SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended December 31, 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 December 31, 1996
------------- ----------------------------
Common Stock, without
par value 7,798,909
GRADCO SYSTEMS, INC.
INDEX
Page Number
Part I. Financial Information:
Consolidated Balance Sheets
at December 31, 1996 and March 31, 1996 3
Consolidated Statements of Operations
for the Three and Nine Months Ended
December 31, 1996 and December 31, 1995 4
Consolidated Statements of Cash Flows
for the Nine Months Ended
December 31, 1996 and December 31, 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)
December, 31 March 31,
1996 1996
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash $23,588 $19,523
Accounts receivable, net 20,135 20,496
Inventories 1,101 1,940
Deferred income taxes - 278
Other current assets 1,909 1,380
------- -------
Total current assets 46,733 43,617
Furniture, fixtures and equipment, net 1,710 1,708
License repurchase 4,615 5,852
Excess of cost over acquired net assets 1,288 1,321
Other assets 6,230 5,517
------- -------
$60,576 $58,015
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $17,497 $12,769
Current installments of long-term debt 14 12
Accounts payable 6,673 8,448
Accrued expenses 1,718 709
Income taxes payable 1,375 2,700
Deferred income taxes 18 -
------- -------
Total current liabilities 27,295 24,638
Long-term debt, excluding current installments 16 25
Non-current liabilities 892 787
Deferred income taxes 2,123 2,599
Minority interest 14,514 13,765
------- -------
Total liabilities 44,840 41,814
------- -------
Shareholders' equity:
Common stock, no par value; authorized
30,000,000 shares, issued 7,798,909 44,618 44,618
Deficit (31,243) (33,210)
Currency translation adjustments 2,361 4,793
------- -------
15,736 16,201
------- -------
$60,576 $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 Nine Months Ended
-------------------- --------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1996 1995 1996 1995
--------- --------- --------- ---------
Revenues:
Net sales $21,950 $24,389 $73,097 $72,849
Development engineering services 295 1,151 804 1,503
Licenses and royalties 938 604 2,169 1,847
------- ------- ------- -------
23,183 26,144 76,070 76,199
------- ------- ------- -------
Costs and expenses:
Cost of sales 17,769 19,071 59,294 57,822
Research and development 892 1,735 2,784 2,993
Selling, general and administrative 3,184 3,351 9,724 10,433
------- ------- ------- -------
21,845 24,157 71,802 71,248
------- ------- ------- -------
Income from operations 1,338 1,987 4,268 4,951
Interest expense (1) (1) (3) (11)
Interest income 45 42 134 167
Gain on trading securities - - - 53
------- ------- ------- -------
Earnings before income taxes
and minority interest 1,382 2,028 4,399 5,160
Income tax expense 528 705 1,748 2,017
Minority interest 229 415 684 1,115
------- ------- ------- -------
Net earnings $ 625 $ 908 $ 1,967 $ 2,028
======= ======= ======= =======
Earnings per common share $ 0.08 $ 0.12 $ 0.25 $ 0.26
======= ======= ======= =======
Weighted average shares
outstanding (000's) 7,799 7,799 7,799 7,795
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,
1996 1995
--------- ---------
Cash flows from operating activities:
Net income $ 1,967 $ 2,028
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 913 934
Amortization 1,237 1,628
Deferred income taxes 53 (438)
Unrealized holding gain on trading securities - (8)
Gain on sale of securities - (45)
Provision for losses on accounts receivable 302 34
Gain on sale of property and equipment (6) -
Purchases of trading securities - (249)
Proceeds from sale of trading securities - 882
Issuance of shares in lieu of cash - 72
Minority interest 684 1,115
Increase in accounts receivable (1,271) (322)
Decrease (increase) in inventory 828 (994)
Increase in prepaid assets (675) (97)
Increase in other assets (2,080) (943)
Decrease in accounts payable (1,273) (298)
Increase (decrease) in accrued expenses 1,034 (72)
(Decrease) increase in income taxes payable (1,203) 1,418
Increase in other liabilities 194 392
------- -------
Total adjustments (1,263) 3,009
------- -------
Net cash provided by operations 704 5,037
------- -------
Cash flows from investing activities:
Acquisition of property and equipment (993) (1,565)
Proceeds from sale of property and equipment 10 2
------- -------
Net cash used in investing activities (983) (1,563)
------- -------
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Nine Months Ended
-----------------------
Dec. 31, Dec. 30,
1996 1995
--------- ---------
Cash flows from financing activities:
Net borrowings on notes less than
three months 5,985 1,705
Repayment of notes in excess of
three months (7) (7)
Dividend to minority shareholders (231) -
------- -------
Net cash provided by financing activities 5,747 1,698
------- -------
Effect of exchange rate changes on cash (1,403) (2,014)
------- -------
Net increase in cash and cash equivalents 4,065 3,158
Cash and cash equivalents at beginning of period 19,523 12,158
------- -------
Cash and cash equivalents at end of period $23,588 $15,316
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 3 $ 13
Income taxes 2,898 1,273
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.
