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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to _______
Commission file number 0-12829
GRADCO SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Nevada 95-3342977
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3753 Howard Hughes Pkwy, Ste 200,
Las Vegas, Nevada 89109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 892-3714
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No par value
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(Title of Class )
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
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Cover page (cont'd)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
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The aggregate market value of voting stock held by non-affiliates of the
Registrant (based on the closing sales price of Gradco common stock on the
NASDAQ National Market System on June 16, 1995) was $31,874,237.
The number of outstanding shares of each class of the Registrant's common stock
outstanding at June 16, 1995 was: common stock, no par value--7,798,909 shares.
PART I
Item 1. Business
Gradco Systems, Inc. ("Gradco", "Company" or the "Registrant") was
originally incorporated in California on November 9, 1978. As previously
reported in the Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1992, the Registrant changed its state of incorporation to Nevada
through a merger which became effective April 3, 1992. The Registrant's
principal executive offices are located at 3753 Howard Hughes Parkway, Suite
200, Las Vegas, Nevada 89109 and its telephone number is (702) 892-3714.
(a) Financial Information About Industry Segments.
Gradco and its subsidiaries operate primarily in one industry segment, the
design, development, production and marketing of intelligent paper handling
devices for the office automation market. Information relating to net sales,
net earnings (loss) and identifiable assets attributable thereto for the fiscal
years ended March 31, 1995, 1994 and 1993 is set forth in response to Item 8
below.
(b) Narrative Description of Business.
Gradco is a holding company which conducts business as follows:
(1) The various activities comprising the copier and printer product
businesses, as described below, are conducted through Gradco's majority-owned
Japanese subsidiary Gradco (Japan) Ltd. ("GJ"), and GJ's wholly-owned domestic
subsidiary Gradco (USA) Inc. ("GUSA"). GJ has a domestic branch office, which
performs research and development activities. GUSA concentrates on marketing
and sales activities.
(2) High technology engineering and manufacturing services are performed
by Gradco's wholly-owned Venture Engineering, Inc. subsidiary based in
Carrollton, Texas.
Unless otherwise indicated or unless the context otherwise requires, (1)
references to Gradco in the remainder of this Item 1(b) are to the parent
company, (2) references to GJ, in the descriptive material in the remainder of
this Item 1(b) pertaining to the copier and printer products businesses,
include the activities of GJ and GUSA, (3) references to the Registrant, in
connection with the presentation of financial data in the remainder of this
Item 1(b), and in Item 1(c), include the consolidated financial results of
Gradco and its subsidiaries.
Sales by GJ of sorter products to the convenience copier market currently
account for most of the Registrant's consolidated revenues. Such revenues also
include sales of printer products by GJ, revenues of GJ from selected
technology licenses and agreements with original equipment manufacturers and
marketers ("OEMs"), and from research and development activities conducted by
GJ on behalf of its OEM customers, and revenues of Venture Engineering from
contract engineering and manufacturing services on behalf of OEMs and other
customers.
Due to the overall maturity of the copier market, high growth cannot be
expected in this portion of GJ's business, so additional emphasis is being put
on printer products.
1
Business of GJ
General
GJ designs, develops, produces (primarily by contract) and markets on a
worldwide basis, intelligent paper handling devices for office copiers,
computer controlled printers and facsimile machines. GJ is a leading
independent supplier of sorters (devices which collate paper sheets) to the
convenience copier market, and supplies feeders and mailboxing sorters and
stackers for the computer controlled printer market. GJ customizes its sorters
and stackers for inclusion in the convenience copiers and printers of OEMs.
Sorter products presently constitute GJ's principal source of revenues. GJ's
revenues also include revenues from feeders and mailboxing sorters for computer
controlled printers, engineering and development activities for certain OEMs
and selected technology, licenses and agreements with OEMs. GJ has developed
and markets to OEMs automatic stackers, high capacity sheet feeders and random
access mailboxes for nonimpact electronic printers and paper handling devices
for facsimile machines. GJ also licenses certain proprietary technology to
OEMs.
GJ's products are marketed domestically and internationally primarily
directly to OEMs for incorporation into their product lines. Principal OEM
customers include Mita, Xerox, Rank Xerox, Fuji Xerox, Ricoh, Konica, Toshiba,
Lanier, Panasonic, Sharp, Olympus and Kyocera. Marketing in Asia is conducted
by GJ, and marketing in North America is conducted by GUSA. Marketing in
Europe is conducted by GJ and GUSA, and by Gradco Belgium, S.C., a wholly-owned
subsidiary of GJ.
GJ produces its products at manufacturing facilities of contract
manufacturers in Japan and Korea.
In addition to marketing intelligent paper handling devices, GJ licenses
certain OEMs to produce products using GJ technology in exchange for license
fees and/or royalties, and receives fees from OEMs for research and development
and customization contracts for its products. GJ's development engineering
activities on behalf of OEMs include engineering, development and prototype
production of various paper handling devices.
Gradco and GJ do not have any common directors or officers. However, as
the majority shareholder Gradco has the controlling vote on major corporate
transactions by GJ. Furthermore, members of Gradco's management consult with
and advise GJ's management on an ongoing basis with regard to current
operational matters and future plans.
GJ Products
Currently, GJ's products are primarily paper input and output devices for
copiers and computer controlled printers, including sorter products for copiers
and printers and sheet feeding products for printers. GJ has development and
customization contracts with a number of OEMs for several new products for
copiers and intelligent non-impact electronic page printers.
Sorter Products. Prior to the introduction by Gradco (during the period
when it was directly engaged in the copier products business) of the sorters
currently sold by GJ, sorters available to the convenience copier market were
large and complicated, with many moving parts and long, complicated paper
paths. The sorters sold by GJ are primarily designed to provide a shorter,
straight-through or nearly straight-through, single paper path.
2
The sorters sold by GJ are designed for use with a variety of convenience
copiers and are available with either 10, 20, or 25 receiving bins. These
products may be attached quickly and easily to a copier or may be designed to
be an integral part of the copier. Some of GJ's sorters are controlled by
intelligence contained within the copier, which communicates with the sorter
through a customized interface, while others contain the necessary intelligence
to stand alone and receive output from the copier or mechanically and
electronically interface with a copier.
New Copier Products. The new products for the copier market include a
variety of 10, 15 and 20 bin sorters with a sheet capacity per bin and a copy
per minute operating speed to satisfy the need in the low through mid-range of
copiers. Some products include means for offsetting copy sets to enhance set
removal and set capacity for mid-range copier use, and some include set-
aligning sheet joggers and in-bin stapling capabilities.
GJ has acquired the exclusive rights to manufacture and market a computer
forms feeder which improves the feeding of continuous forms in medium to high
speed copiers.
New copier products which also are applicable to the printer market
include sorters which are also operable in a random access mode to function
with electronic page printers as a mailbox.
Printer Products. GJ's products include certain additional automatic
paper and envelope feeders and specialized output print stations. These
include a paper feeder, stacker and mailboxes specially designed for laser
printers.
New Printer Products. New products developed for the printer product
market include a sheet and envelope feeder, a variety of its high capacity
sheet feeders applicable to a variety of laser printers, a specialized high
capacity stacker for a high speed laser printer, a stacker for many low speed
laser printers, a sheet invertor and a sheet decurler for laser printers and
facsimile machines.
GJ Marketing and Customers
General. GJ sells its products domestically and internationally primarily
directly to OEMs. GJ (under licenses which were assigned to it by Gradco) has
licensed certain OEMs to manufacture and sell certain products for use in
conjunction with the OEMs' copiers marketed to other companies.
GJ frequently develops a new product or a variation of an existing product
in consultation with an OEM who has agreed to pay for the development work,
then submits a prototype for evaluation to the OEM customer who may agree to
purchase such product in commercial quantities. In other cases, an OEM will
present GJ with a copier, printer or other product in the research and
development stage and engage GJ (at the OEM's expense) to design a paper
handling device to fit the OEM's specifications. Any unique interface designed
to work only with an OEM's particular equipment may be exclusive to the OEM; GJ
retains ownership of the basic technology and any other technology developed by
GJ for use in its business. GJ also does product development work at its own
expense, based on its evaluation of future market requirements.
In fiscal 1995, Mita, Xerox and Sharp accounted for 19%, 16%, and 11%,
respectively, of the Registrant's consolidated revenues. In fiscal 1994,
Ricoh, Mita and Sharp accounted for 23%, 17% and 15%, respectively, of the
3
Registrant's consolidated revenues. In fiscal 1993, Ricoh, Mita, and Lanier
accounted for 35%, 12% and 12%, respectively, of the Registrant's consolidated
revenues. A loss of any of the current principal customers could have a
negative impact on the Registrant's consolidated operations taken as a whole
(see GJ Competition).
Other principal customers of GJ include Rank Xerox, Fuji Xerox, Lanier and
Ricoh.
Licensees. During the period that it was directly involved in the copier
business, Gradco entered into certain agreements and granted certain licenses
to others, described below, to manufacture products using Gradco technology.
These agreements and licenses were assigned by Gradco to GJ as part of the sale
to GJ of substantially all of the assets used in Gradco's copier business (the
"Copier Assets") in fiscal 1991. Thus, the pertinent rights, obligations and
technology of Gradco, described below, have devolved upon GJ. In certain
instances, GJ and the licensee have entered directly into an amended and
restated agreement superseding the original license as assigned to GJ, but
these restatements do not modify the basic features of the arrangement, as
described below. In one instance (the license described in the next to last
paragraph of this section), the license was granted by GJ itself in fiscal
1993.
In exchange for a lump sum payment, Gradco and a major OEM customer
entered into a paid up, royalty-free, worldwide release and agreement not to
assert against the OEM most of Gradco's then-existing patents relating to
sorters existing at the time of the agreement. This agreement is limited to
sorters made, used or sold by the OEM or its affiliates for use only with
certain products made by or for the OEM or its affiliates. In addition, this
OEM has been granted a non-exclusive worldwide license on a royalty basis
limited to certain sorter technology and patent rights for use with certain
products of the OEM or its affiliates. Gradco and the OEM amended this license
to include additional defined sorters in exchange for an additional royalty
payable to Gradco, in conjunction with the grant of royalty-free cross licenses
between Gradco and the OEM with respect to certain conflicting patent rights of
Gradco in the United States and the OEM in Japan.
Another major OEM was granted a limited non-exclusive world-wide license
for a lump sum payment and future royalties restricted to certain sorter
technology and patent rights for use with certain products of the OEM or its
affiliates. Such sorters are limited by definition of size, capacity and
copier speed.
Another OEM was granted a nonexclusive license in exchange for a lump sum
payment and future royalties on certain limited sorter technology for use on
copiers manufactured by the OEM. Certain sorters, as defined in the agreement,
are territorially limited.
