<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended December 31, 1994 Commission file number 0-12829
GRADCO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Nevada 95-3342977
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3753 Howard Hughes Pkwy, Ste 200,
Las Vegas, Nevada 89109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 892-3714
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the proceeding 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
------- -------
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at December 31, 1994
------------- ----------------------------
Common Stock, without
par value 7,783,909
<PAGE>
GRADCO SYSTEMS, INC.
INDEX
Page Number
Part I. Financial Information:
Consolidated Balance Sheets
at December 31, 1994 and March 31, 1994 3
Consolidated Statements of Operations
for the Three and Nine Months Ended
December 31, 1994 and December 31, 1993 4
Consolidated Statements of Cash Flows
for the Nine Months Ended
December 31, 1994 and December 31, 1993 5-6
Notes to Consolidated Financial Statements 7-9
Management's Discussion and Analysis of
Results of Operations and Financial Condition 10-11
Part II. Other Information 12
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<PAGE>
GRADCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash $ 9,212 $ 5,613
Trading securities, at fair value 1,380 2,112
Accounts receivable, net 23,874 13,445
Inventories 1,815 2,579
Other current assets 1,097 187
------- -------
Total current assets 37,378 23,936
------- -------
Furniture, fixtures and equipment, net 1,754 1,536
License repurchase 7,864 8,548
Excess of cost over acquired net assets 1,375 1,407
Other assets 6,429 6,369
------- -------
$54,800 $41,796
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $12,846 $ 3,979
Current installments of long-term debt 10 -
Accounts payable 9,117 8,673
Accrued expenses 1,134 854
Income taxes payable 1,490 186
Deferred income taxes 37 36
------- -------
Total current liabilities 24,634 13,728
------- -------
Long-term debt, excluding current installments 38 -
Non-current liabilities 590 673
Deferred income taxes 2,848 3,063
Minority interest 14,213 13,195
Shareholders' equity:
Common stock, no par value;
authorized 30,000,000 shares,
7,783,909 shares outstanding 44,546 44,546
Deficit (37,018) (37,922)
Currency translation adjustments 4,949 4,513
------- -------
12,477 11,137
------- -------
$54,800 $41,796
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- --------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1994 1993 1994 1993
--------- ---------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Net sales $21,063 $11,234 $55,536 $37,741
Development engineering services 120 45 695 244
Licenses and royalties 625 600 1,848 1,673
------- ------- ------- -------
21,808 11,879 57,968 39,658
------- ------- ------- -------
Costs and expenses:
Costs of sales 16,951 9,191 44,866 30,413
Research and development 396 415 1,591 1,167
Selling, general and administrative 3,106 2,699 8,732 7,717
------- ------- ------- -------
20,453 12,305 55,189 39,297
------- ------- ------- -------
Income (loss) from operations 1,355 (426) 2,779 361
Interest expense (26) (17) (67) (89)
Interest income 38 28 88 115
Dividend income - 12 4 12
Loss on trading securities (84) (3) (302) (3)
------- ------- ------- -------
Earnings before income taxes
and minority interest 1,283 (406) 2,502 396
Income tax expense 514 (114) 1,041 580
Minority interest 303 (154) 557 (204)
------- ------- ------- -------
Net earnings (loss) $ 466 $ (138) $ 904 $ 20
======= ======= ======= =======
Earnings (loss) per common share $ 0.06 $ (.02) $ 0.12 $ 0.00
======= ======= ======= =======
Weighted average shares
outstanding (000's) 7,784 7,784 7,784 7,784
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
Dec. 31, Dec. 31,
1994 1993
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 904 $ 20
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 741 783
Amortization 1,429 1,287
Deferred income taxes (254) (282)
Unrealized holding loss on trading securities 101 7
Loss (gain) on sale of securities 201 (4)
Provision for losses on accounts receivable 47 32
Gain on sale of property and equipment (6) (11)
Purchases of trading securities (2,479) (2,375)
Proceeds from sale of trading securities 2,909 249
Minority interest 557 (204)
(Increase) decrease in accounts receivable (10,104) 3,553
Decrease in inventory 789 522
Increase in prepaid assets (896) (361)
(Increase) decrease in other assets (9) 105
Increase (decrease) in accounts payable 202 (886)
Increase (decrease) in accrued expenses 272 (425)
Increase in income taxes payable 1,295 844
Decrease in other liabilities (84) (290)
------- -------
Total adjustments (5,289) 2,546
------- -------
