SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange Act of  1934

 

 

For Quarter Ended December 31, 2002 Commission file number 0-12829

 

GRADCO SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code  (949) 206-6100

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    ý     No    o

 

Applicable Only to Corporate Issuers:

 

Indicate the number of shares outstanding of each of the issuer’s

classes of common stock, as of the latest practicable date:

 

 

 

GRADCO SYSTEMS, INC.

INDEX

 

	Part I.  FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at December 31, 2002 (Unaudited) and March 31, 2002
	Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2002 and December 31, 2001 (Unaudited)
	Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2002  and December 31, 2001 (Unaudited)
	Notes to Unaudited Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
	Part II.  OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Changes in Securities
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
Signature
Certifications

 

 

 

2

 

 

PART 1. FINANCIAL INFORMATION

 

Item 1.      Financial Statements

 

GRADCO SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

		December 31,			March 31,
		2002			2002
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	2,607		$	3,597
Accounts receivable, less allowance for doubtful accounts of $75 and $175, respectively		5,945			6,242
Inventories, less allowance for obsolescence of  $317 and $228, respectively		874			964
Prepaid expenses		164			281
Total current assets		9,590			11,084
Property and equipment, net		222			229
Cash surrender value of life insurance		312			278
Other assets		2,120			3,074
		$	12,244		$	14,665
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,861		$	2,059
Notes payable to suppliers		3,027			3,238
Accrued expenses		374			1,004
Income taxes payable		312			338
Net liabilities of discontinued operations		81			59
Total current liabilities		5,655			6,698
Non-current liabilities		271			245
Minority interest		479			492
Shareholders’ equity:
Common stock, no par value; authorized 30,000,000 shares, issued 264,150 shares		46,454			46,454
Accumulated deficit		(41,245		)	(38,901		)
Accumulated other comprehensive income		2,298			1,344
Less cost of common stock in treasury, 35,179 share and 34,495 shares, respectively		(1,668		)	(1,667		)
Total shareholders’ equity		5,839			7,230
		$	12,244		$	14,665

                                                 See accompanying notes to consolidated financial statements.

 

 

 

3

 

GRADCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

 

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		December 31, 2002			December 31, 2001				December 31, 2002				December 31, 2001
Revenues:
Net sales		$	4,526		$	5,745			$		13,243		$	19,021
Development engineering services		—			308				433				308
Licenses and royalties		3			17				12				288
		4,529			6,070				13,688				19,617
Costs and expenses:
Cost of sales		4,022			4,662				10,931				14,951
Research and development		737			626				1,223				1,980
Selling, general and administrative		1,174			1,581				3,777				4,626
Foreign currency transaction (gains) losses		(19		)	(88			)	309				18
		5,914			6,781				16,240				21,575
Loss from operations		(1,385		)	(711			)	(2,552			)	(1,958		)
Interest expense		—			—				(1			)	(1		)
Interest income		5			33				18				135
Loss from continuing operations before income taxes and minority interest		(1,380		)	(678			)	(2,535			)	(1,824		)
Income tax expense		2			187				2				1,196
Minority interest		(11		)	(8			)	(40			)	(25		)
Loss from continuing operations		(1,371		)	(857			)	(2,497			)	(2,995		)
Income (loss) from discontinued operations		—			—				153				(1,287		)
Estimated loss on disposal of discontinued operations, including provision for operating losses through disposal date		—			—				—				(2,144		)
Net loss		$	(1,371	)	$	(857		)	$		(2,344	)	$	(6,426	)
Basic and diluted loss per common share:
Continuing operations		$	(5.99	)	$	(3.73		)	$		(10.89	)	$	(13.01	)
Discontinued operations		—			—				.67				(14.91		)
Total		$	(5.99	)	$	(3.73		)	$		(10.22	)	$	(27.92	)
Average shares outstanding, basic and diluted EPS		228,971			229,665				229,292				230,189

 

                                                 See accompanying notes to consolidated financial statements.