Gradco also granted to another customer, with a right to extend the
license to its affiliates in Japan and Europe, a license to make or have made
and sell certain sorter products. The license is limited (with one exception)
to mid-range sorters and future variations of the technology.
GJ granted a license to a laser printer OEM to incorporate GJ's patented
de-curler structure in the OEM's printer for a royalty of one amount if
incorporated in an attachment to the printer, but a lesser amount if
incorporated directly in the printer.
4
These agreements generated recurring royalty revenues of approximately
$2,725,000 during the fiscal year ended March 31, 1995, $2,402,000 during the
fiscal year ended March 31, 1994, and $1,953,000 during the fiscal year ended
March 31, 1993. These agreements allow GJ to receive additional revenues from
certain OEMs while also selling products to the OEMS, and, overall, are
expected to result in better market penetration of GJ technology. However, the
licensees are able to compete with GJ in some of GJ's customary markets to the
limited extent set forth in such agreements. Except as described above, no
licensee has the right to sublicense the technology to nonaffiliates.
GJ Competition
GJ's principal competition for its sorters for convenience copiers is from
its OEM licensees. Certain licensees, because of their much larger resources,
have been able to develop new sorter products more rapidly than GJ. GJ also
experiences competition, to a more limited extent, from other OEMs, and from
other manufacturers of sorters using different technology. Copier
manufacturers or other companies, many of whom are much larger than GJ with
resources far in excess of those of GJ, could seek to enter the convenience
copier sorter market in direct competition with GJ. Certain OEMs make sorters
for use with certain of their convenience copier models using other sorter
technology such as fixed bin technology.
In its marketing of printer products, GJ competes with manufacturers of
mechanical sheet feeding devices, continuous form paper feeding devices and
automatic paper feeding devices, as well as OEMs that build such devices for
sale with their information or word processing systems.
GJ Patents and Proprietary Technology
GJ has an ongoing program of seeking patent protection for its
technology. GJ holds numerous patents and patent applications (including
those acquired by assignment from Gradco as part of the sale of Copier
Assets in fiscal 1991) relating principally to its sorters in the United
States, United Kingdom, Japan, Germany, France, Switzerland and Canada. The
unexpired terms of the major U.S. sorter patents already issued range from 6
to 17 years. Patent applications are pending on most of GJ's recently
introduced new products. Patents have been obtained or patent applications
are pending in the United States and Japan, relating to GJ's paper decurling
technology for laser printers and facsimile machines.
GJ also has United States and foreign patents and has several additional
patent applications pending in the United States and abroad relating to paper
feeding devices for use with printer products.
Gradco believes that the issued patents of GJ are material to the
consolidated operations of Gradco and subsidiaries taken as a whole. However,
there can be no assurance that GJ's sorter patents will not be challenged or
infringed. In addition, there can be no assurance that other parties will not
develop new technology which does not violate such patents but which is
competitive with certain GJ products and patentable by such other parties.
GJ has a confidential information and invention assignment agreement to
protect GJ's technology with each of its key technical employees.
5
GJ Production and Assembly
GJ produces its products at manufacturing facilities of contract
manufacturers in Japan and Korea.
Agreements with the manufacturers for finished products provide for
quality controls and inspection by GJ and its customers. GJ seeks to control
product quality in a variety of ways. It emphasizes initial inspection and
testing of components. Each of GJ's product lines has a high commonality of
parts, enabling GJ to effect certain economies of scale. Raw materials for
GJ's products are available from a number of sources to permit timely shipment
of orders. Microprocessor programming and electronic assemblies are generally
proprietary but certain OEMs may specify electronics. Tooling for most common
parts is owned by GJ or its contract manufacturers, while a number of OEMs own
tooling for parts unique to models customized for their products.
Business of Venture Engineering, Inc.
The Venture Engineering, Inc. ("Venture") subsidiary performs contract
engineering and manufacturing services, relating to the customer's own
products, for OEMs and other customers. Venture offers professional turnkey
services ranging from design concepts through manufacturing production. It
markets its services independently of the engineering services performed by GJ
for its OEM customers, referred to above.
Engineering services performed by Venture are principally related to
paper-handling products, including electronic motion control devices and
devices used for putting marks on paper/media. These devices and applications
include printer-plotters, peripheral media handling, and specialized printing
and support. Services are also performed for other applications such as
automated medical diagnostic equipment, manufacturing robotics, and test and
process control equipment. Services are typically billed on a time and
material or fixed price basis. However, Venture completed a development
project in February 1992 which will provide a royalty stream through 1998.
This project generated royalty revenues of approximately $52,000 in fiscal
1995, $133,000 in fiscal 1994, and $25,000 in fiscal 1993.
Manufacturing services principally include fabrication, assembly and
testing of complex electro-mechanical assemblies for customers in such diverse
fields as computer equipment, medical equipment and telecommunications.
Due to the broad and diverse number of markets and customers served by
Venture, there is not one specific group of competitors. In most cases, the
principal competition is from within the prospective customers' own functional
engineering and manufacturing organizations, or from a product company offering
standard products which may be adapted to a specific unique application
requirement.
Costs and Revenues of Development Engineering Services
In 1995, 1994 and 1993 the Registrant, on a consolidated basis, spent
approximately $2,164,000, $1,793,000 and $1,652,000, respectively, on research
and development and development engineering activities. Costs incurred under
research and development and development engineering contracts are included in
research and development expense. Included in research and development expense
are costs related to development engineering service contracts of approximately
$676,000, $260,000, and $374,000, in fiscal 1995, 1994 and 1993, respectively.
6
The Registrant, on a consolidated basis, also received revenues from customers
under development engineering service contracts of approximately $923,000,
$356,000 and $585,000, in fiscal 1995, 1994 and 1993, respectively.
Backlog
Registrant's order backlog at March 31, 1995 from consolidated operations
was estimated at approximately $25.9 million, and was estimated at
approximately $18.7 million at March 31, 1994. Backlog includes orders
accepted for delivery to customers during the ensuing fiscal year, including
purchases committed by certain customers in the form of purchase agreements,
although such orders are subject to cancellation by the customer (in most cases
upon the payment of a cancellation charge). Substantially all orders shown as
backlog were scheduled for delivery within approximately 6 months. Because
Gradco's operating subsidiaries generally ship products upon specific releases
from customers of previously received orders, the Registrant's backlog as of
any particular date may not be a meaningful measure of the Registrant's actual
sales for the succeeding fiscal period.
Employees
As of June 7, 1995, Gradco and its subsidiaries employed 103 persons. To
date, Gradco and its subsidiaries have encountered no difficulty in attracting
and retaining qualified employees. Gradco believes employee relations to be
satisfactory.
(c) Domestic Operations and Export Sales.
Approximately 43% of the Registrant's consolidated revenues for the fiscal
year ended March 31, 1995 were attributed to domestic sales and approximately
57% were attributed to foreign sales. Approximately 20% of the Registrant's
consolidated revenues for the fiscal year ended March 31, 1994 were attributed
to domestic sales and approximately 80% were attributed to foreign sales.
Approximately 21% of the Registrant's consolidated revenues were attributed to
domestic sales and approximately 79% were attributed to foreign sales for the
fiscal year ended March 31, 1993. In its export sales, Registrant is subject
to the usual risks of international trade, including political instability,
restrictive trade policies, controls on fund transfers and foreign currency
fluctuations.
The Registrant's sales are primarily denominated in Japanese yen and
United States dollars. In order to limit the risk of foreign currency exchange
fluctuations, the Registrant attempts to buy and sell products and services in
the same currency. However, there are foreign currency exchange gains and
losses associated with some sales transactions. In fiscal 1995, the Registrant
had a currency exchange loss of $400,000 caused by the surge in the value of
the yen versus the dollar in March 1995.
Financial information regarding foreign and domestic operations and export
sales is set forth in Note 8 of Notes to the Registrant's Consolidated
Financial Statements filed in response to Item 8 below.
Item 2. Description of Property.
Gradco's corporate offices are located at 3753 Howard Hughes Parkway,
Suite 200, Las Vegas, Nevada 89109. The current term of the lease expires in
March 1996.
7
GJ's offices are located in Tokyo, Japan. The offices of GUSA (GJ's
domestic subsidiary) are located in Irvine, California, and GJ maintains a
branch office at the same location. The Registrant's Venture Engineering
subsidiary has engineering, development and light production facilities in
Carrollton, Texas.
Item 3. Legal Proceedings.
(a) GRADCO SYSTEMS, INC. V. KEITH B. STEWART, ET AL AND RELATED CASES
This litigation was previously reported in the Registrant's Report on Form
10-K for the fiscal year ended March 31, 1994. In April, 1995, all claims and
cross-claims, except those with respect to Horst Sieben, were settled by mutual
consent, with no exchange of monies. In June, 1995, the claims and cross-
claims with respect to Mr. Sieben were settled, with the only consideration
originating with the Company being the issuance to him of 15,000 shares of
restricted common stock.
(b) HAMMA V. GRADCO SYSTEMS, INC., ET AL; DUBOIS V. GRADCO SYSTEMS, INC.
ET AL.
Gradco and its (now former) president, Keith Stewart, have been sued in an
action filed in March 1988 in the United States District Court in Bridgeport,
Connecticut, by John C. Hamma ("Hamma"), an ex-employee. The complaint
primarily alleges misrepresentation and fraudulent concealment by Gradco and
Mr. Stewart in connection with an agreement entered into in March 1982 which
terminated and released Gradco from royalty obligations under a royalty
agreement entered into effective as of August 1979 pursuant to which Hamma
assigned to Gradco his co-inventor's interest in patent rights for improvements
in certain products of the Company. The complaint, which has been amended a
number of times, seeks unspecified damages, rescission of the March 1982
agreement and reversion of Hamma's interest in such patent rights. In a
separate but related action (which has been consolidated with the Hamma action
for certain pretrial purposes), Gradco and Mr. Stewart were sued in August 1989
in the United States District Court in Bridgeport, Connecticut by R. Clark
DuBois ("DuBois"), also an ex-employee of the Company. The complaint primarily
alleges misrepresentation and fraudulent concealment by the Company and Mr.
Stewart in connection with an agreement entered into in March 1983 which
terminated and released the Company from royalty obligations under a royalty
agreement entered into effective as of August 1979 pursuant to which DuBois
assigned to the Company his co-inventor's interest in patent rights for
improvements in certain products of the Company. The complaint, which has been
amended a number of times, seeks unspecified damages, rescission of the March
1983 agreement and reversion of DuBois' interest in such patent rights. 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 GJ seeking to attach $10,000,000 of assets of
each of these two defendants. By reason of the dismissal of the claims against
GJ, this Application likewise has been 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
8
they so request, to renew the Application within the notice period. Should
plaintiffs do so, the Company has agreed to forbear from proceeding with any
such transaction for a limited period. The Company would vigorously oppose a
renewed Application. Management believes that the Consent Order is in the
Company's best interests because it precludes any attachment of the Company's
assets until such time as a proposed transaction which would affect its
ownership of stock in GJ may arise, and it avoids the legal expenses which
would have resulted from a current hearing on the Application.
