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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-12829
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GRADCO SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Nevada 95-3342977
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3753 Howard Hughes Pkwy, Ste 200, Las Vegas, Nevada 89109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 892-3714
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No par value
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(Title of Class )
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 preceding 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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The aggregate market value of voting stock held by non-affiliates of the
Registrant (based on the closing sales price of Gradco common stock on the
NASDAQ National Market System on June 19, 1998) was $54,000,361.
The number of outstanding shares of each class of the Registrant's common stock
outstanding at June 19, 1998 was: common stock, no par value--7,854,598 shares.
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PART I
Item 1. BUSINESS
Gradco Systems, Inc. ("Gradco", the "Company" or the "Registrant")
was originally incorporated in California on November 9, 1978. As previously
reported in the Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1992, the Registrant changed its state of incorporation to Nevada
through a merger which became effective April 3, 1992. The Registrant's
principal executive offices are located at 3753 Howard Hughes Parkway, Suite
200, Las Vegas, Nevada and its telephone number is (702) 892-3714.
(a) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Gradco and its subsidiaries operate primarily in one industry
segment, the design, development, production and marketing of intelligent paper
handling devices and high technology short-run products for the office
automation market. Information relating to net sales, net earnings and
identifiable assets attributable thereto for the fiscal years ended March 31,
1998, 1997 and 1996 is set forth in response to Item 8 below.
(b) NARRATIVE DESCRIPTION OF BUSINESS.
Gradco is a holding company which conducts business as follows:
(1) The various activities comprising the copier and
printer product businesses, as described below, are conducted through Gradco's
majority-owned Japanese subsidiary Gradco (Japan) Ltd. ("GJ"), and Gradco's
wholly-owned domestic subsidiary Gradco (USA) Inc. ("GU"). GU had been a
wholly-owned subsidiary of GJ until September 1997 when Gradco purchased all of
the stock of GU through a wholly-owned subsidiary of Gradco, which was formed
for that purpose and subsequently merged into GU. GJ has a domestic branch
office which performs research and development activities. GU concentrates on
marketing and sales activities.
(2) High technology engineering and manufacturing
services are performed by Gradco's wholly-owned subsidiary, Venture
Engineering, Inc., based in Carrollton, Texas.
Unless otherwise indicated or unless the context otherwise requires,
(1) references to Gradco in the remainder of this Item 1(b) are to the parent
company, (2) references to GJ, in the descriptive material in the remainder of
this Item 1(b) pertaining to the copier and printer products businesses,
include the activities of GJ and GU, (3) references to the Registrant, in
connection with the presentation of financial data in the remainder of this
Item 1(b), and in Item 1(c), include the consolidated financial results of
Gradco and its subsidiaries.
Sales by GJ of sorter products to the convenience copier
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market currently account for most of the Registrant's consolidated revenues.
In addition, the Registrant derives revenues from sales of printer products
by GJ, revenues of GJ from selected technology licenses and agreements with
original equipment manufacturers and marketers ("OEMs"), and from research
and development activities conducted by GJ on behalf of its OEM customers,
and revenues of Venture Engineering from contract engineering and
manufacturing services on behalf of OEMs and other customers.
Due to the overall maturity of the copier market, high growth cannot
be expected in this portion of GJ's business. Accordingly, additional emphasis
is being placed on printer products, including products applicable to the
evolving digital copiers which function as computer driven printers, scanners
and facsimile machines.
BUSINESS OF GJ
GENERAL
GJ designs, develops, produces (primarily by contract) and markets
on a worldwide basis, intelligent paper handling devices for office copiers,
computer controlled printers and facsimile machines. GJ is a leading
independent supplier of sorters (devices which collate paper sheets) to the
convenience copier market, and supplies feeders and mailboxing sorters and
stackers for the computer controlled printer market. GJ customizes its
sorters and stackers for inclusion in the convenience copiers and printers of
OEMs. Sorter products presently constitute GJ's principal source of revenues.
GJ's revenues also include revenues from feeders, stackers and mailboxing
sorters for computer controlled printers, engineering and development
activities for certain OEMs and selected technology, licenses and agreements
with OEMs. GJ has developed and markets to OEMs automatic stackers, high
capacity sheet feeders and random access mailboxes for non-impact electronic
printers and paper handling devices for facsimile machines. GJ also licenses
certain proprietary technology to OEMs.
GJ's products are marketed domestically and internationally
primarily directly to OEMs for incorporation into their product lines.
Principal OEM customers include Mita, Xerox, Xerox Ltd., Fuji Xerox, Ricoh,
Konica, Toshiba, Lanier, Panasonic, Sharp, IBM, Hewlett Packard, Fujitsu,
Olympus and Kyocera. Marketing in Asia is conducted by GJ, and marketing in
North America is conducted by GU. Marketing in Europe is conducted by GJ and
GU, and by Gradco Belgium, S.C., a wholly-owned subsidiary of GJ.
GJ produces its products at manufacturing facilities of contract
manufacturers in Japan, Korea and Canada.
In addition to marketing intelligent paper handling devices, GJ
licenses certain OEMs to produce products using GJ technology in
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exchange for license fees and/or royalties, and receives fees from OEMs for
research and development and customization contracts for its products. GJ's
development engineering activities on behalf of OEMs include engineering,
development and prototype production of various paper handling devices.
GJ PRODUCTS
Currently, GJ's products are primarily paper input and output
devices for copiers and computer controlled printers, including sorter
products for copiers and printers and sheet feeding products for printers.
GJ has development and customization contracts with a number of OEMs for
several new products for copiers and intelligent non-impact electronic page
printers.
SORTER PRODUCTS. During the period when Gradco was directly
engaged in the copier products business, prior to the introduction by it to
the convenience copier market of the sorters currently sold by GJ, sorters
available to the market were large and complicated, with many moving parts
and long, complicated paper paths. The sorters sold by GJ are primarily
designed to provide a shorter, straight-through or nearly straight-through,
single paper path.
The sorters sold by GJ are designed for use with a variety of
convenience copiers and are available with either 10, 20, or 25 receiving
bins. These products may be attached quickly and easily to a copier or may be
designed to be an integral part of the copier. Some of GJ's sorters are
controlled by intelligence contained within the copier, which communicates
with the sorter through a customized interface, while others contain the
necessary intelligence to stand alone and receive output from the copier or
mechanically and electronically interface with a copier.
NEW COPIER PRODUCTS. The new products for the copier market
include a variety of 10, 15 and 20 bin sorters with a sheet capacity per bin
and a copy per minute operating speed to satisfy the need in the low through
mid-range of copiers. Some products include means for offsetting copy sets
to enhance set removal and set capacity for mid-range copier use, and some
include set-aligning sheet joggers and in-bin stapling and hole punching
capabilities.
New copier products which also are applicable to the printer market
include sorters which are also operable in a random access mode to function
with electronic page printers as a mailbox as well as several products that
serve as finishing devices to staple, punch, bind or offset documents. Three
of these products are at or near the production stage and the remainder are
in the development or marketing stages.
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PRINTER PRODUCTS. GJ's products include certain additional
automatic paper and envelope feeders and specialized output print stations.
These include a paper feeder, stacker and mailboxes specially designed for
laser printers.
NEW PRINTER PRODUCTS. New products developed for the printer
product market include a sheet and envelope feeder, a variety of high
capacity sheet feeders applicable to a variety of laser printers, a
specialized high capacity stacker for a high speed laser printer, a stacker
for many low speed laser printers, a sheet invertor and a sheet decurler for
laser printers and facsimile machines.
GJ MARKETING AND CUSTOMERS
GENERAL. GJ sells its products domestically and internationally
primarily directly to OEMs. GJ (under licenses which were assigned to it by
Gradco) has licensed certain OEMs to manufacture and sell certain products
for use in conjunction with the OEMs' copiers marketed to other companies.
GJ frequently develops a new product or a variation of an existing
product in consultation with an OEM who has agreed to pay for or share in the
cost of the development work, then submits a prototype for evaluation to the
OEM customer who may agree to purchase such product in commercial quantities
and who may share tooling and initial production costs. In other cases, an
OEM will present GJ with a copier, printer or other product in the research
and development stage and engage GJ (at the OEM's expense) to design a paper
handling device to fit the OEM's specifications. Any unique interface
designed to work only with an OEM's particular equipment may be exclusive to
the OEM; GJ retains ownership of the basic technology and any other
technology developed by GJ for use in its business. GJ also develops
products at its own expense, based on its evaluation of future market
requirements.
In fiscal 1998, Xerox and Xerox Ltd. (successor to Rank Xerox)
accounted for 26% and 20%, respectively, of the Registrant's consolidated
revenues. In fiscal 1997, Xerox, Rank Xerox, Mita and Lanier accounted for
26%, 17%, 11% and 11%, respectively, of the Registrant's consolidated
revenues. In fiscal 1996, Xerox, Rank Xerox, Mita and Lanier accounted for
29%, 16%, 13% and 11%, respectively, of the Registrant's consolidated
revenues. A loss of any of the current principal customers could have a
negative impact on the Registrant's consolidated operations taken as a whole
(see GJ COMPETITION).
Based on Xerox's system for evaluation of vendors in view of
business/quality management, GJ is officially recognized by Xerox as one of
its certified suppliers.
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LICENSEES. During the period that it was directly involved in the
copier business, Gradco entered into certain agreements and granted certain
licenses to others, described below, to manufacture products using Gradco
technology. These agreements and licenses were assigned by Gradco to GJ as
part of the sale to GJ of substantially all of the assets used in Gradco's
copier business (the "Copier Assets") in fiscal 1991. Thus, the pertinent
rights, obligations and technology of Gradco, described below, have devolved
upon GJ. In certain instances, GJ and the licensee have entered directly
into an amended and restated agreement superseding the original license as
assigned to GJ, but these restatements do not modify the basic terms of the
arrangement, as described below. In one instance (the license described in
the next to last paragraph of this section), the license was granted by GJ
itself in fiscal 1993.
In exchange for a lump sum payment, Gradco and a major OEM customer
entered into a paid up, royalty-free, worldwide release and agreement not to
assert against the OEM most of Gradco's then-existing patents relating to
sorters existing at the time of the agreement. This agreement is limited to
sorters made, used or sold by the OEM or its affiliates for use only with
certain products made by or for the OEM or its affiliates. In addition, this
OEM has been granted a non-exclusive worldwide license on a royalty basis
limited to certain sorter technology and patent rights for use with certain
products of the OEM or its affiliates. Gradco and the OEM amended this
license to include additional defined sorters in exchange for an additional
royalty payable to Gradco, in conjunction with the grant of royalty-free
cross licenses between Gradco and the OEM with respect to certain conflicting
patent rights of Gradco in the United States and the OEM in Japan.
Another major OEM was granted a limited non-exclusive world-wide
license for a lump sum payment and future royalties restricted to certain
sorter technology and patent rights for use with certain products of the OEM
or its affiliates. Such sorters are limited by definition of size, capacity
and copier speed.
Another OEM was granted a nonexclusive license in exchange for a
lump sum payment and future royalties on certain limited sorter technology
for use on copiers manufactured by the OEM. Certain sorters, as defined in
the agreement, are territorially limited.
