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 June 30, 1995 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 June 30, 1995
------------- ----------------------------
Common Stock, without
par value 7,798,909
GRADCO SYSTEMS, INC.
INDEX
Page Number
Part I. Financial Information:
Consolidated Balance Sheets
at June 30, 1995 and March 31, 1995 3
Consolidated Statements of Operations
for the Three Months Ended
June 30, 1995 and June 30, 1994 4
Consolidated Statements of Cash Flows
for the Three Months Ended
June 30, 1995 and June 30, 1994 5-6
Notes to Unaudited Consolidated Financial Statements 7-9
Management's Discussion and Analysis of
Results of Operations and Financial Condition 10-11
Part II. Other Information 12
-2-
GRADCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, March 31,
1995 1995
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash $15,521 $12,158
Trading securities, at fair value 859 579
Accounts receivable, net 26,418 27,450
Inventories 2,152 1,375
Deferred income taxes 196 192
Other current assets 1,443 1,756
------- -------
Total current assets 46,589 43,510
------- -------
Furniture, fixtures and equipment, net 2,693 1,772
License repurchase 8,512 8,689
Excess of cost over acquired net assets 1,353 1,364
Other assets 9,114 9,048
------- -------
$68,261 $64,383
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $16,898 $14,198
Current installments of long-term debt 11 11
Accounts payable 10,742 10,491
Accrued expenses 543 1,168
Income taxes payable 896 915
------- -------
Total current liabilities 29,090 26,783
------- -------
Long-term debt, excluding current installments 33 35
Non-current liabilities 1,357 1,273
Deferred income taxes 4,137 4,166
Minority interest 15,789 15,129
Shareholders' equity:
Common stock, no par value; authorized
30,000,000 shares, 7,798,909 and
7,783,909 shares outstanding June 30,
1995 and March 31, 1995, respectively 44,618 44,546
Deficit (36,169) (36,470)
Currency translation adjustments 9,406 8,921
------- -------
17,855 16,997
------- -------
$68,261 $64,383
======= =======
See accompanying notes to consolidated financial statements.
-3-
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended
----------------------
June 30, June 30,
1995 1994
---------- ----------
Revenues:
Net sales $24,505 $14,620
Development engineering services 147 181
Licenses and royalties 571 594
------- -------
25,223 15,395
------- -------
Costs and expenses:
Costs of sales 19,646 11,916
Research and development 541 283
Selling, general and administrative 3,886 2,736
------- -------
24,073 14,935
------- -------
Income from operations 1,150 460
Interest expense (9) (19)
Interest income 55 31
Dividend income - 3
Loss on trading securities 31 (170)
------- -------
Earnings before income taxes
and minority interest 1,227 305
Income tax expense 574 190
Minority interest 352 67
------- -------
Net earnings $ 301 $ 48
======= =======
Earnings per common share $ 0.04 $ .01
======= =======
Weighted average shares
outstanding (000's) 7,786 7,784
See accompanying notes to consolidated financial statements.
