SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1999 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 June 30, 1999
------------- ----------------------------
Common Stock, without
par value 7,777,759
GRADCO SYSTEMS, INC.
INDEX
Page Number
Part I. Financial Information:
Consolidated Balance Sheets
at June 30, 1999 and March 31, 1999 3
Consolidated Statements of Income
for the Three Months Ended
June 30, 1999 and June 30, 1998 4
Consolidated Statements of Cash Flows
for the Three Months Ended
June 30, 1999 and June 30, 1998 5-6
Notes to Unaudited Consolidated Financial Statements 7-10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-13
Part II. Other Information 14
-2-
GRADCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, March 31,
1999 1999
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $12,149 $12,423
Short-term investments 1,000 1,000
Accounts receivable, net 12,217 17,389
Inventories 1,387 1,368
Deferred income taxes 1,310 1,310
Other current assets 260 612
------- -------
Total current assets 28,323 34,102
Furniture, fixtures and equipment, net 775 855
Excess of cost over acquired net assets 1,181 1,191
Deferred income taxes 3,635 3,766
Other assets 3,932 3,988
------- -------
$37,846 $43,902
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,072 $ 6,543
Notes payable to suppliers 6,720 9,281
Accrued expenses 2,174 2,754
Income taxes payable 138 133
Current installments of long-term debt - 3
------- -------
Total current liabilities 13,104 18,714
Non-current liabilities 2,108 2,330
Excess of fair value of net assets acquired
over cost 1,100 1,200
Minority interest 631 628
Shareholders' equity:
Common stock, no par value; authorized
30,000,000 shares, 7,913,434 and
7,910,934 shares outstanding June 30, 1999
and March 31, 1999, respectively 45,916 45,829
Accumulated deficit (26,003) (26,162)
Currency translation adjustment 1,292 1,363
Less cost of common stock in treasury,
135,675 shares (302) -
------- -------
Total shareholders' equity 20,903 21,030
------- -------
$37,846 $43,902
======= =======
See accompanying notes to consolidated financial statements.
-3-
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended
----------------------
June 30, June 30,
1999 1998
---------- ----------
Revenues:
Net sales $11,403 $23,132
Development engineering services 330 251
Licenses and royalties 454 569
------- -------
12,187 23,952
------- -------
Costs and expenses:
Cost of sales 8,909 18,385
Research and development 812 836
Selling, general and administrative 2,221 1,954
Provision for doubtful Mita receivable - 5,000
------- -------
11,942 26,175
------- -------
Income (loss) from operations 245 (2,223)
Interest expense (1) (1)
Interest income 84 49
------- -------
Earnings (loss) before income taxes
and minority interest 328 (2,175)
Income tax expense (benefit) 165 (1,474)
Minority interest 4 (60)
------- -------
Net earnings (loss) $ 159 $ (641)
======= =======
Basic earnings (loss) per common share $ 0.02 $ (0.08)
======= =======
Average shares outstanding, basic EPS 7,836 7,857
======= =======
Diluted earnings (loss) per common share $ 0.02 $ (0.08)
======= =======
Average shares outstanding, diluted EPS 7,862 7,857
======= =======
See accompanying notes to consolidated financial statements.
