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, 2000 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, 2000
------------- ----------------------------
Common Stock, without
par value 7,160,111
GRADCO SYSTEMS, INC.
INDEX
Page Number
Part I. Financial Information:
Consolidated Balance Sheets
at June 30, 2000 and March 31, 2000 3
Consolidated Statements of Income
for the Three Months Ended
June 30, 2000 and June 30, 1999 4
Consolidated Statements of Cash Flows
for the Three Months Ended
June 30, 2000 and June 30, 1999 5-6
Notes to Unaudited Consolidated Financial Statements 7-10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-12
Quantitative and Qualitative Disclosures
About Market Risk 13
Part II. Other Information 14
-2-
GRADCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, March 31,
2000 2000
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $13,354 $12,208
Short-term investments 1,000 1,000
Accounts receivable, net 13,893 13,766
Inventories 2,054 1,739
Deferred income taxes 1,422 1,436
Other current assets 742 369
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Total current assets 32,465 30,518
Furniture, fixtures and equipment, net 821 723
Excess of cost over acquired net assets 1,137 1,148
Deferred income taxes 3,026 3,104
Other assets 5,185 4,078
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$42,634 $39,571
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,293 $ 5,672
Notes payable to suppliers 5,609 4,426
Accrued expenses 2,733 1,928
Income taxes payable 648 448
------- -------
Total current liabilities 15,283 12,474
Non-current liabilities 2,091 2,157
Excess of fair value of net assets acquired
over cost 700 800
Minority interest 635 673
Shareholders' equity:
Common stock, no par value; authorized
30,000,000 shares, issued 7,913,434
shares 46,247 46,164
Accumulated deficit (24,322) (24,682)
Accumulated other comprehensive income 3,379 3,240
Less cost of common stock in treasury,
753,323 and 687,075 shares, respectively (1,379) (1,255)
------- -------
Total shareholders' equity 23,925 23,467
------- -------
$42,634 $39,571
======= =======
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,
2000 1999
---------- ----------
Revenues:
Net sales $12,900 $11,403
Development engineering services 373 330
Licenses and royalties 287 454
------- -------
13,560 12,187
------- -------
Costs and expenses:
Cost of sales 9,621 8,909
Research and development 875 812
Selling, general and administrative 2,554 2,221
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13,050 11,942
------- -------
Income from operations 510 245
Interest expense - (1)
Interest income 121 84
------- -------
Earnings before income taxes
and minority interest 631 328
Income tax expense 311 165
Minority interest (40) 4
------- -------
Net earnings $ 360 $ 159
======= =======
Basic earnings per common share $ 0.05 $ 0.02
======= =======
Average shares outstanding, basic EPS 7,205 7,836
======= =======
Diluted earnings per common share $ 0.05 $ 0.02
======= =======
Average shares outstanding, diluted EPS 7,205 7,862
======= =======
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,
2000 1999
-------- --------
Cash flows from operating activities:
Net income $ 360 $ 159
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 69 95
Amortization (87) (85)
Deferred income taxes 95 127
Provision for losses on accounts receivable 1 1
Stock-based compensation 83 81
Minority interest (40) 4
(Increase) decrease in accounts receivable (118) 5,117
Increase in inventories (313) (21)
(Increase) decrease in prepaid assets (371) 351
(Increase) decrease in other assets (986) 13
Increase (decrease) in accounts payable 622 (2,455)
Increase (decrease) in notes payable
to suppliers 1,170 (2,518)
Increase (decrease) in accrued expenses 800 (574)
Increase in income taxes payable 200 5
Decrease in other liabilities (68) (216)
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Total adjustments 1,057 (75)
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Net cash provided by operations 1,417 84
------- -------
Cash flows from investing activities:
Acquisition of property and equipment (166) (18)
------- -------
Net cash used in investing activities (166) (18)
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CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Three Months Ended
----------------------
June 30, June 30,
2000 1999
-------- --------
Cash flows from financing activities:
Repayment of notes in excess of three months - (3)
Proceeds from exercise of stock options - 5
Acquisition of treasury stock (124) (302)
------- -------
Net cash used in financing activities (124) (300)
------- -------
Effect of exchange rate changes on cash 19 (40)
------- -------
Net increase (decrease) in cash and
cash equivalents 1,146 (274)
Cash and cash equivalents at beginning of period 12,208 12,423
------- -------
Cash and cash equivalents at end of period $13,354 $12,149
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ - $ 1
Income taxes 16 33
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, 2000 and the results of operations and cash flows for the
three months ended June 30, 2000 and 1999. 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.
A foreign currency loss of $127,000 and a gain of $22,000 are included in
selling, general and administrative expenses for the three months ended June
30, 2000 and 1999, 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, 2000.