 

 

 

4

GRADCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

(Unaudited)

 

		Nine Months Ended
		December 31, 2002				December 31, 2001
Cash flows from operating activities:
Loss from continuing operations		$	(2,497		)	$	(2,995	)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
Depreciation		48				64
Amortization		425				(241		)
Loss on sale of property and equipment		17				—
Deferred income taxes		—				1,344
(Recoveries of) provision for losses on accounts receivable		(97			)	3
Provision for losses on inventories		89				—
Minority interest		(40			)	(25		)
Decrease in accounts receivable		895				4,278
Decrease (increase) in inventories		59				(814		)
Decrease (increase) in prepaid expenses		147				(356		)
Decrease in other assets		1,181				302
Decrease in accounts payable		(406			)	(2,406		)
Decrease in notes payable to suppliers		(584			)	(2,547		)
Decrease in accrued expenses		(644			)	(41		)
Decrease in income taxes payable		(27			)	(158		)
Decrease in other liabilities		(4			)	(167		)
Total adjustments		1,059				(764		)
Net cash used in operating activities		(1,438			)	(3,759		)
Cash flows from investing activities:
Acquisition of property and equipment		(41			)	(25		)
Proceeds from sale of property and equipment		6				—
Net cash used in investing activities		(35			)	(25		)
Cash flows from financing activities:
Acquisition of treasury stock		(1		)		(51		)
Net cash used in financing activities		(1		)		(51		)
Effect of exchange rate changes on cash		309				(302		)
Net decrease in cash and cash equivalents from continuing operations		(1,165		)		(4,137		)
Net increase in cash from discontinued operations		175				71
Net decrease in cash and cash equivalents		(990		)		(4,066		)
Cash and cash equivalents at beginning of period		3,597				7,791
Cash and cash equivalents at end of period		$2,607				$3,725
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest		$1				$2
Income taxes		$29				$10

 

                                                 See accompanying notes to consolidated financial statements.

 

5

 

GRADCO SYSTEMS, INC.

                                       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1:  INTERIM ACCOUNTING POLICY

 

The accompanying unaudited consolidated financial statements include the accounts of Gradco Systems, Inc. and its wholly and majority-owned subsidiaries (the “Company”).  All significant intercompany balances and transactions have been eliminated in consolidation.

 

In the opinion of the Company’s management, the information furnished herein reflects all known accruals and adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position of the Company at December 31, 2002 and the results of operations and cash flows for the three and nine months ended December 31, 2002 and 2001.  Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.  Results of operations for interim periods are not necessarily indicative of results of operations to be expected for the full year.

 

The financial information included in this quarterly report should be read in conjunction with the consolidated financial statements and related notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2002.

 

NOTE 2:  REALIZATION OF ASSETS

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern.  However, the Company has sustained substantial losses from operations in recent years.  In addition, the Company has used, rather than provided, cash in its operations and has experienced a significant reduction in its sales volume.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon growth of revenues and the success of future operations.  The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

 

Management has taken the following steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue in existence: the Company has shut down the operations of Venture Engineering, Inc. (“Venture”, see Note 4), reduced the size of its workforce and reduced other costs in an attempt to conserve cash.  The Company’s survival as a going concern is dependent on the development of new sources in Japan and South Korea for the manufacture and engineering of products and the obtaining of tooling for such manufacture within the limits of its financial resources.  However, there can be no assurance that these activities will be sufficient to reduce expenses quickly and sufficiently enough to meet declining revenues, if they persist.

 

6

 

NOTE 3:  RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” Under these new standards, all acquisitions subsequent to June 30, 2001 must be accounted for using the purchase method of accounting. The cost of intangible assets with indefinite lives and goodwill are no longer amortized, but are subject to an annual impairment test based upon its fair value.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). SFAS 143 establishes accounting standards for recognition and measurement of a liability for the costs of asset retirement obligations.  Under SFAS 143, the costs of retiring an asset will be recorded as a liability when the retirement obligation arises, and will be amortized to expense over the life of the asset.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).  SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and discontinued operations, and it provides guidance on estimating future cash flows to test recoverability.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FAS Statements No. 4, 44 and 64, Amendment of  FAS Statement No. 13, and Technical Corrections,” to update, clarify and simplify existing accounting pronouncements.  FAS Statement No. 4, which required all gains and losses from debt extinguishment to be aggregated and, if material, classified as an extraordinary item, net of related tax effect, was rescinded.  Consequently, FAS Statement No. 64, which amended FAS Statement No. 4, was rescinded because it was no longer necessary.

