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, 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 December 31, 1995
------------- ----------------------------
Common Stock, without
par value 7,798,909
GRADCO SYSTEMS, INC.
INDEX
Page Number
Part I. Financial Information:
Consolidated Balance Sheets
at December 31, 1995 and March 31, 1995 3
Consolidated Statements of Operations
for the Three and Nine Months Ended
December 31, 1995 and December 31, 1994 4
Consolidated Statements of Cash Flows
for the Nine Months Ended
December 31, 1995 and December 31, 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)
December 31, March 31,
1995 1995
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash $ 15,316 $ 12,158
Trading securities, at fair value - 579
Accounts receivable, net 23,947 27,450
Inventories 2,305 1,375
Deferred income taxes 160 192
Other current assets 1,558 1,756
-------- --------
Total current assets 43,286 43,510
-------- --------
Furniture, fixtures and equipment, net 2,032 1,772
License repurchase 6,371 8,689
Excess of cost over acquired net assets 1,332 1,364
Other assets 5,936 9,048
-------- --------
$ 58,957 $ 64,383
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 13,522 $ 14,198
Current installments of long-term debt 11 11
Accounts payable 8,605 10,491
Accrued expenses 1,019 1,168
Income taxes payable 2,097 915
-------- --------
Total current liabilities 25,254 26,783
-------- --------
Long-term debt, excluding current installments 28 35
Non-current liabilities 1,009 1,273
Deferred income taxes 3,130 4,166
Minority interest 13,821 15,129
Shareholders' equity:
Common stock, no par value; authorized
30,000,000 shares, 7,798,909 and
7,783,909 shares outstanding
December 31, 1995 and March 31, 1995,
respectively 44,618 44,546
Deficit (34,441) (36,470)
Currency translation adjustments 5,538 8,921
-------- --------
15,715 16,997
-------- --------
$ 58,957 $ 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 Nine Months Ended
-------------------- --------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1995 1994
--------- --------- --------- ---------
Revenues:
Net sales $24,389 $21,063 $72,849 $55,425
Development engineering services 1,151 120 1,503 695
Licenses and royalties 604 625 1,847 1,848
------- ------- ------- -------
26,144 21,808 76,199 57,968
------- ------- ------- -------
Costs and expenses:
Costs of sales 19,071 16,951 57,822 44,866
Research and development 1,735 396 2,993 1,591
Selling, general and administrative 3,351 3,106 10,433 8,732
------- ------- ------- -------
24,157 20,453 71,248 55,189
------- ------- ------- -------
Income from operations 1,987 1,355 4,951 2,779
Interest expense (1) (26) (11) (67)
Interest income 42 38 167 88
Dividend income - - - 4
Gain (loss) on trading securities - (84) 53 (302)
------- ------- ------- -------
Earnings before income taxes
and minority interest 2,028 1,283 5,160 2,502
Income tax expense 705 514 2,017 1,041
Minority interest 415 303 1,115 557
------- ------- ------- -------
Net earnings $ 908 $ 466 $ 2,028 $ 904
======= ======= ======= =======
Earnings per common share $ 0.12 $ 0.06 $ 0.26 $ 0.12
======= ======= ======= =======
Weighted average shares
outstanding (000's) 7,799 7,784 7,795 7,784
See accompanying notes to consolidated financial statements.
-4-
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
-----------------------
Dec. 31, Dec. 31,
1995 1994
--------- ---------
Cash flows from operating activities:
Net income $ 2,028 $ 904
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 934 741
Amortization 1,628 1,429
Deferred income taxes (438) (254)
Unrealized holding (gain) loss
on trading securities (8) 101
(Gain) loss on sale of securities (45) 201
Provision for losses on accounts receivable 34 47
Gain on sale of property and equipment - (6)
Purchases of trading securities (249) (2,479)
Proceeds from sale of trading securities 882 2,909
Issuance of shares in lieu of cash 72 -
Minority interest 1,115 557
Increase in accounts receivable (322) (10,104)
(Increase) decrease in inventory (994) 789
Increase in prepaid assets (97) (896)
Increase in other assets (943) (9)
(Decrease) increase in accounts payable (298) 202
(Decrease) increase in accrued expenses (72) 272
Increase in income taxes payable 1,418 1,295
Increase (decrease) in other liabilities 392 (84)
------- -------
Total adjustments 3,009 (5,289)
------- -------
Net cash provided by (used in) operations 5,037 (4,385)
------- -------
Cash flows from investing activities:
Acquisition of property and equipment (1,565) (961)
Proceeds from sale of property and equipment 2 28
------- -------
Net cash used in investing activities (1,563) (933)
------- -------
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Nine Months Ended
-----------------------
Dec. 31, Dec. 31,
1995 1994
--------- ---------
Cash flows from financing activities:
Net borrowings on notes less than
three months 1,705 8,725
Proceeds from issuance of notes in
excess of three months - 1,553
Repayment of notes in excess of
three months (7) (1,505)
------- -------
Net cash provided by financing activities 1,698 8,773
------- -------
Effect of exchange rate changes on cash (2,014) 144
------- -------
Net increase in cash and cash equivalents 3,158 3,599
Cash and cash equivalents at beginning of period 12,158 5,613
------- -------
Cash and cash equivalents at end of period $15,316 $ 9,212
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 13 $ 44
Income taxes 1,273 41
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 December 31, 1995 and the results of operations and cash flows for
the three and nine months ended December 31, 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)
Dec. 31, March 31,
1995 1995
--------- ---------
Raw materials $ 696 $ 833
Work-in-process 1,207 210
Finished goods 402 332
------ ------
$2,305 $1,375
====== ======
NOTE 3: SHORT-TERM DEBT
Gradco (Japan) Ltd. ("GJ"), the Company's Japanese subsidiary, has a 200
million yen (approximately $1.9 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, 1995, there were no borrowings on these lines. The
balance of $13,522,000 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
7,799,000 and 7,795,000 in the three and nine months ended December 31, 1995,
respectively, and 7,784,000 in both the three and nine months ended December
31, 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 its former president, Mr. Keith 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 November 1992, the Company and the plaintiffs agreed in principle to a
Consent Order providing that 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 an Application for Prejudment Remedy 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 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 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 Corporation. Gradco has
filed various other related motions which have been opposed by Mr. Hamma.
