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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, 1996
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 7, 1996) was $27,758,046.
The number of outstanding shares of each class of the Registrant's common stock
outstanding at June 7, 1996 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, 1996, 1995 and 1994 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, stackers 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, Fujitsu, 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. GJ has also entered into a contract for
production at a facility in Canada, at which manufacturing is expected to
commence by the end of calendar 1996.
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
2
paths. The sorters sold by GJ are primarily designed to provide a shorter,
straight-through or nearly straight-through, single paper path.
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.
3
In fiscal 1996, Xerox, Rank Xerox, Mita and Lanier accounted for 29%, 16%,
13% and 11%, respectively, of the Registrant's consolidated revenues. 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
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).
Based on Xerox's system for evaluation of vendors in view of business/
quality management, GJ is officially recognized by Xerox as one of its
certified suppliers.
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.
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
$2,528,000 during the fiscal year ended March 31, 1996, $2,725,000 during the
fiscal year ended March 31, 1995, and $2,402,000 during the fiscal year ended
March 31, 1994. 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 3 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. GJ has also entered into a contract for
production at a facility in Canada, at which manufacturing is expected to
commence by the end of calendar 1996.
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.
GUSA, and GJ's domestic branch office, have obtained quality systems
certification under ISO 9001 (an International Standard promulgated under the
European Economic Community Mandate).
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 and semiconductor processing equipment, 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 $32,000 in fiscal 1996, $52,000 in fiscal 1995, and $133,000
in fiscal 1994.
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.
6
Costs and Revenues of Development Engineering Services
In 1996, 1995 and 1994 the Registrant, on a consolidated basis, spent
approximately $3,641,000, $2,164,000 and $1,793,000, 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
$1,603,000, $676,000 and $260,000, in fiscal 1996, 1995 and 1994, respectively.
The Registrant, on a consolidated basis, also received revenues from customers
under development engineering service contracts of approximately $1,877,000,
$923,000 and $356,000, in fiscal 1996, 1995 and 1994, respectively.
Backlog
Registrant's order backlog at March 31, 1996 from consolidated operations
was estimated at approximately $39.3 million, and was estimated at
approximately $25.9 million at March 31, 1995. 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, 1996, Gradco and its subsidiaries employed 116 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 64% of the Registrant's consolidated revenues for the fiscal
year ended March 31, 1996 were attributed to domestic sales and approximately
36% were attributed to foreign 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 were attributed to
domestic sales and approximately 80% were attributed to foreign sales for the
fiscal year ended March 31, 1994. 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 1996, the Registrant
had a currency exchange gain of approximately $1,000,000 caused by the
strengthening of the dollar versus the yen during the year. 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.
7
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 1997.
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.
HAMMA V. GRADCO SYSTEMS, INC., ET AL; DUBOIS V. GRADCO SYSTEMS, INC. ET AL.
Gradco and its (now former) president, Keith Stewart, were 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, sought unspecified damages, and other relief. In a separate
but related action (which was 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, and other relief. For
each of these cases, the Court bifurcated the liability and damage 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. This Application was dismissed as respects GJ.
In November 1992, the Company and the plaintiffs agreed in principle to a
Consent Order instead of proceeding with a hearing on the Application. If
during the pendency of the lawsuits the Company desires to sell, transfer or
take any other action which would affect its ownership of stock in GJ, it has
agreed to give 30 days prior notice to the plaintiffs, who will then be
permitted, if they so request, to renew the Application within the 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
8
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.
In August 1995, the Company filed with the Trial Court a substituted
motion for judgment as a matter of law or, in the alternative, for a new trial,
on substantially all counts. Plaintiffs have responded to the motion and the
Company has replied. The motion is under consideration by the Court. If the
Company is unsuccessful on the motion, it may seek permission from the Trial
Court to appeal the verdict. An appeal is not automatically available prior to
the determination of damages.
In July 1995, the plaintiffs filed a new Application for a Prejudgment
Remedy ("July PJR Application") seeking to attach Gradco Systems' assets. The
July PJR Application sets forth various theories of damages including a theory
calling for treble damages under Connecticut law in the amount of $70,500,000.
