SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended December 31, 1997 Commission file number 0-12829
GRADCO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Nevada 95-3342977
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3753 Howard Hughes Pkwy, Ste 200,
Las Vegas, Nevada 89109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 892-3714
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the 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
------- -------
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at December 31, 1997
------------- ----------------------------
Common Stock, without
par value 7,806,598
GRADCO SYSTEMS, INC.
INDEX
Page Number
Part I. Financial Information:
Consolidated Balance Sheets
at December 31, 1997 and March 31, 1997 3
Consolidated Statements of Operations
for the Three and Nine Months Ended
December 31, 1997 and December 31, 1996 4
Consolidated Statements of Cash Flows
for the Nine Months Ended
December 31, 1997 and December 31, 1996 5-6
Notes to Unaudited Consolidated Financial Statements 7-11
Management's Discussion and Analysis of
Results of Operations and Financial Condition 12-14
Part II. Other Information 15
-2-
GRADCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December, 31 March 31,
1997 1997
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash $ 6,364 $18,335
Accounts receivable, net 27,455 24,583
Inventories 1,919 1,759
Deferred income taxes 411 252
Other current assets 161 327
------- -------
Total current assets 36,310 45,256
Furniture, fixtures and equipment, net 1,521 2,054
License repurchase 306 4,069
Excess of cost over acquired net assets 1,245 1,278
Deferred income taxes 1,480 -
Other assets 4,467 5,429
------- -------
$45,329 $58,086
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,176 $10,939
Notes payable to suppliers 11,732 12,608
Accrued expenses 1,046 684
Income taxes payable 1,696 1,596
Current installments of long-term debt 11 11
------- -------
Total current liabilities 21,661 25,838
Long-term debt, excluding current installments 6 15
Non-current liabilities 2,684 889
Deferred income taxes - 1,833
Minority interest 680 14,172
------- -------
Total liabilities 25,031 42,747
------- -------
Shareholders' equity:
Common stock, no par value; authorized
30,000,000 shares, 7,806,598 and
7,798,909 shares outstanding
December 31, 1997 and March 31,
1997, respectively 44,975 44,618
Deficit (25,838) (30,358)
Currency translation adjustments 1,161 1,079
------- -------
Total shareholders' equity 20,298 15,339
------- -------
$45,329 $58,086
======= =======
See accompanying notes to consolidated financial statements.
-3-
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
-------------------- --------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues:
Net sales $23,548 $21,950 $92,135 $73,097
Development engineering services 666 295 1,259 804
Licenses and royalties 715 938 2,222 2,169
------- ------- ------- -------
24,929 23,183 95,616 76,070
------- ------- ------- -------
Costs and expenses:
Cost of sales 18,913 17,769 74,286 59,294
Research and development 1,021 892 2,623 2,784
Selling, general and administrative 2,879 3,184 9,303 9,724
------- ------- ------- -------
22,813 21,845 86,212 71,802
------- ------- ------- -------
Income from operations 2,116 1,338 9,404 4,268
Interest expense (10) (1) (12) (2)
Interest income 37 45 127 89
------- ------- ------- -------
Earnings before income taxes
and minority interest 2,143 1,382 9,519 4,399
Income tax expense 766 528 3,903 1,748
Minority interest 11 229 1,097 684
------- ------- ------- -------
Net earnings $ 1,366 $ 625 $ 4,519 $ 1,967
======= ======= ======= =======
Basic earnings per common share $ 0.18 $ 0.08 $ 0.58 $ 0.25
======= ======= ======= =======
Average shares outstanding,
basic EPS 7,801 7,799 7,800 7,799
======= ======= ======= =======
Diluted earnings per common share $ 0.17 $ 0.08 $ 0.56 $ 0.25
======= ======= ======= =======
Average shares outstanding,
diluted EPS 8,206 7,833 8,016 7,834
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
-4-
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
-----------------------
Dec. 31, Dec. 31,
1997 1996
--------- ---------
Cash flows from operating activities:
Net income $ 4,519 $ 1,967
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 767 913
Amortization 586 1,237
Deferred income taxes (328) 53
Provision for losses on accounts receivable - 302
Gain on sale of property and equipment - (6)
Stock based compensation 328 -
Minority interest 1,097 684
Increase in accounts receivable (3,642) (1,271)
(Increase) decrease in inventory (181) 828
Decrease (increase) in prepaid assets 155 (675)
Decrease (increase) in other assets 263 (2,080)
Decrease in accounts payable (3,380) (1,273)
Increase in notes payable to suppliers 187 5,985
Increase in accrued expenses 388 1,034
Increase (decrease) in income taxes payable 297 (1,203)
Increase in other liabilities 142 194
------- -------
Total adjustments (3,321) 4,722
------- -------
Net cash provided by operations 1,198 6,689
------- -------
Cash flows from investing activities:
Acquisition of property and equipment (273) (993)
Proceeds from sale of property and equipment - 10
Purchase of minority interest (12,704) -
------- -------
Net cash used in investing activities (12,977) (983)
------- -------
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Nine Months Ended
-----------------------
Dec. 31, Dec. 31,
1997 1996
--------- ---------
Cash flows from financing activities:
Repayment of notes in excess of
three months (9) (7)
Proceeds from exercise of stock options 30 -
Dividend to minority shareholders - (231)
------- -------
Net cash provided by (used in)
financing activities 21 (238)
------- -------
Effect of exchange rate changes on cash (213) (1,403)
------- -------
Net (decrease) increase in cash and cash equivalents (11,971) 4,065
Cash and cash equivalents at beginning of period 18,335 19,523
------- -------
Cash and cash equivalents at end of period $ 6,364 $23,588
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 12 $ 3
Income taxes 4,131 2,898
See accompanying notes to consolidated financial statements.