GJ granted a nonexclusive license to a laser printer OEM to
incorporate GJ's patented decurler structure in the OEM's printer for a
royalty of one amount if incorporated in an attachment to the printer, but a
lesser amount if incorporated directly in the printer.
These agreements generated recurring royalty revenues of
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approximately $2,771,000 during the fiscal year ended March 31, 1998,
$2,694,000 during the fiscal year ended March 31, 1997 and $2,528,000 during
the fiscal year ended March 31, 1996. These agreements allow GJ to receive
additional revenues from certain OEMs while also selling products to the
OEMS, and, overall, are expected to result in better market penetration of GJ
technology. However, the licensees are able to compete with GJ in some of
GJ's customary markets to the limited extent set forth in such agreements.
No licensee has the right to sublicense the technology to nonaffiliates.
GJ COMPETITION
GJ's principal competition for its sorters for convenience copiers
is from its OEM licensees. Certain licensees, because of their much larger
resources, have been able to develop new sorter products more rapidly than
GJ. GJ also experiences competition, to a more limited extent, from other
OEMs, and from other manufacturers of sorters using different technology.
Copier manufacturers or other companies, many of whom are much larger than GJ
with resources far in excess of those of GJ, could seek to enter the
convenience copier sorter market in direct competition with GJ. Certain OEMs
make sorters for use with certain of their convenience copier models using
other sorter technology such as fixed bin technology.
In its marketing of printer products, GJ competes with
manufacturers of mechanical sheet feeding devices, continuous form paper
feeding devices and automatic paper feeding devices, as well as OEMs that
build such devices for sale with their information or word processing systems.
GJ PATENTS AND PROPRIETARY TECHNOLOGY
GJ has an ongoing program of seeking patent protection for its
technology. GJ holds numerous patents and patent applications (including
those acquired by assignment from Gradco as part of the sale of Copier Assets
in fiscal 1991) relating principally to its sorters in the United States,
United Kingdom, Japan, Germany, France, Switzerland and Canada. The
unexpired terms of the major U.S. sorter patents already issued range from 3
to 17 years. Patent applications are pending on most of GJ's recently
introduced new products. Patents have been obtained or patent applications
are pending in the United States and Japan, relating to GJ's paper decurling
technology for laser printers and facsimile machines.
GJ also has United States and foreign patents and has several
additional patent applications pending in the United States and abroad
relating to paper feeding devices for use with printer products.
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Gradco believes that the issued patents of GJ are material to the
consolidated operations of Gradco and its subsidiaries taken as a whole.
However, there can be no assurance that GJ's sorter patents will not be
challenged or infringed. In addition, there can be no assurance that other
parties will not develop new technology which does not violate such patents
but which is competitive with certain GJ products and patentable by such
other parties.
GJ has a confidential information and invention assignment
agreement to protect GJ's technology with each of its key technical employees.
GJ PRODUCTION AND ASSEMBLY
GJ produces its products at manufacturing facilities of contract
manufacturers in Japan, Korea and Canada.
Agreements with the manufacturers for finished products provide for
quality controls and inspection by GJ and its customers. GJ seeks to control
product quality in a variety of ways. It emphasizes initial inspection and
testing of components. Each of GJ's product lines has a high commonality of
parts, enabling GJ to effect certain economies of scale. Raw materials for
GJ's products are available from a number of sources to permit timely
shipment of orders. Microprocessor programming and electronic assemblies
are generally proprietary but certain OEMs may specify electronics. Tooling
for most common parts is owned by GJ or its contract manufacturers, while a
number of OEMs own tooling for parts unique to models customized for their
products.
GU, and GJ's domestic branch office, have obtained quality systems
certification under ISO 9001 (an International Standard promulgated under the
European Economic Community Mandate).
BUSINESS OF VENTURE ENGINEERING, INC.
The Venture Engineering, Inc. ("Venture") subsidiary performs
contract engineering and manufacturing services, relating to the customer's
own products, for OEMs and other customers. Venture offers professional
turnkey services ranging from design concepts through manufacturing
production. It markets its services independently from the engineering
services performed by GJ for GJ's OEM customers, referred to above. Venture
has also obtained quality systems certification under ISO 9001.
Engineering services performed by Venture are principally related
to paper-handling products and semiconductor processing equipment, including
electronic motion control devices and devices used for putting marks on
paper/media. These devices and applications include printer-plotters,
peripheral media handling,
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and specialized printing and support. Services are also performed for other
applications such as automated medical diagnostic equipment, manufacturing
robotics, and test and process control equipment. Services are typically
billed on a time and material or fixed price basis. However, Venture
completed a development project in February 1992 which will provide a royalty
stream through 1998. This project generated royalty revenues of
approximately $305,000 in fiscal 1998, $171,000 in fiscal 1997 and $32,000 in
fiscal 1996.
Venture is also developing devices for processing automation
equipment for the semi-conductor industry both at the chip level and final
packaging level. Venture is concentrating on projects that can lead to
long-term manufacturing contracts.
Manufacturing services principally include fabrication, assembly
and testing of complex electro-mechanical assemblies for customers in such
diverse fields as computer equipment, medical equipment and
telecommunications.
Due to the broad and diverse number of markets and customers served
by Venture, there is not one specific group of competitors. In most cases,
the principal competition is from within the prospective customers' own
functional engineering and manufacturing organizations, or from a product
company offering standard products which may be adapted to a specific unique
application requirement.
Effective May 31, 1998, Daniel A. Hamilton, President of Venture,
resigned to undertake certain academic pursuits. He will remain available to
Venture as a consultant. Richard G. Lein, formerly Director of Worldwide
Test Operations for Amkor Electronic, Inc., an international semiconductor
and test subcontract company, became President and Chief Executive Officer of
Venture.
COSTS AND REVENUES OF DEVELOPMENT ENGINEERING SERVICES
In 1998, 1997 and 1996 the Registrant, on a consolidated basis,
spent approximately $4,191,000, $3,768,000 and $3,771,000, respectively, on
research and development and development engineering activities. Costs
incurred under research and development and development engineering contracts
are included in research and development expense. Included in research and
development expense are costs related to development engineering service
contracts of approximately $1,914,000, $1,111,000 and $1,733,000, in fiscal
1998, 1997 and 1996, respectively. The Registrant, on a consolidated basis,
also received revenues from customers under development engineering service
contracts of approximately $1,421,000, $1,125,000 and $1,877,000, in fiscal
1998, 1997 and 1996, respectively.
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BACKLOG
Registrant's order backlog at March 31, 1998 from consolidated
operations was estimated at approximately $27.3 million, and was estimated at
approximately $47.7 million at March 31, 1997. Backlog includes orders
accepted for delivery to customers during the ensuing fiscal year, including
purchases committed by certain customers in the form of purchase agreements,
although such orders are subject to cancellation by the customer (in most
cases upon the payment of a cancellation charge). Substantially all orders
shown as backlog were scheduled for delivery within approximately 6 months.
Because Gradco's operating subsidiaries generally ship products upon specific
releases from customers of previously received orders, the Registrant's
backlog as of any particular date may not be a meaningful measure of the
Registrant's actual sales for the succeeding fiscal period.
EMPLOYEES
As of June 19, 1998, Gradco and its subsidiaries employed 122
persons. To date, Gradco and its subsidiaries have encountered no difficulty
in attracting and retaining qualified employees. Gradco believes employee
relations to be satisfactory.
(c) DOMESTIC OPERATIONS AND EXPORT SALES.
Approximately 64% of the Registrant's consolidated revenues for the
fiscal years ended March 31, 1998, 1997 and 1996 were attributed to domestic
sales and approximately 36% were attributed to foreign sales. In its export
sales, Registrant is subject to the usual risks of international trade,
including political instability, restrictive trade policies, controls on fund
transfers and foreign currency fluctuations.
The Registrant's sales are primarily denominated in Japanese yen
and United States dollars. In order to limit the risk of foreign currency
exchange fluctuations, the Registrant attempts to buy and sell products and
services in the same currency. However, there are foreign currency exchange
gains and losses associated with some sales transactions. The Registrant had
currency exchange gains of $1,098,000, $904,000 and $1,057,000 in fiscal
years 1998, 1997 and 1996, respectively, caused by the strengthening of the
dollar versus the yen during each year.
Financial information regarding foreign and domestic operations and
export sales is set forth in Note 8 of Notes to the Registrant's Consolidated
Financial Statements filed in response to Item 8 below.
Item 2. DESCRIPTION OF PROPERTY.
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Gradco's corporate office is located at 3753 Howard Hughes Parkway,
Suite 200, Las Vegas, Nevada 89109. The current term of the lease for this
office expires in March 1999.
GJ's principal office is located in Tokyo, Japan. The principal
office of GU is located in Irvine, California, and GJ maintains a branch
office at the same location. The Registrant's Venture Engineering subsidiary
has engineering, development and light production facilities in Carrollton,
Texas.
Item 3. LEGAL PROCEEDINGS.
HAMMA V. GRADCO SYSTEMS, INC., ET AL; DUBOIS V. GRADCO
SYSTEMS, INC. ET AL.
Gradco and its (now former) president, Keith Stewart, were sued in
an action filed in March 1988 in the United States District Court in
Bridgeport, Connecticut, by John C. Hamma ("Hamma"), an ex-employee. The
complaint primarily alleges misrepresentation and fraudulent concealment by
Gradco and Mr. Stewart in connection with an agreement entered into in March
1982 which terminated and released Gradco from royalty obligations under a
royalty agreement entered into effective as of August 1979 pursuant to which
Hamma assigned to Gradco his co-inventor's interest in patent rights for
improvements in certain products of the Registrant. The complaint, which has
been amended a number of times, sought unspecified damages, and other relief.
GJ and GU 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 a separate but related action (which was consolidated with the
Hamma action for certain pretrial purposes), Gradco and Mr. Stewart were sued
in August 1989 in the United States District Court in Bridgeport, Connecticut
by R. Clark DuBois ("DuBois"), also an ex-employee of the Registrant. The
complaint primarily alleges misrepresentation and fraudulent concealment by
the Registrant and Mr. Stewart in connection with an agreement entered into
in March 1983 which terminated and released the Registrant from royalty
obligations under a royalty agreement entered into effective as of August
1979 pursuant to which DuBois assigned to the Registrant his co-inventor's
interest in patent rights for improvements in certain products of the
Registrant. The complaint, which has been amended a number of times, seeks
unspecified damages, and other relief. The case has not yet been scheduled
for trial.
In March 1992, each of the plaintiffs filed an Application for
Prejudgment Remedy against the Registrant and GJ 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 Registrant and the
plaintiffs agreed in principle to a Consent Order instead of proceeding with
a hearing on the Application. If
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during the pendency of the lawsuits the Registrant 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 Registrant has agreed to forbear from
proceeding with any such transaction for a limited period. The Registrant
would vigorously oppose a renewed Application. Management believes that the
Consent Order is in the Registrant's best interests because it precludes any
attachment of the Registrant'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 expenses which would have resulted from a current hearing on
the Application.
In June 1995, a jury found the Registrant to have liability in the
lawsuit filed by Hamma. The Registrant filed a motion in August 1995 for
judgment as a matter of law to reverse the verdict. This motion remains
pending. After a determination by the Court on the Registrant'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 a new Application for a
Prejudgment Remedy (the "July PJR Application") seeking to attach Gradco's
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. An
award of damages of the magnitude sought by Mr. Hamma could have a material
adverse effect on the Registrant's financial position and might threaten its
existence as an ongoing enterprise. 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. Such submissions were made and this
issue is also under consideration by the Court.