Net cash (used in) provided by operations (4,385) 2,566
------- -------
Cash flows from investing activities:
Acquisition of property and equipment (961) (648)
Proceeds from sale of property and equipment 28 24
------- -------
Net cash used in investing activities (933) (624)
------- -------
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Nine Months Ended
----------------------
Dec. 31, Dec. 31,
1994 1993
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) on notes
less than three months 8,725 (5,103)
Proceeds from issuance of notes in
excess of three months 1,553 1,500
Repayment of notes in excess of three months (1,505) (697)
Principal payments for capital lease obligations - (28)
------- -------
Net cash provided by (used in)
financing activities 8,773 (4,328)
------- -------
Effect of exchange rate changes on cash 144 2
------- -------
Net increase (decrease) in cash
and cash equivalents 3,599 (2,384)
Cash and cash equivalents at beginning of period 5,613 5,635
------- -------
Cash and cash equivalents at end of period $ 9,212 $ 3,251
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 44 $ 78
Income taxes 41 39
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: INTERIM ACCOUNTING POLICY
The accompanying consolidated financial statements include the accounts of
Gradco Systems, Inc. and its wholly and majority-owned subsidiaries (the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
In the opinion of the Company's management, the accompanying unaudited
statements include all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the financial position of the
Company at December 31, 1994 and the results of operations and cash flows for
the three and nine months ended December 31, 1994 and 1993. Although the
Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Results of operations for interim periods are not necessarily
indicative of results of operations to be expected for the full year.
The financial information included in this quarterly report should be read in
conjunction with the consolidated financial statements and related notes
thereto in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1994.
NOTE 2: INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Dec. 31, March 31,
1994 1994
--------- ---------
<S> <C> <C>
Raw materials $ 902 $ 979
Work-in-process 121 584
Finished goods 792 1,016
------ ------
$1,815 $2,579
====== ======
</TABLE>
NOTE 3: SHORT-TERM DEBT
Gradco (Japan) Ltd. ("GJ"), the Company's Japanese subsidiary, has a 200
million yen (approximately $2 million) credit line with Sumitomo Bank, Limited
and GJ's U.S. subsidiary has a $2 million credit line with the same bank. At
December 31, 1994, total borrowings on these lines were $1,500,000. The
balance of $11,346,000 in notes payable reflects amounts due to trade creditors
in ninety days.
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<PAGE>
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: INCOME TAXES
The effective consolidated income tax rate used by the Company is based on the
estimated annual effective tax rates for fiscal year 1995 in the countries
where the Company operates applied to results of the quarter. The Company has
given no benefit to loss carryforwards available for U.S. tax purposes as
recent loss experience from U.S. operations does not support realization of
such benefits.
NOTE 5: NET EARNINGS PER SHARE
Net earnings per common share and common share equivalent were computed based
upon the weighted average number of shares outstanding during each period. The
approximate weighted average number of shares used in the computations were
7,784,000 in all periods. For the periods presented, the effect on net
earnings per common share assuming full dilution is either anti-dilutive or
results in less than 3% dilution.
NOTE 6: COMMITMENTS AND CONTINGENCIES
In the following litigations, material claims have been asserted against the
Company:
(a) GRADCO V. KEITH B. STEWART ET AL. This case commenced in August 1990 as a
derivative action against directors of the Company. In September 1991, it was
converted into a direct action by the Company against Keith Stewart and Horst
Sieben and a number of other former officers of the Company. In that action
the Company seeks a determination that the defendants breached their fiduciary
duty in granting to themselves warrants to purchase stock in Gradco (Japan)
Ltd. The Company also seeks damages via a cross complaint which it has filed
against Mr. Stewart and others alleging a conspiracy to defraud the Company.
Various charges have been made against Mr. Stewart and others by the Company
seeking recovery of damages in excess of $2,000,000 plus punitive damages. The
complaint also seeks a declaration that no payments are due to the defendants
under their "golden parachute" agreements.