-6-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: INTERIM ACCOUNTING POLICY
The accompanying consolidated financial statements include the accounts of
Gradco Systems, Inc. and its wholly and majority-owned subsidiaries (the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
In the opinion of the Company's management, the accompanying unaudited
statements include all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the financial position of the
Company at December 31, 1997 and the results of operations and cash flows for
the three and nine months ended December 31, 1997 and 1996. Although the
Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Results of operations for interim periods are not necessarily
indicative of results of operations to be expected for the full year.
Foreign currency translation gains of $192,000 and $235,000 are included in
selling, general and administrative expenses for the three and nine months
ended December 31, 1996, respectively. In the three months ended December 31,
1997, there was a foreign currency translation gain of $346,000 and in the nine
months then ended there was a loss of $128,000.
The financial information included in this quarterly report should be read in
conjunction with the consolidated financial statements and related notes
thereto in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997.
NOTE 2: INVENTORIES
Inventories are summarized as follows:
(Dollars in Thousands)
Dec. 31, March 31,
1997 1997
--------- ---------
Raw materials $ 423 $ 499
Work-in-process 1,011 570
Finished goods 485 690
------ ------
$1,919 $1,759
====== ======
NOTE 3: INCOME TAXES
The effective consolidated income tax rate used by the Company is based on the
estimated annual effective tax rates for fiscal year 1998 in the countries
where the Company operates applied to results of the quarter.
-7-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: 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):
Three Months Ended Nine Months Ended
------------------- -------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1997 1996
--------- --------- --------- ---------
Average shares outstanding,
basic EPS 7,801 7,799 7,800 7,799
Effect of dilutive securities:
Stock options 405 34 216 35
----- ----- ----- -----
Average shares outstanding,
diluted EPS 8,206 7,833 8,016 7,834
===== ===== ===== =====
NOTE 5: COMMITMENTS AND CONTINGENCIES
In the following litigation, material claims have been asserted against the
Company:
HAMMA V. GRADCO SYSTEMS, INC. ET AL., DUBOIS V. GRADCO SYSTEMS, INC. ET AL.
The Company and its (now former) president, Mr. Keith Stewart, have been sued
in the U.S. District Court in Connecticut by John C. Hamma and R. Clark DuBois,
both of whom are former employees of the Company. Complaints in the two cases,
which were consolidated for certain pretrial purposes, primarily allege
misrepresentation and fraudulent concealment by Gradco and Mr. Stewart in
connection with agreements entered into in 1982 with Mr. Hamma and in 1983 with
Mr. DuBois terminating and releasing the Company from royalty obligations under
prior royalty agreements. The complaints, which have been amended a number of
times, seek unspecified damages and other relief. For each of these cases, the
Court bifurcated the liability and damages issues so that a first trial would
determine whether there is any liability and, if so, a second trial would
determine damages.
-8-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)
In March 1992, each of the plaintiffs filed an Application for Prejudgment
Remedy against the Company and Gradco (Japan) Ltd. ("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 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 is
likely to be awarded, but the amount of damages sought by the plaintiffs,
including punitive damages, could only be settled from assets of Gradco
Systems, Inc. (which consist primarily of 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.
-9-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)
There are substantial differences between the Hamma and DuBois cases. Although
the DuBois case will also be tried before a jury so that there are substantial
elements of uncertainty, the Company continues to believe that the DuBois case
alone will not have a material adverse effect on its consolidated financial
position, or on its results of operations or liquidity.