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 Registrant 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.
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Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
(a) MARKET INFORMATION.
Gradco common stock is traded in the over-the-counter market and is
quoted on the NASDAQ National Market System under the symbol GRCO. The
following table sets forth the quarterly high and low closing sales prices
from April 1, 1996 to March 31, 1998.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
<S> <C> <C>
June 30, 1996................. $ 5.00 $ 3.13
September 30, 1996............ $ 4.56 $ 3.13
December 31, 1996............. $ 4.25 $ 3.38
March 31, 1997................ $ 4.25 $ 3.00
June 30, 1997................. $ 5.63 $ 3.19
September 30, 1997............ $ 10.63 $ 5.13
December 31, 1997............. $ 10.00 $ 6.63
March 31, 1998................ $ 7.75 $ 5.63
</TABLE>
(b) HOLDERS.
The approximate number of holders of record of Gradco common stock, no
par value (its sole class of common equity) as of the close of business on June
19, 1998 is 773.
(c) DIVIDENDS.
Gradco has not declared any dividends on its common stock. The
present policy of Gradco's board of directors is to retain earnings to provide
funds for the operation and expansion of Gradco's business.
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Item 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with the consolidated financial statements of Gradco and the notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
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1998 1997 1996 1995 1994
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(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of income data:
Operating revenues: $120,999 $100,887 $100,596 $82,838 $53,148
-------- -------- -------- ------- -------
Costs and expenses:
Cost of sales....................................... 95,019 79,271 77,497 64,919 41,163
Other operating expenses............................ 14,274 14,770 15,785 14,186 11,677
Interest income, net................................ (160) (183) (226) (55) (32)
Investment (gains) losses........................... -- -- (53) 205 52
-------- -------- -------- ------- -------
109,133 93,858 93,003 79,255 52,860
-------- -------- -------- ------- -------
Earnings before income taxes and
minority interest................................... 11,866 7,029 7,593 3,583 288
Income taxes............................................ 4,378 2,983 2,748 1,331 535
Minority interest....................................... 1,102 1,194 1,585 800 (241)
Net earnings (loss)..................................... $ 6,386 $ 2,852 $ 3,260 $ 1,452 $ (6)
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Basic earnings per common share......................... $ .82 $ .36 $ .42 $ .19 $ --
Average shares outstanding, basic EPS................... 7,809 7,799 7,796 7,784 7,784
Diluted earnings per common share....................... $ .79 $ .36 $ .42 $ .19 $ --
Average shares outstanding, diluted EPS................. 8,051 7,832 7,813 7,798 7,784
Balance sheet data:
Working capital..................................... $ 17,240 $ 19,418 $ 18,979 $16,727 $10,208
Total assets........................................ 48,471 58,086 58,015 64,383 41,796
Long-term debt...................................... 2 15 25 35 --
Shareholders' equity................................ 21,473 15,339 16,201 16,997 11,137
</TABLE>
13
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
IN ADDITION TO HISTORICAL INFORMATION, MANAGEMENT'S DISCUSSION AND
ANALYSIS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS, INCLUDING THOSE RELATED
TO THE REGISTRANT'S GROWTH AND STRATEGIES, REGARDING EVENTS AND FINANCIAL
TRENDS THAT MAY AFFECT THE REGISTRANT'S FUTURE RESULTS OF OPERATIONS AND
FINANCIAL POSITION. THE REGISTRANT'S ACTUAL RESULTS AND FINANCIAL POSITION
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF COMPETITION, GENERAL ECONOMIC AND BUSINESS
CONDITIONS, CHANGES IN TECHNOLOGY, FLUCTUATIONS IN THE RATES OF EXCHANGE OF
FOREIGN CURRENCY AND OTHER RISKS AND UNCERTAINTIES OVER WHICH THE REGISTRANT
HAS LITTLE OR NO CONTROL.
GJ and GU 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.
REVENUES
Revenues for the fiscal year ended March 31, 1998 increased by
$20,112,000 (19.9%) from the prior year primarily due to an increase of
$19,605,000 (20.2%) in net sales, from $96,897,000 to $116,502,000. Unit sales
in the copier market increased by 39%, but unit sales in the printer market
were flat compared to the previous year. Sales denominated in yen, when
translated into dollars, were approximately $6.5 million lower than they would
have been had the yen not decreased by 12% against the dollar during the year.
Development engineering services revenue increased $296,000, primarily at
Venture, while royalties increased by $211,000.
Revenues for the fiscal year ended March 31, 1997 increased by
$291,000 from the prior year. Although unit sales increased by 6%, the amount
of net sales increased by only $738,000, from $96,159,000 to $96,897,000.
Sales denominated in yen, when translated into dollars, were approximately $13
million lower than they would have been had the yen not decreased by 17%
against the dollar during the year. Revenue from development engineering
services decreased by $752,000 as copier projects partially funded by customers
in the prior year were completed while royalties increased by $305,000.
COSTS AND EXPENSES
14
<PAGE>
Cost of sales as a percentage of net sales was 81.6%, 81.8% and
80.6% in fiscal 1998, 1997 and 1996, respectively. The increase in the 1998
and 1997 fiscal years is primarily due to a decrease in margins in Venture
Engineering's contract manufacturing business from the fiscal 1996 level.
Research and development expenses ("R&D") in fiscal 1998 totaled
$4,191,000 (3.5% of revenues), compared to $3,768,000 (3.7% of revenues) in
fiscal 1997 and $3,771,000 (3.7% of revenues) in fiscal 1996. R&D expenses
incurred under development engineering service contracts in the fiscal years
ended March 31, 1998, 1997 and 1996, respectively, were $1,914,000,
$1,111,000 and $1,733,000. The decrease from fiscal 1996 to 1997 was
primarily due to the decrease in customer-funded copier projects discussed
previously and the increase from fiscal 1997 to 1998 was primarily at
Venture. R&D expenses incurred on behalf of OEM customers and internal R&D
expenses were $2,277,000, $2,657,000 and $2,038,000 for the same periods.
Selling, general and administrative expenses ("SG&A") decreased by
$919,000 (8.4%) in fiscal 1998 from the prior year. The favorable
translation of SG&A at GJ caused by the weaker yen during the year accounted
for a decrease of approximately $650,000, GU's SG&A decreased by $575,000,
primarily from a reduction in staff associated with the printer distribution
business, and currency exchange gains increased by $194,000. These decreases
were offset by $527,000 in stock-based compensation expense incurred by the
Registrant. SG&A decreased by $1,012,000 (8.4%) in fiscal 1997 from the
prior year. The favorable translation of SG&A at GJ caused by the weaker yen
during the year accounted for a decrease of approximately $1,400,000 and a
reduction in 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 lower currency exchange gains amounting to $153,000 and general increases
at the operating subsidiary level.
PRE-TAX EARNINGS, TAXES, AND MINORITY INTEREST
As a result of the above factors, earnings before income taxes and
minority interest were $11,866,000, $7,029,000 and $7,593,000 in fiscal 1998,
1997 and 1996, respectively. The tax provisions of $4,378,000, $2,983,000 and
$2,748,000 in fiscal 1998, 1997 and 1996, respectively, primarily comprise
foreign taxes on the earnings of GJ and federal and state taxes on the earnings
of GU. The Registrant's consolidated effective tax rate increased in fiscal
1997 as net operating loss carryforwards at GU, which filed a separate return
until September, 1997, were fully utilized. The tax rate decreased in fiscal
1998 as a larger percentage of earnings were generated domestically and foreign
earnings were taxed at a lower rate. For further discussion regarding the tax
15
<PAGE>
provisions, see Note 4 of "Notes to Consolidated Financial Statements" set
forth in Item 8 below.
Minority interest decreased relative to the increased earnings due
to the buyback of GJ shares during the year which increased the Registrant's
ownership in GJ from 58.6% to 97.3%, see Note 2 of "Notes to Consolidated
Financial Statements" set forth in Item 8 below.
LITIGATION
In June 1995, a jury found the Registrant to have liability in a
lawsuit by John C. Hamma, a former employee. The Registrant has filed a
motion to reverse the verdict. After a determination by the Court on the
Registrant'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 Registrant's financial position
and might threaten its existence as an ongoing enterprise. The Registrant
believes that as a matter of law the damages claimed by Mr. Hamma are
excessive to a substantial extent.
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 Registrant 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. See Item 3 "Legal Proceedings" and Note 7 of "Notes to
Consolidated Financial Statements" set forth in Item 8 below.
EFFECTS OF INFLATION
To date, the Registrant has not experienced significant
inflationary cost increases.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $17,240,000 at March 31, 1998, a decrease of
$2,178,000 from March 31, 1997. Although $12,704,000 was used to purchase
the minority interest discussed above, funds generated by operations largely
replenished this expenditure. Working capital increased to $19,418,000 at
March 31, 1997 from $18,979,000 at March 31, 1996 primarily from funds
generated by operations, in spite of the 15% decrease in the value of the yen
against the dollar when compared to the previous year-end rate.
Net cash provided by operations was $3.4 million, $3.0 million and
$11.6 million in fiscal 1998, 1997 and 1996, respectively. The
16
<PAGE>
increase in 1998 from 1997 was due to an increase of $2.6 million in cash
provided by net earnings before depreciation, amortization, deferred taxes,
stock-based compensation and minority interest from $6.5 million in 1997 to
$9.1 million in 1998 and a decrease in prepaid and other assets in 1998 which
provided $1.2 million as compared to an increase in 1997 which accounted for
a use of $1.7 million, but was offset by an additional $0.6 million used to
fund accounts receivable. Also, changes in accounts payable, notes payable to
suppliers and income taxes payable in 1997 provided $4.7 million, but in 1998
changes to these accounts used $0.1 million. The decrease in 1997 from 1996
was due to an increase in accounts receivable in 1997 which accounted for a
use of $7.0 million as compared to a decrease in 1996 which provided $2.2
million. Cash provided by net earnings before depreciation, amortization,
deferred taxes and minority interest decreased to $6.5 million in 1997 from
$7.2 million in 1996, but was offset by an increase in cash provided by
accounts payable and income taxes payable of $3.0 million in 1997 as compared
to $2.0 million in 1996.
Net cash used in investing activities of $0.3 million, $1.7 million
and $1.6 million in fiscal 1998, 1997 and 1996, respectively, was for
acquisition of property and equipment. In fiscal 1998, $12.7 million was
also used to repurchase GJ shares, decreasing the minority interest ownership
of GJ from 41.4% to 2.7%
Net cash provided by financing activities was $0.2 million in
fiscal 1998 primarily from the exercise of stock options. Net cash used in
financing activities was $0.2 million in fiscal 1997 representing a dividend
to minority shareholders.
Exchange rate changes associated with the weakening yen caused
decreases of $0.2 million, $2.2 million and $2.6 million in cash in fiscal
1998, 1997 and 1996, respectively.
