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 and high technology short-run products for the office automation market. Information relating to net sales, net earnings and identifiable assets attributable thereto for the fiscal years ended March 31, 1997, 1996 and 1995 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. ("GJU"). GJ has a domestic branch office, which performs research and development activities. GJU 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 GJU, (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, including products applicable to the evolving digital copiers which function as computer driven printers, scanners and facsimile machines. 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 non-impact 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 GJU. Marketing in Europe is conducted by GJ and GJU, 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 commenced in February 1997.
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. During the period when Gradco was directly engaged in the copier products business, prior to the introduction by it to the convenience copier market of the sorters currently sold by GJ, sorters available to the market were large and complicated, with many moving parts and
long, complicated paper paths. The sorters sold by GJ are primarily designed to provide a shorter, straight-through or nearly straight-through, single paper path.
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 and hole punching 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 or share in the cost of the development work, then submits a prototype for evaluation to the OEM customer who may agree to purchase such product in commercial quantities and who may share tooling and initial production costs. In other cases, an OEM will present GJ with a copier, printer or other product in the research and development stage and engage GJ (at the OEM's expense) to design a paper handling device to fit the OEM's specifications. Any unique interface designed to work only with an OEM's particular equipment may be exclusive to the OEM; GJ retains ownership of the basic technology and any other technology developed by GJ for use in its business. GJ also does product development work at its own expense, based on its evaluation of future market requirements. In fiscal 1997, Xerox, Rank Xerox, Mita and Lanier accounted for 26%, 17%, 11% and 11%, respectively, of the Registrant's consolidated revenues. 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. 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 worldwide 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 non-exclusive 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 non-exclusive license to a laser printer OEM to incorporate GJ's patented decurler 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.
These agreements generated recurring royalty revenues of approximately $2,694,000 during the fiscal year ended March 31, 1997, $2,528,000 during the fiscal year ended March 31, 1996, and $2,725,000 during the fiscal year ended March 31, 1995. 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. 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.
GJ Production and Assembly
GJ produces its products at manufacturing facilities of contract manufacturers in Japan and Korea. Effective August 17, 1995, GJ entered into a three year nonexclusive, extendible contract for production of a new copier
product at a contract manufacturing facility in Canada, at which manufacturing commenced in February 1997.
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.
GJU, 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 $171,000 in fiscal 1997, $32,000 in fiscal 1996, and $52,000 in fiscal 1995.
Manufacturing services principally include fabrication, assembly and testing of complex electro-mechanical assemblies for customers in such diverse fields as computer equipment, medical equipment and telecommunications.
Due to the broad and diverse number of markets and customers served by Venture, there is not one specific group of competitors. In most cases, the principal competition is from within the prospective customers' own functional engineering and manufacturing organizations, or from a product company offering standard products which may be adapted to a specific unique application requirement.
Costs and Revenues of Development Engineering Services
In 1997, 1996 and 1995 the Registrant, on a consolidated basis, spent approximately $3,605,000, $3,641,000 and $2,164,000, 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 $948,000, $1,603,000 and $676,000, in fiscal 1997, 1996 and 1995, respectively. The Registrant, on a consolidated basis, also received revenues from customers under development engineering service contracts of approximately $1,125,000, $1,877,000 and $923,000, in fiscal 1997, 1996 and 1995, respectively.
Backlog
Registrant's order backlog at March 31, 1997 from consolidated operations was estimated at approximately $47.7 million, and was estimated at approximately $39.3 million at March 31, 1996. 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 6, 1997, Gradco and its subsidiaries employed 114 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 years ended March 31, 1997 and 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. 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. The Registrant had currency exchange gains of $904,000 and $1,057,000 in fiscal years 1997 and 1996, respectively caused by the strengthening of the dollar versus the yen during the periods. In fiscal 1995, the Registrant had a currency exchange loss of $387,000 caused by the surge in the value of the yen versus the dollar in March 1995.
Financial information regarding foreign and domestic operations and export sales is set forth in Note 8 of Notes to the Registrant's Consolidated Financial Statements filed in response to Item 8 below.
Item 2.
