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, 1997 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, 1997
------------- ----------------------------
Common Stock, without
par value 7,799,494
GRADCO SYSTEMS, INC.
INDEX
Page Number
Part I. Financial Information:
Consolidated Balance Sheets
at June 30, 1997 and March 31, 1997 3
Consolidated Statements of Operations
for the Three Months Ended
June 30, 1997 and June 30, 1996 4
Consolidated Statements of Cash Flows
for the Three Months Ended
June 30, 1997 and June 30, 1996 5-6
Notes to Unaudited Consolidated Financial Statements 7-10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-12
Part II. Other Information 13
-2-
GRADCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, March 31,
1997 1997
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash $21,543 $18,335
Accounts receivable, net 39,460 24,583
Inventories 1,929 1,759
Deferred income taxes 266 252
Other current assets 389 327
------- -------
Total current assets 63,587 45,256
Furniture, fixtures and equipment, net 2,003 2,054
License repurchase 4,121 4,069
Excess of cost over acquired net assets 1,267 1,278
Other assets 6,031 5,429
------- -------
$77,009 $58,086
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $13,115 $10,939
Notes payable to suppliers 23,554 12,608
Accrued expenses 853 684
Income taxes payable 2,661 1,596
Current installments of long-term debt 12 11
------- -------
Total current liabilities 40,195 25,838
Long-term debt, excluding current installments 12 15
Non-current liabilities 1,005 889
Deferred income taxes 1,895 1,833
Minority interest 15,823 14,172
------- -------
Total liabilities 58,930 42,747
------- -------
Shareholders' equity:
Common stock, no par value; authorized
30,000,000 shares, 7,799,494 and
7,798,909 shares outstanding June30, 1997
and March 31, 1997, respectively 44,618 44,618
Deficit (28,584) (30,358)
Currency translation adjustments 2,045 1,079
------- -------
18,079 15,339
------- -------
$77,009 $58,086
======= =======
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,
1997 1996
---------- ----------
Revenues:
Net sales $39,802 $25,546
Development engineering services 295 272
Licenses and royalties 665 564
------- -------
40,762 26,382
------- -------
Costs and expenses:
Cost of sales 31,841 20,543
Research and development 918 994
Selling, general and administrative 2,860 3,168
------- -------
35,619 24,705
------- -------
Income from operations 5,143 1,677
Interest expense (1) (1)
Interest income 36 40
------- -------
Earnings before income taxes
and minority interest 5,178 1,716
Income tax expense 2,381 673
Minority interest 1,023 251
------- -------
Net earnings $ 1,774 $ 792
======= =======
Earnings per common share $ 0.23 $ .10
======= =======
Weighted average shares
outstanding (000's) 7,799 7,799
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,
1997 1996
-------- --------
Cash flows from operating activities:
Net income $ 1,774 $ 792
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 268 289
Amortization 354 426
Deferred income taxes 85 308
Provision for losses on accounts receivable - 9
Gain on sale of property and equipment - (2)
Minority interest 1,023 251
Increase in accounts receivable (13,087) (3,099)
(Increase) decrease in inventory (144) 386
Increase in prepaid assets (44) (715)
Increase in other assets (54) (195)
Increase (decrease) in accounts payable 1,352 (275)
Increase in notes payable to suppliers 9,530 4,424
Increase in accrued expenses 148 313
Increase (decrease) in income taxes payable 943 (2,089)
Increase in other liabilities 56 42
------- -------
Total adjustments 430 73
------- -------
Net cash provided by operations 2,204 865
------- -------
Cash flows from investing activities:
Acquisition of property and equipment (116) (303)
Proceeds from sale of property and equipment - 4
------- -------
Net cash used in investing activities (116) (299)
------- -------
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Three Months Ended
----------------------
June 30, June 30,
1997 1996
-------- --------
Cash flows from financing activities:
Repayment of notes in excess of three months (3) (3)
Dividend to minority shareholders - (231)
------- -------
Net cash used in financing activities (3) (234)
------- -------
Effect of exchange rate changes on cash 1,123 (381)
------- -------
Net increase (decrease) in cash
and cash equivalents 3,208 (49)
Cash and cash equivalents at beginning of period 18,335 19,523
------- -------
Cash and cash equivalents at end of period $21,543 $19,474
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 1 $ 1
Income taxes 1,231 2,462
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, 1997 and the results of operations and cash flows for the
three months ended June 30, 1997 and 1996. 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.
Foreign currency translation gains of $167,000 and $34,000 are included in
selling, general and administrative expenses for the three months ended June
30, 1997 and 1996, respectively.
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, 1997.
NOTE 2: INVENTORIES
Inventories are summarized as follows:
(Dollars in Thousands)
June 30, March 31,
1997 1997
--------- ---------
Raw materials $ 440 $ 499
Work-in-process 804 570
Finished goods 685 690
------ ------
$1,929 $1,759
====== ======
NOTE 3: SHORT-TERM DEBT
Gradco (Japan) Ltd.'s U.S. subsidiary has a $2 million credit line with
Sumitomo Bank Limited. At June 30, 1997, there were no borrowings on this
line.