NOTE 2: INVENTORIES
Inventories are summarized as follows:
(Dollars in Thousands)
June 30, March 31,
2000 2000
--------- ---------
Raw materials $ 990 $ 874
Work-in-process 459 343
Finished goods 605 522
------ ------
$2,054 $1,739
====== ======
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 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
----------------------
June 30, June 30,
2000 1999
-------- --------
Average shares outstanding, basic EPS 7,205 7,836
Effect of dilutive securities:
Stock options - 26
------ ------
Average shares outstanding, diluted EPS 7,205 7,862
====== ======
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 $499,000 and $88,000 for the three months ended June 30, 2000 and
1999, respectively. The difference from net income as reported is the change
in the cumulative currency translation adjustment.
NOTE 6: TREASURY STOCK
In 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 66,248 shares at an
aggregate cost of $124,000 and 135,675 shares at an aggregate cost of $302,000
during the three months ended June 30, 2000 and 1999, respectively. The
purpose of the stock repurchase program is to help the Company achieve its
long-term goal of enhancing shareholder value.
-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 in October 1999. The Court entered a
scheduling order calling for a 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.
-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. Venture Engineering, Inc. operates in an industry
segment involved in high technology engineering and manufacturing services.
Gradco Technology Ltd. (a majority-owned subsidiary of GJ) was formed in fiscal
2000 to develop other technical and non-technical business opportunities. The
following table reflects information by reportable segments for the quarters
ended June 30, 2000 and 1999 (in thousands):
Net
Earnings
Revenues (Loss) Assets
-------- -------- ------
Quarter Ended 6/30/00
---------------------
Paper handling devices $10,053 $ 879 $47,602
Engineering/manufacturing services 2,820 101 3,813
New technology/products 687 (338) 1,302
Corporate - 18 9,049
Inter-segment & corporate
eliminations - (300) (19,132)
Consolidated $13,560 $ 360 $42,634
Quarter Ended 6/30/99
---------------------
Paper handling devices $10,413 $ 554 $40,359
Engineering/manufacturing services 1,774 (216) 3,302
New technology/products - - -
Corporate - 179 10,398
Inter-segment & corporate
eliminations - - (16,213)
Consolidated $12,187 $ 159 $37,846
-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, translation gains and losses can
still occur when receivables and payables are denominated in other than the
local currency of each company.
RESULTS OF OPERATIONS
Revenues for the three months ended June 30, 2000 increased $1,373,000 from the
amount in the prior year's first quarter principally from a 13% increase in net
sales. Venture's sales increased $1.0 million and a stronger yen, which
increased by 12% 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. These increases were tempered
by a 16% reduction in unit sales in the office automation market. When
compared to the preceding quarter, unit sales were up 23%.
Gross margin on net sales increased to 25.4% from 21.9% for the three months
ended June 30, 2000 and June 30, 1999, respectively. 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.
Research and development expenses in the current quarter totaled $875,000, 6.5%
of revenues, compared to $812,000, 6.7% of revenues, in the prior year's
comparable period.
-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 $2,554,000, 18.8% of revenues, compared to $2,221,000, 18.2% of
revenues, in the prior year's comparable period, an increase of $333,000.
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 an increase of $149,000
in foreign currency losses in the current quarter versus the prior year.
As a result of the above factors, earnings before income taxes and minority
interest increased to $631,000 for the quarter ended June 30, 2000 as compared
to $328,000 for the quarter ended June 30, 1999. The minority interest
reflects a loss incurred by GJ's majority-owned subsidiary, Gradco Technology
Ltd.
FINANCIAL CONDITION
Working capital decreased to $17,182,000 at June 30, 2000 from $18,044,000 at
March 31, 2000. At June 30, 2000, the Company had $13,354,000 in cash, an
increase of $1,146,000 from March 31, 2000, and no long-term debt. $1.4
million of cash was provided by operations. $0.5 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. $1.8 million was used to fund increases in accounts receivable,
inventories, prepaid and other assets. $2.7 million was provided by increases
in accounts payable, notes payable to suppliers, accrued expenses and income
taxes payable. 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, 2000. The Company believes that its
cash and credit facilities are adequate for its short and long-term operational
needs. At June 30, 2000, 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 in October 1999. The Court entered a
scheduling order calling for a 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 case will not have a material
adverse effect on its consolidated financial position or liquidity.
-12-
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency exchange and interest rates. The Company
is exposed to certain levels of market risks, especially changes in foreign
currency exchange rates. Interest rates currently have little effect on the
Company since it has no debt.
The Company conducts a significant portion of its business in Japanese yen.
There have been substantial fluctuations between the yen and the U.S. dollar
over the past several years and it is possible that such fluctuations will
continue. These fluctuations could have a material adverse effect on the
Company's revenues and results of operations.
The Company does not enter into derivatives or other financial instruments for
trading or speculative purposes.
-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 11, 2000 HARLAND L. MISCHLER
Harland L. Mischler
Executive Vice President, Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
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