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 1998. GJ's offices are located in Tokyo, Japan. The offices of GJU (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.
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. The case has not yet been scheduled for trial.
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 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.
In June 1995, a jury found the Company to have liability in the lawsuit filed by John C. Hamma. The Company filed a motion in August 1995 to reverse the verdict. After a determination by the Court on the Company's motion, a separate proceeding to determine the amount of damages will be required, with respect to such portion of the verdict, if any, as remains in effect. 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. 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 damages which are likely to be awarded, but the amount of damages sought by the 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.
There are substantial differences between the Hamma and DuBois cases. Although the DuBois case will also be tried before a jury so that there are substantial elements of uncertainty, the Company continues to believe that the DuBois case alone will not have a material adverse effect on its consolidated financial position, or on its results of operations or liquidity.
Item 4.
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.
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, 1995 to March 31, 1997.
Quarter Ended High Low 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 June 30, 1996..................$ 5.00 $ 3.125 September 30, 1996.............$ 4.5625 $ 3.125 December 31, 1996..............$ 4.25 $ 3.375 March 31, 1997.................$ 4.25 $ 3.00 (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 6, 1997 is 420.
(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.
Item 6.
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, 1997 1996 1995 1994 1993 (In thousands, except per share amounts) Statement of operations data: Operating revenues: $100,887 $100,596 $82,838 $53,148 $61,227 -------- -------- ------- ------- -------
Costs and expenses: Cost of sales 78,331 76,657 64,290 40,629 47,929 Other operating expenses 15,710 16,625 14,815 12,211 12,423 Interest income, net (183) (226) (55) (32) (19) Investment (gains) losses - (53) 205 52 - -------- -------- ------- ------- ------- 93,858 93,003 79,255 52,860 60,333 -------- -------- ------- ------- ------- Earnings before income taxes and minority interest 7,029 7,593 3,583 288 894 Income taxes 2,983 2,748 1,331 535 1,181 Minority interest 1,194 1,585 800 (241) 196 -------- -------- ------- ------- ------- Net earnings (loss) $ 2,852 $ 3,260 $ 1,452 $ (6) $ (483) ======== ======== ======= ======= =======
Earnings (loss) per common share:
Net earnings (loss) $ .36 $ .42 $ .19 $ - $ (.06) ======== ======== ======= ======= =======
Weighted average shares outstanding 7,799 7,796 7,784 7,784 7,784
Balance sheet data: Working capital $19,418 $18,979 $16,727 $10,208 $ 8,349 Total assets 58,086 58,015 64,383 41,796 42,988 Long-term debt 15 25 35 - - Shareholders' equity 15,339 16,201 16,997 11,137 9,194
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
GJ and GJU operate jointly in the development and marketing of products to their customer base, primarily OEMs. Both companies sell into the U.S. domestic and foreign marketplace at similar profit margins, after elimination of intercompany profits. Sales are denominated for the most part in Japanese yen and U.S. dollars, corresponding to the currency charged for the product by the contract manufacturer. Although the gross profit margin percentage is thus protected from foreign currency fluctuations, translation gains and losses can still occur when receivables and payables are denominated in other than the local currency of each company.
Revenues
Revenues for the fiscal year ended March 31, 1997 increased by $291,000 from the prior year. Although unit sales increased by 6%, the amount of net sales increased by only $738,000, from $96,159,000 to $96,897,000. Sales denominated in yen, when translated into dollars, were approximately $13 million lower than they would have been had the yen not decreased by 17% against the dollar during the year. Revenue from development engineering services decreased by $752,000 as copier projects partially funded by customers in the prior year were completed while royalties increased by $305,000.
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 (21.5%) in net sales, from $79,138,000 to $96,159,000. 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.
Costs and Expenses
Cost of sales as a percentage of net sales was 80.8%, 79.7% and 81.2% in fiscal 1997, 1996 and 1995, respectively. The increase in the current fiscal year is primarily due to a decrease in margins in Venture Engineering's contract manufacturing business. The improvement in fiscal 1996 over the prior fiscal year was primarily attributable to a change in mix of units sold toward higher margin products.