The trial in the Hamma case on the liability issue began on June 13, 1995,
and was completed on June 27, 1995. On the following day the jury rendered a
verdict finding Gradco and Mr. Stewart liable on substantially all counts in
the complaint and also found that the actions of the defendants warranted the
imposition of punitive damages. No amount of damages on any count, including
the punitive damages, was determined by the jury but will be determined at a
later time in a separate proceeding. The Company will seek to overturn the
verdict of the jury through motions made before the Trial Court and, to the
extent it is unsuccessful, will seek permission from the Trial Court to appeal
the verdict. An appeal is not automatically available prior to the
determination of damages. The Company is presently unable to determine the
amount of such damages which is likely to be awarded, but the amount of
damages, including punitive damages, 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. and Gradco (USA) 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 is also a case which will be tried before a jury and,
accordingly, 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.
Item 4. Submission of Matters to Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
Matters.
(a) Market Information.
Gradco common stock is traded in the over-the-counter market and is quoted
on the NASDAQ National Market System under the symbol GRCO. The following table
sets forth the quarterly high and low closing sales prices from April 1, 1993
to March 31, 1995.
Quarter Ended High Low
June 30, 1993..................$ 2.50 $ 1.75
September 30, 1993.............$ 2.75 $ 1.625
December 31, 1993..............$ 3.75 $ 2.25
March 31, 1994.................$ 3.125 $ 2.00
June 30, 1994..................$ 2.50 $ 1.75
September 30, 1994.............$ 3.375 $ 2.125
December 31, 1994..............$ 4.25 $ 2.875
March 31, 1995.................$ 4.375 $ 3.125
(b) Holders.
The approximate number of holders of record of Gradco common stock, no
par value (its sole class of common equity) as of the close of business on June
16, 1995 is 481.
(c) Dividends.
Gradco has not declared any dividends on its common stock. The present
policy of Gradco's board of directors is to retain earnings to provide funds
for the operation and expansion of Gradco's business.
10
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with
the consolidated financial statements of Gradco and the notes thereto included
elsewhere herein.
Years Ended March 31,
1995 1994 1993 1992 1991
(In thousands, except per share amounts)
Statement of operations data:
Operating Revenues: $82,838 $53,148 $61,227 $52,796 $ 79,373
------- ------- ------- ------- --------
Costs and expenses:
Cost of sales 64,290 40,629 47,929 39,503 57,507
Other operating expenses 14,815 12,211 12,423 12,728 28,590
Interest (income) expense, net (55) (32) (19) 89 1,200
Investment losses 205 52 - - -
Gain on sale of subsidiary stock - - - (46) (20,358)
Litigation settlement - - - (2,500) -
Non-recurring charges - - - - 22,518
------- ------- ------- ------- --------
79,255 52,860 60,333 49,774 89,457
------- ------- ------- ------- --------
Earnings (loss) before income
taxes, minority interest and
cumulative effect on prior years
of change in accounting policy 3,583 288 894 3,022 (10,084)
Income taxes 1,331 535 1,181 2,728 42
Minority interest 800 (241) 196 581 829
------- ------- ------- ------- --------
Earnings (loss) before cumulative
effect on prior years of change
in accounting policy 1,452 (6) (483) (287) (10,955)
Cumulative effect on prior years
of change in accounting policy - - - (3,356) -
------- ------- ------- ------- --------
Net Earnings (loss) $ 1,452 $ (6) $ (483) $(3,643) $(10,955)
======= ======= ======= ======= ========
Earnings (loss) per common share:
Earnings (loss) before cumulative
effect on prior years of change
in accounting policy $ .19 $ - $ (.06) $ (.04) $ (1.44)
Cumulative effect on prior years
of change in accounting policy - - - (.43) -
------- ------- ------- ------- --------
Net Earnings (loss) $ .19 $ - $ (.06) $ (.47) $ (1.44)
======= ======= ======= ======= ========
Weighted average shares outstanding 7,784 7,784 7,784 7,784 7,627
Balance sheet data:
Working capital $16,727 $10,208 $ 8,349 $ 6,935 $ 5,833
Total assets 64,383 41,796 42,988 39,295 44,776
Long-term debt 35 - - 39 73
Shareholders' equity 16,997 11,137 9,194 7,831 11,347
11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Revenues
Revenues for the fiscal year ended March 31, 1995 increased by $29,690,000
(55.9%) from the prior year. Net sales increased by $28,881,000 (57.5%)
primarily due to a unit sales increase of 38% in the copier market, a stronger
yen which appreciated 8% against the dollar and a change in the mix of sorters
sold toward higher-priced units. A substantial portion of the increase in unit
sales is attributable to increased sales to Xerox Corporation and its European
affiliate. Development engineering services revenue increased $567,000 due
primarily to increased revenues from new projects related to printer products
while royalties increased by $242,000.
Revenues for the fiscal year ended March 31, 1994 decreased by $8,079,000
(13.2%) from the prior year. Net sales decreased by $8,407,000 (14.3%)
primarily due to a unit sales decrease of 12% in the copier market. There was
a significant decrease in sales volume to Ricoh ($9.8 million) due to certain
changes in product mix by Ricoh. The overall decrease in unit sales was
partially offset by a stronger yen which appreciated 11% against the dollar.
Development engineering services revenue decreased $229,000 while royalties
increased by $557,000.
Costs and Expenses
Cost of sales as a percentage of net sales was 81.2%, 80.8% and 81.7% in
fiscal 1995, 1994 and 1993, respectively. While this percentage has remained
consistently around 81% for the last two years, future gross margins could be
negatively impacted by the stronger yen since the Company's pricing policy may
not allow the higher dollar costs to be completely passed on to the customers.
The decreased cost of sales percentage in fiscal 1994 from the previous year
was attributable to a favorable change in the mix of products sold toward
higher margin units.
Research and development expenses ("R&D") in fiscal 1995 totaled
$2,164,000 (2.6% of revenues), compared to $1,793,000 (3.4% of revenues) in
fiscal 1994 and $1,652,000 (2.7% of revenues) in fiscal 1993. R&D expenditures
have remained relatively constant at reduced levels since the significant
downsizing of staff in fiscal 1991. Lower spending at the Company's Venture
Engineering subsidiary has been offset by increases in the copier and printer
portions of the business.
Selling, general and administrative expenses ("SG&A") increased by
$2,233,000 (21.4%) in fiscal 1995 from the prior year. This increase is
partially due to the unfavorable translation of SG&A at the Company's Japanese
subsidiary ("GJ"), the adoption of a retirement plan for its management
($628,000) and a currency exchange loss of approximately $400,000 caused by the
surge in the value of the yen versus the dollar in March 1995. SG&A decreased
$353,000 (3.3%) in fiscal 1994 from fiscal 1993 because higher SG&A costs at
GJ, primarily due to the stronger yen, were offset by reductions in the U.S.
12
Pre-tax Earnings, Taxes, and Minority Interest
As a result of the above factors, earnings before income taxes and
minority interest were $3,583,000, $288,000 and $894,000 in fiscal 1995, 1994
and 1993, respectively. Income taxes and minority interest increased in fiscal
1995 due to the increase in pre-tax earnings. The tax provisions of
$1,331,000, $535,000 and $1,181,000 in fiscal 1995, 1994 and 1993,
respectively, primarily comprise foreign taxes on the earnings of the Company's
Japanese subsidiary. A shift in the geographic distribution of pre-tax
earnings, which began in the third quarter of fiscal 1994, has resulted in
reducing the Company's consolidated effective tax rate.
For further discussion regarding the tax provisions, see Note 5 of Notes
to Consolidated Financial Statements set forth in Item 8 below.
Litigation
On June 28, 1995, a jury found the Company to have liability in the
lawsuit by John H. Hamma, a former employee. A separate proceeding to
determine the amount of damages will be required. An award of damages could
have a material adverse effect on the Company's financial position. For
further discussion regarding this litigation, see Note 7 of Notes to
Consolidated Financial Statements set forth in Item 8 below.
Effects of Inflation
To date, the Company has not experienced significant inflationary cost
increases.
Liquidity and Capital Resources
Working capital increased to $16,727,000 at March 31, 1995 from
$10,208,000 at March 31, 1994 primarily from funds generated by operations and
the 16% increase in the value of the yen against the dollar when compared to
the previous year-end rate.
Working capital increased to $10,208,000 at March 31, 1994 from $8,349,000
at March 31, 1993 primarily from funds generated by operations and the 11%
increase in the value of the yen against the dollar during fiscal 1994.
At March 31, 1995, the Company had $12,158,000 in cash, $579,000 in
trading securities and minimal long-term debt. The Company's Japanese
subsidiary has a 200 million yen (approximately $2.31 million) line of credit
with a Japanese bank and has established a $2 million line of credit for its
U.S. subsidiary. Total borrowings under these lines were $1,500,000 at March
31, 1995 and were repaid in April 1995. The Company believes that as a result
of its restructuring and staff reductions its cash and credit facilities are
adequate for its short and long-term needs. The Company does not have any
material commitments for capital expenditures.
Item 8. Financial Statements and Supplementary Data.
Response to this Item is contained in Item 14(a).
Item 9. Disagreements in Accounting and Financial Disclosure.
Not applicable.
13
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) The following table sets forth the name of each director and executive
officer of the Registrant, and the nature of all positions and offices with the
Registrant held by him at present(1). Unless otherwise indicated, the term of
office of all directors and executive officers expires at the next annual
meeting of stockholders of the Registrant, which is expected to be held in
September 1995.
Name Position
Martin E. Tash Chairman of the Board, President and Chief
Executive Officer
Harland L. Mischler Executive Vice President, Chief Financial
Officer and Director
Bernard Bressler Secretary, Treasurer and Director
Robert J. Stillwell Director
Thomas J. Burger Director
Masakazu (Mark) Takeuchi President and Director of GJ*
Akira (Tony) Shinomiya Chief Financial Officer and Director of GJ*
__________
*Term expires at ordinary general shareholders meeting of GJ for fiscal 1996,
to be held in June 1996.
(1)Masakazu (Mark) Takeuchi and Akira (Tony) Shinomiya, who are listed in
the table, are executive officers of Gradco (Japan) Ltd. ("GJ"), the
Registrant's majority-owned Japanese subsidiary. As described in Item 1(b)
above, the Registrant's primary business is conducted through GJ. Due to the
significance of the role of Messrs. Takeuchi and Shinomiya in managing the
operations of GJ and conducting its relationship with the Registrant,
information regarding them has been included in various portions of this part
III. However, the inclusion of such references to "executive officers of the
Registrant" is not an acknowledgment that Messrs. Takeuchi and Shinomiya may be
so characterized, since they do not perform a policy-making function for the
Registrant.