Effective April 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long
Lived Assets. The adoption had no material impact on the Company's
consolidated financial statements. The Financial Standards Board has also
issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation, which establishes a fair value-based
method of accounting for stock-based compensation plans. The statement also
allows companies to continue to use the intrinsic value-based approach,
supplemented by footnote disclosure of the pro forma net income and earnings
per share of the fair value-based approach. The Company does not anticipate
that the adoption of SFAS 123 will have a material affect on the Company's
consolidated financial statements.
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, 1996 and the results of operations and cash flows for
the three and nine months ended December 31, 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 Company took a charge of $284,000 in the previous quarter for an interim
loan made to a prospective business partner when that company failed to obtain
permanent financing. This item is included in selling, general and
administrative expenses ("SG&A") for the nine months ended December 31, 1996.
Foreign currency translation gains of $192,000 and $235,000 were included in
SG&A for the three and nine months ended December 31, 1996 and gains of
$462,000 and $695,000 were included in the corresponding periods of the
previous 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.
-7-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: INVENTORIES
Inventories are summarized as follows:
(Dollars in Thousands)
Dec. 31, March 31,
1996 1996
--------- ---------
Raw materials $ 489 $ 644
Work-in-process 393 1,069
Finished goods 219 227
------ ------
$1,101 $1,940
====== ======
NOTE 3: SHORT-TERM DEBT
Gradco (Japan) Ltd. ("GJ"), the Company's Japanese subsidiary, has a 350
million yen (approximately $3 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, 1996, there were no borrowings on these lines. The balance of
$17,497,000 in notes payable reflects amounts due to trade creditors in ninety
days.
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 nine months ended December 31, 1996, and
7,799,000 and 7,795,000 in the three and nine months ended December 31, 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.
-8-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
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.
-9-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: COMMITMENTS AND CONTINGENCIES (Continued)
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 only be settled from assets of Gradco
Systems, Inc. (which consist primarily of its investment in GJ). An award of
damages of the magnitude sought by the plaintiffs 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.
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, or on its results of operations or liquidity.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's operations are conducted principally through its wholly-owned
subsidiary Venture Engineering, Inc. ("Venture"), its majority-owned subsidiary
Gradco (Japan) Ltd. ("GJ") and GJ's wholly-owned subsidiary Gradco (USA) Inc.
("GJU"). Venture performs contract engineering and manufacturing services for
OEMs and other customers, primarily for the U.S. market. GJ and GJU design,
develop, produce (by contract) and market on a worldwide basis, intelligent
paper handling devices for office copiers, computer controlled printers and
facsimile machines.
GJ and GJU operate jointly in the development and marketing of products to
their customer base, primarily OEMs. Both companies sell into the U.S.
domestic and foreign marketplace at similar profit margins, after elimination
of intercompany profits. Sales are denominated for the most part in Japanese
yen and U.S. dollars, corresponding to the currency charged for the product by
the contract manufacturer. Although the gross profit margin percentage is thus
protected from foreign currency fluctuations, translation gains and losses can
still occur when receivables and payables are denominated in other than the
local currency of each company.