Research and development expenses ("R&D") in fiscal 1997 totaled $3,605,000 (3.6% of revenues), compared to $3,641,000 (3.6% of revenues) in fiscal 1996 and $2,164,000 (2.6% of revenues) in fiscal 1995. 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") decreased by $879,000 (6.8%) in fiscal 1997 from the prior year. The favorable translation of SG&A at GJ caused by the weaker yen during the year accounted for a decrease of approximately $1,400,000 and a reduction in legal fees associated with the Hamma lawsuit, which was tried in June 1995, accounted for a decrease of $600,000. These decreases were offset by lower currency exchange gains
amounting to $153,000 and general increases at the operating subsidiary level. SG&A increased by $333,000 (2.6%) in fiscal 1996 from fiscal 1995. Increased SG&A attributable to the growth in revenue was moderated by a currency exchange gain of $1,057,000 in fiscal 1996 as the dollar strengthened against the yen during the year compared to a currency exchange loss of $387,000 in fiscal 1995.
Pre-tax Earnings, Taxes, and Minority Interest
As a result of the above factors, earnings before income taxes and minority interest were $7,029,000, $7,593,000 and $3,583,000 in fiscal 1997, 1996 and 1995, respectively. Income taxes and minority interest increased in fiscal 1996 from 1995 due to the increases in pre-tax earnings. The tax provisions of $2,983,000, $2,748,000 and $1,331,000 in fiscal 1997, 1996 and 1995, respectively, primarily comprise foreign taxes on the earnings of the Company's Japanese subsidiary. The Company's consolidated effective tax rate increased in fiscal 1997 as net operating loss carryforwards at GJ's domestic subsidiary, which files a separate return, were fully utilized. For further discussion regarding the tax provisions, see Note 3 of Notes to Consolidated Financial Statements set forth in Item 8
Item 8. Financial Statements and Supplementary Data.
Response to this Item is contained in Item 14(a).
Item 9.
Item 9. Disagreements in Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10.
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 1997.
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 1998, to be held in June 1998.
(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 56 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. Harland L. Mischler, Mr. Mischler has been Chief Financial Officer age 65 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 69 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 61 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 50 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
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 60 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 54 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.
Compliance with Section 16(a) of the Exchange Act
Martin Tash failed to file on a timely basis a Statement of Changes in Beneficial Ownership on Form 4, reporting the transfer of 6,250 shares owned by Mr. Tash individually into a private profit sharing plan of which Mr. Tash is the sole beneficiary. Such transfer does not affect Mr. Tash's beneficial ownership. Mr. Tash will be filing the Form 4 on or about the date of filing of this Form 10-K.
Item 11.
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 6, 1997 for services rendered in all capacities to the Registrant and its subsidiaries during each of the fiscal years ended March 31, 1997, 1996 and 1995: (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, 1997 required to be disclosed in column (c) below exceeded $100,000:
SUMMARY COMPENSATION TABLE (a) (b) (c)(1)(2) Name and Principal Position Year Salary and Bonus($) - --------------------------- ---- -------------------
Martin E. Tash 1997 125,000 Chairman of the Board, President 1996 125,000 and Chief Executive Officer 1995 125,000
Masakazu (Mark) Takeuchi 1997 317,996 President, 1996 315,248 Gradco (Japan) Ltd. 1995 289,166
Akira (Tony) Shinomiya 1997 278,757 Chief Financial Officer 1996 277,940 Gradco (Japan) Ltd. 1995 254,123 _______________
(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). Such compensation includes bonuses for 1997 in the amount of $37,286 and $31,072 for Messrs. Takeuchi and Shinomiya, respectively. All such compensation was paid in yen by GJ and is translated into dollars at each year's average annual exchange rates in the above table. When measured in yen, there was a 6% increase in compensation from 1995 to 1996, and a 17% increase in compensation from 1996 to 1997.
(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 331,000 shares are outstanding under the 1988 Plan. There are no shares available for issuance.
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).
The following table sets forth the number of unexercised options held at March 31, 1997 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 3/31/97). Therefore, such options were not "in-the-money" at such date. The aggregate dollar value of the options held by Mr. Tash at 3/31/97 (determined as the difference between the fair market value and the exercise price of the underlying shares at that date) was $25,000.