At March 31, 1998, the Registrant had $8,691,000 in cash and
minimal long-term debt. The Registrant's Japanese subsidiary has informal
credit facilities with a Japanese bank. There were no borrowings at March
31, 1998. The Registrant believes that its cash and credit facilities are
adequate for its short and long-term needs. The Registrant does not have any
material commitments for capital expenditures.
IMPACT OF THE YEAR 2000
The Registrant and its subsidiaries have addressed the impact of
the year 2000 on their internal accounting and operating systems and have
determined that these systems are Year 2000 compliant as a result of the
recent purchases of computer software upgrades. The Registrant is completing
an assessment of how its interface with customers and suppliers, through
sales and purchase orders, might be impacted. This assessment is expected to
be completed before
17
<PAGE>
the end of the current fiscal year. To date, there do not appear to be any
issues which would have a material impact on the Registrant's results of
operations, liquidity or capital resources.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Response to this Item is contained in Item 14(a).
Item 9. DISAGREEMENTS IN ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) The following table sets forth the name of each director
and executive officer of the Registrant, and the nature of all positions and
offices with the Registrant held by him at present.(1) Unless otherwise
indicated, the term of office of all directors and executive officers expires
at the next annual meeting of stockholders of the Registrant, which is expected
to be held in September 1998.
<TABLE>
<CAPTION>
NAME POSITION
<S> <C>
Martin E. Tash Chairman of the Board, President
and Chief Executive Officer
Harland L. Mischler Executive Vice President, Chief
Financial Officer and Director
Bernard Bressler Secretary, Treasurer and Director
Robert J. Stillwell Director
Thomas J. Burger Director
Masakazu (Mark) Takeuchi Director of Registrant; President and
Director of GJ*
</TABLE>
- ----------------
(1) Akira (Tony) Shinomiya, who is listed in the table, is an executive
officer of Gradco (Japan) Ltd. ("GJ"), the Registrant's majority-owned Japanese
subsidiary. As described in Item 1(b) above, a principal portion of the
Registrant's business is conducted through GJ. Due to the significance of the
role of Mr. Shinomiya in managing the operations of GJ and conducting its
relationship with the Registrant, information regarding him has been included
in various portions of this Part III. However, the inclusion of such
information under references to "executive officers of the Registrant" is not
an acknowledgement that Mr. Shinomiya may be so characterized, since he does
not perform a policy-making function for the Registrant.
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Akira (Tony) Shinomiya Chief Financial Officer and
Director of GJ*
</TABLE>
- ----------------
*Term expires at ordinary general shareholders meeting of GJ for fiscal 1998,
to be held in June 1998.
(b) The following is a brief account of the recent business
experience of each director and executive officer and directorships held with
other companies which file reports with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
NAME BUSINESS EXPERIENCE
- ---- -------------------
<S> <C>
Martin E. Tash, Mr. Tash has been Chairman of the Board and
age 57 Chief Executive Officer of the Registrant since
October 1990, and President of the Registrant since
October 1991. Mr. Tash is also Chairman of the Board
and President of Plenum Publishing Corporation, a
position he has held since July 1977.
Harland L. Mr. Mischler has been Chief Financial Officer
Mischler, age 66 and a director of the Registrant since October 1990,
and Executive Vice President of the Registrant since
October 1991. Mr. Mischler is a certified public
accountant. Mr. Mischler served as Vice President,
Controller and Treasurer of Hobart Corporation from
1966 to 1981. From 1981 to 1984 he was Vice President
of Finance of Bausch & Lomb, Inc. At that time he
purchased, with another, Applied Research Laboratories,
Inc., an analytical instrument company, in a leveraged
buyout from Bausch & Lomb. After such company was sold
profitably in 1987, Mr. Mischler founded HLM Capital
Resources, Inc., a private investment and holding
company of which he is President and Chairman.
Bernard Bressler, Mr. Bressler has been Secretary and a director of
age 70 the Registrant since October 1990 and Treasurer of the
Registrant since April 1992. He has been a practicing
attorney since 1952, and is presently a member of the
firm of Bressler, Amery & Ross, P.C., counsel to the
Registrant. Mr. Bressler is also a director of Plenum
Publishing Corporation.
Robert J. Stillwell, Mr. Stillwell has been a director of the
19
<PAGE>
<CAPTION>
<S> <C>
age 62 Registrant since October 1991. Mr. Stillwell owns and
operates the Robert J. Stillwell Agency, Inc., an
independent life and health insurance agency which he
founded over 20 years ago, and he owns and operates
Nationwide Property Management, which handles diverse
real estate investments in which he is involved. In
1985, Mr. Stillwell founded and is the principal owner
of Service Concepts Unlimited, Inc. Mr. Stillwell is a
director of Crusader Savings Bank located in Rosemont,
Pennsylvania.
Thomas J. Burger, Mr. Burger has been a director of the Registrant
age 51 since October 1993. He is Associate Senior Vice
President of NEC America, Inc. (a position he has held
since July 1993), and is responsible for the sale and
marketing of its business telephone systems throughout
the United States. Prior thereto, he was President and a
director of two wholly-owned subsidiaries of NEC
America Inc., which conducted the sales, installation
and maintenance of NEC communication systems and
networks throughout the Central, South and Western
United States. From August 1988 to December 1989 Mr.
Burger was President and a director of Marcom
Communications Inc. After he reorganized its
telecommunication subsidiary, the subsidiary was sold
to NEC America and he became an employee of NEC. In
July 1987 Mr. Burger founded Astra Services Inc., a
computer company providing various software
development services to the communications industry.
Astra Services was sold profitably in 1992. From 1973
to 1987 Mr. Burger was employed in various capacities
by Telecom Plus International Inc., one of the major
independent interconnect companies in the U.S. He
became President in 1980, a position he held until May
1987 when the company was sold to Siemens
Communications.
Masakazu (Mark) Mr. Takeuchi has been a director of the Registrant
Takeuchi, age 61 since September 1997. He has been President and
Chief Executive Officer of GJ since 1989 and a director
of GJ since 1988. He is also President and a director
of GU. He was Senior Vice President of Far East
Operations and New Business Development of the
Registrant from August 1988 to October 1990,
20
<PAGE>
<CAPTION>
<S> <C>
and a director of the Registrant from March 1990 until
October 1990. Mr. Takeuchi was also Chairman of GJ
from August 1988 until December 1988. Previously,
from 1961, Mr. Takeuchi was employed by C. Itoh & Co.
Ltd. in various positions.
Akira (Tony) Mr. Shinomiya has been Chief Financial Officer and
Shinomiya, age 55 a director of GJ since January 1989. From 1987 to
1988, he served as deputy General Manager of C. Itoh
Electronics Corp. and from September 1985 through 1986
he was Section Manager of the Electronics Division of
C. Itoh & Co. Ltd. From 1975 to 1985 he was Vice
President of C. Itoh Electronics Inc. in Los Angeles,
California.
</TABLE>
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Harland L. Mischler failed to file on a timely basis a Statement of
Changes in Beneficial Ownership On Form 4, reporting the exercise of stock
options for the purchase of 4,000 shares. Mr. Mischler has since filed the
Form 4 reporting such exercise.
Item 11. EXECUTIVE COMPENSATION.
(a) SUMMARY COMPENSATION TABLE. The following table sets forth
all compensation awarded to, earned by or paid to the following persons through
June 19, 1998 for services rendered in all capacities to the Registrant and its
subsidiaries during each of the fiscal years ended March 31, 1998, 1997 and
1996: (1) the Registrant's Chief Executive officer, and (2) each of the other
executive officers whose total compensation for the fiscal year ended March 31,
1998 required to be disclosed below exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
NAME AND SALARY AND UNDERLYING
PRINCIPAL POSITION YEAR BONUS($)(1)(2) OPTIONS(3)
- ------------------ ---- -------------- ----------
<S> <C> <C> <C>
Martin E. Tash 1998 125,000 100,000
Chairman of the 1997 125,000 ---
Board, President 1996 125,000 ---
and Chief Executive
Officer
Masakazu (Mark) Takeuchi 1998 263,388 60,000
President, 1997 317,996 ---
Gradco (Japan) Ltd. 1996 315,248 ---
21
<PAGE>
Akira (Tony) Shinomiya 1998 232,358 40,000
Chief Financial Officer 1997 278,757 ---
Gradco (Japan) Ltd. 1996 277,940 ---
</TABLE>
- -----------------
(1) With regard to Mr. Tash, the amounts shown in this column represent
compensation for special services rendered as a director.
(2) With regard to Messrs. Takeuchi and Shinomiya, the amounts shown in these
columns represent compensation paid to such individuals for services as
executive officers of GJ. See note (1) in Item 10(a). Such compensation
includes bonuses for 1997 in the amount of $37,286 and $31,072 for Messrs.
Takeuchi and Shinomiya, respectively. All such compensation was paid in yen by
GJ and is translated into dollars at each year's average annual exchange rates
on the above table. When measured in yen, there was a 17% increase in
compensation from 1996 to 1997 and a 9.4% decrease in compensation from 1997 to
1998.
(3) Represents the number of shares of common stock issuable upon the exercise
of options granted to the named officer pursuant to the 1997 Stock Option Plan
(see below) during the last fiscal year.
(b) STOCK OPTION PLANS. On September 11, 1997, the Board of Directors
adopted the Registrant's 1997 Stock Option Plan (the "1997 Plan") which
provides for the grant of options which do not qualify as "incentive stock
options" within the meaning of Section 422A of the Internal Revenue Code. Any
officer, director, key employee or consultant of Gradco or any of its
subsidiaries, in the discretion of the Board of Directors, may be designated to
receive options under this plan. The 1997 Plan provides for the issuance of up
to 400,000 shares of Gradco common stock upon exercise of stock options
(subject to adjustment in the event of a stock split, stock dividend,
consolidation, reorganization, or comparable change in Gradco's capital
structure).
The 1997 Plan is administered by the Registrant's Board of Directors.
Subject to limitations contained in the 1997 Plan, the Board determines the
optionees, option prices, number of shares subject to such options, the
duration of each option, the dates of grant (no options may be granted after
September 11, 2007), and the schedule for exercise of each option. The options
are not transferable. Currently, options for 259,000 shares are outstanding
under the 1997 Plan. 133,000 shares are available for issuance under the 1997
Plan.
Gradco also has a 1988 Stock Option Plan (the "1988 Plan") which provides
for the grant of options which either do or do not qualify as "incentive stock
options" within the meaning of Section 422A of the Internal Revenue Code. Any
officer, director or key
22
<PAGE>
employee of Gradco or any of its subsidiaries, in the discretion of the Stock
Option Committee, may be designated to receive options under this plan. The
1988 Plan, which provided for the issuance of up to 350,000 shares of Gradco
common stock upon exercise of stock options, terminated on May 25, 1998 in
accordance with its terms. Thus, no additional options may be granted
thereunder, but the termination does not affect the validity of outstanding
options. Currently, options for 287,000 shares are outstanding under the
1997 Plan.
The Stock Option Committee, which administers the 1988 Plan, is
appointed by the Board of Directors. Bernard Bressler and Robert J.
Stillwell currently comprise the Stock Option Committee. Since no new
options may be issued under the 1988 Plan, the Committee's powers under such
Plan are limited to such administrative matters as may arise with regard to
currently outstanding options.