Mr. Stewart and other former employees have instituted actions against the
Company, certain of its subsidiaries, Martin E. Tash and Plenum Publishing
Corporation claiming various damages including payments under their "golden
parachute" agreements. The stated aggregate claims for compensatory damages
sought for said former employees for all of their claims exceeds $20,000,000.
Of that sum approximately $2,500,000 is attributed to the aforesaid alleged
breaches of the "golden parachute" agreements. The balance is principally
attributed to various causes of action arising from the same set of facts,
including such claims as conspiracy to induce breach of contract and
intentional infliction of emotional distress. The Company has denied all
liability in connection with the aforesaid claims and asserted affirmative
defenses thereto. The claims by one of the former employees have been settled.
Pre-trial discovery is being conducted in all of the above matters, and the
discovery cutoff date is April 30, 1995. A trial date has been set for May 30,
1995.
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<PAGE>
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: COMMITMENTS AND CONTINGENCIES (Continued)
(b) HAMMA V. GRADCO SYSTEMS, INC. ET AL., DUBOIS V. GRADCO SYSTEMS, INC. ET
AL. The Company and Mr. Stewart have been sued in Connecticut by John C. Hamma
and R. Clark DuBois, both of whom are former employees of the Company.
Complaints in the two cases, which have been consolidated for certain purposes,
allege misrepresentation and fraudulent concealment by Gradco and Mr. Stewart
in connection with agreements entered into in 1982 with Mr. Hamma and in 1983
with Mr. DuBois terminating and releasing the Company from royalty obligations
under prior royalty agreements which agreements required the payment by Gradco
of royalties to each of the plaintiffs based upon sales of products subject to
patents in which such persons were involved. The complaints, which have been
amended a number of times, seek unspecified damages and other relief. The
court has bifurcated the liability and damage issues, so that in the first
trial there will only be a determination of whether there is any liability. If
liability is found, then there will be further discovery and a second trial on
the damages issue.
In March 1992, each of the plaintiffs filed an Application for Prejudgment
Remedy against the Company, seeking to attach $10,000,000 of its assets. In
November 1992, the Company and the plaintiffs agreed in principle to a Consent
Order instead of proceeding with a hearing on the Application. If during the
pendency of the lawsuits the Company desires to sell, transfer or take any
other action which would affect its ownership of stock in Gradco (Japan) Ltd.,
it has agreed to give 30 days prior notice to the plaintiffs, who will then be
permitted, if they so request, to renew the Application within the notice
period. Should plaintiffs do so, the Company has agreed to forbear from
proceeding with any such transaction for a limited period. The Company would
vigorously oppose a renewed Application. Management believes that the Consent
Order is in the Company's best interests because it precludes any attachment of
the Company's assets until such time as a proposed transaction which would
affect its ownership of stock in GJ may arise, and it avoids the legal expenses
which would have resulted from a current hearing on the Application.
The District Court Judge previously assigned to these cases recently was
appointed to the Court of Appeals. These cases have been assigned to a new
District Court Judge, who held a status conference in December 1994, and has
scheduled additional pretrial proceedings. The Company anticipates that a
trial will be held during 1995.
The Company's management believes that in each of the actions in which claims
are made against the Company described above it has substantial defenses, and
in the case described in (a) above it has substantial counterclaims. While any
proceeding or litigation has an element of uncertainty, the Company believes
that the ultimate outcome of these lawsuits or claims will not have a material
adverse effect on its consolidated financial position.
-9-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Revenues for the three and nine months ended December 31, 1994 increased
$9,929,000 and $18,310,000, respectively, as compared to amounts in the
comparable prior year periods. Net sales increased $9,829,000 in the current
quarter over the year earlier period due to a 66% increase in unit sales in the
copier market and a stronger yen, which appreciated 8% against the dollar
during the period. Net sales increased $17,684,000 in the nine-month period
over the prior year due to a 35% increase in unit sales in the copier market
and a stronger yen. A substantial portion of the increases in unit sales was
attributable to increased sales to Xerox Corporation and its European
affiliate. Revenue from development engineering services increased by $75,000
and $451,000 in the three and nine-month periods, respectively, as a result of
new printer and copier projects which were partially funded by customers.
