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, 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 December 31, 1999
------------- ----------------------------
Common Stock, without
par value 7,402,759
GRADCO SYSTEMS, INC.
INDEX
Page Number
Part I. Financial Information:
Consolidated Balance Sheets
at December 31, 1999 and March 31, 1999 3
Consolidated Statements of Income
for the Three and Nine Months Ended
December 31, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows
for the Nine Months Ended
December 31, 1999 and December 31, 1998 5-6
Notes to Unaudited Consolidated Financial Statements 7-11
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-14
Part II. Other Information 15
-2-
GRADCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, March 31,
1999 1999
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $15,788 $12,423
Short-term investments 1,000 1,000
Accounts receivable, net 12,926 17,389
Inventories 917 1,368
Deferred income taxes 1,809 1,310
Other current assets 641 612
------- -------
Total current assets 33,081 34,102
Furniture, fixtures and equipment, net 693 855
Excess of cost over acquired net assets 1,159 1,191
Deferred income taxes 3,179 3,766
Other assets 4,126 3,988
------- -------
$42,238 $43,902
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,506 $ 6,543
Notes payable to suppliers 6,328 9,281
Accrued expenses 2,340 2,754
Income taxes payable 481 133
Current installments of long-term debt - 3
------- -------
Total current liabilities 14,655 18,714
Non-current liabilities 1,954 2,330
Excess of fair value of net assets acquired
over cost 900 1,200
Minority interest 716 628
Shareholders' equity:
Common stock, no par value; authorized
30,000,000 shares, 7,913,434 and
7,910,934 shares outstanding
December 31, 1999 and
March 31, 1999, respectively 46,082 45,829
Accumulated deficit (25,025) (26,162)
Currency translation adjustment 3,867 1,363
Less cost of common stock in treasury,
510,675 shares (911) -
------- -------
Total shareholders' equity 24,013 21,030
------- -------
$42,238 $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 Nine Months Ended
-------------------- --------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Net sales $13,333 $19,909 $37,201 $62,407
Development engineering services 373 106 933 612
Licenses and royalties 280 484 892 1,754
------- ------- ------- -------
13,986 20,499 39,026 64,773
------- ------- ------- -------
Costs and expenses:
Cost of sales 9,785 15,934 27,857 49,919
Research and development 912 585 2,446 2,118
Selling, general and administrative 3,180 3,771 7,958 8,313
Provision for (recovery of)
doubtful Mita receivable (935) - (935) 5,619
Hamma litigation settlement - 5,000 - 5,000
------- ------- ------- -------
12,942 25,290 37,326 70,969
------- ------- ------- -------
Income (loss) from operations 1,044 (4,791) 1,700 (6,196)
Interest expense - (1) (1) (2)
Interest income 102 56 277 166
------- ------- ------- -------
Earnings (loss) before income taxes
and minority interest 1,146 (4,736) 1,976 (6,032)
Income tax expense (benefit) 542 (1,775) 832 (3,014)
Minority interest 4 (8) 7 (71)
------- ------- ------- -------
Net earnings (loss) $ 600 $(2,953) $ 1,137 $(2,947)
======= ======= ======= =======
Basic earnings per common share $ 0.08 $ (0.37) $ 0.15 $ (0.37)
======= ======= ======= =======
Average shares outstanding,
basic EPS 7,584 7,911 7,704 7,893
======= ======= ======= =======
Diluted earnings per common share $ 0.08 $ (0.37) $ 0.15 $ (0.37)
======= ======= ======= =======
Average shares outstanding,
diluted EPS 7,584 7,911 7,712 7,893
======= ======= ======= =======
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,
1999 1998
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 1,137 $(2,947)
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 268 580
Amortization (254) 68
Deferred income taxes 656 (3,317)
Provision for losses on accounts receivable 3 5,955
Stock-based compensation 247 228
Installment portion of Hamma
litigation settlement (1,000) 2,000
Minority interest 7 (71)
Decrease in accounts receivable 5,316 7,793
Decrease in inventories 468 823
Decrease (increase) in prepaid assets 3 (2,095)
(Increase) decrease in other assets (89) 891
Decrease in accounts payable (1,404) (3,367)
Decrease in notes payable to suppliers (3,772) (555)
(Decrease) increase in accrued expenses (526) 67
Increase (decrease) in income taxes payable 348 (2,340)
Increase in other liabilities 445 122
------- -------
Total adjustments 716 6,782
------- -------
Net cash provided by operations 1,853 3,835
------- -------
Cash flows from investing activities:
Redemption (purchase) of investments 1,000 (2,000)
Acquisition of property and equipment (42) (191)
------- -------
Net cash provided by (used in) investing activities 958 (2,191)
------- -------
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Nine Months Ended
-----------------------
Dec. 31, Dec. 31,
1999 1998
--------- ---------
Cash flows from financing activities:
Repayment of notes in excess of three months (3) (9)
Proceeds from exercise of stock options 5 158
Acquisition of treasury stock (911) -
------- -------
Net cash (used in) provided by financing activities (909) 149
------- -------
Effect of exchange rate changes on cash 1,463 2,010
------- -------
Net increase in cash and cash equivalents 3,365 3,803
Cash and cash equivalents at beginning of period 12,423 8,691
------- -------
Cash and cash equivalents at end of period $15,788 $12,494
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 1 $ 2
Income taxes (172) 2,666
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, 1999 and the results of operations and cash flows for
the three and nine months ended December 31, 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 losses of $145,000 and $1,102,000 are included in selling,
general and administrative expenses for the three months ended December 31,
1999 and 1998, respectively. In the nine months ended December 31, 1999 and
1998, there were foreign currency losses of $628,000 and $742,000,
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)
Dec. 31, March 31,
1999 1999
--------- ---------
Raw materials $ 201 $ 142
Work-in-process 564 372
Finished goods 152 854
------ ------
$ 917 $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: 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 three and nine months ended December 31, 1998, there is no difference
in the average shares outstanding between diluted and basic because there were
net losses in both periods. 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 Income.