(b) The following is a brief account of the recent business experience of each
director and executive officer and directorships held with other companies
which file reports with the Securities and Exchange Commission.
Name Business Experience
- ---- -------------------
Martin E. Tash, Mr. Tash has been Chairman of the Board and Chief
age 54 Executive Officer of the Registrant since October
1990, and President of the Registrant since
October 1991. Mr. Tash is also Chairman of the
Board and President of Plenum Publishing
Corporation, a position he has held since July
1977.
14
Harland L. Mischler, Mr. Mischler has been Chief Financial Officer
age 63 and a director of the Registrant since October
1990, and Executive Vice President of the
Registrant since October 1991. Mr. Mischler is a
certified public accountant. Mr. Mischler served
as Vice President, Controller and Treasurer of
Hobart Corporation from 1966 to 1981. From 1981
to 1984 he was Vice President of Finance of Bausch
& Lomb, Inc. At that time he purchased, with
another, Applied Research Laboratories, Inc., an
analytical instrument company, in a leveraged
buyout from Bausch & Lomb. After such company was
sold profitably in 1987, Mr. Mischler founded HLM
Capital Resources, Inc., a private investment and
holding company of which he is President and
Chairman.
Bernard Bressler, Mr. Bressler has been Secretary and a director of
age 67 the Registrant since October 1990 and Treasurer
of the Registrant since April 1992. He has been a
practicing attorney since 1952, and is presently a
member of the firm of Bressler, Amery & Ross,
counsel to the Registrant. Mr. Bressler is also a
director of Plenum Publishing Corporation.
Robert J. Stillwell, Mr. Stillwell has been a director of the
age 59 Registrant since October 1991. Mr. Stillwell
owns and operates the Robert J. Stillwell Agency,
Inc., an independent life and health insurance
agency which he founded over 20 years ago, and he
owns and operates Nationwide Property Management,
which handles diverse real estate investments in
which he is involved. In 1985, Mr. Stillwell
founded and is the principal owner of Service
Concepts Unlimited, Inc. Mr. Stillwell is a
director of Crusader Savings Bank located in
Rosemont, Pennsylvania.
Thomas J. Burger, Mr. Burger has been a director of the
age 48 Registrant since October 1993. He is Associate
Senior Vice President of NEC America, Inc. (a
position he has held since July 1993), and is
responsible for the sale and marketing of its
business telephone systems throughout the United
States. Prior thereto, he was President and a
director of two wholly-owned subsidiaries of NEC
America Inc., which conducted the sales,
installation and maintenance of NEC communication
systems and networks throughout the Central, South
and Western United States. From August 1988 to
December 1989 Mr. Burger was President and a
director of Marcom Communications Inc. After he
reorganized its telecommunication subsidiary, the
subsidiary was sold to NEC America and he became
an employee of NEC. In July 1987 Mr. Burger
founded Astra Services Inc., a computer company
providing various software development services to
the communications industry. Astra Services was
15
sold profitably in 1992. From 1973 to 1987 Mr.
Burger was employed in various capacities by
Telecom Plus International Inc., one of the major
independent interconnect companies in the U.S. He
became President in 1980, a position he held until
May 1987 when the company was sold to Siemens
Communications.
Masakazu (Mark) Takeuchi, Mr. Takeuchi has been President and Chief
age 58 Executive Officer of Gradco (Japan) Ltd. since
1989 and a director of GJ since 1988. He is also
President and a director of Gradco (USA) Inc. He
was Senior Vice President of Far East Operations
and New Business Development of the Registrant
from August 1988 to October 1990, and a director
of the Registrant from March 1990 until October
1990. Mr. Takeuchi was also Chairman of GJ from
August 1988 until December 1988. Previously, from
1961, Mr. Takeuchi was employed by C. Itoh & Co.
Ltd. in various positions.
Akira (Tony) Shinomiya, Mr. Shinomiya has been Chief Financial Officer
age 52 and a director of GJ since January 1989. From
1987 to 1988, he served as deputy General Manager
of C. Itoh Electronics Corp. and from September
1985 through 1986 he was Section Manager of the
Electronics Division of C. Itoh & Co. Ltd. From
1975 to 1985 he was Vice President of C. Itoh
Electronics Inc. in Los Angeles, California.
Item 11. Executive Compensation.
(a) Summary Compensation Table. The following table sets forth all
compensation awarded to, earned by or paid to the following persons through
June 16, 1995 for services rendered in all capacities to the Registrant and its
subsidiaries during each of the fiscal years ended March 31, 1995, 1994 and
1993: (1) the Registrant's Chief Executive officer, and (2) each of the other
executive officers whose total compensation for the fiscal year ended March 31,
1995 required to be disclosed in column (c) below exceeded $100,000:
SUMMARY COMPENSATION TABLE
(a) (b) (c)(1)(2)
Name and Principal Position Year Salary ($)
- --------------------------- ---- ----------
Martin E. Tash 1995 125,000
Chairman of the Board, President 1994 125,000
and Chief Executive Officer 1993 125,000
Masakazu (Mark) Takeuchi 1995 295,800
President, 1994 261,055
Gradco (Japan) Ltd. 1993 226,110
Akira (Tony) Shinomiya 1995 260,520
Chief Financial Officer 1994 229,418
Gradco (Japan) Ltd. 1993 198,708
_______________
16
(1) With regard to Mr. Tash, the amounts shown in this column represent
compensation for special services rendered as a director.
(2) With regard to Messrs. Takeuchi and Shinomiya, the amounts shown in this
column represent compensation paid to such individuals for services as
executive officers of Gradco (Japan) Ltd. See note (1) in Item 10(a). All
such compensation was paid in yen by GJ and is translated into dollars at year-
end exchange rates on the above table. When measured in yen, there was no
increase in compensation from 1993 to 1994, and a 3% increase from 1994 to
1995.
(b) Stock Option Plans. Gradco has a 1988 Stock Option Plan providing for
the grant of options which either do or do not qualify as "incentive stock
options" within the meaning of Section 422A of the Internal Revenue Code. Any
officer, director or key employee of Gradco or any of its subsidiaries, in the
discretion of the Stock Option Committee, may be designated to receive options
under this plan. The 1988 Plan provides for the issuance of up to 350,000
shares of Gradco common stock upon exercise of stock options (subject to
adjustment in the event of a stock split, stock dividend, consolidation,
reorganization, or comparable change in Gradco's capital structure). Gradco
also has a 1982 Incentive Stock Option Plan designed to satisfy Internal
Revenue Code requirements relating to "incentive stock options". The 1982
plan, which provided for the issuance of up to 550,000 shares of Gradco stock
upon exercise of stock options, terminated on December 31, 1991 in accordance
with its terms. Thus, no additional options may be granted thereunder, but the
termination does not affect the validity of outstanding options.
The Gradco stock option plans are administered by the Stock Option
Committee appointed by the Board of Directors. Bernard Bressler and Robert J.
Stillwell currently comprise the Stock Option Committee. Since no new options
may be issued under the 1982 Plan, the Committee's powers under such Plan will
be limited to such administrative matters as may arise with regard to currently
outstanding options (which cover 19,410 shares).
Subject to limitations contained in the 1988 Plan, the Committee
determines the optionees, option prices, number of shares subject to such
options, the duration of each option (the plans specify a maximum of 10 years
from date of grant or five years for 10% shareholders), the dates of grant, and
the schedule for exercise of each option. The option price is determined by
the Stock Option Committee at the time the option is granted, but in the case
of incentive stock options within the meaning of Section 422A of the Internal
Revenue Code, shall not be less than fair market value of the stock at that
time. The Gradco plans provide the option price may be paid in cash or in the
form of shares of Gradco common stock, subject to the power of the Stock Option
Committee in its discretion to impose restrictions on an optionee's right to
exercise an option with shares of Gradco common stock. The options are subject
to forfeiture upon termination of employment except by reason of death,
disability or retirement in which event the options may continue to be
exercised for a limited period. Currently, options for 319,500 shares are
outstanding under the 1988 Plan and 11,500 shares are available for issuance
upon exercise of options which may be granted in the future.
During the last fiscal year, no options under the 1982 or 1988 Plan were
granted to or exercised by the executive officers named in the Summary
Compensation Table (above).
17
The following table sets forth the number of unexercised options held at
March 31, 1995 by each of the aforesaid named executive officers. All of such
options were exercisable at that date. The exercise price in each case is
equal to the closing price of the Registrant's Common Stock on NASDAQ on the
date that the option was granted. The exercise price of the options held by
Messrs. Takeuchi and Shinomiya was above the fair market value of the
underlying shares at fiscal year end (determined as the closing price of the
Registrant's Common Stock on NASDAQ on 3/31/95). Therefore, such options were
not "in-the-money" at such date. The aggregate dollar value of the options
held by Mr. Tash at 3/31/95 (determined as the difference between the fair
market value and the exercise price of the underlying shares at that date) was
$18,750.
Number of Unexercised Options
Name at Fiscal Year-End
- ---- -----------------------------
Martin E. Tash 50,000
Masakazu (Mark) Takeuchi(1) 18,000
Akira (Tony) Shinomiya(1) 6,000
_______________
(1) Messrs. Takeuchi and Shinomiya are executive officers of Gradco (Japan)
Ltd. See note 1 in Item 10(a).
(c) Retirement Plan (GJ). In June 1994, GJ adopted a retirement plan
providing that, subject to approval by GJ's shareholders at the time of
proposed payment, a retirement allowance be paid by GJ to a member of GJ
management who retires after his term of office or by reason of reaching his
mandatory retirement age. The amount of the retirement allowance is determined
by a formula multiplying (1) the monthly salary at the time of retirement, by
(2) the number of years served, by (3) a factor which varies depending upon the
office held by the eligible individual. Each of Messrs. Takeuchi and Shinomiya
is eligible for payments under this Plan upon his retirement.
(d) Compensation of Directors.
Each director who is not also an officer receives a fee of $1,250 for each
quarter in a fiscal year during which he serves in such position. Accordingly,
Mr. Stillwell and Mr. Burger each received $5,000 for the 1995 fiscal year.
Martin E. Tash (the Registrant's President and Chairman of the Board)
received $125,000 in cash for special services rendered to the Registrant as a
director during the fiscal year ended March 31, 1995. This amount is included
in the Summary Compensation Table in Item 11(a) above.
HLM Capital Resources, Inc., a closely-held corporation controlled by
Harland L. Mischler (the Registrant's Executive Vice President and Chief
Financial Officer) received $70,000 in cash for providing to the Registrant
special services rendered by Mr. Mischler as a director during the fiscal year
ended March 31, 1995.