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 1997 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, 1997. 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, 1997. 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, 1997. 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.
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, 1997, 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, 1997, 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, 1996 (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.
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 6, 1997 based on 7,799,494 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
Ryback Management 992,000(2) 12.7% Corporation 7711 Carondelet Avenue Box 16900 St. Louis, MO 63105
Dimensional Fund 579,649(3) 7.4% Advisors, Inc. 1299 Ocean Avenue 11th Floor Santa Monica, CA 90401
Kennedy Capital 419,800(4) 5.4% Management, Inc. 10829 Olive Boulevard 11th Floor St. Louis, MO 63141
_______________ (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 (47,433 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. 2 to Statement on Schedule 13G, dated January 27, 1997, Ryback Management Corporation ("Ryback"), a registered investment advisor, has sole voting and dispositive power as to 992,000 shares as of December 31, 1996. 703,000 of such shares are held by Lindner Growth Fund, a registered investment company, and 289,000 are managed by Ryback.
(3) As set forth in Amendment No. 5 to Statement on Schedule 13G, dated February 5, 1997, Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment advisor, is deemed to have beneficial ownership of 579,649 shares as of December 31, 1996, 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.
(4) As set forth in Statement on Schedule 13G, dated February 10, 1997, Kennedy Capital Management, Inc. ("Kennedy"), a registered investment advisor, is deemed to have beneficial ownership of 419,800 shares as of December 31, 1996.
(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 6, 1997.
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 22,600 (5) * 1009 N. Bethlehem Pike Springhouse, PA 19477
Thomas J. Burger 7,500 (6) * 1555 West Walnut Lane Irving, TX 75038
Masakazu (Mark) Takeuchi 18,000 (7) * Shibuya-ku, Tokyo 150 Japan
Akira (Tony) Shinomiya 6,000 (8) * Shibuya-ku, Tokyo 150 Japan
All Executive Officers and 1,414,704 (9) 17.8% 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 (9).
(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 15,100 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) Represents shares which may be acquired upon the exercise of currently exercisable options.
(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. Takeuchi.
(8) 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.
(9) 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.
Item 13. Certain Relationships and Related Transactions
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 1997 fiscal year, the Registrant paid legal fees of $70,081 to such firm.
PART IV
Item 14.
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.
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 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 ), incorporated by reference from Form 10-K for fiscal year ended March 31, 1996, Exhibit 10.16.
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.
10.19 Agreement among Gradco (Japan) Ltd., Gradco (USA) Inc., and Xerox Canada Ltd. dated as of August 17, 1995, incorporated by reference from Form 10-K for the fiscal year ended March 31, 1996, Exhibit 10.19.
22 List of Significant Subsidiaries
(i) Gradco (Japan) Ltd. (Japan) (ii) Venture Engineering, Inc. (Texas) (iii) Gradco (USA) Inc. (California)