GRADCO (USA) INC. V. SULLIVAN, STEWART, HINDMAN, ET AL. This Action has been
commenced by Gradco (USA) Inc. ("GU"), a wholly-owned subsidiary of the
Company, against Sullivan and Hindman, two former employees of GU, and Stewart,
an independent contractor. The Complaint seeks a declaration that a certain
memorandum of understanding between GU and the defendants did not constitute an
enforceable distribution contract. The Complaint includes several other
counts.
The defendants have filed a cross-complaint against GU for breach of contract,
contending that the memorandum of understanding was an enforceable agreement.
The defendants also allege that the Company and its majority-owned subsidiary,
Gradco (Japan) Ltd., wrongfully caused GU to breach its alleged contract with
the defendants, and have asserted causes of action for interference with
contract and economic advantage against the Company and Gradco (Japan) Ltd.
The cross-complaint seeks damages of $1.2 million and contains a claim for
punitive damages.
A trial date for this matter has not yet been set. At this early stage in the
litigation, the Company is unable to express an opinion as to the outcome of
the action or the likelihood or range of potential recovery or loss. The
Company believes, however, that GU and the cross-defendants have defenses to
all claims and that the memorandum of understanding was not a binding
agreement.
NOTE 6: 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 now a director of the Company, Tony
Shinomiya, Chief Financial Officer of GJ and the GJ Employee Stock Ownership
Plan, respectively.
-10-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: REORGANIZATION (Continued)
On September 30, 1997, GJ's U.S. subsidiary, Gradco (USA) Inc. 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, negative goodwill was created as required by SFAS 109 and
will be amortized into income over its estimated useful life.
NOTE 7: 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 $281,000 and
$328,000 is included in selling, general and administrative expenses for the
three and nine months ended December 31, 1997, respectively.
-11-
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
Company's growth and strategies, regarding events and financial trends that may
affect the Company's future results of operations and financial position. The
Company'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 Company has little or no control.
The Company's operations are conducted principally through its wholly-owned
subsidiaries Venture Engineering, Inc. ("Venture") and Gradco (USA) Inc. ("GU")
and its majority-owned subsidiary Gradco (Japan) Ltd. ("GJ"). Venture performs
contract engineering and manufacturing services for OEMs and other customers,
primarily for the U.S. market. GJ and GU design, develop, produce (by
contract) and market on a worldwide basis, intelligent paper handling devices
for office copiers, computer controlled printers and facsimile machines.
GJ and 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.
RESULTS OF OPERATIONS
Revenues for the three and nine months ended December 31, 1997 increased
$1,746,000 and $19,546,000, respectively, from the comparable prior year
periods principally as a result of increases in net sales. Venture's net sales
in its contract manufacturing business increased $1,149,000 in the three-month
period. Although unit sales in the copier market were 11% higher for the
quarter, this volume increase was partially offset by a lower average sales
price in the units. The reduction in unit sales price was due to a weaker yen
as well as the introduction of a new lower-priced product line. Sales
denominated in yen were $1.5 million lower than they would have been had the
yen not decreased by 11% against the dollar when compared to the same period in
the previous year. In the nine-month period, unit sales in the copier market
were 49% higher and Venture showed an increase of $778,000 in net sales in its
contract manufacturing business. Sales denominated in yen were $5.8 million
lower than they would have been had the yen not decreased by 10% against the
dollar when compared to the same period in the previous year. Revenue from
development engineering services increased by $371,000 and $455,000 in the
three and nine-month periods, respectively.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Based upon projected orders by the Company's present OEM customers, the Company
anticipates that unit sales and revenues of its existing copier product line in
the coming fiscal year may be seriously impacted by the shift from analog to
digital copiers by these OEM manufacturers. The Company is attempting to
provide new products to the digital market and is reviewing cost savings which
could be made to lessen the effect of the change in the market. It is not
currently possible to gauge with any accuracy the adverse effect of the market
change or the degree to which such effect will be softened by the steps being
taken by the Company to meet such change.
Cost of sales as a percentage of net sales decreased to 80.3% from 81.0% for
the three months ended December 31, 1997 and 1996, respectively, and decreased
to 80.6% from 81.1% for the nine-month periods then ended.
Research and development expenses ("R&D") in the current quarter totaled
$1,021,000, 4.1% of revenues, compared to $892,000, 3.8% of revenues, in the
prior year's comparable period. For the nine months ended December 31, 1997
and 1996, R&D totaled $2,623,000, 2.7% of revenues, and $2,784,000, 3.7% of
revenues, respectively.
Selling, general and administrative expenses ("SG&A") in the current quarter
totaled $2,879,000, 11.5% of revenues, compared to $3,184,000, 13.7% of
revenues, in the prior year's comparable period, a decrease of $305,000. The
favorable translation of SG&A at the Company's Japanese subsidiary ("GJ")
caused by the weaker yen during this period accounted for a decrease of
approximately $214,000; there was a reduction of $405,000 in amortization
expense from the writedown of intangible assets related to the acquisition of
GJ shares from its minority shareholders and there was an increase of $154,000
in foreign currency translation gains in the current quarter. These decreases
were partially offset by $281,000 in stock based compensation expense arising
from the issuance of nonqualified stock options in September 1997 (see Note 7).