All directors (and Messrs. Tash, Mischler and Bressler in their capacity
as officers as well) are eligible to receive options under the 1988 Stock
Option Plan. See table in Item 10(b) as to options held by Mr. Tash as of
March 31, 1995. As of that date, Mr. Mischler held options for 50,000 shares,
Mr. Stillwell held options for 7,500 shares, and Mr. Burger held options for
7,500 shares.
18
Bernard Bressler, a practicing attorney, receives compensation based on
his usual hourly rate for attendance at Board meetings.
(e) Indemnification.
The Registrant's By-laws provide that it shall, to the fullest extent
permitted by the Nevada General Corporation Law, indemnify any person against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that any such person is or was a director, officer, employee or agent of
the Registrant. Accordingly, all current officers and directors of the
Registrant are entitled to indemnification by the Registrant under this
provision. In addition, Masakazu (Mark) Takeuchi, who served as an officer and
director of the Registrant during 1990, and James P. Owens, who served as an
officer of the Registrant from 1989 until April 1992, each is entitled to
indemnification under such provision based on his activities in such capacity.
Mr. Takeuchi is currently President of Gradco (Japan) Ltd. and Mr. Owens is
Vice President, Finance and Administration, of Gradco (USA) Inc.
(f) Compensation Committee Interlocks and Insider Participation.
The Registrant's Board of Directors has no compensation committee (or
other Board committee performing equivalent functions); compensation policies
applicable to executive officers are determined by the Board. During the
fiscal year ended March 31, 1995, the officers of the Registrant participating
in the Board's deliberations concerning executive compensation were Martin E.
Tash, Harland L. Mischler and Bernard Bressler (who are members of the Board).
During the fiscal year ended March 31, 1995, Martin E. Tash (an executive
officer of the Registrant) served as a member of the Board of Directors of
Plenum Publishing Corporation ("Plenum"). Plenum has no compensation committee
(or other Board committee performing equivalent functions); compensation
policies applicable to executive officers are determined by its Board. Mr.
Tash is an executive officer of Plenum and is the only such executive officer
who also served on the Registrant's Board. Bernard Bressler (Secretary and a
director of the Registrant) is an officer and director of Plenum, but he is not
an executive officer of either entity.
During the period since April 1, 1994 (the beginning of the Registrant's
last fiscal year), there were no transactions between the Registrant and Plenum
of the type required to be disclosed under Item 13, Certain Relationships and
Related Transactions.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) The following table sets forth information regarding persons known to
the Registrant to be the beneficial owners of more than 5% of the Registrant's
voting securities as of June 16, 1995 based on 7,798,909 shares of Common
Stock, no par value, outstanding as of such date.
Amount and Nature
Name and Address of of Beneficial Percentage
Title of Class Beneficial Owner Ownership of Class
- -------------- ------------------- ----------------- ----------
Common Stock, Plenum-Tash Group 1,213,672(1) 15.5%
no par value 233 Spring Street
New York, NY 10013
19
Dimensional Fund 563,549(2) 7.2%
Advisors, Inc.
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Ryback Management 575,700(3) 7.4%
Corporation
7711 Carondelet Avenue
Box 16900
St. Louis, MO 63105
_______________
(1) As set forth in their joint statement on Schedule 13D dated December 1,
1989, and amendments thereto through January 3, 1991, Plenum Publishing
Corporation, Martin E. Tash and his wife Arlene Tash constitute a "group" as
defined in Rule 13d-5(b)(1) under the Securities and Exchange Act of 1934,
since Plenum, on the one hand, and Mr. and Mrs. Tash, on the other hand, have
agreed to act together for the purpose of voting the securities of the
Registrant held by them, and in general to act together for the purpose of
acquiring and disposing of such securities (although it is understood that, at
any given time, a purchase or sale may be effected by one such party without
the effectuation of a purchase or sale by the other party). Pursuant to said
Rule, the Group is therefore deemed the beneficial owner of the shares held by
each of its members.
The Group beneficially holds 1,213,672 shares of Common Stock of the Registrant
(including for this purpose currently exercisable options held by Mr. Tash to
purchase 50,000 shares). Plenum Publishing Corporation has sole voting and
dispositive power as to 913,000 shares owned solely by it, representing 11.7%
of the outstanding stock, and Martin E. Tash has sole voting and dispositive
power as to 80,672 shares owned solely by him which, together with his
currently exercisable options, represent 1.7% of the outstanding stock. Mr.
Tash and his wife, Arlene S. Tash, have shared voting and dispositive power as
to 170,000 shares owned jointly by them, representing 2.2% of the outstanding
stock. The shares which may be acquired upon exercise of the options held by
Mr. Tash have been deemed outstanding for the purpose of computing his
individual percentage ownership of outstanding shares and the percentage owned
by the Group as set forth in the table, but not for the purpose of computing
the percentage owned by any other party. Plenum has disclaimed beneficial
ownership of the shares owned by Mr. and Mrs. Tash, they have disclaimed
beneficial ownership of the shares owned by Plenum, and Mrs. Tash has
disclaimed beneficial ownership of the shares owned solely by Mr. Tash. The
Group may be deemed to have obtained control of Gradco in October 1990 when its
nominees were elected as a majority of Gradco's Board of Directors. The Group
may be deemed to continue to have control due to the fact that the entire Board
now consists of five persons designated as nominees at the request of the
Group.
(2) As set forth in Amendment No. 3 to Statement on Schedule 13G, dated January
30, 1995, Dimensional Fund Advisors Inc. ("Dimensional"), a registered
investment advisor, is deemed to have beneficial ownership of 563,549 shares as
of December 31, 1994, all of which shares are held in portfolios of DFA
Investment Dimensions Group Inc., a registered open-end investment company, or
in series of the DFA Investment Trust Company, a Delaware business trust, or
the DFA Group Trust and DFA Participation Group Trust, investment vehicles for
qualified employee benefit plans, all of which Dimensional Fund Advisors Inc.
serves as investment manager. Dimensional disclaims beneficial ownership of
all such shares.
20
(3) As set forth in Statement on Schedule 13G, dated January 25, 1995, Ryback
Management Corporation ("Ryback"), a registered investment advisor, has sole
voting and dispositive power as to 575,700 shares as of December 31, 1994.
470,000 of such shares are held by Lindner Bulwark Fund, a registered
investment company, and 105,700 are managed by Ryback.
(b) The following table sets forth information regarding the voting
securities of the Registrant beneficially owned by each director of the
Registrant, each of the executive officers named in the Summary Compensation
Table in Item 11(a), and all officers and directors as a group (7 persons), as
of June 16, 1995.
Amount and Nature
Name and Address of of Beneficial Percentage
Title of Class Beneficial Owner Ownership of Class
- -------------- ------------------- ----------------- ----------
Common Stock, Martin E. Tash 1,213,672 (2) 15.5%
no par value 233 Spring Street
New York, NY 10013
Harland L. Mischler 131,932 (3) 1.7%
7900 Glades Road
Boca Raton, FL 33434
Bernard Bressler 15,000 (4) *
90 Broad Street
New York, NY 10004
Robert J. Stillwell 7,500 (5) *
1009 N. Bethlehem Pike
Springhouse, PA 19477
Thomas J. Burger 5,000 (5) *
1555 West Walnut Lane
Irving, TX 75038
Masakazu (Mark) Takeuchi 18,000 (6) *
Shibuya-ku, Tokyo 150 Japan
Akira (Tony) Shinomiya 6,000 (7) *
Shibuya-ku, Tokyo 150 Japan
All Executive Officers 1,397,104 (8) 17.6%
and Directors as a Group
(comprising the 7
persons shown above)
* Less than 1%
_______________
(1) In each instance where a named individual is listed as the holder of a
currently exercisable option, the shares which may be acquired upon exercise
thereof have been deemed outstanding for the purpose of computing the
percentage of outstanding shares owned by such person, but not for the purpose
of computing the percentage owned by any other person, except the group
referred to in note (8).
21
(2) Mr. Tash, his wife Arlene S. Tash, and Plenum Publishing Corporation, are
members of the Plenum-Tash Group. The shares shown above include all shares
beneficially owned by the Group, including currently exercisable options to
purchase 50,000 shares of Gradco stock held by Mr. Tash. See note (1) to the
table in Item 12(a) for a breakdown of such ownership among the Group's
members. Mr. Tash disclaims beneficial ownership of the 913,000 shares owned
by Plenum.
(3) Includes 51,932 shares owned directly by HLM Capital Resources, Inc., a
private investment and holding corporation, of which Mr. Mischler is President,
Chairman and major shareholder, and 30,000 shares owned directly by Mr.
Mischler. Also includes currently exercisable options granted to Mr. Mischler
to purchase 50,000 shares of the Registrant's stock.
(4) Includes 12,000 shares owned directly by Mr. Bressler and 3,000 shares held
for Mr. Bressler in an individual retirement account.
(5) Represents shares which may be acquired upon the exercise of currently
exercisable options.
(6) See note (1) to table in Item 10(a). The number of shares shown above
represents those which are subject to currently exercisable options held by Mr.
Takeuchi.
(7) See note (1) to table in Item 10(a). The number of shares shown above
represents those which are subject to currently exercisable options held by Mr.
Shinomiya.
(8) Number of shares and percentage owned includes 136,500 shares which may be
acquired through exercise of currently exercisable options held by certain of
such persons individually named. Number of outstanding shares for purpose of
computation of percentage of ownership by the group includes such shares.
Item 13. Certain Relationships and Related Transactions
(a) Certain Business Relationships.
Bernard Bressler, Secretary, Treasurer and a director of the Registrant,
is a member of the law firm of Bressler, Amery & Ross, counsel to the
Registrant. During the 1995 fiscal year, the Registrant paid legal fees of
$75,700 to such firm.
(b) Indebtedness of Management.
Messrs. Takeuchi and Shinomiya are indebted to the Registrant in the
respective approximate amounts of $243,000 and $170,000 (translated from yen at
fiscal year-end exchange rate) under non-interest bearing promissory notes
delivered by them in connection with the purchase of GJ stock from the
Registrant in March 1991, as previously reported in the 1991 10-K Report.
These notes will be cancelled in September 1995, in accordance with their
terms, since an initial public offering by GJ will not have occurred as of that
date. The cancellation will have no effect on the Registrant's earnings, since
the gain on the sale of the stock, to the extent represented by the notes, was
deferred pending their payment.
22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) See the index to financial statements and financial statement
schedules. See the list of exhibits in paragraph (c) below.
(b) 8-K Reports - None.
(c) Exhibits:
2 Agreement and Plan of Merger dated July 25, 1991 regarding
reincorporation of Gradco in Nevada, incorporated by reference
from definitive Proxy Statement dated September 18, 1991,
Exhibit C.
3.1 Articles of Incorporation of Gradco as reincorporated in Nevada,
incorporated by reference from definitive Proxy Statement dated
September 18, 1991, Exhibit D.
