also alleged that it was unfair and arbitrary for the Qualifications Committee to project the Company's future based solely on past performance. Gunther acknowledged that many companies having similar performance histories would be unable to recover to the point of being profitable, but contended that such companies did not have stockholders who had demonstrated their commitment by converting, in the past 15 months, $900,000 of Company indebtedness into equity. In addition, one of these stockholders had guaranteed the Company's bank line of credit, the principal amount of which currently stood at $1,500,000. The commitment by these stockholders, Gunther asserted, together with improvements in operations already instituted by new senior management, would result in the Company matching its internal projections and satisfying the capital and surplus requirement. In its decision dated July 31, 1995, the Review Committee acknowledged that Gunther's projections evidenced a positive trend. -[10]- The Review Committee determined, nonetheless, to affirm the Qualifications Committee's denial of Gunther's exception request. The Review Committee found that, as of the date of the hearing, the Company had not demonstrated compliance with the maintenance criteria. Since the issuance of the Review Committee's decision, Gunther has made several other filings with the Commission. -[11]- We take official notice of these filings. III. Gunther seeks reversal of the NASD's action delisting the Company and ordering reinstatement of its Nasdaq SmallCap listing. In general, we determine whether the specific grounds ---------FOOTNOTES---------- -[10]- The Review Committee noted that Gunther had not filed its Form 10-KSB for its fiscal year ended March 31, 1995 as of the date of the hearing by the Review Committee. That Form was filed on June 29, 1995 and Gunther filed an amendment, a Form 10-KSB/A, on September 12, 1995. In these forms, Gunther's balance sheet indicated that it had $509,364 of capital and surplus. -[11]- In addition to the forms discussed in note 10, Gunther filed a Form 10-QSB for the quarter ended June 30, 1995, which reported capital and surplus of $33,340, and a Form 10-QSB for the quarter ended September 30, 1995, which reported capital and surplus of $1,305,101. In its latest filing, Gunther represented that it had completed a $1 million private placement of common stock. ==========================================START OF PAGE 7====== on which such action is based exist in fact, whether such action is in accordance with applicable NASD rules, and whether these rules are, and were, applied in a manner consistent with the purposes of the federal securities laws. -[12]- We believe that the NASD acted properly when it delisted Gunther. The Company continues to maintain that the convertible notes payable should be considered equity. Therefore, Gunther asserts it should have never been delisted. The Company also contends that the NASD should have considered the undertakings, projections, and other materials submitted by the Company in support of an exception to the capital and surplus requirement and that the refusal to consider such material was arbitrary and capricious. The burden is on Gunther to demonstrate its compliance with Nasdaq listing requirements. -[13]- The Company has failed to meet this burden. As of December 31, 1994, Gunther did not meet the $1 million capital and surplus requirement. Gunther does not cite to us, nor can we find, any authority in generally accepted accounting principles ("GAAP") that would support the Company's position that the convertible notes payable underlying the First Conversion Agreement should be considered equity. In fact, Gunther admits that, in accordance with GAAP, the Company was precluded from including that amount in its capital and surplus as of December 31, 1994. -[14]- The Company's ---------FOOTNOTES---------- -[12]- Section 19(f) of the Securities Exchange Act of 1934. -[13]- See Biorelease Corp., Securities Exchange Act Rel. No. 33575 (Apr. 6, 1995), 59 SEC Docket 84, 90. -[14]- In its brief, Gunther states: when an investor agrees to exchange debt of a publicly traded company for equity in the company, the company may not reflect the conversion of the debt until such time as the shares of stock are actually issued to the investor and the debt is extinguished. It does not matter that the holder of the debt has made a binding agreement to convert his or her debt to equity. Our Staff Accounting Bulletin No. 94 ("SAB 94") makes clear that a gain or loss from a debt extinguishment such as that contemplated by the First Conversion Agreement should be recognized only in the period of extinguishment. Staff Accounting Bulletin No. 94, Federal Securities Law Reports (CCH) 75,557 and 75,721. Gunther contends, however, that it continued to categorize (continued...) ==========================================START OF PAGE 8====== argument seeking to persuade us of the "economic reality" is therefore to no avail. -[15]- Gunther argues that the NASD's enforcement of its listing requirements focused on "hyper-technical accounting positions." The Company is mistaken. Enforcement of the listing requirements protects the interests of prospective future investors who are entitled to assume that the securities listed in Nasdaq Smallcap meet the system's listing standards. -[16]- Gunther contends that the NASD acted unfairly and ---------FOOTNOTES---------- -[14]-(...continued) the convertible