The July PJR Application asserts that there is probable cause that a verdict in
an amount greater than $70,500,000 will be rendered in the damages part of the
case after trial on those issues. It is Gradco's belief that damages based on
applicable law would result in a significantly smaller damages award even if
the motion by Gradco for judgment as a matter of law is denied. The Court has
determined that it will rule on the July PJR Application only after ruling on
the August 1995 motion for judgment as a matter of law.
In November 1995, the Court ordered the plaintiffs to submit a memorandum
regarding the legal theories on which they based their damages claims and for
the defendants to respond. This issue is also under consideration by the
Court. If Gradco's view prevails, the magnitude of damages, even should the
August 1995 motion prove unavailing, will be reduced substantially from the
amount sought in the July PJR Application.
The Company is presently unable to determine the amount of such damages
which is likely to be awarded, but the amount of damages sought by plaintiffs,
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.
Counsel for DuBois moved on May 20, 1996 to vacate the order to bifurcate
the trial in his case. The Company will respond by seeking an extension for
its response to await the decision on the Hamma motion.
There are substantial differences between the Hamma and DuBois cases.
Although the DuBois case will also be tried before a jury so that there are
substantial elements of uncertainty, the Company continues to believe that the
DuBois case alone will not have a material adverse effect on its consolidated
financial position.
9
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.
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, 1994
to March 31, 1996.
Quarter Ended High Low
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
June 30, 1995..................$ 5.25 $ 1.75
September 30, 1995.............$ 3.25 $ 1.75
December 31, 1995..............$ 3.00 $ 1.75
March 31, 1996.................$ 4.125 $ 2.25
(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
7, 1996 is 436.
(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,
1996 1995 1994 1993 1992
(In thousands, except per share amounts)
Statement of operations data:
Operating revenues: $100,596 $82,838 $53,148 $61,227 $52,796
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Costs and expenses:
Cost of sales 76,657 64,290 40,629 47,929 39,503
Other operating expenses 16,625 14,815 12,211 12,423 12,728
Interest (income) expense, net (226) (55) (32) (19) 89
Investment (gains) losses (53) 205 52 - -
Gain on sale of subsidiary stock - - - - (46)
Litigation settlement - - - - (2,500)
-------- ------- ------- ------- -------
93,003 79,255 52,860 60,333 49,774
-------- ------- ------- ------- -------
Earnings before income taxes,
minority interest and
cumulative effect on prior years
of change in accounting policy 7,593 3,583 288 894 3,022
Income taxes 2,748 1,331 535 1,181 2,728
Minority interest 1,585 800 (241) 196 581
-------- ------- ------- ------- -------
Earnings (loss) before cumulative
effect on prior years of change
in accounting policy 3,260 1,452 (6) (483) (287)
Cumulative effect on prior years
of change in accounting policy - - - - (3,356)
-------- ------- ------- ------- -------
Net earnings (loss) $ 3,260 $ 1,452 $ (6) $ (483) $(3,643)
======== ======= ======= ======= =======
Earnings (loss) per common share:
Earnings (loss) before cumulative
effect on prior years of change
in accounting policy $ .42 $ .19 $ - $ (.06) $ (.04)
Cumulative effect on prior years
of change in accounting policy - - - - (.43)
-------- ------- ------- ------- -------
Net earnings (loss) $ .42 $ .19 $ - $ (.06) $ (.47)
======== ======= ======= ======= =======
Weighted average shares outstanding 7,796 7,784 7,784 7,784 7,784
Balance sheet data:
Working capital $18,979 $16,727 $10,208 $ 8,349 $ 6,935
Total assets 58,015 64,383 41,796 42,988 39,295
Long-term debt 25 35 - - 39
Shareholders' equity 16,201 16,997 11,137 9,194 7,831
11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Revenues
Revenues for the fiscal year ended March 31, 1996 increased by $17,758,000
(21.4%) from the prior year primarily due to an increase of $17,021,000 in net
sales (21.5%). Although unit sales in the copier market were flat compared to
the previous year, the average unit price was higher as customers primarily
purchased units with in-bin stapling. The yen was on average 3% stronger
against the dollar than during the previous year, but ended fiscal 1996
significantly lower. Development engineering services revenue increased
$954,000 due to increased revenues from new projects related to both copier and
printer products while royalties decreased by $217,000.