RESULTS OF OPERATIONS
Revenues for the three and nine months ended December 31, 1996 decreased
$2,961,000 and $129,000, respectively, from the comparable prior year periods.
The decrease in the current quarter was principally as a result of a decrease
in net sales of $2,439,000. Venture's net sales in its contract manufacturing
business decreased $930,000. Unit sales in the copier market were 4% higher,
but unit sales in the printer market were down. Sales denominated in yen were
$1.9 million lower than they would have been had the yen not decreased by 11%
against the dollar. Net sales for the nine-month period increased $248,000.
Unit sales in the copier market were 2% higher and Venture showed an increase
of $1,422,000 in net sales in its contract manufacturing business. Sales
denominated in yen were $10.6 million lower than they would have been had the
yen not decreased by 14% against the dollar. Revenue from development
engineering services decreased by $856,000 and $699,000 in the three and nine-
month periods, respectively, as copier projects partially funded by customers
in the prior year were completed.
Cost of sales as a percentage of net sales increased to 81.0% from 78.2% for
the three months ended December 31, 1996 and 1995, respectively, and increased
to 81.1% from 79.4% for the nine-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
$892,000, 3.8% of revenues, compared to $1,735,000, 6.6% of revenues, in the
prior year's comparable period. For the nine months ended December 31, 1996
and 1995, R&D totaled $2,784,000, 3.7% of revenues, and $2,993,000, 3.9% of
revenues, respectively. The decrease in the three-month period is directly
attributable to the decrease in customer funded projects previously
mentioned; the decrease in the nine-month period is less than the decrease in
related revenue due to costs incurred in the current period in transitioning
new product production to a contract manufacturer in Canada which are being
borne by the Company.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, general and administrative expenses ("SG&A") in the current quarter
totaled $3,184,000, 13.7% of revenues, compared to $3,351,000, 12.8% of
revenues, in the prior year's comparable period, a decrease of $167,000. The
decrease is primarily attributable to favorable translation of SG&A at the
Company's Japanese subsidiary ("GJ") caused by the weaker yen, offset by a
decline of $270,000 in foreign currency translation gains in the current
quarter. For the nine months ended December 31, 1996 and 1995, SG&A totaled
$9,724,000, 12.8% of revenues and $10,433,000, 13.7% of revenues, respectively,
a decrease of $709,000. The favorable translation of SG&A at GJ associated with
the weaker yen during this period accounted for a decrease of approximately
$1,100,000 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 $600,000.
These decreases were offset by a writeoff of $284,000 in the second quarter of
an interim loan made to a prospective business partner when that company failed
to obtain permanent financing, $460,000 less in foreign currency translation
gains and general increases at the operating subsidiary level.
The results for the nine months ended December 31, 1996 has no gain or loss on
trading securities as compared to a gain of $53,000 in the prior year's
comparable period.
As a result of the above factors, earnings before income taxes and minority
interest decreased from $2,028,000 in the quarter ended December 31, 1995 to
$1,382,000 in the current quarter and from $5,160,000 in the nine months ended
December 31, 1995 to $4,399,000 in the current nine-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 nine
months than in the comparable periods in fiscal 1996.
FINANCIAL CONDITION
Working capital increased to $19,438,000 at December 31, 1996 from $18,979,000
at March 31, 1996, an increase of $459,000. At December 31, 1996, the Company
had $23,588,000 in cash, an increase of $4,065,000 from March 31, 1996, and
minimal long-term debt. Major sources of funds were net income of $2.0 million
and non-cash provisions of $2.1 million for depreciation and amortization. GJ
has a 350 million yen (approximately $3 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, 1996.
The Company believes that its cash and credit facilities are adequate for its
short and long-term operational needs. At December 31, 1996, there were no
material commitments for capital expenditures.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As previously reported, in June 1995, a jury found the Company to have
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.
The lawsuit by R. Clark DuBois, a former employee, has not yet been tried.
Although the case will 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 results of operations or
liquidity.
-13-
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.
-14-
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: July 7, 1997 HARLAND L. MISCHLER
Harland L. Mischler
Executive Vice President, Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
-15-
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