-4-
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
----------------------
June 30, June 30,
1995 1994
-------- --------
Cash flows from operating activities:
Net income $ 301 $ 48
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 328 271
Amortization 627 455
Deferred income taxes (120) (98)
Unrealized holding gain on trading securities (31) (111)
Loss on sale of securities - 281
Provision for losses on accounts receivable 11 9
Loss on sale of property and equipment - 4
Purchases of trading securities (249) (1,964)
Proceeds from sale of trading securities - 1,965
Issuance of shares in lieu of cash 72 -
Minority interest 352 67
Decrease (increase) in accounts receivable 1,361 (3,665)
(Increase) decrease in inventory (769) 152
Decrease (increase) in prepaid assets 353 (711)
Decrease in other assets 315 135
Increase (decrease) in accounts payable 30 (1,778)
(Decrease) increase in accrued expenses (638) 68
(Decrease) increase in income taxes payable (34) 276
Increase (decrease) in other liabilities 83 (84)
------- -------
Total adjustments 1,691 (4,728)
------- -------
Net cash provided by (used in) operations 1,992 (4,680)
------- -------
Cash flows from investing activities:
Acquisition of property and equipment (1,219) (72)
Proceeds from sale of property and equipment - 6
------- -------
Net cash used in investing activities (1,219) (66)
------- -------
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Three Months Ended
----------------------
June 30, June 30,
1995 1994
-------- --------
Cash flows from financing activities:
Net borrowings on notes less than three months 2,422 4,322
Proceeds from issuance of notes in
excess of three months - 53
Repayment of notes in excess of three months (2) -
------- -------
Net cash provided by financing activities 2,420 4,375
------- -------
Effect of exchange rate changes on cash 170 182
------- -------
Net increase (decrease) in cash
and cash equivalents 3,363 (189)
Cash and cash equivalents at beginning of period 12,158 5,613
------- -------
Cash and cash equivalents at end of period $15,521 $ 5,424
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 10 $ 1
Income taxes 712 9
See accompanying notes to consolidated financial statements.
-6-
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 June 30, 1995 and the results of operations and cash flows for the
three months ended June 30, 1995 and 1994. 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, 1995.
NOTE 2: INVENTORIES
Inventories are summarized as follows:
(Dollars in Thousands)
June 30, March 31,
1995 1995
--------- ---------
Raw materials $ 824 $ 833
Work-in-process 635 210
Finished goods 693 332
------ ------
$2,152 $1,375
====== ======
NOTE 3: SHORT-TERM DEBT
Gradco (Japan) Ltd. ("GJ"), the Company's Japanese subsidiary, has a 200
million yen (approximately $2.4 million) credit line with Sumitomo Bank,
Limited and GJ's U.S. subsidiary has a $2 million credit line with the same
bank. At June 30, 1995, there were no borrowings on these lines. The balance
of $16,898,000 in notes payable reflects amounts due to trade creditors in
ninety days.
-7-
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 1996 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
7,786,000 in the three months ended June 30, 1995 and 7,784,000 in the three
months ended June 30, 1994. 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 litigation, material claims have been asserted against the
Company:
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 pretrial 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. For each
of these cases, the Court bifurcated the liability and damage issues so that a
first trial would determine whether there is any liability and, if so, a second
trial would determine damages.
In March 1992, each of the plaintiffs filed an Application for Prejudgment
Remedy against the Company and Gradco (Japan) Ltd. seeking to attach
$10,000,000 of assets of each of these two defendants. By reason of the
dismissal of the claims against GJ, this Application likewise has been
dismissed as respects GJ. 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 GJ, 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.
-8-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: COMMITMENTS AND CONTINGENCIES (Continued)
The trial in the HAMMA case on the liability issue began on June 13, 1995, and
was completed on June 27, 1995. On the following day the jury rendered a
verdict finding Gradco and Mr. Stewart liable on substantially all counts in
the complaint and also found that the actions of the defendants warranted the
imposition of punitive damages. No amount of damages on any count, including
the punitive damages, was determined by the jury but will be determined at a
later time in a separate proceeding. The Company will seek to overturn the
verdict of the jury through motions made before the Trial Court and, to the
extent it is unsuccessful, will seek permission from the Trial Court to appeal
the verdict. An appeal is not automatically available prior to the
determination of damages. The Company is presently unable to determine the
amount of such damages which is likely to be awarded, but the amount of
damages, including punitive damages, could have a material adverse effect on
the Company's financial position and might threaten the Company's existence as
an ongoing enterprise. Gradco (Japan) Ltd. and Gradco (USA) Inc. are not
parties to the lawsuit and any judgment awarded will not affect their
operations, since those operations are independent of Gradco Systems, Inc.
In July 1995 Gradco filed a motion for judgment as a matter of law or, in the
alternative, for a new trial in the Federal District Court of Connecticut
seeking judgment or a new trial on substantially all counts of the complaint of
John Hamma and his wholly-owned corporation, Tenex. Gradco has filed various
other related motions which have been opposed by Mr. Hamma.