23 Consent of Price Waterhouse LLP - filed herewith.
27 Financial Data Schedule - filed herewith.
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 23, 1997 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 23, 1997 - ------------------------ Martin E. Tash
Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Harland L. Mischler and Director June 23, 1997 - ------------------------ Harland L. Mischler
Secretary, Treasurer and /s/ Bernard Bressler Director June 23, 1997 - ------------------------ Bernard Bressler
/s/ Robert J. Stillwell Director June 23, 1997 - ------------------------ Robert J. Stillwell
/s/ Thomas J. Burger Director June 23, 1997 - ------------------------ 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, 1997
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, 1997 and 1996..................................S-2 Consolidated Statements of Operations--Years Ended March 31, 1997, 1996 and 1995............................S-3 Consolidated Statements of Shareholders' Equity-- Years Ended March 31, 1997, 1996 and 1995................S-4 Consolidated Statements of Cash Flows--Years Ended March 31, 1997, 1996 and 1995............................S-5 Notes to Consolidated Financial Statements..................S-7 to S-18 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-19
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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, 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 June 5, 1997
S-1 GRADCO SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) March 31, 1997 1996 ---- ---- ASSETS Current assets: Cash $18,335 $19,523 Accounts receivable, less allowance for doubtful accounts of $59 and $103 24,583 20,496 Inventories 1,759 1,940 Deferred income taxes 252 278 Other current assets 327 1,380 ------- ------- Total current assets 45,256 43,617 Furniture, fixtures and equipment, net 2,054 1,708 License repurchase, net of accumulated amortization of $10,994 and $11,523 4,069 5,852 Excess of cost over acquired net assets, net of accumulated amortization of $451 and $408 1,278 1,321 Other assets 5,429 5,517 ------- ------- $58,086 $58,015 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $12,608 $12,769 Current installments of long-term debt 11 12 Accounts payable 10,939 8,448 Accrued expenses 684 709 Income taxes payable 1,596 2,700 ------- ------- Total current liabilities 25,838 24,638 Long-term debt, excluding current installments 15 25 Non-current liabilities 889 787 Deferred income taxes 1,833 2,599 Minority interest 14,172 13,765 ------- ------- Total liabilities 42,747 41,814 ------- ------- 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 44,618 44,618 Deficit (30,358) (33,210) Currency translation adjustments 1,079 4,793 ------- ------- Total shareholders' equity 15,339 16,201 ------- ------- $58,086 $58,015 ======= =======
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, ------------------------------------ 1997 1996 1995 ---- ---- ---- Revenues:
Net sales $ 96,897 $ 96,159 $ 79,138 Development engineering services 1,125 1,877 923 Licenses and royalties 2,865 2,560 2,777 -------- -------- -------- 100,887 100,596 82,838 -------- -------- -------- Costs and expenses:
Cost of sales 78,331 76,657 64,290 Research and development 3,605 3,641 2,164 Selling, general and administrative 12,105 12,984 12,651 -------- -------- -------- 94,041 93,282 79,105 -------- -------- -------- Income from operations 6,846 7,314 3,733
Interest expense (4) (13) (93) Interest income 187 239 148 Dividend income - - 4 Gain (loss) on trading securities - 53 (209) -------- -------- -------- Earnings before income taxes and minority interest 7,029 7,593 3,583 Income tax expense 2,983 2,748 1,331 Minority interest 1,194 1,585 800 -------- -------- -------- Net earnings $ 2,852 $ 3,260 $ 1,452 ======== ======== ========
Earnings per common share $ .36 $ .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, 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 Translation adjustment - - - (3,714) Net earnings - - 2,852 - --------- ------- -------- ------ Balance at March 31, 1997 7,798,909 $44,618 $(30,358) $1,079 ========= ======= ======== ======
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, --------------------------------- 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net earnings $ 2,852 $ 3,260 $ 1,452 ------- ------- ------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,268 1,213 988 Amortization 1,583 2,066 1,941 Deferred income taxes (406) (947) 330 Unrealized holding gain on trading securities - (8) (126) (Gain) loss on sale of securities - (45) 335 Provision for losses on accounts receivable 240 64 18 (Gain) loss on sale of property and equipment (5) 66 (6) Purchases of trading securities - (249) (2,479) Proceeds from sale of trading securities - 882 3,803 Issuance of shares in lieu of cash - 72 - Minority interest 1,194 1,585 800 (Increase) decrease in accounts receivable (7,024) 2,182 (11,896) Decrease (increase) in inventory 142 (609) 1,373 Decrease (increase) in prepaid assets 968 37 (1,516) (Increase) decrease in other assets (2,662) (1,057) 19 Increase (decrease) in accounts payable 3,835 (133) 330 (Decrease) increase in accrued expenses (9) (387) 280 (Decrease) increase in income taxes payable (842) 2,135 727 Increase in other liabilities 204 145 600 ------- ------- ------- Total adjustments (1,514) 7,012 (4,479) ------- ------- ------- Net cash provided by (used in) operations 1,338 10,272 (3,027) ------- ------- ------- Cash flows from investing activities: Acquisition of property and equipment (1,753) (1,638) (1,023) Proceeds from sale of property and equipment 10 3 29 ------- ------- ------- Net cash used in investing activities (1,743) (1,635) (994) ------- ------- -------
S-5 CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
For the years ended March 31, --------------------------------- 1997 1996 1995 ---- ---- ---- Cash flows from financing activities: Net borrowings on notes less than three months 1,690 1,305 11,262 Proceeds from issuance of notes in excess of three months - - 1,553 Repayment of notes in excess of three months (10) (9) (3,007) Dividend to minority shareholders (231) - - ------- ------- ------- Net cash provided by financing activities 1,449 1,296 9,808 ------- ------- ------- Effect of exchange rate changes on cash (2,232) (2,568) 758 ------- ------- ------- Net (decrease) increase in cash and cash equivalents (1,188) 7,365 6,545 Cash and cash equivalents at beginning of year 19,523 12,158 5,613 ------- ------- ------- Cash and cash equivalents at end of year $18,335 $19,523 $12,158 ======= ======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for: Interest $ 4 $ 15 $ 93 Income taxes 4,232 1,910 272
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, worldwide, 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%.