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.
Costs and Expenses
Cost of sales as a percentage of net sales was 79.7%, 81.2% and 80.8% in
fiscal 1996, 1995 and 1994, respectively. The improvement in the current
fiscal year is primarily attributable to a change in mix of units sold toward
higher margin products.
Research and development expenses ("R&D") in fiscal 1996 totaled
$3,641,000 (3.6% of revenues), compared to $2,164,000 (2.6% of revenues) in
fiscal 1995 and $1,793,000 (3.4% of revenues) in fiscal 1994. The increase in
fiscal 1996 R&D of $1,477,000 was due to an increase of $927,000 in costs
incurred under development engineering service contracts and an increase of
$550,000 in expenses on behalf of OEM customers and internal research and
development.
Selling, general and administrative expenses ("SG&A") increased by
$333,000 (2.6%) in fiscal 1996 from the prior year. The increase was moderated
by a currency exchange gain of approximately $1 million as the dollar
strengthened against the yen during the year. SG&A increased by $2,233,000
(21.4%) in fiscal 1995 from fiscal 1994 primarily 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.
Pre-tax Earnings, Taxes, and Minority Interest
As a result of the above factors, earnings before income taxes and
minority interest were $7,593,000, $3,583,000 and $288,000 in fiscal 1996, 1995
and 1994, respectively. Income taxes and minority interest increased in fiscal
1996 and 1995 due to the increases in pre-tax earnings. The tax provisions of
$2,748,000, $1,331,000 and $535,000 in fiscal 1996, 1995 and 1994,
respectively, primarily comprise foreign taxes on the earnings of the Company's
12
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
As previously reported, in June 1995, a jury found the Company to have
liability in the lawsuit by John C. Hamma, a former employee. The Company has
filed a motion to reverse the verdict. After a determination by the Court on
the Company's motion, a separate proceeding to determine the amount of damages
will be required, with respect to such portion of the verdict, if any, as
remains in effect. An award of damages of the magnitude sought by Mr. Hamma
could have a material adverse effect on the Company's financial position and
might threaten its existence as an ongoing enterprise. The Company believes
that as a matter of law the damages claimed by Mr. Hamma are excessive to a
substantial extent. For further information regarding this litigation, see
Note 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 $18,979,000 at March 31, 1996 from
$16,727,000 at March 31, 1995 primarily from funds generated by operations.
This increase is in spite of the 24% decrease in the value of the yen against
the dollar when compared to the previous year-end rate.
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.
At March 31, 1996, the Company had $19,523,000 in cash and minimal long-
term debt. The Company's Japanese subsidiary has a 350 million yen
(approximately $3.26 million) line of credit with a Japanese bank and has
established a $2 million line of credit for its U.S. subsidiary. There were no
borrowings under these lines at March 31, 1996. The Company believes that 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 1996.
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 55 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 64 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 68 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, P.C.
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 60 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 49 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 59 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 53 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 7, 1996 for services rendered in all capacities to the Registrant and its
subsidiaries during each of the fiscal years ended March 31, 1996, 1995 and
1994: (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,
1996 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 1996 125,000
Chairman of the Board, President 1995 125,000
and Chief Executive Officer 1994 125,000
Masakazu (Mark) Takeuchi 1996 288,752
President, 1995 295,800
Gradco (Japan) Ltd. 1994 261,055
Akira (Tony) Shinomiya 1996 254,580
Chief Financial Officer 1995 260,520
Gradco (Japan) Ltd. 1994 229,418
_______________
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 a 3%
increase from 1994 to 1995, and a marginal increase in compensation from 1995
to 1996.
(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 4,410 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, 1996 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 3/31/96). Therefore, such options were
not "in-the-money" at such date. The aggregate dollar value of the options
held by Mr. Tash at 3/31/96 (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 1996 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, 1996. 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, 1996.