The implementation of these pronouncements in fiscal 2003 has not had a material impact on the Company’s financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”).  SFAS 146 provides financial accounting and reporting guidance for costs associated with exit or disposal activities, including one-time termination benefits, contract termination costs other than for a capital lease, and costs to consolidate facilities or relocate employees.  SFAS 146 nullifies EITF Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).

Under SFAS 146, a liability for a cost associated with an exit or disposal activity should be recognized and measured initially at its fair value in the period in which the liability is incurred, except for a liability for one-time termination benefits that is incurred over time.  Accounting for one-time benefits depends on whether the employee will be providing future services.  In addition, a liability for costs to terminate a contract before the end of its term should be recognized and measured at its fair value at the time the entity terminates the contract in accordance with its terms.  A liability for costs that will continue to be incurred under the contract for its remaining term without economic benefit to the entity should be recognized and measured at its fair value when the entity ceases to use the right conveyed by the contract.  SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002.  The Company has not determined the impact the adoption of SFAS 146 will have on its consolidated financial position or results of operations.

 

 

 

7

 

NOTE 4:  DISCONTINUED OPERATIONS

 

In fiscal 2002, the Company announced its intention to shut down Venture, one of its wholly-owned subsidiaries.  The Board of Directors approved a plan to dispose of the business, which was substantially completed by March 31, 2002.

 

The disposal of Venture has been accounted for as a discontinued operation and, accordingly, its net liabilities have been segregated from continuing operations in the accompanying consolidated balance sheets, and its operating results are segregated and reported as discontinued operations in the accompanying consolidated statements of operations and cash flows. The Company has not recorded a tax benefit attributable to the loss from discontinued operations due to losses from continuing operations and the uncertainty of recoverability.

 

Information relating to the discontinued operations of Venture is as follows (dollars in thousands):

		Three Months Ended						Nine Months Ended
		December 31, 2002			December 31, 2001			December 31, 2002			December 31, 2001
Net sales		$	—		$	1,288		$	78		$	5,013
Development engineering services		—			4			—			113
		—			1,292			78			5,126
Cost of sales		—			1,655			—			5,125
Research and development		—			10			—			243
Selling, general and administrative		—			205			(75		)	1,013
Interest, net		—			11			—			31
		—			1,881			(75		)	6,412
Income (loss) before income taxes		—			(589		)	153			(1,286		)
Income tax expense		—			—			—			1
Income (loss) from discontinued operations		$	—		$	(589	)	$	153		$	(1,287	)

 

 

The net liabilities, excluding cash of $51,000 and $116,000 as of December 31, 2002 and March 31, 2002, respectively, of the discontinued operations of Venture included in the accompanying consolidated balance sheets as of December 31, 2002 and March 31, 2002 are as follows (dollars in thousands):

		December 31, 2002			March 31, 2002
Accounts receivable, net		$	—		$	55
Other assets		—			30
Accounts payable		(78		)	(61		)
Accrued expenses		—			(10		)
Income taxes payable		(3		)	(5		)
Estimated costs related to disposal		—			(68		)
Net liabilities of discontinued operations		$	(81	)	$	(59	)

 

 

 

8

 

NOTE 5:  REVERSE STOCK SPLIT

 

The Board of Directors authorized a one-for-thirty reverse stock split of the Company’s common stock which was approved by the shareholders on September 27, 2002.  This decreased the number of common shares issued to 264,150.  All references in the accompanying financial statements to the number of common shares and per-share amounts for prior periods have been restated to reflect the reverse stock split.

 

NOTE 6:  DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS

 

Inventories are summarized as follows (dollars in thousands):

 

		December 31, 2002			March 31, 2002
Raw materials		$	218		$	169
Finished goods		656			795
		$	874		$	964

 

 

 

Other assets are summarized as follows (dollars in thousands):

		December 31, 2002			March 31, 2002
Nonrefundable tooling advances		$	1,091		$	2,119
Deposits		587			456
Investments		192			249
Canon License		180			193
Distribution license for Dippin’ Dots ice cream		40			57
Other		30			—
		$	2,120		$	3,074

 

 

Included in accounts receivable are unbilled receivables in the amount of $334,000 and $354,000 at December 31, 2002 and March 31, 2002, respectively.

