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 September 30, 1996 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 September 30, 1996
------------- ----------------------------
Common Stock, without
par value 7,798,909
GRADCO SYSTEMS, INC.
INDEX
Page Number
Part I. Financial Information:
Consolidated Balance Sheets
at September 30, 1996 and March 31, 1996 3
Consolidated Statements of Operations
for the Three and Six Months Ended
September 30, 1996 and September 30, 1995 4
Consolidated Statements of Cash Flows
for the Six Months Ended
September 30, 1996 and September 30, 1995 5-6
Notes to Unaudited Consolidated Financial Statements 7-10
Management's Discussion and Analysis of
Results of Operations and Financial Condition 11-12
Part II. Other Information 13
-2-
GRADCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September, 30 March 31,
1996 1996
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash $20,654 $19,523
Accounts receivable, net 24,127 20,496
Inventories 1,120 1,940
Deferred income taxes - 278
Other current assets 1,882 1,380
------- -------
Total current assets 47,783 43,617
Furniture, fixtures and equipment, net 1,734 1,708
License repurchase 5,080 5,852
Excess of cost over acquired net assets 1,299 1,321
Other assets 5,772 5,517
------- -------
$61,668 $58,015
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $15,857 $12,769
Current installments of long-term debt 12 12
Accounts payable 9,848 8,448
Accrued expenses 1,404 709
Income taxes payable 812 2,700
Deferred income taxes 15 -
------- -------
Total current liabilities 27,948 24,638
Long-term debt, excluding current installments 19 25
Non-current liabilities 870 787
Deferred income taxes 2,326 2,599
Minority interest 14,744 13,765
------- -------
Total liabilities 45,907 41,814
------- -------
Shareholders' equity:
Common stock, no par value; authorized
30,000,000 shares, issued 7,798,909 44,618 44,618
Deficit (31,868) (33,210)
Currency translation adjustments 3,011 4,793
------- -------
15,761 16,201
------- -------
$61,668 $58,015
======= =======
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 Six Months Ended
-------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
--------- --------- --------- ---------
Revenues:
Net sales $25,601 $23,955 $51,147 $48,460
Development engineering services 237 205 509 352
Licenses and royalties 667 672 1,231 1,243
------- ------- ------- -------
26,505 24,832 52,887 50,055
------- ------- ------- -------
Costs and expenses:
Cost of sales 20,982 19,105 41,525 38,751
Research and development 898 717 1,892 1,258
Selling, general and administrative 3,372 3,196 6,540 7,082
------- ------- ------- -------
25,252 23,018 49,957 47,091
------- ------- ------- -------
Income from operations 1,253 1,814 2,930 2,964
Interest expense (1) (1) (2) (10)
Interest income 49 70 89 125
Gain (loss) on trading securities - 22 - 53
------- ------- ------- -------
Earnings before income taxes
and minority interest 1,301 1,905 3,017 3,132
Income tax expense 547 738 1,220 1,312
Minority interest 204 348 455 700
------- ------- ------- -------
Net earnings $ 550 $ 819 $ 1,342 $ 1,120
======= ======= ======= =======
Earnings per common share $ 0.07 $ 0.10 $ 0.17 $ 0.14
======= ======= ======= =======
Weighted average shares
outstanding (000's) 7,799 7,799 7,799 7,793
See accompanying notes to consolidated financial statements.
-4-
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
-----------------------
Sept. 30, Sept. 30,
1996 1995
--------- ---------
Cash flows from operating activities:
Net income $ 1,342 $ 1,120
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 588 663
Amortization 844 1,159
Deferred income taxes 136 (219)
Unrealized holding gain on trading securities - (8)
Gain on sale of securities - (45)
Provision for losses on accounts receivable 302 23
Purchases of trading securities - (249)
Proceeds from sale of trading securities - 882
Issuance of shares in lieu of cash - 72
Minority interest 455 700
(Increase) decrease in accounts receivable (4,763) 1,265
Decrease (increase) in inventory 810 (1,287)
(Increase) decrease in prepaid assets (566) 186
Increase in other assets (977) (246)
Increase (decrease) in accounts payable 1,733 (2,096)
Increase (decrease) in accrued expenses 707 (542)
(Decrease) increase in income taxes payable (1,837) 506
Increase in other liabilities 110 126
------- -------
Total adjustments (2,458) 890
------- -------
Net cash (used in) provided by operations (1,116) 2,010
------- -------
Cash flows from investing activities:
Acquisition of property and equipment (654) (1,402)
Proceeds from sale of property and equipment 4 2
------- -------
Net cash used in investing activities (650) (1,400)
------- -------
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Six Months Ended
-----------------------
Sept. 30, Sept. 30,
1996 1995
--------- ---------
Cash flows from financing activities:
Net borrowings on notes less than
three months 3,659 1,461
Repayment of notes in excess of
three months (5) (4)
Dividend to minority shareholders (231) -
------- -------
Net cash provided by financing activities 3,423 1,457
------- -------
Effect of exchange rate changes on cash (526) (1,227)
------- -------
Net increase in cash and cash equivalents 1,131 840
Cash and cash equivalents at beginning of period 19,523 12,158
------- -------
Cash and cash equivalents at end of period $20,654 $12,998
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 2 $ 12
Income taxes 2,922 1,052
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 September 30, 1996 and the results of operations and cash flows for
the three and six months ended September 30, 1996 and 1995. 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, 1996.