Plaintiffs have responded to the motion and Gradco has replied. The Court is
considering the motion and will either rule on a request by plaintiff for a
right to file additional briefs, direct that there be oral arguments or decide
the motion.
In July 1995 Mr. Hamma and Tenex Corporation made an application for a pre-
judgment remedy ("PJR Motion") 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. It is Gradco's belief
that the proper measure of damages would result in a smaller damages award even
if the motions by Gradco for judgment as a matter of law are denied. The Court
has determined that it will rule on the PJR Motion only after ruling on the
July 1995 motion for judgment as a matter of law. The parties have also filed
briefs as to their theories of damages. If Gradco's view prevails, the
magnitude of damages, even should the July 1995 motion prove unavailing, will
be reduced substantially from the amount sought in the PJR Motion.
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 and nine months ended December 31, 1995 increased
$4,336,000 and $18,231,000, respectively, as compared to amounts in the
comparable prior year periods. Net sales increased $3,326,000 in the current
quarter over the year earlier period due to an increase in the average unit
price as customers are primarily purchasing units with in-bin stapling. This
increase in sales revenue is in spite of a 13% decrease in unit sales in the
copier market and a weaker yen, which on average was down 3% against the dollar
during the current quarter from the year-earlier period. Net sales increased
$17,424,000 in the nine-month period over the prior year due to a 4% increase
in unit sales in the copier market, a stronger yen which on average was 6%
stronger against the dollar during the current nine-month period than it was
during the earlier period and an increase in the average unit price. Revenue
from development engineering services increased by $1,031,000 and $808,000 in
the three and nine-month periods, respectively, as a result of new copier
projects which were partially funded by customers.
Cost of sales as a percentage of net sales decreased to 78.2% from 80.5% for
the three months ended December 31, 1995 and 1994, respectively, and decreased
to 79.4% from 80.9% for the nine-month periods then ended. This improvement is
primarily attributable to a change in mix of units sold toward higher margin
products.
Research and development expenses ("R&D") in the current quarter totaled
$1,735,000, 6.6% of revenues, compared to $396,000, 1.8% of revenues, in the
prior year's comparable period. For the nine months ended December 31, 1995
and 1994, R&D totaled $2,993,000, 3.9% of revenues and $1,591,000, 2.7% of
revenues, respectively. These increases are attributable to the copier
projects previously mentioned.
Selling, general and administrative expenses ("SG&A") in the current quarter
totaled $3,351,000, 12.8% of revenues, compared to $3,106,000, 14.2% of
revenues, in the prior year's comparable period. For the nine months ended
December 31, 1995 and 1994, SG&A totaled $10,433,000, 13.7% of revenues and
$8,732,000, 15.1% of revenues, respectively. In the nine-month period, higher
costs caused by the unfavorable translation of SG&A at the Company's Japanese
subsidiary ("GJ") associated with the stronger yen and increased legal fees
associated with the Hamma and DuBois lawsuits have been partially offset by
currency exchange gains at GJ.
The results for the current quarter have no gain or loss on trading securities
as compared to a loss of $84,000 in the prior year's comparable period. For
the nine months ended December 31, 1995 there was a gain on trading securities
of $53,000 as compared to a loss of $302,000 for the nine months ended December
31, 1994.
As a result of the above factors, earnings before income taxes and minority
interest increased from $1,283,000 in the third quarter ended December 31, 1994
to $2,028,000 in the current quarter and from $2,502,000 in the nine months
ended December 31, 1994 to $5,160,000 in the current nine-month period.
The tax provisions in all 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 $18,032,000 at December 31, 1995 from $16,727,000
at March 31, 1995. At December 31, 1995, the Company had $15,316,000 in cash
and minimal long-term debt. GJ has a 200 million yen (approximately $1.9
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 December 31, 1995.
The Company believes that its cash and credit facilities are adequate for its
short and long-term operational needs. At December 31, 1995, there were no
material commitments for capital expenditures.
As previously reported, in June 1995, a jury found the Company to have a
liability in the lawsuit by John C. Hamma, a former employee. The Company has
filed a motion to reverse the verdict. After a determination by the Court on
the Company's motion, a separate proceeding to determine the amount of damages
will be required, with respect to such portion of the verdict, if any, as
remains in effect. An award of damages of the magnitude sought by Mr. Hamma
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: February 6, 1996 HARLAND L. MISCHLER
Harland L. Mischler
Executive Vice President, Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
-13-
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