 

 

NOTE 7:  INCOME TAXES

 

The Company has federal net operating loss carryforwards (“NOLs”) for tax reporting purposes of approximately $25 million, which will expire in fiscal 2003 through 2022 if not utilized.  These NOLs are utilizable by the Company and its domestic subsidiary.  The Company’s foreign subsidiaries in Japan also have NOLs in the amount of Yen 892 million ($7.5 million) which will expire through fiscal 2007.  Management has determined at this time that it is not likely these NOLs can be utilized and therefore a valuation allowance has been established for the full amount of deferred tax assets.  The amounts shown as income tax expense reflect only required minimum amounts due under local jurisdictions.

 

 

 

 

9

 

NOTE 8:  EARNINGS (LOSS) PER SHARE

 

Basic EPS is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.  Diluted EPS reflects the potential dilution that could occur if stock options and other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.  For all periods presented, the net earnings (loss) available to common shareholders is the same for both basic and diluted EPS and is equal to the net earnings (loss) stated in the Consolidated Statements of Operations.  The average number of outstanding shares used in the computation of basic EPS and diluted EPS is the same for all periods presented.  As of December 31, 2002 and 2001, the Company had outstanding stock options of 10,170 and 15,350, respectfully.  No stock options were dilutive as of December 31, 2002 and 2001, respectively.

 

NOTE 9:  COMPREHENSIVE INCOME

 

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS 130”), establishes standards for reporting and displaying of comprehensive income and its components in the Company’s consolidated financial statements.  Comprehensive income is defined in SFAS 130 as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources.  Total comprehensive loss was $(1,219,000) and $(1,390,000) for the three and nine months ended December 31, 2002, respectively and $(1,768,000) and $(6,949,000) for the three and nine months ended December 31, 2001, respectively.  The difference from net loss as reported is the change in the cumulative currency translation adjustment.

 

NOTE 10:  TREASURY STOCK

 

In fiscal 2000, the Company began acquiring shares of its common stock in connection with a stock repurchase program announced in March 1999 which authorizes the Company to purchase up to 66,667 common shares from time to time on the open market.  The Company purchased 684 shares during the nine months ended December 31, 2002 at an aggregate cost of $1,000 and 3,030 shares during the nine months ended December 31, 2001 at an aggregate cost of $51,000.

 

NOTE 11:  SEGMENT INFORMATION

 

The majority of the Company’s operations are in one industry segment, the design, development, production and marketing of intelligent paper handling devices for the office automation market.  Three of the Company’s subsidiaries, Gradco (Japan) Ltd. (“GJ”), Gradco (USA) Inc. and Gradco Belgium, S.C. (a wholly-owned subsidiary of GJ) operate in this segment.  Gradco Technology Ltd. (a majority-owned subsidiary of GJ) focuses on developing markets for new technologies and products.  Venture, whose operations are reflected as discontinued, operated in an industry segment involved in high technology engineering and manufacturing services.  The following table reflects information by reportable segments for the three and nine-month periods ended December 31, 2002 and 2001 (in thousands):

 

 

 

10

 

		Net Earnings
		Revenues			(Loss)			Assets
Three Months Ended 12/31/02
Paper handling devices		$	4,095		$	(1,127	)	$	25,648
New technology/products		434			(83		)	857
Discontinued operations		—			—			51
Corporate		—			(161		)	5,419
Inter-segment & corporate eliminations		—			—			(19,731		)
Consolidated		$	4,529		$	(1,371	)	$	12,244
Three Months Ended 12/31/01
Paper handling devices		$	5,548		$	(515	)	$	31,481
New technology/products		522			(265		)	1,442
Discontinued operations		—			—			1,585
Corporate		—			(77		)	5,431
Inter-segment & corporate eliminations		—			—			(21,024		)
Consolidated		$	6,070		$	(857	)	$	18,915
Nine Months Ended 12/31/02
Paper handling devices		$	11,966		$	(1,899	)	$	25,648
New technology/products		1,722			(74		)	857
Discontinued operations		—			153			51
Corporate		—			(524		)	5,419
Inter-segment & corporate eliminations		—			—			(19,731		)
Consolidated		$	13,688		$	(2,344	)	$	12,244
Nine Months Ended 12/31/01
Paper handling devices		$	17,534		$	(1,034	)	$	31,481
New technology/products		2,083			(729		)	1,442
Discontinued operations		—			(3,431		)	1,585
Corporate		—			(1,232		)	5,431
Inter-segment & corporate eliminations		—			—			(21,024		)
Consolidated		$	19,617		$	(6,426	)	$	18,915