-4-
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
----------------------
June 30, June 30,
1999 1998
-------- --------
Cash flows from operating activities:
Net income (loss) $ 159 $ (641)
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 95 208
Amortization (85) (2)
Deferred income taxes 127 (1,643)
Provision for losses on accounts receivable 1 5,047
Stock-based compensation 81 83
Minority interest 4 (60)
Decrease in accounts receivable 5,117 5,543
Increase in inventories (21) (643)
Decrease (increase) in prepaid assets 351 (591)
Decrease (increase) in other assets 13 (511)
Decrease in accounts payable (2,455) (1,117)
(Decrease) increase in notes payable
to suppliers (2,518) 1,687
Decrease in accrued expenses (574) (169)
Increase (decrease) in income taxes payable 5 (2,123)
Decrease in other liabilities (216) (9)
------- -------
Total adjustments (75) 5,700
------- -------
Net cash provided by operations 84 5,059
------- -------
Cash flows from investing activities:
Acquisition of property and equipment (18) (155)
------- -------
Net cash used in investing activities (18) (155)
------- -------
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Three Months Ended
----------------------
June 30, June 30,
1999 1998
-------- --------
Cash flows from financing activities:
Repayment of notes in excess of three months (3) (4)
Proceeds from exercise of stock options 5 156
Acquisition of treasury stock (302) -
------- -------
Net cash (used in) provided by
financing activities (300) 152
------- -------
Effect of exchange rate changes on cash (40) (340)
------- -------
Net (decrease) increase in cash and
cash equivalents (274) 4,716
Cash and cash equivalents at beginning of period 12,423 8,691
------- -------
Cash and cash equivalents at end of period $12,149 $13,407
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 1 $ 1
Income taxes 33 2,338
See accompanying notes to consolidated financial statements.
-6-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: INTERIM ACCOUNTING POLICY
The accompanying consolidated financial statements include the accounts of
Gradco Systems, Inc. and its wholly and majority-owned subsidiaries (the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
In the opinion of the Company's management, the accompanying unaudited
statements include all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the financial position of the
Company at June 30, 1999 and the results of operations and cash flows for the
three months ended June 30, 1999 and 1998. 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 gains of $22,000 and $426,000 are included in selling, general
and administrative expenses for the three months ended June 30, 1999 and 1998,
respectively.
The financial information included in this quarterly report should be read in
conjunction with the consolidated financial statements and related notes
thereto in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1999.
NOTE 2: INVENTORIES
Inventories are summarized as follows:
(Dollars in Thousands)
June 30, March 31,
1999 1999
--------- ---------
Raw materials $ 202 $ 142
Work-in-process 726 372
Finished goods 459 854
------ ------
$1,387 $1,368
====== ======
NOTE 3: INCOME TAXES
The effective consolidated income tax rate used by the Company is based on the
estimated annual effective tax rates for the fiscal years 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
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 the quarter ended June 30, 1998, there is no difference in the average
shares outstanding between diluted and basic because there was a net loss for
the quarter. 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 or loss stated in the Consolidated Statements of Income. 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
----------------------
June 30, June 30,
1999 1998
-------- --------
Average shares outstanding, basic EPS 7,836 7,857
Effect of dilutive securities:
Stock options 26 -
------ ------
Average shares outstanding, diluted EPS 7,862 7,857
====== ======
NOTE 5: COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), REPORTING
COMPREHENSIVE INCOME establishes standards for reporting and displaying of
comprehensive income and its components in the Company's consolidated financial
statements. Comprehensive income is defined in SFAS 130 as the change in
equity (net assets) of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. Total comprehensive
income was $88,000 in the current quarter and a loss of $1,440,000 for the
three months ended June 30, 1998. The difference from net income or loss as
reported is the change in the cumulative currency translation adjustment.
NOTE 6: NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES ("SFAS 133"), which will become effective for the
Company in fiscal 2001. The Company does not anticipate that the adoption of
SFAS 133 will have a material impact on its consolidated financial position,
results of operations or cash flows.
-8-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: COMMITMENTS AND CONTINGENCIES
In the following litigation, material claims have been asserted against the
Company:
DUBOIS V. GRADCO SYSTEMS, INC. ET AL. In 1989, the Company and its (now former)
president, Keith Stewart, were sued in the U.S. District Court in Connecticut
by R. Clark DuBois, a former employee of the Company. The complaint primarily
alleges misrepresentation and fraudulent concealment by Gradco and Mr. Stewart
in connection with an agreement entered into in 1983 with Mr. DuBois
terminating and releasing the Company from royalty obligations under a prior
royalty agreement. The complaint, which has been amended a number of times,
seeks unspecified damages and other relief.