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, 1996. 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, 1996, 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, 1996, 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,
Treasurer 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, 1995 (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 7, 1996 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
Ryback Management 969,000(2) 12.4%
Corporation
7711 Carondelet Avenue
Box 16900
St. Louis, MO 63105
Dimensional Fund 564,249(3) 7.2%
Advisors, Inc.
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
_______________
(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 (41,183 shares of which are held
by a private profit sharing plan of which Mr. Tash is sole beneficiary) 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.1 to Statement on Schedule 13G, dated January
25, 1996, Ryback Management Corporation ("Ryback"), a registered investment
advisor, has sole voting and dispositive power as to 969,000 shares as of
December 31, 1995. 699,000 of such shares are held by Lindner Growth Fund, a
registered investment company, and 270,000 are managed by Ryback.
(3) As set forth in Amendment No. 4 to Statement on Schedule 13G, dated
February 7, 1996, Dimensional Fund Advisors Inc. ("Dimensional"), a registered
20
investment advisor, is deemed to have beneficial ownership of 564,249 shares as
of December 31, 1995, 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.
(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 7, 1996.
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) *
17 State Street
New York, NY 10004
Robert J. Stillwell 14,500 (5) *
1009 N. Bethlehem Pike
Springhouse, PA 19477
Thomas J. Burger 7,500 (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 1,406,604 (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) Includes 7,000 shares held for Mr. Stillwell in an individual retirement
account, and 7,500 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 139,000 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, P.C., counsel to the
Registrant. During the 1996 fiscal year, the Registrant paid legal fees of
$103,774 to such firm.
(b) Indebtedness of Management.
Messrs. Takeuchi and Shinomiya had been indebted to the Registrant in the
respective approximate amounts of $243,000 and $170,000 (translated from yen at
the fiscal 1995 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 were cancelled in September 1995, in accordance with their terms,
since an initial public offering by GJ had not occurred as of that date. The
cancellation had no effect on the Registrant's earnings, since the gain on the
sale of the stock, to the extent represented by the notes, had been 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 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.
10.6 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.
10.7 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.
10.8 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.
23
10.9 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.
10.10 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.
10.11 (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, incorporated by reference
from Form 10-K for the fiscal year ended March 31, 1993, Exhibit
10.14(ii).
10.12 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.
10.13 Agreement between Gradco and Gradco (Japan) Ltd. dated March 1,
1991, incorporated by reference from Form 8-K for March 1, 1991,
Exhibit 28.
10.14 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.
10.15 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.
10.16 Basic Agreement between Gradco (Japan) Ltd. and Ikegami Tsushinki
Co. Ltd. dated as of January 1, 1996 (English translation of
Japanese original) - filed herewith.
10.17 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.
10.18 Regulations of Retirement Allowance for Board of Directors and
Auditors of Gradco (Japan) Ltd., adopted June 3, 1994 (English
translation of Japanese original),incorporated by reference from
Form 10-K for the fiscal year ended March 31, 1995, Exhibit 10.22.
Page 24
10.19 Agreement among Gradco (Japan) Ltd., Gradco (USA) Inc., and Xerox
Canada Ltd. dated as of August 17, 1995 - filed herewith.
NOTE: Confidential treatment has been requested for certain
portions of this Exhibit, and these portions have been removed
from this filing in the places labeled "Confidential Treatment".
22 List of Significant Subsidiaries
(i) Gradco (Japan) Ltd. (Japan)
(ii) Venture Engineering, Inc. (Texas)
(iii) Gradco (USA) Inc. (California)
23 (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 17, 1996
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 17, 1996
- ------------------------
Martin E. Tash
Executive Vice President,
Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ Harland L. Mischler and Director June 17, 1996
- ------------------------
Harland L. Mischler
Secretary, Treasurer and
/s/ Bernard Bressler Director June 17, 1996
- ------------------------
Bernard Bressler
/s/ Robert J. Stillwell Director June 17, 1996
- ------------------------
Robert J. Stillwell
/s/ Thomas J. Burger Director June 17, 1996
- ------------------------
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, 1996
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, 1996 and 1995..................................S-2
Consolidated Statements of Operations--Years Ended
March 31, 1996, 1995 and 1994............................S-3
Consolidated Statements of Shareholders' Equity--
Years Ended March 31, 1996, 1995 and 1994................S-4
Consolidated Statements of Cash Flows--Years Ended
March 31, 1996, 1995 and 1994............................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, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1996, 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.
