-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UAGQuBf/puwfS9wAJOn30UiZ/sy8PXOVCb7AxGa1QXBNMuu5cDtWsD13Pwkz1qVm +OqP+49afAmVBtpSq8TxGA== 0000719597-97-000007.txt : 19970731 0000719597-97-000007.hdr.sgml : 19970731 ACCESSION NUMBER: 0000719597-97-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970730 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRADCO SYSTEMS INC CENTRAL INDEX KEY: 0000719597 STANDARD INDUSTRIAL CLASSIFICATION: OFFICE MACHINES, NEC [3579] IRS NUMBER: 953342977 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12829 FILM NUMBER: 97647932 BUSINESS ADDRESS: STREET 1: 3753 HOWARD HUGHES PARKWAY SUITE 200 CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7028923714 MAIL ADDRESS: STREET 1: 3753 HOWARD HUGHES PKWY CITY: LAS VEGAS STATE: NV ZIP: 89109 10-Q 1 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, 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 proceeding 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, 1997 ------------- ---------------------------- Common Stock, without par value 7,799,494 GRADCO SYSTEMS, INC. INDEX Page Number Part I. Financial Information: Consolidated Balance Sheets at June 30, 1997 and March 31, 1997 3 Consolidated Statements of Operations for the Three Months Ended June 30, 1997 and June 30, 1996 4 Consolidated Statements of Cash Flows for the Three Months Ended June 30, 1997 and June 30, 1996 5-6 Notes to Unaudited Consolidated Financial Statements 7-10 Management's Discussion and Analysis of Financial Condition and Results of Operations 11-12 Part II. Other Information 13 -2- GRADCO SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, March 31, 1997 1997 ------------ ------------ (Unaudited) ASSETS Current assets: Cash $21,543 $18,335 Accounts receivable, net 39,460 24,583 Inventories 1,929 1,759 Deferred income taxes 266 252 Other current assets 389 327 ------- ------- Total current assets 63,587 45,256 Furniture, fixtures and equipment, net 2,003 2,054 License repurchase 4,121 4,069 Excess of cost over acquired net assets 1,267 1,278 Other assets 6,031 5,429 ------- ------- $77,009 $58,086 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $13,115 $10,939 Notes payable to suppliers 23,554 12,608 Accrued expenses 853 684 Income taxes payable 2,661 1,596 Current installments of long-term debt 12 11 ------- ------- Total current liabilities 40,195 25,838 Long-term debt, excluding current installments 12 15 Non-current liabilities 1,005 889 Deferred income taxes 1,895 1,833 Minority interest 15,823 14,172 ------- ------- Total liabilities 58,930 42,747 ------- ------- Shareholders' equity: Common stock, no par value; authorized 30,000,000 shares, 7,799,494 and 7,798,909 shares outstanding June30, 1997 and March 31, 1997, respectively 44,618 44,618 Deficit (28,584) (30,358) Currency translation adjustments 2,045 1,079 ------- ------- 18,079 15,339 ------- ------- $77,009 $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 ---------------------- June 30, June 30, 1997 1996 ---------- ---------- Revenues: Net sales $39,802 $25,546 Development engineering services 295 272 Licenses and royalties 665 564 ------- ------- 40,762 26,382 ------- ------- Costs and expenses: Cost of sales 31,841 20,543 Research and development 918 994 Selling, general and administrative 2,860 3,168 ------- ------- 35,619 24,705 ------- ------- Income from operations 5,143 1,677 Interest expense (1) (1) Interest income 36 40 ------- ------- Earnings before income taxes and minority interest 5,178 1,716 Income tax expense 2,381 673 Minority interest 1,023 251 ------- ------- Net earnings $ 1,774 $ 792 ======= ======= Earnings per common share $ 0.23 $ .10 ======= ======= Weighted average shares outstanding (000's) 7,799 7,799 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, 1997 1996 -------- -------- Cash flows from operating activities: Net income $ 1,774 $ 792 ------- ------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 268 289 Amortization 354 426 Deferred income taxes 85 308 Provision for losses on accounts receivable - 9 Gain on sale of property and equipment - (2) Minority interest 1,023 251 Increase in accounts receivable (13,087) (3,099) (Increase) decrease in inventory (144) 386 Increase in prepaid assets (44) (715) Increase in other assets (54) (195) Increase (decrease) in accounts payable 1,352 (275) Increase in notes payable to suppliers 9,530 4,424 Increase in accrued expenses 148 313 Increase (decrease) in income taxes payable 943 (2,089) Increase in other liabilities 56 42 ------- ------- Total adjustments 430 73 ------- ------- Net cash provided by operations 2,204 865 ------- ------- Cash flows from investing activities: Acquisition of property and equipment (116) (303) Proceeds from sale of property and equipment - 4 ------- ------- Net cash used