In March 1992, Mr. DuBois and John C. Hamma (whose related case was settled)
filed an Application for Prejudgment Remedy ("PJR") against the Company and
Gradco (Japan) Ltd. ("GJ") seeking to attach $10,000,000 of assets of each of
the two companies. This Application was dismissed as respects GJ. In November
1992, the Company and DuBois and Hamma (together the "Plaintiffs") agreed in
principle to a Consent Order instead of proceeding with a hearing on the PJR.
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 PJR 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 DuBois suit will be tried as to liability and damages together. There are
substantial differences between the DuBois and Hamma cases. The Company is
presently unable to determine the amount of damages which is likely to be
awarded if DuBois is successful in his lawsuit. Motions are pending for
summary judgment in the DuBois case. If those motions are unsuccessful the
DuBois case will be tried before a jury so that there are substantial elements
of uncertainty. Nevertheless, the Company believes that the DuBois case will
not have a material adverse effect on its consolidated financial position, or
on its results of operations or liquidity.
NOTE 8: TREASURY STOCK
In the first quarter of fiscal 2000, the Company began acquiring shares of its
common stock in connection with a stock repurchase program announced in March
1999. That program authorizes the Company to purchase up to 2 million common
shares from time to time on the open market. The Company purchased 135,675
shares during the current quarter at an aggregate cost of $302,000. The
purpose of the stock repurchase program is to help the Company achieve its
long-term goal of enhancing shareholder value.
-9-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: SEGMENT INFORMATION
The majority of the Company's operations are in one industry segment, the
design, development, production and marketing of intelligent paper handling
devices for the office automation market. Three of the Company's subsidiaries,
GJ, Gradco (USA) Inc. and Gradco Belgium, S.C. (a wholly-owned subsidiary of
GJ) operate in this segment. A second industry segment involved in high
technology engineering and manufacturing services, whose operations are
conducted by Venture Engineering, Inc., accounts for the remainder. The
following table reflects information by reportable segments for the quarters
ended June 30, 1999 and 1998 (in thousands):
Paper Engineering/ Intersegment
Handling Manufacturing & Corporate
Devices Services Corporate Eliminations Consolidated
-------- ------------- --------- ------------ ------------
Quarter Ended 6/30/99
- ---------------------
Revenues $10,413 $1,774 $ - $ - $12,187
Net earnings (loss) 554 (216) (179) - 159
Assets 40,359 3,302 10,398 (16,213) 37,846
Quarter Ended 6/30/98
- ---------------------
Revenues $21,873 $2,079 $ - $ - $23,952
Net earnings (loss) (949) 31 (506) 783 (641)
Assets 45,318 4,486 7,995 (13,185) 44,614
-10-
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, exchange gains and losses can
still occur when receivables and payables are denominated in other than the
local currency of each company.
RESULTS OF OPERATIONS
Revenues for the three months ended June 30, 1999 decreased $11,765,000 from
the amount in the prior year's first quarter principally from a 51% decrease in
net sales, reflecting a 57% reduction in unit sales in the office automation
market and a 19% decrease in Venture's sales. When compared to the preceding
quarter, unit sales were down 31%. A stronger yen, which increased by 11%
against the dollar when compared to the same period in the previous year,
caused an increase of $0.7 million in revenue when yen denominated sales were
translated into dollars.
Gross margin on net sales increased to 21.9% from 20.5% for the three months
ended June 30, 1999 and June 30, 1998, respectively, reflecting continued
improvement in product mix.
Research and development expenses ("R&D") in the current quarter totaled
$812,000, 6.7% of revenues, compared to $836,000, 3.5% of revenues, in the
prior year's comparable period. R&D expenditures made by Venture, in
connection with its development engineering service revenue, were up by $0.2
million while R&D expenditures made by GJ, in connection with new product
development, were down by a like amount.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, general and administrative expenses ("SG&A") in the current quarter
totaled $2,221,000, 18.2% of revenues, compared to $1,954,000, 8.2% of
revenues, in the prior year's comparable period, an increase of $267,000.