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,
1999 1998 1999 1998
--------- --------- --------- ---------
Average shares outstanding,
basic EPS 7,584 7,911 7,704 7,893
Effect of dilutive securities:
Stock options - - 8 -
------ ------ ------ ------
Average shares outstanding,
diluted EPS 7,584 7,911 7,712 7,893
====== ====== ====== ======
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 (loss) was $1,234,000 and $3,645,000 for the three and nine months ended
December 31, 1999, respectively and $177,000 and $(431,000) for the three and
nine months ended December 31, 1998, respectively. The difference from net
income 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 2002. 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 ("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 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, 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"). 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 for summary judgment
filed in the DuBois case were denied on October 28, 1999. The Court entered a
scheduling order calling for an early year 2000 trial. 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 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 235,700
shares during the current quarter at an aggregate cost of $302,000 and 510,675
shares in the year-to-date period at an aggregate cost of $911,000. 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: MITA BANKRUPTCY
In August 1998, Mita Industrial Co. Ltd. ("Mita"), one of GJ's largest
customers, filed a petition in Japan along with five of its affiliates for the
Japanese equivalent of a Chapter XI Reorganization. The Company established an
allowance of $5.7 million, representing all of Mita's remaining indebtedness to
Gradco as of the bankruptcy date. On an after-tax and minority interest basis,
this charge amounted to $2,842,000, or $.36 per share, in the nine months ended
December 31, 1998 calculated at the yen rate in effect at that time. Mita's
reorganization plan, approved by the court on January 18, 2000, made Mita a
wholly-owned subsidiary of Kyocera Corporation and directed Mita to repay 18%
of the unsecured creditors' debt over a period of 10 years. These payments to
the Company will total $1,357,000 based on the value of the yen at December 31,
1999, since the yen has strengthened against the dollar since the bankruptcy
filing. The Company has recorded a non-current receivable and a pre-tax credit
to income in the amount of $935,000, representing the present value of the non-
interest bearing payments to be received using an 8% discount rate.
NOTE 10: TERMINATION OF GJ RETIREMENT PLAN
The Company's Japanese subsidiary has an unfunded 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. In an effort to reduce operating expenses in future years, GJ
management has agreed to terminate the retirement plan at the end of the
current fiscal year. In return, the Company has agreed to loan to each
eligible individual an amount equal to 80% of his vested benefit at year end.
The loans, which will bear interest at a nominal rate, must be repaid at the
time of retirement at which time the accrued benefit will be paid. The Company
has elected to expense the unamortized prior service cost of $693,000 in the
current quarter, which results in the full value of the vested benefits being
reflected in non-current liabilities at December 31, 1999. The $693,000 is
included in selling, general and administrative expenses.
NOTE 11: 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 involving high
technology engineering and manufacturing services accounts for the remainder.
These operations are conducted by Venture Engineering, Inc.. The following
table reflects information by reportable segments for the three and nine-month
periods ended December 31, 1999 and 1998 (in thousands):
-10-
GRADCO SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: SEGMENT INFORMATION (Continued)
Paper Engineering/ Intersegment
Handling Manufacturing & Corporate
Devices Services Corporate Eliminations Consolidated
-------- ------------- --------- ------------ ------------
Three Months Ended 12/31/99
- ---------------------------
Revenues $12,247 $1,739 $ - $ - $13,986
Net earnings (loss) 1,133 (28) (505) - 600
Three Months Ended 12/31/98
- ---------------------------
Revenues $18,406 $2,093 $ - $ - $20,499
Net earnings (loss) 171 (224) (3,702) 802 (2,953)
Nine Months Ended 12/31/99
- --------------------------
Revenues $33,848 $5,178 $ - $ - $39,026
Net earnings (loss) 2,484 (444) (903) - 1,137
Assets 46,914 3,193 9,033 (16,902) 42,238
Nine Months Ended 12/31/98
- --------------------------
Revenues $58,205 $6,568 $ - $ - $64,773
Net earnings (loss) 108 (609) (4,810) 2,364 (2,947)
Assets 48,800 3,333 10,927 (16,705) 46,355
-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, 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 and nine months ended December 31, 1999 decreased
$6,513,000 and $25,747,000, respectively, from the comparable prior year
periods principally as a result of decreases in net sales. Unit sales in the
office automation market decreased 45% in the quarter from the comparable
quarter in the prior year and Venture's sales decreased 30%. When compared to
the preceding quarter, unit sales were up 9%. A stronger yen, which increased
by 13% against the dollar when compared to the same period in the previous
year, caused an increase of $0.9 million in revenue when yen denominated sales
were translated into dollars. In the nine-month period, unit sales in the
office automation market decreased 52% and Venture's sales decreased 25%. Yen
denominated sales translated into $2.8 million more in revenue due to the
stronger yen which gained 14% against the dollar during this period.