3.2 By-laws of Gradco as reincorporated in Nevada, incorporated by
reference from Form 10-K for the fiscal year ended March 31, 1992,
Exhibit 3.2.
10.1 Agreement between Gradco and Minolta Camera Co., Ltd. dated March
19, 1984, incorporated by reference from Form 10-K for the fiscal
year ended April 7, 1984, Exhibit 10.16.
10.2 Amended and Restated License Agreement between Gradco (Japan) Ltd.
and Minolta Camera Co., Ltd. dated July 1, 1991 (Japanese original
and English Translation), incorporated by reference from Form 10-K
for the fiscal year ended March 31, 1992, Exhibit 10.2.
10.3 General Agreement between Gradco and Ricoh Company, Ltd. dated
July 1, 1984, incorporated by reference from Form 10-K for the
fiscal year ended March 31, 1985, Exhibit 10.19.
10.4 Amended and Restated License Agreement between Gradco (Japan) Ltd.
and Ricoh Company, Ltd. dated April 1, 1991 (Japanese original and
English Translation), incorporated by reference from Form 10-K for
the fiscal year ended March 31, 1992, Exhibit 10.4.
10.5 License Agreement between Xerox Corporation and Gradco dated March
27, 1986, incorporated by reference from Form 10-K for the fiscal
year ended March 31, 1986, Exhibit 10.35.
10.6 Lease dated February 26, 1985 as thereafter supplemented and
amended between Ziyad (succeeded by Gradco Systems, Inc.) and W.P.
Realty Co., incorporated by reference from Ziyad's Form 10-K for
the fiscal year ended February 28, 1986, Exhibit 10.2.
10.7 Agreement between Gradco Systems, Inc., and Canon, Inc., dated as
of July 1, 1988, incorporated by reference from Form 8-K for July
1, 1988, Exhibit 10.62.
10.8 Agreement between Gradco/Dendoki Inc. and Canon Inc. dated
February 25, 1983, incorporated by reference from Form 10-K for
the fiscal year ended March 31, 1986, Exhibit 19.0.
23
10.9 Agreement between Gradco/Dendoki Inc. and Canon Inc. dated
February 25, 1983, incorporated by reference from Form 10-K for
the fiscal year ended March 31, 1986, Exhibit 19.3.
10.10 Agreement among Gradco, Gradco (Japan) Ltd. and Canon, Inc. dated
April 1, 1991, incorporated by reference from Form 10-K for the
fiscal year ended March 31, 1992, Exhibit 10.12.
10.11 Gradco 1982 Incentive Stock Option Plan, as amended, incorporated
by reference from its Registration Statement on Form S-8 filed
December 22, 1989, Exhibit 4.4, and amendment thereto dated July
24, 1991, incorporated by reference from Report on Form 10-Q for
quarter ended June 30, 1991, Exhibit 19.1.
10.12 Gradco 1988 Stock Option Plan, incorporated by reference from
Form 8-K for July 1, 1988, Exhibit 19.3, and amendment thereto
dated July 24, 1991, incorporated by reference from Report on
Form 10-Q for quarter ended June 30, 1991, Exhibit 19.2.
10.13 (i) Exclusive License Agreement among Gradco Systems, Inc., John
Sudarma and George Howell, III dated February 6, 1990,
incorporated by reference from Form 10-K for the fiscal year ended
March 31, 1990, Exhibit 10.72.
(ii) Letter Agreement dated October 19, 1992 among Gradco (USA)
Inc., John Sudarma and George Howell, filed herewith.
10.14 Amended Umbrella Agreement dated as of December 5, 1990 among
Gradco, Gradco (Japan) Ltd. and Gradco (USA) Inc., incorporated
by reference from Form 8-K for December 5, 1990, Exhibit 28.
10.15 Agreement between Gradco and Gradco (Japan) Ltd. dated March 1,
1991, incorporated by reference from Form 8-K for March 1, 1991,
Exhibit 28.
10.16 Letter Agreement dated March 29, 1991 between Gradco Systems, Inc.
and Gradco (Japan) Ltd., incorporated by reference from Form 10-K
for the fiscal year ended March 31, 1991, Exhibit 10.31.
10.17 Agreement for Purchase and Sale of Stock and Promissory Note dated
March 25, 1991 between Gradco and Masakazu (Mark) Takeuchi,
incorporated by reference from Form 10-K for the fiscal year ended
March 31, 1991, Exhibit 10.32.
10.18 Agreement for Purchase and Sale of Stock and Promissory Note dated
March 25, 1991 between Gradco and Akira (Tony) Shinomiya,
incorporated by reference from Form 10-K for the fiscal year ended
March 31, 1991, Exhibit 10.33.
10.19 Lease Agreement between Venture Engineering, Inc. and Aetna Life
Insurance Company, Inc. (formerly Trammell Crow Company) dated
October 1, 1988 and subsequent amendments dated July 1, 1989,
August 1, 1989, February 1, 1990 and March 1, 1991, incorporated
herein by reference from Form 10-K for fiscal year ended March 31,
1991, Exhibit 19.3.
24
10.20 Basic Agreement between Gradco (Japan) Ltd. and Ikegami Tsushinki
Co. Ltd. dated January 1, 1992 (Japanese original and English
Translation), incorporated by reference from Form 10-K for fiscal
year ended March 31, 1992, Exhibit 10.23.
10.21 Agreement between Gradco (Japan) Ltd. and Lexmark International,
Inc. dated September 1, 1992, incorporated by reference from Form
10-K for the fiscal year ended March 31, 1993, Exhibit 10.22.
10.22 Regulations of Retirement Allowance for Board of Directors and
Auditors of Gradco (Japan) Ltd., adopted June 3, 1994 (English
translation) - filed herewith.
22 List of Significant Subsidiaries
(i) Gradco (Japan) Ltd. (Japan)
(ii) Venture Engineering, Inc. (Texas)
(iii) Gradco (USA) Inc. (California)
24 (ii) Consent of Price Waterhouse LLP - filed herewith.
27 Financial Data Schedule - filed herewith
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: June 29, 1995
GRADCO SYSTEMS, INC.
By: /s/ Martin E. Tash
------------------------------------
Martin E. Tash
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Chairman of the Board,
President and Chief
Executive Officer (Principal
/s/ Martin E. Tash Executive Officer) June 29, 1995
- ------------------------
Martin E. Tash
Executive Vice President,
Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ Harland L. Mischler and Director June 29, 1995
- ------------------------
Harland L. Mischler
Secretary, Treasurer and
/s/ Bernard Bressler Director June 29, 1995
- ------------------------
Bernard Bressler
/s/ Robert J. Stillwell Director June 29, 1995
- ------------------------
Robert J. Stillwell
/s/ Thomas J. Burger Director June 29, 1995
- ------------------------
Thomas J. Burger
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) AND (2) AND (d)
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SCHEDULES
YEAR ENDED MARCH 31, 1995
GRADCO SYSTEMS, INC.
LAS VEGAS, NEVADA
FORM 10-K--ITEM 14(a) (1) AND (2)
GRADCO SYSTEMS, INC.
INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Gradco Systems, Inc. and
subsidiary companies are included in Item 8:
Consolidated Balance Sheets--
March 31, 1995 and 1994..................................S-2
Consolidated Statements of Operations--Years Ended
March 31, 1995, 1994 and 1993............................S-3
Consolidated Statements of Shareholders' Equity--
Years Ended March 31, 1995, 1994 and 1993................S-4
Consolidated Statements of Cash Flows--Years Ended
March 31, 1995, 1994 and 1993............................S-5
Notes to Consolidated Financial Statements..................S-7 to S-17
inclusive
The following consolidated financial statement schedule of Gradco Systems, Inc.
and subsidiary companies is included in Item 14(d):
II--Valuation and Qualifying Accounts.......................S-18
All other schedules for which provision is made in the applicable regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Gradco Systems, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index to the financial statements (Item 14a) present fairly, in
all material respects, the financial position of Gradco Systems, Inc. and its
subsidiaries (the "Company") at March 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 7 to the consolidated financial statements, the Company is
a defendant in a legal matter in which the plaintiff is seeking unspecified
damages and other relief. On June 28, 1995 a jury found the Company to have
liability in the matter. A separate proceeding to determine the amount of
damages to be awarded will be required. The Company is presently unable to
determine the amount of such damages, if any, which are likely to be awarded,
but the amount of such damages, including punitive damages, could have a
material adverse effect on the Company's financial position and might threaten
the Company's existence as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
PRICE WATERHOUSE LLP
Costa Mesa, California
June 5, 1995, except for
Note 7, as to which the date
is June 28, 1995
S-1
GRADCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31,
-----------------------
1995 1994
---- ----
ASSETS
Current assets:
Cash $12,158 $ 5,613
Trading securities, at fair value 579 2,112
Accounts receivable, less allowance for
doubtful accounts of $39 and $174 27,450 13,445
Inventories, net of valuation allowances
of $71 and $42 1,375 2,579
Deferred income taxes 192 -
Other current assets 1,756 187
------- -------
Total current assets 43,510 23,936
------- -------
Furniture, fixtures and equipment, net 1,772 1,536
License repurchase, net of accumulated
amortization of $12,846 and $9,633 8,689 8,548
Excess of cost over acquired net assets, net
of accumlated amortization of $365 and $322 1,364 1,407
Other assets 9,048 6,369
------- -------
$64,383 $41,796
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $14,198 $ 3,979
Current installments of long-term debt 11 -
Accounts payable 10,491 8,673
Accrued expenses 1,168 854
Income taxes payable 915 186
Deferred income taxes - 36
------- -------
Total current liabilities 26,783 13,728
------- -------
Long-term debt, excluding current installments 35 -
Non-current liabilities 1,273 673
Deferred income taxes 4,166 3,063
Minority interest 15,129 13,195
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, no par value; authorized
7,500,000 shares, none issued
Common stock, no par value; authorized
30,000,000 shares, issued 7,783,909 44,546 44,546
Deficit (36,470) (37,922)
Currency translation adjustments 8,921 4,513
------- -------
Total shareholders' equity 16,997 11,137
------- -------
$64,383 $41,796
======= =======
See accompanying notes to consolidated financial statements.
S-2
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
For the years ended March 31,
------------------------------------
1995 1994 1993
---- ---- ----
Revenues:
Net sales $79,138 $50,257 $58,664
Development engineering services 923 356 585
Licenses and royalties 2,777 2,535 1,978
------- ------- -------
82,838 53,148 61,227
------- ------- -------
Costs and expenses:
Cost of sales 64,290 40,629 47,929
Research and development 2,164 1,793 1,652
Selling, general and administrative 12,651 10,418 10,771
------- ------- -------
79,105 52,840 60,352
------- ------- -------
Income from operations 3,733 308 875
Interest expense (93) (107) (230)
Interest income 148 139 249
Dividend income 4 47 -
Loss on trading securities (209) (99) -
------- ------- -------
Earnings before income taxes
and minority interest 3,583 288 894
Income tax expense 1,331 535 1,181
Minority interest 800 (241) 196
------- ------- -------
Net earnings (loss) $ 1,452 $ (6) $ (483)
======= ======= =======
Earnings (loss) per common share $ .19 $ - $ (.06)
======= ======= =======
See accompanying notes to consolidated financial statements.