Approximately $200,000 of this increase is due to the unfavorable translation
of SG&A at GJ caused by the stronger yen and there was a decrease of $404,000
in foreign currency gains in the current quarter versus the prior year. Other
SG&A expenses were down, especially at Venture. In addition to the normal SG&A
expenses, the Company took a $5,000,000 charge in the prior year's first
quarter due to the bankruptcy petition filed by Mita Industrial Co. Ltd., one
of GJ's largest customers.
As a result of the above factors, earnings before income taxes and minority
interest increased to a gain of $328,000 in the current quarter from a loss of
$2,175,000 in the first quarter of fiscal 1999. The effective tax rate
decreased to 50.3% from 67.8% because in the prior year there was pre-tax
income generated domestically and a pre-tax loss in Japan where the tax rate is
considerably higher.
FINANCIAL CONDITION
Working capital decreased to $15,219,000 at June 30, 1999 from $15,388,000 at
March 31, 1999. At June 30, 1999, the Company had $12,149,000 in cash, a
decrease of $274,000 from March 31, 1999, and no long-term debt. $0.1 million
of cash was provided by operations. $0.4 million was provided by net earnings
before non-cash provisions for depreciation, amortization, deferred taxes,
provision for losses on accounts receivable and stock-based compensation. $5.5
million was provided by a decrease in accounts receivable and prepaid assets.
$6.1 million was used to pay down accounts payable, notes payable to suppliers,
accrued expenses and other liabilities. Cash was not significantly affected by
exchange rate changes. GJ has informal credit facilities with a Japanese bank.
There were no borrowings under this facility at June 30, 1999. The Company
believes that its cash and credit facilities are adequate for its short and
long-term operational needs. At June 30, 1999, there were no material
commitments for capital expenditures.
A lawsuit remains pending by R. Clark DuBois, a former employee, in which fraud
is claimed in connection with the acquisition by Gradco of a release from Mr.
DuBois of his royalty agreement. In this case, with Gradco's consent, the
liability and damages phases have been consolidated. The facts in the DuBois
case differ from those in the Hamma case (a related case that was settled in
December 1998) in many significant respects. Motions are pending for summary
judgment in the DuBois case. If those motions are unsuccessful the DuBois case
will be tried before a jury so that there are substantial elements of
uncertainty. Nevertheless, the Company believes that the case will not have a
material adverse effect on its consolidated financial position, or on its
results of operations or liquidity.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Impact of the Year 2000
The Company 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 ("Y2K") compliant as a result of recent purchases of
computer software upgrades. The Company's products will not be affected by Y2K
because they do not use dates to calculate actions nor do they maintain any
date fields within their internal logic. The Company has completed an
assessment of how its interface with customers and suppliers, through sales and
purchase orders might be impacted and has determined that there do not appear
to be any issues which would have a material impact on the Company's results of
operations, liquidity or capital resources.
-13-
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information regarding the current status of the DuBois lawsuit,
contained in Note 7 of Notes to Unaudited Consolidated Financial
Statements set forth in Part I of this Report, is hereby incorporated
by reference in response to this Item 1.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
-14-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRADCO SYSTEMS, INC.
Registrant
By:
Date: August 9, 1999 HARLAND L. MISCHLER
Harland L. Mischler
Executive Vice President, Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the 6/30/99
Form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-1999
<CASH> 12,149
<SECURITIES> 0
<RECEIVABLES> 18,690
<ALLOWANCES> 6,473
<INVENTORY> 1,387
<CURRENT-ASSETS> 28,323
<PP&E> 6,324
<DEPRECIATION> 5,549
<TOTAL-ASSETS> 37,846
<CURRENT-LIABILITIES> 13,104
<BONDS> 0
0
0
<COMMON> 45,916
<OTHER-SE> (25,013)
<TOTAL-LIABILITY-AND-EQUITY> 37,846
<SALES> 11,403
<TOTAL-REVENUES> 12,187
<CGS> 8,909
<TOTAL-COSTS> 11,942
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (83)
<INCOME-PRETAX> 328
<INCOME-TAX> 165
<INCOME-CONTINUING> 159
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 159
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