PRICE WATERHOUSE LLP
Costa Mesa, California
May 31 1996
S-1
GRADCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31,
1996 1995
---- ----
ASSETS
Current assets:
Cash $19,523 $12,158
Trading securities, at fair value - 579
Accounts receivable, less allowance for
doubtful accounts of $103 and $39 20,496 27,450
Inventories, net of valuation allowances
of $150 and $71 1,940 1,375
Deferred income taxes 278 192
Other current assets 1,380 1,756
------- -------
Total current assets 43,617 43,510
Furniture, fixtures and equipment, net 1,708 1,772
License repurchase, net of accumulated
amortization of $11,523 and $12,846 5,852 8,689
Excess of cost over acquired net assets, net
of accumulated amortization of $408 and $365 1,321 1,364
Other assets 5,517 9,048
------- -------
$58,015 $64,383
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $12,769 $14,198
Current installments of long-term debt 12 11
Accounts payable 8,448 10,491
Accrued expenses 709 1,168
Income taxes payable 2,700 915
------- -------
Total current liabilities 24,638 26,783
Long-term debt, excluding current installments 25 35
Non-current liabilities 787 1,273
Deferred income taxes 2,599 4,166
Minority interest 13,765 15,129
------- -------
Total liabilities 41,814 47,386
------- -------
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 7,798,909
and 7,783,909 44,618 44,546
Deficit (33,210) (36,470)
Currency translation adjustments 4,793 8,921
------- -------
Total shareholders' equity 16,201 16,997
------- -------
$58,015 $64,383
======= =======
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,
------------------------------------
1996 1995 1994
---- ---- ----
Revenues:
Net sales $ 96,159 $ 79,138 $ 50,257
Development engineering services 1,877 923 356
Licenses and royalties 2,560 2,777 2,535
-------- -------- --------
100,596 82,838 53,148
-------- -------- --------
Costs and expenses:
Cost of sales 76,657 64,290 40,629
Research and development 3,641 2,164 1,793
Selling, general and administrative 12,984 12,651 10,418
-------- -------- --------
93,282 79,105 52,840
-------- -------- --------
Income from operations 7,314 3,733 308
Interest expense (13) (93) (107)
Interest income 239 148 139
Dividend income - 4 47
Gain (loss) on trading securities 53 (209) (99)
-------- -------- --------
Earnings before income taxes
and minority interest 7,593 3,583 288
Income tax expense 2,748 1,331 535
Minority interest 1,585 800 (241)
-------- -------- --------
Net earnings (loss) $ 3,260 $ 1,452 $ (6)
======== ======== ========
Earnings (loss) per common share $ .42 $ .19 $ -
======== ======== ========
See accompanying notes to consolidated financial statements.