The following table sets forth the options that were granted under the
1997 Plan during fiscal 1998 to the executive officers named in the SUMMARY
COMPENSATION TABLE (above). During this period, no options were granted to
said executive officers under the 1988 Plan and no options were exercised by
said executive officers under either stock option plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL MARKET
SECURITIES OPTIONS EXER- PRICE
UNDERLYING GRANTED CISE ON DATE EXPIR- GRANT DATE
OPTIONS IN FISCAL PRICE OF GRANT ATION PRESENT VALUE
NAME GRANTED YEAR ($/SH) ($/SH) DATE(1) ($)(2)
- ---- ---------- ---------- ------ -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Martin E. Tash 100,000 32.1% 2.00 8.00 9/11/07 712,000
Masakazu (Mark) 60,000 19.2% 2.00 8.00 9/11/07 427,200
Takeuchi
Akira (Tony) 40,000 12.8% 2.00 8.00 9/11/07 284,800
Shinomiya
</TABLE>
- -----------------
(1) The options also expire 90 days after the optionee ceases to be an employee
of the Registrant (or a subsidiary) for any reason other than the optionee's
death or total permanent disability. In the event of an optionee's death or
total permanent disability, the options may be exercised for a period of 365
days after such event, but in no event later than September 11, 2007.
23
<PAGE>
(2) The Black-Scholes model was used to calculate the present value of the
options granted. The underlying assumptions used were: expected volatility
(50%), risk-free rate of return (6.5%), dividend yield (none) and time of
exercise (10 years).
The following table sets forth the number of shares underlying unexercised
options held by the foregoing executive officers at March 31, 1998 together
with the value of such options as of March 31, 1998.
UNEXERCISED OPTIONS AT FISCAL YEAR-END
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNEXERCISED IN-THE-MONEY
AT FY-END OPTIONS
NUMBER AT FY-END
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE($)
- ---- ------------- ----------------
<S> <C> <C>
Martin E. Tash 75,000 / 75,000 334,375 / 384,375
Masakazu (Mark)
Takeuchi (1) 33,000 / 45,000 83,625 / 230,625
Akira (Tony)
Shinomiya (1) 16,000 / 30,000 53,500 / 153,750
</TABLE>
- ---------------
(1) Messrs. Takeuchi and Shinomiya are executive officers of Gradco (Japan)
Ltd. See note 1 in Item 10(a).
During the last fiscal year, no options under the 1988 Plan or 1997 Plan
were exercised by the executive officers named in the SUMMARY COMPENSATION
TABLE (above).
(c) RETIREMENT PLAN (GJ). In June 1994, GJ adopted a retirement plan
providing that, subject to approval by GJ's shareholders at the time of
proposed payment, a retirement allowance be paid by GJ to a member of GJ
management who retires after his term of office or by reason of reaching his
mandatory retirement age. The amount of the retirement allowance is
determined by a formula multiplying (1) the monthly salary at the time of
retirement, by (2) the number of years served, by (3) a factor which varies
depending upon the office held by the eligible individual. Each of Messrs.
Takeuchi and Shinomiya is eligible for payments under this Plan upon his
retirement.
(d) COMPENSATION OF DIRECTORS.
Each director who is not also an officer receives a fee of
24
<PAGE>
$1,250 for each quarter in a fiscal year during which he serves in such
position. Accordingly, Mr. Stillwell and Mr. Burger each received $5,000 for
the 1998 fiscal year.
Martin E. Tash (the Registrant's President and Chairman of the Board)
received $125,000 in cash for special services rendered to the Registrant as
a director during the fiscal year ended March 31, 1998. This amount is
included in the SUMMARY COMPENSATION TABLE in Item 11(a) above.
HLM Capital Resources, Inc., a closely held corporation controlled by
Harland L. Mischler (the Registrant's Executive Vice President and Chief
Financial Officer) received $70,000 in cash for providing to the Registrant
special services rendered by Mr. Mischler as a director during the fiscal
year ended March 31, 1998.
All directors (and Messrs. Tash, Mischler and Bressler in their capacity
as officers as well) are eligible to receive options under the 1988 Stock
Option Plan and 1997 Stock Option Plan. See table in Item 10(b) as to
options held by Messrs. Tash and Takeuchi as of March 31, 1998. As of that
date, Mr. Mischler held options for 46,000 shares and Messrs. Stillwell and
Burger each held options for 7,500 shares, all of which were issued under the
1988 Plan.
Bernard Bressler, a practicing attorney, receives compensation based on
his usual hourly rate for attendance at Board meetings.
(e) INDEMNIFICATION.
The Registrant's By-Laws provide that it shall, to the fullest extent
permitted by the Nevada General Corporation Law, indemnify any person against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of
the fact that any such person is or was a director, officer, employee or
agent of the Registrant. Accordingly, all current officers and directors of
the Registrant are entitled to indemnification by the Registrant under this
provision. In addition, James P. Owens, who served as an officer of the
Registrant from 1989 until April 1992, is entitled to indemnification under
such provision based on his activities in such capacity. Mr. Owens is
currently Vice President, Finance and Administration, of GU.
(f) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
The Registrant's Board of Directors has no compensation committee
(or other Board committee performing equivalent functions); compensation
policies applicable to executive officers are determined by the Board.
During the fiscal year ended March 31, 1998, the officers of the Registrant
participating in the
25
<PAGE>
Board's deliberations concerning executive compensation were Martin E. Tash,
Harland L. Mischler and Bernard Bressler (who are members of the Board).
During the fiscal year ended March 31, 1998, Martin E. Tash (an
executive officer of the Registrant) served as a member of the Board of
Directors of Plenum Publishing Corporation ("Plenum"). Plenum has no
compensation committee (or other Board committee performing equivalent
functions); compensation policies applicable to executive officers are
determined by its Board. Mr. Tash is an executive officer of Plenum and is
the only such executive officer who also served on the Registrant's Board.
Bernard Bressler (Secretary, Treasurer and a director of the Registrant) is
an officer and director of Plenum, but he is not an executive officer of
either entity.
During the period since April 1, 1997 (the beginning of the
Registrant's last fiscal year), there were no transactions between the
Registrant and Plenum of the type required to be disclosed under Item 13,
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) The following table sets forth information regarding persons known
to the Registrant to be the beneficial owners of more than 5% of the
Registrant's voting securities as of June 19, 1998 based on 7,854,598 shares
of Common Stock, no par value, outstanding as of such date.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP OF CLASS
- -------------- ------------------- ---------- -----------
<S> <C> <C> <C>
Ryback Management 878,600(1) 11.2%
Corporation
7711 Carondelet Avenue
Box 16900
St. Louis, MO 63105
Dimensional Fund 580,549(2) 7.4%
Advisors, Inc.
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Martin E. Tash 466,487(3) 5.9%
233 Spring Street
New York, NY 10013
</TABLE>
26
<PAGE>
- ------------------
(1) As set forth in Amendment No. 3 to Statement on Schedule 13G, dated January
23, 1998, Ryback Management Corporation ("Ryback"), a registered investment
advisor, has sole voting and dispositive power as to 878,600 shares as of
December 31, 1997. 776,000 of such shares are held by Lindner Growth Fund, a
registered investment company, and 102,600 are managed by Ryback.
(2) As set forth in Amendment No. 6 to Statement on Schedule 13G, filed on
February 13, 1998, Dimensional Fund Advisors Inc. ("Dimensional"), a registered
investment advisor, is deemed to have beneficial ownership of 580,549 shares as
of December 31, 1997, all of which shares are held on behalf of advisory
clients of Dimensional, a registered open-end management investment company.
Dimensional disclaims beneficial ownership of all such shares.
(3) As set forth in their joint statement on Schedule 13D which is being
filed on or about the date of this filing, Martin E. Tash and his wife Arlene
S. Tash may be deemed to be the beneficial owners of 466,487 shares. Martin
E. Tash has sole voting and dispositive power as to 111,990 shares owned
solely by him (49,852 shares of which are held by a private profit sharing
plan of which Mr. Tash is sole beneficiary and 28,085 shares of which are
held by the Plenum Profit Sharing Plan for the benefit of Mr. Tash) which,
together with his currently exercisable options, represent 2.4% of the
outstanding stock. Mr. and Mrs. Tash have shared voting and dispositive
power as to 244,558 shares owned jointly by them, representing 3.1% of the
outstanding stock. The 75,000 shares which may be acquired upon exercise of
the options held by Mr. Tash have been deemed outstanding for the purpose of
computing his individual percentage ownership of outstanding shares, but not
for the purpose of computing the percentage owned by any other party. Mrs.
Tash disclaims beneficial ownership of the shares owned solely by Mr. Tash.
Plenum, of which Mr. Tash is President and Chairman of the Board, is the
owner of and has sole voting and dispositive power as to 34,939 shares. On
March 20, 1998, Plenum distributed as a dividend to its shareholders 878,061
shares of Gradco out of a total of 913,000 shares owned by Plenum. Prior to
the declaration of such dividend, Plenum and Mr. and Mrs. Tash constituted a
"group" as defined in Rule 13d-5(b)(1) under the Securities and Exchange Act of
1934, as reflected in their joint Statement on Schedule 13D dated December 1,
1989, and amendments thereto. In accordance with Amendment No. 7 to the
Statement on Schedule 13D of Plenum and Mr. and Mrs. Tash, which is being filed
on or about the date of this filing, the group has been dissolved. Mr. Tash
disclaims beneficial ownership of the 34,939 shares owned by Plenum.
(b) The following table sets forth information regarding the
27
<PAGE>
voting securities of the Registrant beneficially owned by each director of
the Registrant, each of the executive officers named in the SUMMARY
COMPENSATION TABLE in Item 11(a), and all officers and directors as a group
(7 persons), as of June 19, 1998.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP OF CLASS (1)
- -------------- ------------------- ----------- ------------
<S> <C> <C> <C>
Common Stock Martin E. Tash 466,487(2) 5.9%
no par value 233 Spring Street
New York, NY 10013
Harland L. Mischler 123,000(3) 1.6%
7900 Glades Road
Boca Raton, FL 33434
Bernard Bressler 23,786(4) *
17 State Street
New York, NY 10004
Robert J. Stillwell 34,600(5) *
1009 N. Bethlehem Pike
Springhouse, PA 19477
Thomas J. Burger
1555 West Walnut Lane 7,500(6) *
Irving, TX 75038
Masakazu (Mark) Takeuchi 33,000(7) *
Shibuya-ku, Tokyo 150
Japan
Akira (Tony) Shinomiya 16,000(8) *
Shibuya-ku, Tokyo 150
Japan
All Executive Officers 704,373(9) 8.7%
and Directors as a
Group (comprising the
7 persons shown above)
</TABLE>
* Less than 1%
- -----------------
(1) In each instance where a named individual is listed as the holder of
currently exercisable options, the shares which may be acquired upon exercise
thereof have been deemed outstanding for the purpose of computing the
percentage of outstanding shares owned by such person, but not for the purpose
of computing the percentage owned by any other person, except the group
referred to in note
28
<PAGE>
(9).
(2) See note (3) to the table in Item 12(a) for a breakdown of ownership.
(3) Includes 52,000 shares owned directly by HLM Capital Resources, Inc., a
private investment and holding corporation, of which Mr. Mischler is President,
Chairman and major shareholder, and 25,000 shares owned directly by Mr.