in investing activities (116) (299) ------- ------- -5- CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) Three Months Ended ---------------------- June 30, June 30, 1997 1996 -------- -------- Cash flows from financing activities: Repayment of notes in excess of three months (3) (3) Dividend to minority shareholders - (231) ------- ------- Net cash used in financing activities (3) (234) ------- ------- Effect of exchange rate changes on cash 1,123 (381) ------- ------- Net increase (decrease) in cash and cash equivalents 3,208 (49) Cash and cash equivalents at beginning of period 18,335 19,523 ------- ------- Cash and cash equivalents at end of period $21,543 $19,474 ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 1 $ 1 Income taxes 1,231 2,462 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, 1997 and the results of operations and cash flows for the three months ended June 30, 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 $167,000 and $34,000 are included in selling, general and administrative expenses for the three months ended June 30, 1997 and 1996, 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, 1997. NOTE 2: INVENTORIES Inventories are summarized as follows: (Dollars in Thousands) June 30, March 31, 1997 1997 --------- --------- Raw materials $ 440 $ 499 Work-in-process 804 570 Finished goods 685 690 ------ ------ $1,929 $1,759 ====== ====== NOTE 3: SHORT-TERM DEBT Gradco (Japan) Ltd.'s U.S. subsidiary has a $2 million credit line with Sumitomo Bank Limited. At June 30, 1997, there were no borrowings on this line. -7- GRADCO SYSTEMS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: 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. The Company has given no benefit to loss carryforwards available for U.S. tax purposes as recent loss experience from operations of the U.S. companies to which these carryforwards apply does not support realization of such benefits. NOTE 5: NET EARNINGS PER SHARE Net earnings per common share and common share equivalent were computed based upon the weighted average number of shares outstanding during each period. The approximate weighted average number of shares used in the computations were 7,799,000 in the three months ended June 30, 1997 and 1996. For the periods presented, the effect on net earnings per common share assuming full dilution is either anti-dilutive or results in less than 3% dilution. 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. The Company will adopt SFAS 128 during the third quarter of the current fiscal year, as required. The adoption of SFAS 128 is not expected to have a material effect on the Company's reported net earnings per common share. NOTE 6: 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. In March 1992, each of the plaintiffs filed an Application for Prejudgment Remedy against the Company and Gradco (Japan) Ltd. seeking to attach $10,000,000 of assets of each of these two defendants. This Application was dismissed as respects GJ. In November 1992, the Company and the plaintiffs agreed in principle to a Consent Order instead of proceeding with a hearing on the Application. If during the pendency of the lawsuits the Company desires to sell, transfer or take any other action which would affect its ownership of stock in GJ, it has agreed to give 30 days prior notice to the plaintiffs, who will then be permitted, if they so request, to renew the Application within the -8- GRADCO SYSTEMS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 6: COMMITMENTS AND CONTINGENCIES (Continued) 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 its investment in GJ). An award of damages of the magnitude sought by the plaintiffs could have a material adverse effect on the Company's financial position and might threaten the Company's existence as an ongoing enterprise. Gradco (Japan) Ltd., Gradco (USA) Inc. and Venture Engineering, Inc. are not parties to the lawsuit and any judgment awarded will not affect their operations, since those operations are independent of Gradco Systems, Inc. There are substantial differences between the Hamma and DuBois cases. Although the DuBois case will also be tried before a jury so that there are substantial elements of uncertainty, the Company continues to believe that the DuBois case alone will not have a material adverse effect on its consolidated financial position, or on its results of operations or liquidity. -9- GRADCO SYSTEMS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 7: SUBSEQUENT EVENT 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 in July. The total price of approximately $11.1 million was paid from available cash of GJ. The Company's ownership in the stock of GJ increased from 58.6% to 90.0%. -10- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's operations are