NOTE 2: INVENTORIES
Inventories are summarized as follows:
(Dollars in Thousands)
Sept. 30, March 31,
1996 1996
--------- ---------
Raw materials $ 487 $ 644
Work-in-process 240 1,069
Finished goods 393 227
------ ------
$1,120 $1,940
====== ======
NOTE 3: SHORT-TERM DEBT
Gradco (Japan) Ltd. ("GJ"), the Company's Japanese subsidiary, has a 350
million yen (approximately $3.1 million) credit line with Sumitomo Bank,
Limited and GJ's U.S. subsidiary has a $2 million credit line with the same
bank. At September 30, 1996, there were no borrowings on these lines. The
balance of $15,857,000 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 1997 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 in both the three and six months ended September 30, 1996, and
7,799,000 and 7,793,000 in the three and six months ended September 30, 1995.
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 (now former) president, Mr. Keith Stewart, have been sued
in the U.S. District Court 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 were consolidated for certain pretrial purposes, primarily 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 damages 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. This Application was
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. 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
-8-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: COMMITMENTS AND CONTINGENCIES (Continued)
affect its ownership of stock in GJ may arise, and it avoids the legal expense
which would have resulted from a current hearing on the Application.
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.
In August 1995, the Company filed with the Trial Court a substituted motion for
judgment as a matter of law or, in the alternative, for a new trial on
substantially all counts. Plaintiffs have responded to the motion and the
Company has replied. The motion is under consideration by the Court. If the
Company is unsuccessful on the motion, it may seek permission from the Trial
Court to appeal the verdict. An appeal is not automatically available prior to
the determination of damages.
In July 1995, the plaintiffs filed another Application for a Prejudgment Remedy
("July PJR Application") seeking to attach Gradco Systems' assets. The July
PJR 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 July PJR Application asserts that there is probable cause that a verdict in
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 damages based on
applicable law would result in a significantly smaller damages award even if
the motion by Gradco for judgment as a matter of law is denied. The Court has
determined that it will rule on the July PJR Application only after ruling on
the August 1995 motion for judgment as a matter of law.
In November 1995, the Court ordered the plaintiffs to submit a memorandum
regarding the legal theories on which they based their damages claims and for
the defendants to respond. This issue is also under consideration by the
Court. If Gradco's view prevails, the magnitude of damages, even should the
August 1995 motion prove unavailing, will be reduced substantially from the
amount sought in the July PJR Application.
The Company is presently unable to determine the amount of such damages which
is likely to be awarded, but the amount of damages sought by the plaintiffs,
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.
Counsel for DuBois moved on May 20, 1996 to vacate the order to bifurcate the
trial in his case. The Company has moved for an extension for its response to
await the decision on the motion for judgment as a matter of law in the Hamma
case. DuBois has opposed this extension.
-9-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: COMMITMENTS AND CONTINGENCIES (Continued)
There are substantial differences between the Hamma and DuBois cases. Although
the DuBois case will also be tried before a jury so that 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.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Revenues for the three and six months ended September 30, 1996 increased
$1,673,000 and $2,832,000, respectively, from the comparable prior year periods
principally as a result of increases in net sales. Although unit sales in the
copier market were only 1% higher for the quarter and the yen decreased by 16%
against the dollar, there was a change in mix of units sold in favor of higher
price products. In the six-month period, unit sales in the copier market were
only 2% higher and the yen decreased by 12% against the dollar, but the
Company's Venture Engineering subsidiary showed an increase of $2.3 million in
net sales (primarily in the first quarter) in its contract manufacturing
business.