For the nine months ended December 31, 1997 and 1996, SG&A totaled $9,303,000,
9.7% of revenues and $9,724,000, 12.8% of revenues, respectively, a decrease of
$421,000. The favorable translation of SG&A at GJ associated with the weaker
yen during this period accounted for a decrease of approximately $609,000; a
reduction of $648,000 in amortization expense and the absence of a loan
writeoff of $284,000 made in the prior year were other decreases. These
decreases were partially offset by $363,000 less in foreign currency
translation gains and $328,000 in stock based compensation expense.
As a result of the above factors, earnings before income taxes and minority
interest increased from $1,382,000 in the quarter ended December 31, 1996 to
$2,143,000 in the current quarter and from $4,399,000 in the nine months ended
December 31, 1996 to $9,519,000 in the current nine-month period.
Minority interest decreased in the current quarter due to the acquisition of GJ
shares made in July and October. For further information regarding this
transaction, see Note 6 of Notes to Unaudited Consolidated Financial
Statements. Minority interest for the current nine-month period increased
because earnings in the first quarter of the current year, which was before the
stock acquisitions, were significantly higher than the prior year's comparable
period.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Working capital decreased to $14,649,000 at December 31, 1997 from $19,418,000
at March 31, 1997. At December 31, 1997, the Company had $6,364,000 in cash, a
decrease of $11,971,000 from March 31, 1997, and minimal long-term debt. $12.7
million of cash was used to purchase 4,851,000 shares of GJ from its minority
shareholders (see Note 6). Cash provided by operations was $1.2 million,
primarily from net earnings of $4.5 million, non-cash provisions of $2.4
million for depreciation, amortization and minority interest, $1.0 million in
other current liabilities and offset by $7.0 million in increased accounts
receivable and decreased accounts payable. GJ has informal credit facilities
with a Japanese bank . There were no borrowings under this facility at
December 31, 1997.
The Company believes that its cash and credit facilities are adequate for its
short and long-term operational needs. At December 31, 1997, there were no
material commitments for capital expenditures.
In June 1995, a jury found the Company to have liability in a lawsuit by John
C. Hamma, a former employee. The Company has filed a motion to reverse the
verdict. After a determination by the Court on the Company's motion, a
separate proceeding to determine the amount of damages will be required, with
respect to such portion of the verdict, if any, as remains in effect. An award
of damages of the magnitude sought by Mr. Hamma could have a material adverse
effect on the Company's financial position and might threaten its existence as
an ongoing enterprise. The Company believes that as a matter of law the
damages claimed by Mr. Hamma are excessive to a substantial extent. For
further information regarding this litigation, see Note 5 of Notes to Unaudited
Consolidated Financial Statements.
The lawsuit by R. Clark DuBois, a former employee, has not yet been tried.
Although the case will be tried before a jury, so that there are substantial
elements of uncertainty, the Company continues to believe that the DuBois case
alone will not have a material adverse effect on its consolidated financial
position, or on its results of operations or liquidity.
-14-
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information regarding the current status of the Hamma and DuBois
lawsuits, contained in Note 5 of Notes to Unaudited Consolidated
Financial Statements set forth in Part I of this Report, is hereby
incorporated by reference in response to this Item 1.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
None.
(b) REPORTS ON FORM 8-K.
None.
-15-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRADCO SYSTEMS, INC.
Registrant
By:
Date: February 12, 1998 HARLAND L. MISCHLER
Harland L. Mischler
Executive Vice President, Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the 12/31/97
Form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 6,364
<SECURITIES> 0
<RECEIVABLES> 27,513
<ALLOWANCES> 58
<INVENTORY> 1,919
<CURRENT-ASSETS> 36,310
<PP&E> 6,931
<DEPRECIATION> 5,410
<TOTAL-ASSETS> 45,329
<CURRENT-LIABILITIES> 21,661
<BONDS> 0
0
0
<COMMON> 44,975
<OTHER-SE> (24,677)
<TOTAL-LIABILITY-AND-EQUITY> 45,329
<SALES> 92,135
<TOTAL-REVENUES> 95,616
<CGS> 74,286
<TOTAL-COSTS> 86,212
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (115)
<INCOME-PRETAX> 9,519
<INCOME-TAX> 3,903
<INCOME-CONTINUING> 4,519
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,519
<EPS-PRIMARY> .58
<EPS-DILUTED> .56
</TABLE>