-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 1998 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 operations of the U.S. companies to which these
carryforwards apply 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 the three months ended June 30, 1997 and 1996. 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.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), Earnings per Share, which
establishes a simplified computation of earnings per share ("EPS"). Under SFAS
128, primary EPS is replaced by basic EPS, and dual presentation of basic and
diluted EPS is required for all entities with a complex capital structure. The
Company will adopt SFAS 128 during the third quarter of the current fiscal
year, as required. The adoption of SFAS 128 is not expected to have a material
effect on the Company's reported net earnings per common share.
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. 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
-8-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: COMMITMENTS AND CONTINGENCIES (Continued)
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.
In June 1995, a jury found the Company to have liability in the lawsuit filed
by John C. Hamma. The Company filed a motion in August 1995 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.
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 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., Gradco (USA) Inc. and
Venture Engineering, 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.
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.
-9-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: SUBSEQUENT EVENT
On June 5, 1997, the Company announced that GJ had obtained agreements from the
holders of 4,271,000 shares of the outstanding stock of Gradco Japan to sell
such stock back to GJ at a price of 299 yen per share. The transaction was
consummated in July. The total price of approximately $11.1 million was paid
from available cash of GJ. The Company's ownership in the stock of GJ
increased from 58.6% to 90.0%.
-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 months ended June 30, 1997 increased $14,380,000 from
the amount in the prior year's first quarter principally from an increase in
net sales. Although unit sales in both the copier and printer markets more
than doubled, this volume increase was partially offset by a lower average
sales price in the copier units. The reduction in unit sales price was due to
a weaker yen as well as the introduction of a new lower-priced product line.
Sales denominated in yen were $2.8 million lower than they would have been had
the yen not decreased by 11% against the dollar when compared to the same
period in the previous year. The introduction of a new product line typically
results in a temporary spike in demand as customers purchase the new product
before phasing out the old versions. The Company anticipates that unit sales
in subsequent quarters will decrease somewhat from this quarter's level.
Cost of sales as a percentage of net sales decreased to 80.0% from 80.4% for
the three months ended June 30, 1997 and June 30, 1996, respectively.
Research and development expenses ("R&D") in the current quarter totaled
$918,000, 2.3% of revenues, compared to $994,000, 3.8% of revenues, in the
prior year's comparable period.
Selling, general and administrative expenses ("SG&A") in the current quarter
totaled $2,860,000, 7.0% of revenues, compared to $3,168,000, 12.0% of
revenues, in the prior year's comparable period, a decrease of $308,000.
Approximately $225,000 of this decrease is due to the favorable translation of
SG&A at the Company's Japanese subsidiary ("GJ") caused by the weaker yen.
As a result of the above factors, earnings before income taxes and minority
interest increased to $5,178,000 in the current quarter from $1,716,000 in the
first quarter of fiscal 1997. The
effective tax rate increased to 46.0% from 39.2% because a larger proportion of
the pre-tax income was earned in Japan where the tax rate is higher than the
U.S. rate.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
Minority interest increased more than proportionally because a higher portion
of the consolidated net income was earned by GJ and its subsidiaries in the
current quarter than in the first quarter of fiscal 1997.
FINANCIAL CONDITION
Working capital increased to $23,392,000 at June 30, 1997 from $19,418,000 at
March 31, 1997. At June 30, 1997, the Company had $21,543,000 in cash, an
increase of $3,208,000 from March 31, 1997, and minimal long-term debt. Cash
provided by operations was $2.2 million, primarily from net earnings of $1.8
million, non-cash provisions of $1.6 million for depreciation, amortization and
minority interest, an increase of $11.8 million in accounts, notes and income
taxes payable and offset by $13.1 million in increased accounts receivable.
Cash increased another $1.1 million as a result of exchange rate changes. GJ
has informal credit facilities with a Japanese bank and has established a $2
million line of credit for its U.S. subsidiary. There were no borrowings under
this line at June 30, 1997.
The Company believes that its cash and credit facilities are adequate for its
short and long-term operational needs. At June 30, 1997, there were no
material commitments for capital expenditures except for the repurchase of
4,271,000 shares of GJ stock by GJ for approximately $11.1 million, as
discussed in Note 7 of Notes to Unaudited Consolidated Financial Statements.
Given the Company's current working capital, its available credit facilities
and expected cash flows from operations, it is not anticipated that the
reduction of cash as a result of this transaction will have any adverse effect
upon operations.
In June 1995, a jury found the Company to have liability in a 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 consolidated financial
position, or on its results of operations or liquidity.
-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
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.
-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: July 30, 1997 HARLAND L. MISCHLER
Harland L. Mischler
Executive Vice President, Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
-14-
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