 

 

 

 

 

 

 

11

 

Item 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

                  AND RESULTS OF OPERATIONS

 

In addition to historical information, management’s discussion and analysis includes certain forward-looking statements, including those related to the Company’s growth and strategies, regarding events and financial trends that may affect the Company’s future results of operations and financial position.  The Company’s actual results and financial position could differ materially from those anticipated in the forward-looking statements as a result of competition, general economic and business conditions, changes in technology, fluctuations in the rates of exchange of foreign currency and other risks and uncertainties over which the Company has little or no control.

 

The Company’s operations are conducted principally through its wholly-owned subsidiary Gradco (USA) Inc. (“GU”) and its majority-owned subsidiaries Gradco (Japan) Ltd. (“GJ”) and Gradco Technology Ltd. (“GTL”). Venture Engineering, Inc. (“Venture”), another wholly-owned subsidiary, was involved with engineering and manufacturing activities.  The Board of Directors approved a plan to dispose of Venture, which was substantially completed by March 31, 2002.  This disposal has been accounted for as a discontinued operation and, accordingly, Venture’s net liabilities have been segregated from continuing operations in the accompanying consolidated balance sheets, and its operating results are segregated and reported as discontinued operations in the accompanying consolidated statements of operations and cash flows.  See Note 4 of Notes to Unaudited Consolidated Financial Statements.

 

GJ and GU operate jointly in the development and marketing of products to their customer base, primarily OEMs.  Both companies sell into the U.S. domestic and foreign marketplace at similar profit margins, after elimination of intercompany profits.  Sales are denominated for the most part in Japanese yen and U.S. dollars, corresponding to the currency charged for the product by the contract manufacturer.  Although the gross profit margin percentage is thus protected from foreign currency fluctuations, translation gains and losses can still occur when receivables and payables are denominated in other than the local currency of each company.

 

The Company’s survival as a going concern is dependent on the development of new sources in Japan and South Korea for the manufacture and engineering of products and the obtaining of tooling for such manufacture within the limits of its financial resources.

 

Critical Accounting Policies

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  On an ongoing basis, management evaluates its estimates, including those related to uncollectible receivables, excess and obsolete inventories, income taxes and contingencies.  Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

 

 

 

12

 

Management believes the following critical accounting policies affect our more significant judgments and estimates used in preparing the Company’s consolidated financial statements: revenue recognition and valuation allowances on inventories, accounts receivable and deferred tax assets.

 

Revenues from product sales (“net sales”) are recorded when units or spare parts are shipped.  Revenues from development engineering service contracts are recognized as earned, which generally occurs as services are performed.  Licenses and royalties are recognized when all obligations of the appropriate agreements have been fulfilled.

 

Inventories are stated at the lower of cost or market.  Each quarter, the Company evaluates its inventories for excess quantities and obsolescence.  Inventories that are considered obsolete are written off.  Remaining inventory balances are adjusted to approximate the lower of cost or market value.  The valuation of inventories at the lower of cost or market requires the use of estimates as to the amounts of current inventories that will be sold.  These estimates are dependent on the Company’s assessment of current and expected orders from its customers.

 

Valuation allowances are maintained for doubtful accounts for estimated losses from the inability of the Company’s customers to make required payments.  If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.  Management also records a valuation allowance to reduce the Company’s deferred tax assets to the amount that is more likely than not to be realized.  Management considers estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance.

 

Results of Operations

 

Revenues for the three and nine months ended December 31, 2002 decreased $1,541,000 or 25% and $5,929,000 or 30%, respectively, from the comparable prior year periods.  The decreases in both periods were principally a result of a decrease in net sales.  Sales in the office automation market decreased $1,131,000 or 22% in the current quarter from the comparable quarter in the prior year, primarily from a decrease of 29% in the number of units sold and development engineering services decreased by $308,000.  In the nine-month period, sales in the office automation market decreased $5,417,000 or 32% from the prior year, primarily from a decrease of 44% in the number of units sold and royalties decreased by $276,000 or 96%.  Because the exchange rate between the yen and dollar was almost the same in both comparable periods, sales denominated in yen did not have a material effect on revenues when translated into dollars.