S-3
GRADCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Common Stock
-------------------- Translation
Shares Amount Deficit Adjustment
------ ------ ------- ----------
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
Issuance of shares in
lieu of cash 15,000 72 - -
Translation adjustment - - - (4,128)
Net earnings - - 3,260 -
--------- ------- -------- ------
Balance at March 31, 1996 7,798,909 $44,618 $(33,210) $4,793
========= ======= ======== ======
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,
---------------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net earnings (loss) $ 3,260 $ 1,452 $ (6)
------- ------- -------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 1,213 988 1,097
Amortization 2,066 1,941 1,710
Deferred income taxes (947) 330 (79)
Unrealized holding (gain) loss on
trading securities (8) (126) 134
(Gain) loss on sale of securities (45) 335 (35)
Provision for losses on accounts
receivable 64 18 (60)
Loss (gain) on sale of property
and equipment 66 (6) 77
Purchases of trading securities (249) (2,479) (6,004)
Proceeds from sale of trading securities 882 3,803 3,793
Issuance of shares in lieu of cash 72 - -
Minority interest 1,585 800 (241)
Decrease (increase) in accounts
receivable 2,182 (11,896) 5,260
(Increase) decrease in inventory (609) 1,373 117
Decrease (increase) in prepaid assets 37 (1,516) 519
(Increase) decrease in other assets (1,057) 19 (126)
(Decrease) increase in accounts payable (133) 330 565
(Decrease) increase in accrued expenses (387) 280 (603)
Increase (decrease) in income taxes
payable 2,135 727 37
Increase (decrease) in other liabilities 145 600 (374)
------- ------- -------
Total adjustments 7,012 (4,479) 5,787
------- ------- -------
Net cash provided by (used in)
operations 10,272 (3,027) 5,781
------- ------- -------
Cash flows from investing activities:
Acquisition of property and equipment (1,638) (1,023) (730)
Proceeds from sale of property and
equipment 3 29 83
------- ------- -------
Net cash used in investing activities (1,635) (994) ( 647)
------- ------- -------
S-5
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
For the years ended March 31,
---------------------------------
1996 1995 1994
---- ---- ----
Cash flows from financing activities:
Net borrowings (repayments) on notes
less than three months 1,305 11,262 (6,188)
Proceeds from issuance of notes in
excess of three months - 1,553 3,000
Repayment of notes in excess of
three months (9) (3,007) (2,197)
Principal payments for capital lease
obligations - - (39)
------- ------- -------
Net cash provided by (used in)
financing activities 1,296 9,808 (5,424)
------- ------- -------
Effect of exchange rate changes on cash (2,568) 758 268
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 7,365 6,545 (22)
Cash and cash equivalents at beginning
of year 12,158 5,613 5,635
------- ------- -------
Cash and cash equivalents at end of year $19,523 $12,158 $ 5,613
======= ======= =======
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the period for:
Interest $ 15 $ 93 $ 111
Income taxes 1,910 272 576
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%.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
respective reporting periods. Actual results could differ from those
estimates.
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 gains or losses on sale of securities.
For the fiscal year ended March 31, 1996, the $53,000 gain on trading
securities consisted of unrealized and realized gains of $8,000 and $45,000,
respectively. 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, 1996.
S-7
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
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
shipped. Revenues from development engineering services and research and
development contracts are recognized as earned, and licenses and royalties are
recognized when all obligations of the appropriate agreements have been
fulfilled.
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 2) 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, 1996, 1995 and 1994,
respectively, were $1,603,000, $676,000 and $260,000. Research and development
expenses on behalf of OEM customers and internal research and development
expenses in the fiscal years ended March 31, 1996, 1995 and 1994, respectively,
were $2,038,000, $1,488,000 and $1,533,000.
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. There was a foreign currency transaction gain of
$1,057,000 in fiscal 1996 and a loss of $387,00 in fiscal 1995.
S-8
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Income Taxes
The Company accounts for income taxes utilizing 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, the Company 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 7,796,000 in fiscal year 1996 and 7,784,000 in fiscal years
1995 and 1994. The effect on net earnings per common share assuming full
dilution is either anti-dilutive or results in less than 3% dilution.
NOTE 2--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 $1,158,000, $1,436,000 and $1,212,000 in the
years ended March 31, 1996, 1995 and 1994, respectively.
NOTE 3-- SHORT TERM BORROWING ARRANGEMENTS
GJ has a 350 million yen (approximately $3.26 million) line of
credit and its U.S. subsidiary has a $2 million line of credit with Sumitomo
Bank, Limited. There were no borrowings under these lines at March 31, 1996.
Notes payable at March 31, 1996 consist of $12,769,000 due to a trade creditor
in ninety days.