Cost of sales as a percentage of net sales increased to 82.0% from 79.8% for
the three months ended September 30, 1996 and 1995, respectively, and increased
to 81.2% from 80.0% for the six-month periods then ended. These increases are
attributable to volume discounts earned by certain customers.
Research and development expenses ("R&D") in the current quarter totaled
$898,000, 3.4% of revenues, compared to $717,000, 2.9% of revenues, in the
prior year's comparable period. For the six months ended September 30, 1996
and 1995, R&D totaled $1,892,000, 3.6% of revenues, and $1,258,000, 2.5% of
revenues, respectively. The increases are largely attributable to several new
printer and copier projects and to costs incurred in transitioning new product
production to a contract manufacturer in Canada.
Selling, general and administrative expenses ("SG&A") in the current quarter
totaled $3,372,000, 12.7% of revenues, compared to $3,196,000, 12.9% of
revenues, in the prior year's comparable period, an increase of $176,000. This
increase was attributable to a writeoff of $284,000 for a loan made to a
prospective business partner, as well as to general increases at the operating
subsidiary level, partially mitigated by approximately $300,000 of favorable
translation of SG&A at the Company's Japanese subsidiary ("GJ") caused by the
weaker yen. For the six months ended September 30, 1996 and 1995, SG&A totaled
$6,540,000, 12.4% of revenues and $7,082,000, 14.1% of revenues, respectively,
a decrease of $542,000. The favorable translation of SG&A at GJ associated with
the weaker yen during this period accounted for a decrease of approximately
$900,000 in SG&A and a reduction of legal fees associated with the Hamma
lawsuit, which was tried in June 1995, accounted for a decrease of $500,000.
These decreases were offset by the loan writeoff noted above, lower foreign
currency translation gains and general increases at the operating subsidiary
level.
The results for the current quarter and six-months ended September 30, 1996
have no gain or loss on trading securities as compared to gains of $22,000 and
$53,000, respectively, in the prior year's comparable periods.
As a result of the above factors, earnings before income taxes and minority
interest decreased from $1,905,000 in the second quarter ended September 30,
1995 to $1,301,000 in the current quarter and from $3,132,000 in the six months
ended September 30, 1995 to $3,017,000 in the current six-month period.
Minority interest decreased because a lower portion of the consolidated net
income was earned by GJ and its subsidiaries in the current quarter and six
months than in the comparable periods in fiscal 1996.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Working capital increased to $19,835,000 at September 30, 1996 from $18,979,000
at March 31, 1996. At September 30, 1996, the Company had $20,654,000 in cash
and minimal long-term debt. GJ has a 350 million yen (approximately $3.1
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 September 30, 1996.
The Company believes that its cash and credit facilities are adequate for its
short and long-term operational needs. At September 30, 1996, 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. The Company believes
that as a matter of law the damages claimed by Mr. Hamma are excessive to a
substantial extent. For further information regarding this litigation, see
Note 6 of Notes to Unaudited Consolidated Financial Statements.
-12-
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
(a) The Company's Annual Meeting of Stockholders was held on
September 6, 1996.
(b) The sole purpose of the meeting was the election of five
directors of the Company, to serve for a term of one year (i.e.,
until the Annual Meeting to be held in 1997). Proxies were solicited
by management for its nominees, pursuant to Regulation 14 under the
Securities Exchange Act of 1934, and there was no opposing
solicitation. All of such nominees were elected as directors by the
required plurality of the votes cast. The directors so elected (all
of whom were incumbent directors) are Bernard Bressler, Thomas J.
Burger, Harland L. Mischler, Robert J. Stillwell and Martin E. Tash.
(c) The votes cast for, and withheld from, each of the nominees (out
of the 7,798,909 shares of Common Stock outstanding and entitled to
vote as of the record date of July 26, 1996) are set forth below.
There were no broker non-votes.
Nominees FOR WITHHELD
-------- --- --------
Bernard Bressler 6,664,196 2,600
Thomas J. Burger 6,664,496 2,300
Harland L. Mischler 6,664,696 2,100
Robert J. Stillwell 6,664,496 2,300
Martin E. Tash 6,664,786 2,010
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.
-13-
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: November 8, 1996 HARLAND L. MISCHLER
Harland L. Mischler
Executive Vice President, Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
-14-
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