In July 1995 Mr. Hamma and Tenex Corporation made an application for a pre-
judgment remedy seeking to attach Gradco Systems' assets. The application sets
forth various theories of damages including a theory calling for treble damages
under Connecticut law in the amount of $70,500,000. The application asserts
that there is probable cause that a verdict in the amount of $70,500,000 or an
amount greater than $70,500,000 will be rendered in the damages part of the
case after trial on those issues.
Gradco intends to vigorously pursue all avenues available to it to reverse the
verdict rendered and to prevent the imposition of the attachment sought by the
plaintiffs in the action.
There are substantial differences between the Hamma and DuBois cases. Although
the DuBois case is also a case which will be tried before a jury and,
accordingly, there are substantial elements of uncertainty, the Company
continues to believe that the DuBois case alone will not have a material
adverse effect on its consolidated financial position.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Revenues for the three months ended June 30, 1995 increased $9,828,000 from the
amount in the prior year's first quarter. Net sales increased $9,885,000 due
to a 30% increase in unit sales in the copier market and a stronger yen, which
appreciated 18% against the dollar during the period. A substantial portion of
the increase in unit sales was attributable to increased sales to Xerox
Corporation.
Cost of sales as a percentage of net sales decreased to 80.2% from 81.5% for
the three months ended June 30, 1995 and June 30, 1994, respectively. This
percentage has remained consistently around 81% for more than two years.
Research and development expenses ("R&D") in the current quarter totaled
$541,000, 2.1% of revenues, compared to $283,000, 1.8% of revenues, in the
prior year's comparable period. The increase is attributable to several new
copier projects and the fact that last year's expenditures were unusually low
in the first quarter.
Selling, general and administrative expenses ("SG&A") in the current quarter
totaled $3,886,000, 15.4% of revenues, compared to $2,736,000, 17.8% of
revenues, in the prior year's comparable period, an increase of $1,150,000.
Approximately $450,000 of this increase is due to the unfavorable translation
of SG&A at the Company's Japanese subsidiary ("GJ") caused by the stronger yen
and $350,000 is due to increased legal fees associated with the Hamma and
DuBois lawsuits, and to a charge to SG&A in connection with the issuance of
stock in the settlement of the lawsuit involving former management.
The results for the current quarter include a gain on trading securities of
$31,000 as compared to a loss of $170,000 in the prior year period.
As a result of the above factors, earnings before income taxes and minority
interest increased to $1,227,000 in the current quarter from $305,000 in the
first quarter of fiscal 1995.
The tax provisions in both periods primarily reflect GJ income taxed in Japan.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Working capital increased to $17,499,000 at June 30, 1995 from $16,727,000 at
March 31, 1995. At June 30, 1995, the Company had $15,521,000 in cash,
$859,000 in trading securities and minimal long-term debt. GJ has a 200
million yen (approximately $2.4 million) line of credit with a Japanese bank
and has established a $2 million line of credit for its U.S. subsidiary.
There were no borrowings under these lines at June 30, 1995. Notes payable to
trade creditors has 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
operational needs. At June 30, 1995, there were no material commitments
for capital expenditures.
On June 28, 1995, a jury found the Company to have a liability in the lawsuit
by John C. Hamma, a former employee. A separate proceeding to determine the
amount of damages will be required. An award of damages could have a material
adverse effect on the Company's financial position and might threaten its
existence as an ongoing enterprise. For further information regarding this
litigation, see Note 6 of Notes to Unaudited Consolidated Financial Statements.
-11-
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information regarding the current status of the Hamma and DuBois
lawsuits, contained in Note 6 of Notes to Unaudited Consolidated
Financial Statements set forth in Part I of this Report, is hereby
incorporated by reference in response to this Item 1.
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-
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: August 11, 1995 HARLAND L. MISCHLER
Harland L. Mischler
Executive Vice President, Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
-13-
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