conducted principally through its wholly-owned subsidiary Venture Engineering, Inc. ("Venture"), its majority-owned subsidiary Gradco (Japan) Ltd. ("GJ") and GJ's wholly-owned subsidiary Gradco (USA) Inc. ("GJU"). Venture performs contract engineering and manufacturing services for OEMs and other customers, primarily for the U.S. market. GJ and GJU 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 GJU 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, 1997 increased $14,380,000 from the amount in the prior year's first quarter principally from an increase in net sales. Although unit sales in both the copier and printer markets more than doubled, this volume increase was partially offset by a lower average sales price in the copier 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 $2.8 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. The introduction of a new product line typically results in a temporary spike in demand as customers purchase the new product before phasing out the old versions. The Company anticipates that unit sales in subsequent quarters will decrease somewhat from this quarter's level. Cost of sales as a percentage of net sales decreased to 80.0% from 80.4% for the three months ended June 30, 1997 and June 30, 1996, respectively. Research and development expenses ("R&D") in the current quarter totaled $918,000, 2.3% of revenues, compared to $994,000, 3.8% of revenues, in the prior year's comparable period. Selling, general and administrative expenses ("SG&A") in the current quarter totaled $2,860,000, 7.0% of revenues, compared to $3,168,000, 12.0% of revenues, in the prior year's comparable period, a decrease of $308,000. Approximately $225,000 of this decrease is due to the favorable translation of SG&A at the Company's Japanese subsidiary ("GJ") caused by the weaker yen. As a result of the above factors, earnings before income taxes and minority interest increased to $5,178,000 in the current quarter from $1,716,000 in the first quarter of fiscal 1997. The effective tax rate increased to 46.0% from 39.2% because a larger proportion of the pre-tax income was earned in Japan where the tax rate is higher than the U.S. rate. -11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION Minority interest increased more than proportionally because a higher portion of the consolidated net income was earned by GJ and its subsidiaries in the current quarter than in the first quarter of fiscal 1997. FINANCIAL CONDITION Working capital increased to $23,392,000 at June 30, 1997 from $19,418,000 at March 31, 1997. At June 30, 1997, the Company had $21,543,000 in cash, an increase of $3,208,000 from March 31, 1997, and minimal long-term debt. Cash provided by operations was $2.2 million, primarily from net earnings of $1.8 million, non-cash provisions of $1.6 million for depreciation, amortization and minority interest, an increase of $11.8 million in accounts, notes and income taxes payable and offset by $13.1 million in increased accounts receivable. Cash increased another $1.1 million as a result of exchange rate changes. GJ has informal credit facilities with a Japanese bank and has established a $2 million line of credit for its U.S. subsidiary. There were no borrowings under this line at June 30, 1997. The Company believes that its cash and credit facilities are adequate for its short and long-term operational needs. At June 30, 1997, there were no material commitments for capital expenditures except for the repurchase of 4,271,000 shares of GJ stock by GJ for approximately $11.1 million, as discussed in Note 7 of Notes to Unaudited Consolidated Financial Statements. Given the Company's current working capital, its available credit facilities and expected cash flows from operations, it is not anticipated that the reduction of cash as a result of this transaction will have any adverse effect upon operations. 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 6 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. -12- PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information regarding the current status of the Hamma and DuBois lawsuits, contained in Note 6 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. -13- 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: July 30, 1997 HARLAND L. MISCHLER Harland L. Mischler Executive Vice President, Chief Financial Officer (Principal Financial and Chief Accounting Officer) -14- EX-27 2
5 This schedule contains summary financial information extracted from the 6/30/97 Form 10-Q and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS MAR-31-1998 JUN-30-1997 21,543 0 39,519 59 1,929 63,587 7,451 5,448 77,009 40,195 0 0 0 44,618 (26,539) 77,009 39,802 40,762 31,841 35,619 0 0 (35) 5,178 2,381 1,774 0 0 0 1,774 .23 .23
-----END PRIVACY-ENHANCED MESSAGE-----