Information relative to short-term borrowings is as follows (in
thousands):
Fiscal Year
------------------------------
1996 1995 1994
---- ---- ----
Maximum amount outstanding $1,500 $1,500 $2,197
Average balance outstanding $ 111 $1,500 $1,581
Weighted average interest rate
during the period 6.7% 5.6% 4.3%
S-9
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4--DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS
March 31,
-----------------
1996 1995
---- ----
(In Thousands)
Inventories are summarized as follows:
Raw materials $ 644 $ 833
Work-in-process 1,069 210
Finished goods 227 332
------ ------
$1,940 $1,375
====== ======
Furniture, fixtures and equipment, at cost,
are summarized as follows:
Office, shop and automotive equipment $ 959 $ 904
Computer equipment 541 313
Leasehold improvements 118 193
Tooling 4,346 4,546
------ ------
5,964 5,956
Less:
Accumulated depreciation
and amortization 4,256 4,184
------ ------
$1,708 $1,772
====== ======
Other assets are summarized as follows:
Patents $2,339 $5,325
Investments 894 1,124
Cash surrender value of life insurance 984 862
Notes receivable - 490
Deposits 983 627
Intangible pension asset 220 450
Other 97 170
------ ------
$5,517 $9,048
====== ======
Other non-current liabilities are
summarized as follows:
Accumulated benefit obligation $ 641 $ 684
Deferred gain on stock sale - 489
Other 146 100
------ ------
$ 787 $1,273
====== ======
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
------------------------------
1996 1995 1994
---- ---- ----
Current
Foreign $3,250 $ 929 $ 584
Federal 218 23 -
State 227 49 29
Deferred
Foreign (779) 330 (78)
Federal (168) - -
------ ------ ------
Total $2,748 $1,331 $ 535
====== ====== ======
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% to the effective tax rates on earnings are as follows:
Fiscal Year
------------------------------
1996 1995 1994
---- ---- ----
Federal statutory tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax rate
resulting from:
State income taxes, less
federal benefit 3.0 1.3 10.1
Foreign tax expense 32.5 35.1 175.7
Net operating loss (34.3) (34.3) (35.0)
------ ------ ------
Effective income tax rate 36.2% 37.1% 185.8%
====== ====== ======
Foreign tax expense in 1994 was 175.7% 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,
-----------------
1996 1995
---- ----
Deferred tax liabilities
License repurchase $1,922 $2,850
Intercompany loan revaluation 883 1,095
Life insurance premiums - 198
Tax benefits for increase in imports 87 144
Other 107 138
------ ------
2,999 4,425
------ ------
Deferred tax assets
Retirement benefits 219 362
Local taxes 348 89
Other 111 -
Tax loss carryforwards 9,800 10,850
Valuation allowance (9,800) (10,850)
------ ------
678 451
------ ------
Net deferred tax liabilities $2,321 $3,974
====== ======
At March 31, 1996, the Company had federal net operating loss
carryforwards for tax reporting purposes of $28,000,000 which will expire in
2000 through 2011 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, 1996, the Company had
unused investment tax and research and development credits for income tax
purposes of $320,000 which, if not utilized, will expire in 1997 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, 1996, the Company's share of such undistributed foreign earnings
totaled $6,650,000. Foreign withholding taxes of approximately $665,000 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 (4,410 at March 31, 1996). At March
31, 1996 there were 284,743 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, 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
Canceled (15,000) 9.25
-------
Outstanding March 31, 1996 323,910 $2.375 - $8.3125
=======
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 1994 through
1996.
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, 1996, the Company
has recorded an intangible pension asset of $220,000 and an accumulated benefit
obligation of $641,000. The amount charged to expense in fiscal 1996 and 1995
was $329,000 and $638,000, respectively.
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, 1996, under noncancelable
facility and equipment leases with remaining lease terms in excess of one year
are as follows:
1997 $ 465,000
1998 382,000
1999 217,000
2000 18,000
2001 -
Thereafter -
----------
$1,082,000
==========
Rent expense, net of sub-lease income, was approximately $916,000,
$799,000 and $858,000 for fiscal years 1996, 1995 and 1994, respectively.
The Company's Japanese subsidiary discounts certain of its receivables in
the normal course of business. At March 31, 1996, $1,851,000 was discounted
with recourse.
In the following litigation, material claims have been asserted against
the Company:
HAMMA V. GRADCO SYSTEMS INC. ET AL., DUBOIS V. GRADCO SYSTEMS INC. ET AL.