 

Gross margin on net sales decreased to 11.1% from 18.9% for the three months ended December 31, 2002 and 2001, respectively, and decreased to 17.5% from 21.4% for the nine-month periods then ended.  In the current quarter and nine-month period, the Company has accelerated the amortization of nonrefundable tooling advances by $275,000 and $367,000, respectively. The increase in amortization expense is a result of the Company lowering it’s estimate of future unit sales volume for units sold in Japan.  In addition, the Company took a charge of $139,000 in the last quarter to fully reserve for its remaining wide format printer inventory, the mix of products shifted toward lower margin units and fixed manufacturing overhead costs could not be trimmed at the same pace as the declines in net sales.  These items all contributed to the overall margin decline.  The gross margin for the current nine-month period includes a unique sale of tooling in the first quarter, without which the gross margin would have been 16.3%.

 

 

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Research and development expenses (“R&D”) in the current quarter totaled $737,000, 16.3% of revenues, compared to $626,000, 11.0% of revenues, in the prior year’s comparable period.  For the nine months ended December 31, 2002 and 2001, R&D totaled $1,223,000, 8.9% of revenues, and$1,980,000, 10.3% of revenues, respectively.  The decrease in the nine-month period is principally attributable to the elimination of the Company’s internal engineering department.  Included in the current quarter and nine-month period is $712,000 of expenses which may be recoverable from customers in future periods through development engineering service billings.

 

Selling, general and administrative expenses (“SG&A”) in the current quarter totaled $1,174,000, 25.9% of revenues, compared to $1,581,000, 27.8% of revenues, in the prior year’s comparable period, a decrease of $407,000.  There was a savings of approximately $425,000 due to a reduction in personnel and severance expense, $20,000 from the closure of the Company’s Belgium office, $25,000 in reduced rental expenses and $40,000 in lower legal fees, offset by $100,000 less of negative goodwill amortization.  For the nine months ended December 31, 2002 and 2001, SG&A totaled $3,777,000, 27.6% of revenues and $4,626,000, 24.1% of revenues, respectively, a decrease of $849,000.  There was a savings of approximately $875,000 due to a reduction in personnel and severance expense, $100,000 in recovered bad debts, $75,000 in reduced rental expenses and $70,000 in reduced advertising and trade show expenses, offset by $278,000 less of negative goodwill amortization.

 

There was a foreign currency gain of $19,000 in the current quarter and a gain of $88,000 in the prior year’s comparable period, a decrease of $69,000.  For the nine months ended December 31, 2002 and 2001, there was a foreign currency loss of $309,000 and $18,000, respectively, an increase of $291,000.  The losses are primarily attributable to receivables held by GJ in Japan but denominated in U.S. dollars.  When the dollar weakens, the yen equivalent is reduced and a loss is recognized.  The reverse is true when the dollar strengthens.

 

As a result of the above factors, the loss from continuing operations before income taxes and minority interest increased from $678,000 in the quarter ended December 31, 2001 to $1,380,000 in the current quarter and increased from $1,824,000 in the nine months ended December 31, 2001 to $2,535,000 in the current nine-month period.  The income tax provisions in the prior three and nine-month periods were primarily attributable to increases in the valuation allowance related to the Company’s non-current deferred tax asset for net operating loss carryforwards.

 

The Company commenced a shut down of Venture and therefore its results are included in the Consolidated Statements of Operations as discontinued operations; see Note 4 of Notes to Unaudited Consolidated Financial Statements.  The income of $153,000 as reported in the current nine-month period is from the sale of inventory and the recovery of accounts receivable against which reserves had been fully established.  The loss of $3,431,000 from discontinued operations in the nine months ended December 31, 2001 included $1,287,000 of operating losses and $2,144,000 of estimated losses on disposal of Venture from the writedown of certain fixed assets and inventories to expected scrap value, closedown expenses including severance payments and expected operating losses of Venture subsequent to December 31, 2001 through the shutdown date.  It also included the writeoff of the Company’s remaining goodwill related to Venture in the amount of $1,083,000.