Cost of sales as a percentage of net sales decreased to 80.5% from 81.8% for
the three months ended December 31, 1994 and 1993, respectively and increased
to 80.9% from 80.6% for the nine-month periods then ended. This percentage has
remained consistently around 81% for the last two years.
Research and development expenses ("R&D") in the current quarter totaled
$396,000, 1.8% of revenues, compared to $415,000, 3.5% of revenues, in the
prior year's comparable period. For the nine months ended December 31, 1994
and 1993, R&D totaled $1,591,000, 2.7% of revenues and $1,167,000, 2.9% of
revenues, respectively. The increase in the nine-month amount is attributable
to the printer and copier projects previously mentioned.
Selling, general and administrative expenses ("SG&A") in the current quarter
totaled $3,106,000, 14.2% of revenues, compared to $2,699,000, 22.7% of
revenues, in the prior year's comparable period. For the nine months ended
December 31, 1994 and 1993, SG&A totaled $8,732,000, 15.1% of revenues and
$7,717,000 (which includes a credit for $141,000 representing a settlement in
the Company's favor of an insurance claim for property damage incurred several
years earlier), 19.5% of revenues, respectively. These increases are partially
due to the unfavorable translation of SG&A at the Company's Japanese subsidiary
("GJ") caused by the stronger yen and the balance is consistent with the growth
in revenue.
As a result of the above factors, earnings before income taxes and minority
interest increased to $1,283,000 in the current quarter from a loss of $406,000
in the third quarter of fiscal 1994 and to $2,502,000 in the nine months ended
December 31, 1994 from $396,000 in the prior year nine-month period. The
results for the current quarter and nine-month period include losses on trading
securities of $84,000 and $302,000, respectively as compared to a loss of
$3,000 in both prior year periods.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
The tax provisions in all periods primarily comprise foreign taxes on the
earnings of the Company's Japanese subsidiary. A shift in the geographic
distribution of pre-tax earnings, which began in the third quarter of last
year, has resulted in reducing the consolidated effective tax rate from 146.5%
in the nine months ended December 31, 1993 to 41.6% in the current nine months,
since U.S. profits can be offset by NOL carryforwards for federal tax purposes.
FINANCIAL CONDITION
Working capital increased to $12,744,000 at December 31, 1994 from $10,208,000
at March 31, 1994. At December 31, 1994, the Company had $9,212,000 in cash,
$1,380,000 in trading securities and minimal long-term debt. The Company's
Japanese subsidiary ("GJ") has a 200 million yen (approximately $2 million)
line of credit with a Japanese bank and has established a $2 million line of
credit for its U.S. subsidiary. Total borrowings under these lines were
$1,500,000 at December 31, 1994. Accounts receivable and notes payable to
trade creditors have increased as a result of the increase in net sales during
the current quarter.
The Company believes that as a result of its restructuring and staff reductions
its cash and credit facilities are adequate for its short and long-term needs.
At December 31, 1994, there were no material commitments for capital
expenditures.
-11-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
GRADCO SYSTEMS, INC.
Registrant
By:
Date: February 7, 1995 HARLAND L. MISCHLER
Harland L. Mischler
Executive Vice President, Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the 12/31/94
Form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> DEC-31-1994
<CASH> 9,212
<SECURITIES> 1,380
<RECEIVABLES> 23,874
<ALLOWANCES> 0
<INVENTORY> 1,815
<CURRENT-ASSETS> 37,378
<PP&E> 6,314
<DEPRECIATION> 4,560
<TOTAL-ASSETS> 54,800
<CURRENT-LIABILITIES> 24,634
<BONDS> 0
<COMMON> 44,546
0
0
<OTHER-SE> (32,069)
<TOTAL-LIABILITY-AND-EQUITY> 54,800
<SALES> 55,536
<TOTAL-REVENUES> 57,968
<CGS> 44,866
<TOTAL-COSTS> 55,189
<OTHER-EXPENSES> 298
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (21)
<INCOME-PRETAX> 2,502
<INCOME-TAX> 1,041
<INCOME-CONTINUING> 904
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 904
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