Mischler. Also includes currently exercisable options granted to Mr. Mischler
to purchase 46,000 shares of the Registrant's stock.
(4) Includes 2,626 shares held by Mr. Bressler's wife. Mr. Bressler disclaims
beneficial ownership of the shares owned by his wife.
(5) Includes 17,100 shares held for Mr. Stillwell in an individual retirement
account, and 7,500 shares which may be acquired upon the exercise of currently
exercisable options.
(6) Represents shares which may be acquired upon the exercise of currently
exercisable options.
(7) See note (1) to table in Item 10(a). The number of shares shown above
represents those which are subject to currently exercisable options held by Mr.
Takeuchi.
(8) See note (1) to table in Item 10(a). The number of shares shown above
represents those which are subject to currently exercisable options held by Mr.
Shinomiya.
(9) The number of shares and percentage owned includes 185,000 shares which may
be acquired upon the exercise of currently exercisable options held by certain
of such persons individually named. The number of outstanding shares used in
computing the percentage of ownership by the group includes such shares.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bernard Bressler, Secretary, Treasurer and a director of the Registrant,
is a member of the law firm of Bressler, Amery & Ross, P.C., counsel to the
Registrant. During the 1998 fiscal year, the Registrant paid legal fees of
$128,803 to such firm.
29
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) See index to financial statements and financial statement schedules.
See list of exhibits in paragraph (c) below.
(b) 8-K Reports - None.
(c) Exhibits:
2 Agreement and Plan of Merger dated July 25, 1991 regarding
reincorporation of Gradco in Nevada, incorporated by reference from
definitive Proxy Statement dated September 18, 1991, Exhibit C.
3.1 Articles of Incorporation of Gradco as reincorporated in Nevada,
incorporated by reference from definitive Proxy Statement dated
September 18, 1991, Exhibit D.
3.2 By-laws of Gradco as reincorporated in Nevada, incorporated by
reference from Form 10-K for the fiscal year ended March 31, 1992,
Exhibit 3.2.
10.1 Agreement between Gradco and Minolta Camera Co., Ltd.
dated March 19, 1984, incorporated by reference from Form 10-K for
the fiscal year ended April 7, 1984, Exhibit 10.16.
10.2 Amended and Restated License Agreement between Gradco
(Japan) Ltd. and Minolta Camera Co., Ltd. dated July 1, 1991
(Japanese original and English Translation), incorporated by
reference from Form 10-K for the fiscal year ended March 31, 1992,
Exhibit 10.2.
10.3 General Agreement between Gradco and Ricoh Company, Ltd.
dated July 1, 1984, incorporated by reference from Form 10-K for the
fiscal year ended March 31, 1985, Exhibit 10.19.
10.4 Amended and Restated License Agreement between Gradco (Japan) Ltd.
and Ricoh Company, Ltd. dated April 1, 1991 (Japanese original and
English Translation), incorporated by reference from Form 10-K for
the fiscal year ended March 31, 1992, Exhibit 10.4.
10.5 Agreement between Gradco Systems, Inc., and Canon, Inc.,
dated as of July 1, 1988, incorporated by reference from Form 8-K
for July 1, 1988, Exhibit 10.62.
30
<PAGE>
10.6 Agreement between Gradco/Dendoki Inc. and Canon Inc. dated
February 25, 1983, incorporated by reference from Form 10-K for the
fiscal year ended March 31, 1986, Exhibit 19.0.
10.7 Agreement between Gradco/Dendoki Inc. and Canon Inc. dated
February 25, 1983, incorporated by reference from Form 10-K for the
fiscal year ended March 31, 1986, Exhibit 19.3.
10.8 Agreement among Gradco, Gradco (Japan) Ltd. and Canon,
Inc. dated April 1, 1991, incorporated by reference from Form 10-K
for the fiscal year ended March 31, 1992, Exhibit 10.12.
10.9 Gradco 1988 Stock Option Plan, incorporated by reference
from Form 8-K for July 1, 1988, Exhibit 19.3, and amendment thereto
dated July 24, 1991, incorporated by reference from Form 10-Q for
quarter ended June 30, 1991, Exhibit 19.2.
10.10 Gradco 1997 Stock Option Plan, incorporated by reference
from its Registration Statement on Form S-8 filed February 3, 1998,
Exhibit 4.
10.11 Amended Umbrella Agreement dated as of December 5, 1990
among Gradco, Gradco (Japan) Ltd. and Gradco (USA) Inc.,
incorporated by reference from Form 8-K for December 5, 1990,
Exhibit 28.
10.12 Agreement between Gradco and Gradco (Japan) Ltd. dated
March 1, 1991, incorporated by reference from Form 8-K for March 1,
1991, Exhibit 28.
10.13 Letter Agreement dated March 29, 1991 between Gradco Systems, Inc.
and Gradco (Japan) Ltd., incorporated by reference from Form 10-K
for the fiscal year ended March 31, 1991, Exhibit 10.31.
10.14 Lease Agreement between Venture Engineering, Inc. and
Aetna Life Insurance Company, Inc. (formerly Trammell Crow Company)
dated October 1, 1988 and subsequent amendments dated July 1, 1989,
August 1, 1989, February 1, 1990 and March 1, 1991, incorporated
herein by reference from Form 10-K for fiscal year ended March 31,
1991, Exhibit 19.3.
10.15 Basic Agreement between Gradco (Japan) Ltd. and Ikegami
Tsushinki Co. Ltd. dated as of January 1, 1996 (English Translation
of Japanese original), incorporated by
31
<PAGE>
reference from Form 10-K for fiscal year ended March 31, 1996,
Exhibit 10.16.
10.16 Agreement between Gradco (Japan) Ltd. and Lexmark International,
Inc. dated September 1, 1992, incorporated by reference from Form 10-K
for the fiscal year ended March 31, 1993, Exhibit 10.22.
10.17 Regulations of Retirement Allowance for Board of Directors
and Auditors of Gradco Japan, adopted June 3, 1994 (English
translation of Japanese original), incorporated by reference from
Form 10-K for the fiscal year ended March 31, 1995, Exhibit 10.22.
10.18 Agreement among Gradco (Japan) Ltd., Gradco (USA) Inc.,
and Xerox Canada Ltd. dated as of August 17, 1995, incorporated by
reference from Form 10-K for fiscal year ended March 31, 1996,
Exhibit 10.19.
21 List of Significant Subsidiaries
(i) Gradco (Japan) Ltd. (Japan)
(ii) Venture Engineering, Inc. (Texas)
(iii) Gradco (USA) Inc. (California)
23 Consent of Price Waterhouse LLP - filed herewith.
27 Financial Data Schedule - filed herewith
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: June 29, 1998
GRADCO SYSTEMS, INC.
By: /s/ Martin E. Tash
-----------------------------------------
Martin E. Tash
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the Board,
President and Chief
/s/ Martin E. Tash Executive Officer (Principal
- ----------------------- Executive Officer) June 29, 1998
Martin E. Tash
Executive Vice President,
Chief Financial Officer
(Principal Financial
/s/ Harland L. Mischler and Accounting Officer)
- ----------------------- and Director June 29, 1998
Harland L. Mischler
/s/ Bernard Bressler
- ----------------------- Secretary, Treasurer and June 29, 1998
Bernard Bressler Director
/s/ Robert J. Stillwell
- ----------------------- Director June 29, 1998
Robert J. Stillwell
/s/ Thomas J. Burger
- ----------------------- Director June 29, 1998
Thomas J. Burger
33
<PAGE>
/s/ Mark Takeuchi
- ----------------------- Director June 29, 1998
Mark Takeuchi
34
<PAGE>
FORM 10-K--ITEM 14(a) (1) AND (2)
GRADCO SYSTEMS, INC.
INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Gradco Systems, Inc. and
subsidiary companies are included in Item 8:
Consolidated Balance Sheets--
March 31, 1998 and 1997.............................. S-2
Consolidated Statements of Income--Years Ended
March 31, 1998, 1997 and 1996........................ S-3
Consolidated Statements of Shareholders' Equity--
Years Ended March 31, 1998, 1997 and 1996............ S-4
Consolidated Statements of Cash Flows--Years Ended
March 31, 1998, 1997 and 1996........................ S-5
Notes to Consolidated Financial Statements................ S-7 to S-15
inclusive
The following consolidated financial statement schedule of Gradco Systems, Inc.