S-3
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
For the Years Ended March 31, 1993, 1994 and 1995
Common Stock
-------------------- Translation
Shares Amount Deficit Adjustment
------ ------ ------- ----------
Balance at March 31, 1992 7,783,909 $44,546 $(37,433) $ 718
Translation adjustment - - - 1,846
Net loss - - (483) -
--------- ------- -------- ------
Balance at March 31, 1993 7,783,909 44,546 (37,916) 2,564
Translation adjustment - - - 1,949
Net loss - - (6) -
--------- ------- -------- ------
Balance at March 31, 1994 7,783,909 44,546 (37,922) 4,513
Translation adjustment - - - 4,408
Net earnings - - 1,452 -
--------- ------- -------- ------
Balance at March 31, 1995 7,783,909 $44,546 $(36,470) $8,921
========= ======= ======== ======
See accompanying notes to consolidated financial statements.
S-4
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the years ended March 31,
---------------------------------
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net earnings (loss) $ 1,452 $ (6) $ (483)
------- ------- -------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 988 1,097 1,339
Amortization 1,941 1,710 1,305
Deferred income taxes 330 (79) (325)
Unrealized holding (gain) loss on
trading securities (126) 134 -
Loss (gain) on sale of securities 335 (35) -
Provision for losses on accounts
receivable 18 (60) 103
(Gain) loss on sale of property
and equipment (6) 77 (3)
Purchases of trading securities (2,479) (6,004) -
Proceeds from sale of trading
securities 3,803 3,793 -
Minority interest 800 (241) 196
(Increase) decrease in accounts
receivable (11,896) 5,260 (2,169)
Decrease (increase) in inventory 1,373 117 (486)
(Increase) decrease in prepaid assets (1,516) 519 (374)
Decrease (increase) in other assets 19 (126) 883
Increase (decrease) in accounts payable 330 565 (4,004)
Increase (decrease) in accrued expenses 280 (603) (131)
Increase (decrease) in income taxes
payable 727 37 (2,100)
Increase (decrease) in other liabilities 600 (374) (527)
------- ------- -------
Total adjustments (4,479) 5,787 (6,293)
------- ------- -------
Net cash (used in) provided by
operations (3,027) 5,781 (6,776)
------- ------- -------
Cash flows from investing activities:
Acquisition of property and equipment (1,023) (730) (382)
Proceeds from sale of property and
equipment 29 83 7
Purchase of partnership interest - - (746)
------- ------- -------
Net cash used in investing activities (994) (647) (1,121)
------- ------- -------
S-5
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
For the years ended March 31,
---------------------------------
1995 1994 1993
---- ---- ----
Cash flows from financing activities:
Net borrowings (repayments) on notes
less than three months 11,262 (6,188) 4,556
Proceeds from issuance of notes in
excess of three months 1,553 3,000 3,719
Repayment of notes in excess of
three months (3,007) (2,197) (3,022)
Principal payments for capital lease
obligations - (39) (34)
------- ------- -------
Net cash provided by (used in)
financing activities 9,808 (5,424) 5,219
------- ------- -------
Effect of exchange rate changes on cash 758 268 135
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 6,545 (22) (2,543)
Cash and cash equivalents at beginning
of year 5,613 5,635 8,178
------- ------- -------
Cash and cash equivalents at end of year $12,158 $ 5,613 $ 5,635
======= ======= =======
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the period for:
Interest $ 93 $ 111 $ 241
Income taxes 272 576 3,472
See accompanying notes to consolidated financial statements.
S-6
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Gradco Systems, Inc. (the "Company") is a holding company which, through
its subsidiaries, designs, develops, contracts to produce and markets, world-
wide, intelligent paper handling devices for the office automation industry.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its majority and wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. The Company's
current ownership in Gradco (Japan) Ltd. (GJ), its principal operating
subsidiary, is 58.6%.
Cash Equivalents
Cash includes all highly liquid debt instruments purchased with a maturity
of three months or less.
Trading Securities
Investments in marketable securities have been classified as trading
securities since they are bought and held principally for the purpose of
selling them in the near term. The Company uses specific identification in
determining cost in computing realized gain or loss on sale of securities. For
the fiscal year ended March 31, 1995, the $209,000 loss on trading securities
consisted of a $126,000 unrealized holding gain and a $335,000 realized loss.
For the fiscal year ended March 31, 1994, the $99,000 loss on trading
securities consisted of a $134,000 unrealized holding loss and a $35,000
realized gain.
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations of
credit risk consist primarily of trade receivables. International copier
manufacturers comprise a significant portion of the Company's customer base.
All such trade receivables were current at March 31, 1995.
Inventories
Inventories consist primarily of materials and finished assemblies which
are held to satisfy spare parts requirements of the Company's customers. The
Company has certain contractual commitments to supply spare parts for up to six
years after the end of a production cycle. Inventories are stated at the lower
of cost (first-in, first-out and weighted average) or market (net realizable
value).
Revenue Recognition
Revenues from product sales ("net sales") are recorded as units are ship-
ped. Revenues from development engineering services and research and develop-
ment contracts are recognized as earned, and licenses and royalties are recog-
nized when all obligations of the appropriate agreements have been fulfilled.
S-7
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Depreciation and Amortization
Furniture, fixtures and equipment are carried at cost and depreciated on a
straight-line basis over their estimated useful lives. Tooling is amortized
over its estimated useful life, generally four years. Leasehold improvements
are amortized over the lesser of their estimated useful lives or the term of
the lease. The license repurchase (Note 3) is carried at cost and is being
amortized over 15 years, the estimated life of the patents associated with the
license. The excess of cost over the net assets of acquired companies is
amortized over 40 years.
Research and Development Expenses
Research and development expenses incurred under development engineering
service contracts, research and development contracts on behalf of OEM
customers and internal research and development are reflected in research and
development expense.
Research and development expenses incurred under development engineering
service contracts in the fiscal years ended March 31, 1995, 1994 and 1993,
respectively, were $676,000, $260,000 and $374,000. Research and development
expenses on behalf of OEM customers and internal research and development
expenses in the fiscal years ended March 31, 1995, 1994 and 1993, respectively,
were $1,488,000, $1,533,000 and $1,278,000.
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates and the resulting adjustments are
accumulated in shareholders' equity. Income and expenses are translated at
average exchange rates for the year. Foreign currency transaction gains and
losses are included in net income, except for those relating to intercompany
transactions of a long-term investment nature which are accumulated in
shareholders' equity.
Income Taxes
During fiscal 1994, the Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109 is an
asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactment of changes in the tax law or rates.
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 7,784,000 in all years presented. The effect on net earnings
per common share assuming full dilution is either anti-dilutive or results in
less than 3% dilution.
S-8
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2-- SHORT TERM BORROWING ARRANGEMENTS
GJ has a 200 million yen (approximately $2.31 million) line of credit and
its U.S. subsidiary has a $2 million line of credit with Sumitomo Bank,
Limited. Total borrowings under these lines of $1,500,000 at March 31, 1995
were repaid in April 1995.
Notes payable at March 31, 1995 also include $12,698,000 due to a trade
creditor in ninety days.
Information relative to short-term borrowings is as follows (in
thousands):
Fiscal Year
------------------------------
1995 1994 1993
---- ---- ----
Maximum amount outstanding $1,500 $2,197 $3,647
Average balance outstanding $1,500 $1,581 $2,697
Weighted average interest rate
during the period 5.6% 4.3% 5.2%
NOTE 3--LICENSE REPURCHASE
In 1986, the Company entered into an agreement with C. Itoh Electronics,
Inc. (CIE) to terminate the exclusive Japanese license granted to CIE in 1983.
The Company paid the equivalent of 1.864 billion yen ($11,500,000 in 1986-87),
and is amortizing these costs over a period of 15 years. Amortization of the
license repurchase amounted to $1,436,000, $1,212,000 and $1,082,000 in the
years ended March 31, 1995, 1994 and 1993, respectively.
NOTE 4--DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS
March 31,
-----------------
1995 1994
---- ----
(In Thousands)
Inventories are summarized as follows:
Raw materials $ 833 $ 979
Work-in-process 210 584
Finished goods 332 1,016
------ ------
$1,375 $2,579
====== ======
S-9
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4--DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS (Continued)
March 31,
-----------------
1995 1994
---- ----
(In Thousands)
Furniture, fixtures and equipment, at cost,
are summarized as follows:
Office, shop and automotive equipment $ 904 $ 690
Computer equipment 313 259
Leasehold improvements 193 172
Tooling 4,546 4,032
Equipment under capital lease - 154
------ ------
5,956 5,307
Less:
Accumulated depreciation
and amortization 4,184 3,771
------ ------
$1,772 $1,536
====== ======
Other assets are summarized as follows:
Patents $5,325 $3,842
Investments 1,124 961
Cash surrender value of life insurance 862 505
Notes receivable 490 490
Deposits 627 438
Intangible pension asset 450 -
Other 170 133
------ ------
$9,048 $6,369
====== ======
Other non-current liabilities are
summarized as follows:
Accrued lease payments $ - $ 84
Accumulated benefit obligation 684 -
Deferred gain on stock sale 489 489
Other 100 100
------ ------
$1,273 $ 673
====== ======
S-10
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5--INCOME TAXES
Income tax expense consists of the following (in thousands):
Fiscal Year
------------------------------
1995 1994 1993
---- ---- ----
Current
Foreign $ 929 $ 584 $1,497
Federal 23 - -
State 49 29 9
Deferred
Foreign 330 (78) (325)
------ ------ ------
Total $1,331 $ 535 $1,181
====== ====== ======
The provisions for all years primarily reflect GJ income taxed in Japan.