 

 

 

 

 

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Financial Condition

 

Working capital decreased to $3,935,000 at December 31, 2002 from $4,386,000 at March 31, 2002, primarily due to operating losses partially offset by an increase in net current yen-denominated assets resulting from a stronger yen.  At December 31, 2002, the Company had $2,607,000 in cash, a decrease of $990,000 from March 31, 2002, and no long-term debt.

 

For the nine months ended December 31, 2002, net cash used in operating activities was approximately  $1.4 million.  Approximately $2.7 million was provided by a decrease in accounts receivable of $0.8 million, a decrease in inventory of $0.1 million, a decrease in other assets of $1.2 million, a decrease in prepaid expenses of $0.1 million and depreciation and amortization of $0.5 million.  Approximately $2.5 million was used to fund the Company’s loss from continuing operations and another $1.6 million was used to fund a decrease in accounts payable of $0.4 million, a decrease in notes payable to suppliers of $0.6 million and a decrease in accrued expenses of $0.6 million.

 

Cash was positively affected by exchange rate changes in the amount of $0.3 million for the nine months ended December 31, 2002 and cash provided by discontinued operations was approximately $0.2 million.  The Company believes that its cash is adequate for its short-term needs, but its long-term survival is dependent upon the development of relationships and sources of working capital to enable it to compete in the highly competitive digital market.

 

Item 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates.  The Company is exposed to certain levels of market risks, especially changes in foreign currency exchange rates.  Interest rates currently have little effect on the Company since it has no interest-bearing debt.

 

The Company conducts a significant portion of its business in Japanese yen.  There have been substantial fluctuations between the yen and the U.S. dollar over the past several years and it is possible that such fluctuations will continue.  These fluctuations could have a material adverse effect on the Company’s revenues and results of operations.

 

The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.

 

Item 4.      CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures.  Based on their evaluation as of a date within 90 days of the filing date of this Form 10-Q, our principal executive officer and principal accounting officer have concluded that Gradco Systems, Inc.’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934) are effective to ensure that information required to be disclosed by Gradco Systems, Inc. in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in Internal Controls.  There have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date that our principal executive officer and principal accounting officer carried out their evaluation.

 

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                                                                                                 PART II

                                                                                  OTHER INFORMATION

 

Item 1.      LEGAL PROCEEDINGS

                  Not Applicable.

 

Item 2.      CHANGES IN SECURITIES

                  Not Applicable.

 

Item 3.      DEFAULTS UPON SENIOR SECURITIES

                  Not Applicable.

 

Item 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                  Not Applicable.

 

Item 5.      OTHER INFORMATION

                  Not Applicable.

 

Item 6.      EXHIBITS AND REPORTS ON FORM 8-K

                  (a)  Exhibits.

                  99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

                  (b)  Reports on Form 8-K.

                  None.

 

 

 

 

 

 

 

 

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                                                                                            SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, who is also signing as the Chief Financial Officer.

 

 

		GRADCO SYSTEMS, INC.
		Registrant
		By:
Date:  March 28, 2003		/s/ Harland L. Mischler
		Harland L. Mischler
		Executive Vice President, Chief Financial Officer

 

 

 

 

 

 

 

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                                                                                        CERTIFICATION

 

I, Martin E. Tash, certify that:

 

1.  I have reviewed this quarterly report on Form 10-Q of Gradco Systems, Inc;

 

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this  quarterly report, fairly presents in all material respects the financial condition , results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.  The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date” ); and

c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.  The  registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: March 28, 2003
	/s/ Martin E. Tash
	Chairman of the Board, President and
	Chief Executive Officer

 

 

18

 

                                                                                        CERTIFICATION

 

I, Harland L. Mischler, certify that:

 

1.  I have reviewed this quarterly report on Form 10-Q of Gradco Systems, Inc;

 

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this  quarterly report, fairly presents in all material respects the financial condition , results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.  The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date” ); and

c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.  The  registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: March 28, 2003
	/s/ Harland L. Mischler
	Executive Vice President, Chief
	Financial Officer

 

 

 

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