Gross margin on net sales increased to 26.6% from 20.0% for the three months
ended December 31, 1999 and 1998, respectively, and increased to 25.1% from
20.0% for the nine-month periods then ended. In addition to an improvement in
product mix toward higher margin units, there were some contractual price
increases resulting from the lower volume of units sold.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Research and development expenses ("R&D") in the current quarter totaled
$912,000, 6.5% of revenues, compared to $585,000, 2.9% of revenues, in the
prior year's comparable period. For the nine months ended December 31, 1999
and 1998, R&D totaled $2,446,000, 6.3% of revenues, and $2,118,000, 3.3% of
revenues, respectively. The increases in both periods are principally
attributable to increases in Venture's contract engineering business.
Selling, general and administrative expenses ("SG&A") in the current quarter
totaled $3,180,000, 22.7% of revenues, compared to $3,771,000, 18.4% of
revenues, in the prior year's comparable period, a decrease of $591,000. This
decrease was principally attributable to a decrease of $957,000 in foreign
currency losses and lower patent amortization costs and legal fees, but was
offset by a one-time charge of $693,000 resulting from the termination of the
GJ retirement plan, see Note 10 of Notes to Unaudited Consolidated Financial
Statements. For the nine months ended December 31, 1999 and 1998, SG&A totaled
$7,958,000, 20.4% of revenues and $8,313,000, 12.8% of revenues, respectively,
a decrease of $355,000. This decrease was principally attributable to
reductions in bad debt expense of $333,000, patent amortization costs of
$316,000 and foreign currency losses of $114,000 as well as manpower reductions
in the current year. These favorable changes were partially offset by the one-
time charge from the termination of the GJ retirement plan previously
discussed. In addition to the normal SG&A expenses, the Company took a charge
of $5,619,000 in the nine-month period of the prior year due to the bankruptcy
petition filed by Mita Industrial Co. Ltd. ("Mita"), one of GJ's largest
customers. Mita's reorganization plan, which was approved at a creditors
meeting in January 2000, provides for the repayment of 18% of the amount owed
at the date of bankruptcy over a ten-year period with no interest. The Company
has recognized a gain of $935,000, representing the present value of the non-
interest bearing payments to be received, see Note 9 of Notes to Unaudited
Consolidated Financial Statements. The Company also took a $5,000,000 charge
in the quarter and year-to-date period of the prior year for the settlement of
the Hamma litigation.
As a result of the above factors, earnings before income taxes and minority
interest increased from a loss of $4,736,000 in the quarter ended December 31,
1998 to a gain of $1,146,000 in the current quarter and from a loss of
$6,032,000 in the nine months ended December 31, 1998 to a gain of $1,976,000
in the current nine-month period.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Working capital increased to $18,426,000 at December 31, 1999 from $15,388,000
at March 31, 1999. At December 31, 1999, the Company had $15,788,000 in cash,
an increase of $3,365,000 from March 31, 1999, and no long-term debt. $1.9
million of cash was provided by operations. $2.1 million of cash was provided
by net earnings before non-cash provisions for depreciation, amortization,
deferred taxes, provision for losses on accounts receivable and stock-based
compensation, $5.8 million was provided by decreases in accounts receivable and
inventories and $0.8 was provided by increases in income taxes payable and
other liabilities. $5.7 million of cash was used to pay down accounts payable,
notes payable to suppliers and accrued expenses. $1.0 million was used to pay
the Hamma litigation installment and $0.9 million to purchase treasury stock.
Exchange rate changes caused an increase of $1.5 million in cash. GJ has
informal credit facilities with a Japanese bank . There were no borrowings
under this facility at December 31, 1999. The Company believes that its cash
and credit facilities are adequate for its short and long-term operational
needs. At December 31, 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 for summary judgment
filed in the DuBois case were denied on October 28, 1999. The Court entered a
scheduling order calling for an early year 2000 trial. 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 liquidity.
-14-
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.
-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 10, 2000 HARLAND L. MISCHLER
Harland L. Mischler
Executive Vice President, Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
-16-
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<INCOME-TAX> 832
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<EPS-BASIC> .15
<EPS-DILUTED> .15
</TABLE>