Reconciliations of the applicable statutory U.S. federal income tax rate
of 35% in fiscal 1995 and 1994 and 34% in fiscal 1993 to the effective tax
rates on earnings (losses) are as follows:
Fiscal Year
------------------------------
1995 1994 1993
---- ---- ----
Federal statutory tax rate 35.0% 35.0% 34.0%
Increase (decrease) in tax rate
resulting from:
State income taxes, less
federal benefit 1.3 10.1 1.0
Foreign tax expense 35.1 175.7 131.1
Net operating loss (34.3) (35.0) (34.0)
------ ------ ------
Effective income tax rate 37.1% 185.8% 132.1%
====== ====== ======
Foreign tax expense in 1994 and 1993 was 175.7% and 131.1%, respectively,
of consolidated pre-tax income primarily due to the generation of pre-tax
losses in the United States which could not be utilized to reduce foreign tax
expense.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows (in
thousands):
S-11
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5--INCOME TAXES (Continued)
March 31,
-----------------
1995 1994
---- ----
Deferred tax liabilities
License repurchase $2,850 $2,802
Intercompany loan revaluation 1,095 -
Life insurance premiums 198 109
Tax benefits for increase in imports 144 152
Other 138 36
------ ------
4,425 3,099
------ ------
Deferred tax assets
Retirement benefits 362 -
Other 89 -
Tax loss carryforwards 10,850 10,500
Valuation allowance (10,850) (10,500)
------ ------
451 -
------ ------
Net deferred tax liabilities $3,974 $3,099
====== ======
At March 31, 1995, the Company had federal net operating loss
carryforwards for tax reporting purposes of $27,000,000 which will expire in
2000 through 2009 if not utilized. These net operating loss carryforwards
include approximately $1,200,000 which resulted from the acquisition of
subsidiaries acquired in fiscal 1988. At March 31, 1995, the Company had
federal capital loss carryforwards for tax reporting purposes of $8,000,000
which will expire in 1997 if not utilized. At March 31, 1995, the Company had
unused investment tax and research and development credits for income tax
purposes of $321,000 which, if not utilized, will expire in 1996 through 2001.
If certain substantial changes in the Company's ownership should occur, there
would be an annual limitation on the amount of net operating loss, investment
tax, and research and development credit carryforwards which can be utilized.
The Company does not provide for U.S. income taxes on undistributed
foreign earnings considered permanently invested in its Japanese operations.
At March 31, 1995, the Company's share of such undistributed foreign earnings
totaled $7,500,000. Foreign withholding taxes of approximately $750,000 would
be due upon remittance of these earnings.
S-12
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6--EMPLOYEE BENEFITS
The Company's 1988 Stock Option Plan has 350,000 shares authorized for
issuance. Such options are exercisable in increments over periods at a price
equal to the fair market value at the date of grant in the case of Incentive
Stock Options and at or below fair market value in the case of Non-qualified
Stock Options. The Company's 1982 Incentive Stock Option Plan, as amended, had
550,000 shares authorized for issuance. The 1982 Plan terminated on December
31, 1991 in accordance with its terms. Thus, no additional options may be
granted thereunder, but the termination does not affect the validity of
outstanding options under the 1982 Plan (19,410 at March 31, 1995). At March
31, 1995 there were 278,910 options exercisable. No options may be exercised
later than 10 years from the date of grant.
Information with respect to these plans is as follows:
Shares Option Price
------ ------------------
Outstanding March 31, 1992 293,560 $3.00 - $15.00
Canceled (7,900) 3.25 - 9.25
-------
Outstanding March 31, 1993 285,660 3.00 - 15.00
Granted 7,500 2.375
Canceled (9,050) 6.75 - 15.00
-------
Outstanding March 31, 1994 284,110 2.375 - 9.25
Granted 55,000 3.38
Canceled (200) 9.25
-------
Outstanding March 31, 1995 338,910 $2.375 - $9.25
=======
The Company's domestic subsidiaries each have a 401(k) employee benefits
plan. All employees are eligible for the plan upon the completion of six
months of service with the Company. As part of the plan, the Company may match
employee contributions contingent upon the Company's annual earnings
performance. No Company contributions were made during fiscal 1993 through
1995.
During fiscal 1995, the Company's Japanese subsidiary adopted a 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. Currently the plan is unfunded. At March 31, 1995, the Company
has recorded an intangible pension asset of $450,000, an accumulated benefit
obligation of $684,000 and a current liability of $462,000 representing
expected fiscal 1996 payments. The amount charged to expense in fiscal 1995
was $638,000.
S-13
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under non-
cancelable leases. Under the lease agreements for its facilities, the Company
is required to pay for insurance, taxes, utilities and building maintenance and
is subject to certain consumer price index adjustments. Future minimum lease
payments at March 31, 1995, under noncancelable facility and equipment leases
with remaining lease terms in excess of one year are as follows:
1996 $1,031,000
1997 486,000
1998 360,000
1999 215,000
2000 23,000
Thereafter -
----------
$2,115,000
==========
Rent expense, net of sub-lease income, was approximately $799,000,
$858,000 and $1,202,000 for fiscal years 1995, 1994 and 1993, respectively.
The Company's Japanese subsidiary discounts certain of its receivables in
the normal course of business. At March 31, 1995, $3,874,000 was discounted
with recourse.
In the following litigations, material claims have been asserted against
the Company:
(a) GRADCO V. KEITH B. STEWART ET AL. This case commenced in August 1990
as a derivative action against directors of the Company. In September 1991, it
was converted into a direct action by the Company against Keith Stewart and
Horst Sieben and a number of other former officers of the Company. In that
action the Company sought a determination that the defendants breached their
fiduciary duty in granting to themselves warrants to purchase stock in Gradco
(Japan) Ltd. The Company also sought damages via a cross complaint which it
filed against Mr. Stewart and others alleging a conspiracy to defraud the
Company.
Mr. Stewart and other former employees instituted actions against the
Company, certain of its subsidiaries, Martin E. Tash and Plenum Publishing
Corporation claiming various damages including payments under their "golden
parachute" agreements.
In April 1995, all remaining claims and cross-claims referred to above,
except those with respect to Mr. Sieben, were settled by mutual consent, with
no exchange of monies. In June 1995, the claims and cross-claims with respect
to Mr. Sieben were settled, with the only consideration originating with the
Company being the issuance to him of 15,000 shares of restricted common stock.
(b) HAMMA V. GRADCO SYSTEMS INC. ET AL., DUBOIS V. GRADCO SYSTEMS INC. ET
AL. The Company and Mr. Stewart have been sued 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 have been consolidated for certain pretrial
purposes, primarily allege misrepresentation and fraudulent concealment by
S-14
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7--COMMITMENTS AND CONTINGENCIES (Continued)
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 which agreements
required the payment by Gradco of royalties to each of the plaintiffs based
upon sales of products subject to patents in which such persons were involved.
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. By reason of the
dismissal of the claims against GJ, this Application likewise has been
dismissed as respects GJ. In November 1992, the Company and the plaintiffs
agreed in principle to a Consent Order instead of proceeding with a hearing on
the Application. If during the pendency of the lawsuits the Company desires to
sell, transfer or take any other action which would affect its ownership of
stock in GJ, it has agreed to give 30 days prior notice to the plaintiffs, who
will then be permitted, if they so request, to renew the Application within the
notice period. Should plaintiffs do so, the Company has agreed to forbear from
proceeding with any such transaction for a limited period. The Company would
vigorously oppose a renewed Application. Management believes that the Consent
Order is in the Company's best interests because it precludes any attachment of
the Company's assets until such time as a proposed transaction which would
affect its ownership of stock in GJ may arise, and it avoids the legal expenses
which would have resulted from a current hearing on the Application.
The trial in the Hamma case on the liability issue began on June 13, 1995,
and was completed on June 27, 1995. On the following day the jury rendered a
verdict finding Gradco and Mr. Stewart liable on substantially all counts in
the complaint and also found that the actions of the defendants warranted the
imposition of punitive damages. No amount of damages on any count, including
the punitive damages, was determined by the jury but will be determined at a
later time in a separate proceeding. The Company will seek to overturn the
verdict of the jury through motions made before the Trial Court and, to the
extent it is unsuccessful, will seek permission from the Trial Court to appeal
the verdict. An appeal is not automatically available prior to the
determination of damages. The Company is presently unable to determine the
amount of such damages which is likely to be awarded, but the amount of
damages, including punitive damages, 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. and Gradco (USA) 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 is also a case which will be tried before a jury and,
accordingly, 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.
S-15
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8--CUSTOMER INFORMATION AND GEOGRAPHIC DATA
The Company had sales to major customers (in excess of 10% of revenues) in
each fiscal year as follows:
Fiscal Year
------------------------------
1995 1994 1993
---- ---- ----
Mita 19% 17% 12%
Xerox 16% N/A N/A
Sharp 11% 15% N/A
Ricoh N/A 23% 35%
Lanier N/A N/A 12%
Geographic data follows (in thousands):
Domestic Europe Asia Consolidated
-------- ------ ---- ------------
March 31, 1995
- --------------
Net sales $34,967 $ - $44,171 $79,138
Net earnings 377 2 1,073 1,452
Assets 3,181 82 61,120 64,383
March 31, 1994
- --------------
Net sales $10,372 $ - $39,885 $50,257
Net earnings (loss) (1,679) (14) 1,687 (6)
Assets 3,151 38 38,607 41,796
March 31, 1993
- --------------
Net sales $12,351 $ - $46,313 $58,664
Net earnings (loss) (2,700) 2 2,215 (483)
Assets 5,319 50 37,619 42,988
For the years ended March 31, 1995, 1994 and 1993 export sales were
$8,426,000, $645,000 and $586,000, respectively, consisting principally of
sales to Europe and Canada.
S-16
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9--INTERIM FINANCIAL RESULTS (Unaudited)
Quarter
-------------------------------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
(In thousands of dollars,except per share amounts)
1995
- ----
Net sales $14,620 $19,742 $21,063 $23,713 $79,138
Gross margin 2,704 3,743 4,112 4,289 14,848
Earnings before income taxes 305 914 1,283 1,081 3,583
Net earnings 48 390 466 548 1,452
Net earnings per common share $ .01 $ .05 $ .06 $ .07 $ .19
1994
- ----
Net sales $12,734 $13,773 $11,234 $12,516 $50,257
Gross margin 2,627 2,658 2,043 2,300 9,628
Earnings (loss) before
income taxes 353 449 (406) (108) 288
Net earnings (loss) 122 36 (138) (26) (6)
Net earnings (loss) per
common share $ .02 $ - $ (.02) $ - $ -
S-17
SCHEDULE II
GRADCO SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the years ended March 31, 1993, 1994 and 1995
Additions
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
---------- ---------- ---------- -------
Year ended March 31, 1993:
- --------------------------
Allowance for doubtful
accounts $331,000 $103,000 $ 28,000 $406,000
Inventory valuation
allowance $402,000 $ 73,000 $222,000 $253,000
Year ended March 31, 1994:
- --------------------------
Allowance for doubtful
accounts $406,000 $(60,000) $172,000 $174,000
Inventory valuation
allowance $253,000 $105,000 $316,000 $ 42,000
Year ended March 31, 1995:
- --------------------------
Allowance for doubtful
accounts $174,000 $ 18,000 $153,000 $ 39,000
Inventory valuation
allowance $ 42,000 $ 84,000 $ 55,000 $ 71,000
S-18