and subsidiary companies is included in Item 14(d):
II--Valuation and Qualifying Accounts..................... S-16
All other schedules for which provision is made in the applicable regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Gradco Systems, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index to the financial statements (Item 14a) present fairly, in all material
respects, the financial position of Gradco Systems, Inc. and its subsidiaries
(the "Company") at March 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Costa Mesa, California
June 4, 1998
S-1
<PAGE>
GRADCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,691 $18,335
Accounts receivable, less allowance for
doubtful accounts of $108 and $59 29,930 24,583
Inventories 1,608 1,759
Deferred income taxes 552 252
Other current assets 166 327
------- -------
Total current assets 40,947 45,256
Furniture, fixtures and equipment, net 1,290 2,054
License repurchase, net of accumulated
amortization of $10,700 and $10,994 130 4,069
Excess of cost over acquired net assets, net
of accumulated amortization of $495 and $451 1,234 1,278
Deferred income taxes 1,571 --
Other assets 3,299 5,429
------- -------
$58,086 $48,471
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,241 $ 10,939
Notes payable to suppliers 9,849 12,608
Accrued expenses 1,077 684
Income taxes payable 2,527 1,596
Current installments of long-term debt 13 11
-------- --------
Total current liabilities 23,707 25,838
Long-term debt, excluding current installments 2 15
Non-current liabilities 1,024 889
Deferred income taxes -- 1,833
Excess of fair value of net assets acquired over
cost, net of accumulated amortization of $200 1,600 --
Minority interest 665 14,172
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, no par value; authorized
7,500,000 shares, none issued
Common stock, no par value; authorized 30,000,000
shares, issued 7,854,598 and 7,798,909 45,325 44,618
Accumulated deficit (23,972) (30,358)
Currency translation adjustments 120 1,079
-------- --------
Total shareholders' equity 21,473 15,339
-------- --------
$ 48,471 $ 58,086
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
S-2
<PAGE>
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the years ended March 31,
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net sales $116,502 $ 96,897 $ 96,159
Development engineering services 1,421 1,125 1,877
Licenses and royalties 3,076 2,865 2,560
-------- -------- --------
120,999 100,887 100,596
-------- -------- --------
Costs and expenses:
Cost of sales 95,019 79,271 77,497
Research and development 4,191 3,768 3,771
Selling, general and administrative 10,083 11,002 12,014
-------- -------- --------
109,293 94,041 93,282
-------- -------- --------
Income from operations 11,706 6,846 7,314
Interest expense (12) (4) (13)
Interest income 172 187 239
Gain on trading securities -- -- 53
-------- -------- --------
Earnings before income taxes
and minority interest 11,866 7,029 7,593
Income tax expense 4,378 2,983 2,748
Minority interest 1,102 1,194 1,585
-------- -------- --------
Net earnings $ 6,386 $ 2,852 $ 3,260
-------- -------- --------
-------- -------- --------
Basic earnings per common share $ .82 $ .36 $ .42
-------- -------- --------
-------- -------- --------
Average shares outstanding, basic EPS 7,809 7,799 7,796
-------- -------- --------
-------- -------- --------
Diluted earnings per common share $ .79 $ .36 $ .42
-------- -------- --------
-------- -------- --------
Average shares outstanding, diluted EPS 8,051 7,832 7,813
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
S-3
<PAGE>
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Currency
--------------------- Accumulated translation
Shares Amount deficit adjustments
------ ------ ------- -----------
<S> <C> <C> <C> <C>
Balance at March 31, 1995 7,783,909 $ 44,546 $ (36,470) $ 8,921
Issuance of shares in lieu of cash 15,000 72 -- --
Translation adjustment -- -- -- (4,128)
Net earnings -- 3,260 --
--------- --------- --------- ---------
Balance at March 31, 1996 7,798,909 44,618 (33,210) 4,793
Translation adjustment -- -- -- (3,714)
Net earnings -- -- 2,852 --
--------- --------- --------- ---------
Balance at March 31, 1997 7,798,909 44,618 (30,358) 1,079
Issuance of shares in exchange
for Ziyad shares 689 -- -- --
Exercise of stock options 55,000 180 -- --
Stock-based compensation -- 527 -- --
Translation adjustment -- -- -- (959)
Net earnings -- -- 6,386 --
--------- --------- --------- ---------
Balance at March 31, 1998 7,854,598 $ 45,325 $ (23,972) $ 120
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
S-4
<PAGE>
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the years ended March 31,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,386 $ 2,852 $ 3,260
-------- -------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,005 1,268 1,213
Amortization 806 1,583 2,066
Deferred income taxes (684) (406) (947)
Unrealized holding gain on trading securities -- -- (8)
Gain on sale of securities -- -- (45)
Provision for losses on accounts receivable 50 240 64
Loss (gain) on sale of property and equipment 41 (5) 66
Purchases of trading securities -- -- (249)
Proceeds from sale of trading securities -- -- 882
Issuance of common shares in lieu of cash -- -- 72
Stock-based compensation 527 -- --
Minority interest 1,102 1,194 1,585
(Increase) decrease in accounts receivable (7,641) (7,024) 2,182
Decrease (increase) in inventory 124 142 (609)
Decrease in prepaid assets 149 968 37
Decrease (increase) in other assets 1,014 (2,662) (1,057)
(Decrease) increase in accounts payable (183) 3,835 (133)
(Decrease) increase in notes payable to suppliers (1,047) 1,690 1,305
Increase (decrease) in accrued expenses 435 (9) (387)
Increase (decrease) in income taxes payable 1,162 (842) 2,135
Increase in other liabilities 199 204 145
-------- -------- --------
Total adjustments (2,941) 176 8,317
-------- -------- --------
Net cash provided by operations 3,445 3,028 11,577
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment (330) (1,753) (1,638)
Proceeds from sale of property and equipment -- 10 3
Purchase of minority interest (12,704) -- --
-------- -------- --------
Net cash used in investing activities (13,034) (1,743) (1,635)
-------- -------- --------
</TABLE>
S-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
<TABLE>
<CAPTION>
For the years ended March 31,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Repayment of notes in excess of three months (11) (10) (9)
Proceeds from exercise of stock options 181 -- --
Dividend to minority shareholders -- (231) --
-------- -------- --------
Net cash provided by (used in) financing activities 170 (241) (9)
-------- -------- --------
Effect of exchange rate changes on cash (225) (2,232) (2,568)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (9,644) (1,188) 7,365
Cash and cash equivalents at beginning of year 18,335 19,523 12,158
-------- -------- --------
Cash and cash equivalents at end of year $ 8,691 $ 18,335 $ 19,523
-------- -------- --------
-------- -------- --------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 12 $ 4 $ 15
Income taxes 4,131 4,232 1,910
</TABLE>
See accompanying notes to consolidated financial statements.
S-6
<PAGE>
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Gradco Systems, Inc. (the "Company") is a holding company which, through
its subsidiaries, designs, develops, contracts to produce and markets,
worldwide, intelligent paper handling devices for the office automation
industry.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its majority and wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
During fiscal 1998, the Company increased its ownership in Gradco (Japan) Ltd.
("GJ"), its principal operating subsidiary, from 58.6% to 97.3% (Note 2).
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
respective reporting periods. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash includes all highly liquid debt instruments purchased with a maturity
of three months or less.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of trade receivables. International copier manufacturers
comprise a significant portion of the Company's customer base. All such trade
receivables were current at March 31, 1998.
INVENTORIES
Inventories consist primarily of materials and finished assemblies which
are held to satisfy spare parts requirements of the Company's customers. The
Company has certain contractual commitments to make spare parts available for
purchase for up to six years after the end of a production cycle. Inventories
are stated at the lower of cost (first-in, first-out and weighted average) or
market (net realizable value).
LONG-LIVED ASSETS
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the book value of an asset may not be recoverable. With respect to the
excess of cost over acquired net assets ("goodwill"), the Company records
impairment to the extent that fair value (using future undiscounted cash flows)
is less than the carrying value of goodwill.
REVENUE RECOGNITION
Revenues from product sales ("net sales") are recorded as units are
shipped. Revenues from development engineering services and research and
development contracts are recognized as earned, and licenses and royalties are
recognized when all obligations of the appropriate agreements have been
fulfilled.
S-7
<PAGE>
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
DEPRECIATION AND AMORTIZATION
Furniture, fixtures and equipment are carried at cost and depreciated on a
straight-line basis over their estimated useful lives, ranging from three to ten
years. Tooling is amortized over its estimated useful life, generally four
years. Leasehold improvements are amortized over the lesser of their estimated
useful lives or the term of the lease. The excess of cost over the net assets of
acquired companies is amortized over forty years.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses incurred under development engineering
service contracts, research and development contracts on behalf of OEM customers
and internal research and development are reflected in research and development
expense.
Research and development expenses incurred under development engineering
service contracts in the fiscal years ended March 31, 1998, 1997 and 1996,
respectively, were $1,914,000, $1,111,000 and $1,733,000. Research and
development expenses on behalf of OEM customers and internal research and
development expenses in the fiscal years ended March 31, 1998, 1997 and 1996,
respectively, were $2,277,000, $2,657,000 and $2,038,000.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries are translated
at year-end exchange rates and the resulting adjustments are accumulated in
shareholders' equity. Income and expenses are translated at average exchange
rates for the year. Foreign currency transaction gains and losses are included
in net income, except for those relating to intercompany transactions of a
long-term investment nature which are accumulated in shareholders' equity.
There were foreign currency transaction gains of $1,098,000, $904,000 and
$1,057,000 included in selling, general and administrative expenses in fiscal
1998, 1997 and 1996, respectively.
NET EARNINGS PER SHARE
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.
Basic EPS is computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if stock options and other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity. For all periods
presented, the net earnings available to common shareholders is the same for
both basic and diluted EPS and is equal to the net earnings stated in the
Consolidated Statements of Operations. Basic and diluted EPS do not differ
materially from earnings per share previously presented. A reconciliation of
the average number of outstanding shares used in the computation of basic EPS to
that used in the computation of diluted EPS is shown in the following table (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year
-------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average shares outstanding, basic EPS 7,809 7,799 7,796
Effect of dilutive securities:
Stock options 242 33 17
----- ----- -----
Average shares outstanding, diluted EPS 8,051 7,832 7,813
----- ----- -----
----- ----- -----
</TABLE>
S-8
<PAGE>
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
INCOME TAXES
The Company accounts for income taxes utilizing an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future tax
consequences, the Company considers all expected future events other than
enactment of changes in the tax law or rates.
NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME,
and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. These statements, which are effective for fiscal years beginning
after December 15, 1997, expand or modify disclosures and will have no impact on
the Company's consolidated financial position, results of operations or cash
flows.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 1997 and 1996
consolidated financial statements to conform to the fiscal 1998 presentation.
NOTE 2--REORGANIZATION
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 by GJ in July, increasing the Company's ownership in the stock of GJ
from 58.6% to 90.0%. The total purchase price of $11.1 million was paid from
available cash of GJ and was $2.0 million less than the book value of the net
assets acquired. The purchase price has been allocated to the assets and
liabilities acquired based on their estimated fair values on the acquisition
date. In October 1997, an additional 580,000 shares of GJ were purchased by the
Company for 325 yen per share or approximately $1.6 million in total. This
increased the Company's ownership in the stock of GJ from 7,180,000 shares to
7,760,000 shares which represents 97.3% of the currently outstanding shares of
GJ. Included in this purchase were 60,000, 40,000 and 35,000 shares acquired
from Mark Takeuchi, President of GJ and a director of the Company, Tony
Shinomiya, Chief Financial Officer of GJ and the GJ Employee Stock Ownership
Plan, respectively.
On September 30, 1997, GJ's U.S. subsidiary, Gradco (USA) Inc. ("GU"), was
sold to Gradco Systems, Inc. No gain or loss was recognized in connection with
this transaction. GU will be included in the Company's consolidated U.S.
federal tax return subsequent to the acquisition date. In accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for
Income Taxes, a reduction in the Company's valuation allowance for its tax loss
carryforwards in the amount of $1.8 million was recorded in conjunction with the
acquisition based on an assessment of expected future results of operations.
Because there were no material noncurrent assets of the acquired enterprise to
reduce, a corresponding credit to "excess of fair value of assets acquired over
cost" was recorded as required by SFAS 109 and will be amortized into income
over four and one-half years, the same period over which the utilization of the
tax loss carryforwards was estimated.
S-9
<PAGE>
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
March 31,
---------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Inventories are summarized as follows:
Raw materials $ 128 $ 499
Work-in-process 992 570
Finished goods 488 690
------ ------
$1,608 $1,759
------ ------
------ ------
Furniture, fixtures and equipment, at cost, are
summarized as follows:
Office, shop and automotive equipment $1,192 $1,080
Computer equipment 873 730
Leasehold improvements 122 130
Tooling 3,911 4,991
------ ------
6,098 6,931
Less:
Accumulated depreciation and amortization 4,808 4,877
------ ------
$1,290 $2,054
------ ------
------ ------
Other assets are summarized as follows:
Deposits $1,352 $2,479
Cash surrender value of life insurance 837 855
Investments 642 835
Patents 250 938
Intangible pension asset 171 228
Other 47 94
------ ------
$3,299 $5,429
------ ------
------ ------
Other non-current liabilities are summarized as follows:
Accumulated benefit obligation $ 867 $ 730
Other 157 159
------ ------
$1,024 $ 889
------ ------
------ ------
</TABLE>
NOTE 4--INCOME TAXES
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current
Foreign $ 4,251 $ 2,971 $ 3,250
Federal 453 296 218
State 358 122 227
Deferred
Foreign (1,185) (441) (779)
Federal 501 35 (168)
------- ------- -------
Total $ 4,378 $ 2,983 $ 2,748
------- ------- -------
------- ------- -------
</TABLE>
S-10
<PAGE>
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INCOME TAXES--(CONTINUED)
The foreign provisions for all years primarily reflect GJ income taxed in
Japan.