notes payable as debt only to be consistent with GAAP. The Company argues that, if it had known that the NASD would have a problem with Gunther's capital and surplus, the Company might have chosen to report the convertible notes payable as stockholders' equity. This position is inconsistent with Gunther's own brief, as quoted above, and with the authorities cited. Gunther also attempts to argue that the placement of the convertible notes payable below the Company's Class B Senior, Non-Convertible Redeemable Preferred Stock on the balance sheet shows that the convertible notes payable were equity. Gunther is correct in stating that the position of a balance sheet item may indicate that the item has characteristics of equity. The placement of an item on a balance sheet, however, does not, by itself, confer equity status. -[15]- The Company represents that our Staff agreed with Gunther that the First Conversion Agreement constituted a completed private placement for purposes of registration requirements. We note that there is no documentation of this communication, nor any indication of the context in which such a statement may have been made. In any event, the status of the First Conversion Agreement for registration purposes is not relevant to its characterization in the financial statements in accordance with GAAP. Section 1(c)(3) of Part II of Schedule D of the NASD's By- Laws specifically references GAAP in defining capital and surplus. -[16]- KLH Engineering Group, Inc., Securities Exchange Act Rel. No. 26422 (Oct. 26, 1995), 60 SEC Docket 1714, 1720; Biorelease Corp., Securities Exchange Act Rel. No. 35575 (Apr. 6, 1995), 59 SEC Docket 84, 92; Tassaway, Inc., 45 S.E.C. 706, 709 (1975). ==========================================START OF PAGE 9====== arbitrarily in refusing to consider the undertakings, internal projections, and other material submitted by the Company in support of its exception request. We disagree. The record shows that the NASD considered and found wanting those undertakings, internal projections, and other materials. Gunther further declares that it currently meets the $1 million capital and surplus requirements and, in accordance with its pro forma statements, has at all times exceeded the minimum capital and surplus requirement. -[17]- The Company also mentions the strong financial commitment of its stockholders who have invested approximately $2 million since December 30, 1994. -[18]- Although Gunther may currently meet the NASD's capital and surplus maintenance requirement, with capital and surplus reported as $1,305,101 in its Form 10-QSB filed on November 13, 1995, the NASD is well-founded in its concern as to whether the Company will be able to continue to maintain the Nasdaq SmallCap listing requirements. -[19]- Gunther appears unable to stop its hemorrhage of money as evidenced by the fact that the Company currently maintains only $1,305,101 in capital and surplus even in light of these stockholders' recent investment of approximately $2 million in the Company during 1995. ---------FOOTNOTES---------- -[17]- Once delisted, a company must meet initial listing requirements in order to be relisted on the Nasdaq SmallCap. -[18]- The transactions upon which Gunther relies are the First Conversion Agreement involving $551,000, the Second Conversion Agreement involving $455,000, and a $1 million private placement. -[19]- In its brief, the Company seeks to refute a statement of the facts by the NASD in which the NASD stated that "Gunther's arguments were based upon what it perceived to be the probable outcome of various events that had not yet occurred." Gunther counters that only one event had not occurred. This event involved a $540,172 conversion of debt into equity purportedly on March 31, 1995. This reference is unclear. The Company's Form 10-KSB indicates that the conversion of this amount of debt occurred on March 31, 1995. However, the Company represented to both us and the NASD that the Second Conversion Agreement, which is for this same amount of money, occurred on April 10, 1995. In view of our resolution of this appeal, we find it unnecessary to address this inconsistency. ==========================================START OF PAGE 10====== We find that a sufficient factual basis existed to delist Gunther, that the NASD acted fairly and in accordance with its Rules, which are, and were applied in a manner consistent with the purposes of the federal securities laws. Accordingly, this review proceeding should be dismissed. An appropriate order will issue. -[20]- By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary ---------FOOTNOTES---------- -[20]- All of the contentions advanced by the parties have been considered. The contentions are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed in this opinion. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37073 \ April 5, 1996 Admin. Proc. File No. 3-8792 _________________________________________________ : In the Matter of the Application of : : GUNTHER INTERNATIONAL LTD. : 5 Wisconsin Ave. : Norwich, CT 06360 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : _________________________________________________ : ==========================================START OF PAGE 12====== ORDER DISMISSING REVIEW PROCEEDING On the basis of the Commission's opinion issued this day, it is ORDERED that the application for review filed by Gunther International Ltd. be, and it hereby is, dismissed. By the Commission. Jonathan G. Katz Secretary