The Company and its (now former) president, Mr. Keith Stewart, have been sued
in the U.S. District Court in Connecticut by John C. Hamma and R. Clark DuBois,
both of whom are former employees of the Company. Complaints in the two cases,
which were consolidated for certain pretrial purposes, primarily allege
misrepresentation and fraudulent concealment by Gradco and Mr. Stewart in
connection with agreements entered into in 1982 with Mr. Hamma and in 1983 with
Mr. DuBois terminating and releasing the Company from royalty obligations under
prior royalty agreements 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. This Application was
dismissed as respects GJ. In November 1992, the Company and the plaintiffs
agreed in principle to a Consent Order instead of proceeding with a hearing on
the Application. If during the pendency of the lawsuits the Company desires to
sell, transfer or take any other action which would affect its ownership of
stock in GJ, it has agreed to give 30 days prior notice to the plaintiffs, who
S-14
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7--COMMITMENTS AND CONTINGENCIES--(Continued)
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 expense
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.
In August 1995, the Company filed with the Trial Court a substituted
motion for judgment as a matter of law or, in the alternative, for a new trial
on substantially all counts. Plaintiffs have responded to the motion and the
Company has replied. The motion is under consideration by the Court. If the
Company is unsuccessful on the motion, it may seek permission from the Trial
Court to appeal the verdict. An appeal is not automatically available prior to
the determination of damages.
In July 1995, the plaintiffs filed another Application for a Prejudgment
Remedy ("July PJR Application") seeking to attach Gradco Systems' assets. The
July PJR Application sets forth various theories of damages including a theory
calling for treble damages under Connecticut law in the amount of $70,500,000.
The July PJR Application asserts that there is probable cause that a verdict in
an amount greater than $70,500,000 will be rendered in the damages part of the
case after trial on those issues. It is Gradco's belief that damages based on
applicable law would result in a significantly smaller damages award even if
the motion by Gradco for judgment as a matter of law is denied. The Court has
determined that it will rule on the July PJR Application only after ruling on
the August 1995 motion for judgment as a matter of law.
In November 1995, the Court ordered the plaintiffs to submit a memorandum
regarding the legal theories on which they based their damages claims and for
the defendants to respond. This issue is also under consideration by the
Court. If Gradco's view prevails, the magnitude of damages, even should the
August 1995 motion prove unavailing, will be reduced substantially from the
amount sought in the July PJR Application.
The Company is presently unable to determine the amount of such damages
which is likely to be awarded, but the amount of damages sought by plaintiffs,
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.
S-15
GRADCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7--COMMITMENTS AND CONTINGENCIES--(Continued)
Counsel for DuBois moved on May 20, 1996 to vacate the order to bifurcate
the trial in his case. The Company will respond by seeking an extension for
its response to await the decision on the Hamma motion.
There are substantial differences between the Hamma and DuBois cases.
Although the DuBois case will also be tried before a jury so that there are
substantial elements of uncertainty, the Company continues to believe that the
DuBois case alone will not have a material adverse effect on its consolidated
financial position.
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
------------------------------
1996 1995 1994
---- ---- ----
Xerox 29% 16% N/A
Rank Xerox 16% N/A N/A
Mita 13% 19% 17%
Lanier 11% N/A N/A
Sharp N/A 11% 15%
Ricoh N/A N/A 23%
Geographic data follows (in thousands):
Domestic Europe Asia Consolidated
-------- ------ ---- ------------
March 31, 1996
- --------------
Net sales $62,194 $ - $33,965 $96,159
Net earnings 1,296 5 1,959 3,260
Assets 2,805 67 55,143 58,015
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
For the years ended March 31, 1996, 1995 and 1994 export sales were
$16,279,000, $8,426,000 and $645,000, 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)
1996
- ----
Net sales $24,505 $23,955 $24,389 $23,310 $96,159
Gross margin 4,859 4,850 5,318 4,475 19,502
Earnings before income taxes 1,227 1,905 2,028 2,433 7,593
Net earnings 301 819 908 1,232 3,260
Net earnings per common share $ .04 $ .10 $ .12 $ .16 $ .42
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
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, 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
Year ended March 31, 1996:
- --------------------------
Allowance for doubtful
accounts $ 39,000 $ 64,000 $ - $103,000
Inventory valuation
allowance $ 71,000 $239,000 $160,000 $150,000
S-18