Reconciliations of the applicable statutory U.S. federal income tax rate of
35% to the effective tax rates on earnings are as follows:
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax rate resulting from:
State income taxes, less federal benefit 2.1 1.2 2.2
Foreign tax expense 7.9 12.4 10.7
Recognition of deferred income, previously taxed (7.6) (6.4) (5.9)
Net operating loss utilized -- -- (6.9)
Other (0.5) 0.2 1.1
------ ------ ------
Effective income tax rate 36.9% 42.4% 36.2%
------ ------ ------
------ ------ ------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Patent amortization $ 632 $ --
Local taxes 401 201
Retirement benefits 334 261
Other 387 227
Tax loss carryforwards 9,390 9,450
Valuation allowance (8,167) (9,450)
------- -------
2,977 689
------- -------
Deferred tax liabilities
Intercompany loan revaluation 711 766
License repurchase -- 1,338
Other 143 166
------- -------
854 2,270
------- -------
Net deferred tax assets (liabilities) $ 2,123 $(1,581)
------- -------
------- -------
</TABLE>
At March 31, 1998, the Company had federal net operating loss carryforwards
("NOLs") for tax reporting purposes of $27,700,000 which will expire in 2000
through 2012 if not utilized. These NOLs are utilizable by Gradco Systems, Inc.
and its subsidiaries, Venture Engineering, Inc. and Gradco (USA) Inc. At this
time it is not deemed more likely than not that all of these NOLs can be
utilized and therefore a valuation allowance has been established. As described
in Note 2, a reduction in the valuation allowance in the amount of $1.8 million
was recorded in fiscal 1998 in conjunction with the intercompany transfer of GU.
If certain substantial changes in the Company's ownership should occur, there
would be an annual limitation on the amount of net operating loss carryforwards
which can be utilized.
The Company does not provide for U.S. income taxes on undistributed foreign
earnings considered permanently invested in its Japanese operations. At March
31, 1998, the Company's share of such undistributed foreign earnings totaled
$12,500,000. Foreign withholding taxes of approximately $1,250,000 would be due
upon remittance of these earnings.
S-11
<PAGE>
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LICENSE REPURCHASE
In 1986, the Company entered into an agreement with C. Itoh Electronics,
Inc. ('CIE') to terminate the exclusive Japanese license granted to CIE in 1983.
The Company paid the equivalent of 1.864 billion yen ($11,500,000 in 1986-87),
and was amortizing these costs over a period of 15 years. In conjunction with
the reacquisition of GJ shares (Note 2), the carrying value of the license
repurchase was reduced by 421 million yen (approximately $3.7 million) and its
amortization period was shortened to 13 years; there is currently one year
remaining. Amortization of the license repurchase amounted to $488,000,
$1,004,000 and $1,158,000 in the years ended March 31, 1998, 1997 and 1996,
respectively.
NOTE 6--EMPLOYEE BENEFITS
The Board of Directors of the Company adopted the 1997 Stock Option Plan
(the "1997 Plan") in September 1997. A maximum of 400,000 shares of the
Company's common stock have been reserved for issuance pursuant to the 1997
Plan. Options may be granted only to officers, key employees, directors or
consultants of the Company or any of its subsidiaries. The options are not
intended to qualify as "Incentive Stock Options" within the meaning of Section
422(a) of the Internal Revenue Code of 1986, but are instead nonqualified
options. Options for 312,000 shares were granted during September 1997 at an
exercise price of $6.00 per share below fair market value of the common stock on
the date of grant. This difference will be recorded ratably as compensation
expense during the period September 1997 through February 2001, the vesting
period of the options. Stock-based compensation expense of $527,000 is included
in selling, general and administrative expenses for the year ended March 31,
1998.
The Company's 1988 Stock Option Plan has 350,000 shares authorized for
issuance. Such options are exercisable in increments over periods at a price
equal to the fair market value at the date of grant in the case of Incentive
Stock Options and at or below fair market value in the case of nonqualified
options.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its plans. The Company adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 ("SFAS 123"), Accounting for Stock-Based Compensation. Accordingly, no
compensation cost has been recognized on the Incentive Stock Options. Had
compensation cost been determined consistent with SFAS 123, there would have
been no material effect on results of operations for the periods presented.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Weighted Average
Number Exercise Price
------ --------------
<S> <C> <C>
Outstanding March 31, 1995 338,910 $ 4.29
Expired (15,000) 9.25
-------
Outstanding March 31, 1996 323,910 4.06
Granted 11,500 3.38
-------
Outstanding March 31, 1997 335,410 4.04
Granted 312,000 2.00
Exercised (55,000) 3.29
Expired (1,410) 8.31
-------
Outstanding March 31, 1998 591,000 $ 3.02
-------
-------
</TABLE>
Of the options outstanding at March 31, 1996, 1997 and 1998, options to
purchase 284,743, 305,576 and 351,250 shares, respectively, were exercisable at
weighted average prices of $4.16, $4.10 and $3.64 per share, respectively.
S-12
<PAGE>
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--EMPLOYEE BENEFITS--(CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable stock options as of March 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.00 304,000 9.5 $2.00 70,000 $2.00
2.38 to 3.38 162,500 4.1 3.04 156,750 3.03
4.25 70,500 3.0 4.25 70,500 4.25
6.75 to 7.38 54,000 1.1 7.10 54,000 7.10
------- -------
591,000 351,250
------- -------
------- -------
</TABLE>
The Company's Japanese subsidiary has a retirement plan for its management
which provides for a lump sum payment to be made to each eligible individual at
his retirement date. The payment is based on a formula that factors in length
of service, position held and salary at the time of retirement. Currently the
plan is unfunded. At March 31, 1998, the Company has recorded an intangible
pension asset of $171,000 and an accumulated benefit obligation of $867,000.
The amount charged to expense in fiscal 1998, 1997 and 1996 was $249,000,
$149,000 and $329,000, respectively.
The Company's domestic subsidiaries each have a 401(k) employee benefits
plan. All employees are eligible for the plan upon the completion of six months
of service with the Company. As part of the plans, the Company may match a
portion of employee contributions or make an additional contribution contingent
upon the Company's annual earnings performance. In fiscal 1998 and 1997, the
Company contributed $55,000 and $14,000 to the plans. No Company contributions
were made during fiscal 1996.
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under
non-cancelable leases. Under the lease agreements for its facilities, the
Company is required to pay for insurance, taxes, utilities and building
maintenance and is subject to certain consumer price index adjustments.
Future minimum lease payments at March 31, 1998, under non-cancelable
facility and equipment leases with remaining lease terms in excess of one year
are as follows:
<TABLE>
<S> <C>
1999 $ 714,000
2000 649,000
2001 605,000
2002 613,000
2003 246,000
Thereafter 168,000
</TABLE>
Rent expense was approximately $1,109,000, $914,000 and $916,000 for fiscal
years 1998, 1997 and 1996, respectively.
In the following litigation, material claims have been asserted against the
Company:
S-13
<PAGE>
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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
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
are 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 the capital stock of its subsidiaries). 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.
S-14
<PAGE>
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--CUSTOMER INFORMATION AND GEOGRAPHIC DATA
The Company had sales to major customers (in excess of 10% of revenues) in
each fiscal year as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Xerox 26% 26% 29%
Xerox Ltd. 20% 17% 16%
Mita N/A 11% 13%
Lanier N/A 11% 11%
</TABLE>
Geographic data follows (in thousands):
<TABLE>
<CAPTION>
Domestic Europe Asia Eliminations Consolidated
-------- ------ ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
March 31, 1998
Net sales $76,003 $ 9 $ 91,236 $ (50,746) $ 116,502
Net earnings 4,139 1 3,996 (1,750) 6,386
Assets 23,122 56 38,871 (13,579) 48,471
March 31, 1997
Net sales $63,304 $ 134 $ 86,388 $ (52,879) $ 96,897
Net earnings 1,886 1 1,292 (327) 2,852
Assets 18,377 73 51,958 (15,371) 58,086
March 31, 1996
Net sales $62,194 $ 89 $ 86,186 (52,310) $ 96,159
Net earnings 1,933 3 1,324 -- 3,260
Assets 19,411 67 53,908 (15,371) 58,015
</TABLE>
For the years ended March 31, 1998, 1997 and 1996 export sales were
$26,394,000, $18,618,000 and $16,279,000, respectively, consisting principally
of sales to Europe and Canada.
NOTE 9--INTERIM FINANCIAL RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter
-------------------------------------------------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
(In thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C> <C>
1998
Net sales $ 39,802 $ 28,785 $ 23,548 $ 24,367 $ 116,502
Gross margin 7,725 5,001 4,363 4,394 21,483
Earnings before income taxes 5,178 2,198 2,143 2,347 11,866
Net earnings 1,774 1,379 1,366 1,867 6,386
Basic earnings per common share $ .23 $ .18 $ .18 $ .24 $ .82
Diluted earnings per common share $ .23 $ .17 $ .17 $ .23 $ .79
1997
Net sales $ 25,546 $ 25,601 $ 21,950 $ 23,800 $ 96,897
Gross margin 4,752 4,402 3,950 4,522 17,626
Earnings before income taxes 1,716 1,301 1,382 2,630 7,029
Net earnings 792 550 625 885 2,852
Basic earnings per common share $ .10 $ .07 $ .08 $ .11 $ .36
Diluted earnings per common share $ .10 $ .07 $ .08 $ .11 $ .36
</TABLE>
S-15
<PAGE>
SCHEDULE II
GRADCO SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the three years ended March 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Additions
Balance Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
------- -------- ---------- -------
<S> <C> <C> <C> <C>
Valuation reserve deducted in the balance
sheet from the asset to which it applies:
Year ended March 31, 1998:
Accounts receivable $ 59 $ 50 $ 1 $ 108
Deferred income taxes $ 9,450 $ 717 $ 2,000 $ 8,167
Year ended March 31, 1997:
Accounts receivable $ 103 $ 240 $ 284 $ 59
Deferred income taxes $ 9,800 $ -- $ 350 $ 9,450
Year ended March 31, 1996:
Accounts receivable $ 39 $ 64 $ -- $ 103
Deferred income taxes $ 10,850 $ -- $ 1,050 $ 9,800
</TABLE>
S-16
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-35656 and No. 333-45483) of Gradco Systems, Inc.
of our report dated June 4, 1998 appearing on page S-1 of this Form 10-K.
PRICE WATERHOUSE LLP
Costa Mesa, California
June 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 3/31/98
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,691
<SECURITIES> 0
<RECEIVABLES> 30,038
<ALLOWANCES> 108
<INVENTORY> 1,608
<CURRENT-ASSETS> 40,947
<PP&E> 6,098
<DEPRECIATION> 4,808
<TOTAL-ASSETS> 48,471
<CURRENT-LIABILITIES> 23,707
<BONDS> 0
0
0
<COMMON> 45,325
<OTHER-SE> (23,852)
<TOTAL-LIABILITY-AND-EQUITY> 48,471
<SALES> 116,502
<TOTAL-REVENUES> 120,999
<CGS> 95,019
<TOTAL-COSTS> 109,293
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (160)
<INCOME-PRETAX> 11,866
<INCOME-TAX> 4,378
<INCOME-CONTINUING> 6,386
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,386
<EPS-PRIMARY> .82
<EPS-DILUTED> .79
</TABLE>