On June 5, 1997, the Company announced that GJ had obtained agreements from the holders of 4,271,000 shares of the outstanding stock of Gradco Japan to sell such stock back to GJ at a price of 299 yen per share. The transaction is expected to be consummated after a special meeting of GJ to be held on June 27, 1997. The total price of approximately $11 million will be paid from available cash of GJ. After the completion of the transaction, the Company will own approximately 90% of the stock of GJ.
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.
S-7 GRADCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
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, 1997.
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 make spare parts available for purchase 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).
Long-Lived Assets
Effective April 1, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets. Under SFAS 121, the Company is required to review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the book value of an asset may not be recoverable. With respect to the excess of cost over acquired net assets ("goodwill"), the Company records impairment to the extent that future undiscounted cash flows are less than the carrying value of goodwill. The implementation of SFAS 121 did not have an impact on the Company's financial position or results of operations.
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 4) 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.
S-8 GRADCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
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, 1997, 1996 and 1995, respectively, were $948,000, $1,603,000 and $676,000. Research and development expenses on behalf of OEM customers and internal research and development expenses in the fiscal years ended March 31, 1997, 1996 and 1995, respectively, were $2,657,000, $2,038,000 and $1,488,000.
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 were foreign currency transaction gains of $904,000 and $1,057,000 in fiscal 1997 and 1996, respectively, and a loss of $387,00 in fiscal 1995.
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 7,799,000, 7,796,000 and 7,784,000 in fiscal years 1997, 1996 and 1995, respectively. The effect on net earnings per common share assuming full dilution is either anti-dilutive or results in less than 3% dilution.
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings per Share, which establishes a simplified computation of earnings per share ("EPS"). Under SFAS 128, primary EPS is replaced by basic EPS, and dual presentation of basic and diluted EPS is required for all entities with a complex capital structure. The Company will adopt SFAS 128 during fiscal 1998. The adoption of SFAS 128 is not expected to have a material effect on the Company's reported net earnings per common share.
S-9 GRADCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2--DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS
March 31, ----------------- 1997 1996 ---- ---- (In Thousands) Inventories are summarized as follows:
Raw materials $ 499 $ 644 Work-in-process 570 1,069 Finished goods 690 227 ------ ------ $1,759 $1,940 ====== ======
Furniture, fixtures and equipment, at cost, are summarized as follows:
Office, shop and automotive equipment $1,080 $ 959 Computer equipment 730 541 Leasehold improvements 130 118 Tooling 4,991 4,346 ------ ------ 6,931 5,964 Less: Accumulated depreciation and amortization 4,877 4,256 ------ ------ $2,054 $1,708 ====== ======
Other assets are summarized as follows:
Deposits $2,479 $ 983 Patents 938 2,339 Cash surrender value of life insurance 855 984 Investments 835 894 Intangible pension asset 228 220 Other 94 97 ------ ------ $5,429 $5,517 ====== ======
Other non-current liabilities are summarized as follows:
Accumulated benefit obligation $ 730 $ 641 Other 159 146 ------ ------ $ 889 $ 787 ====== ======
S-10 GRADCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3--INCOME TAXES
Income tax expense consists of the following (in thousands): Fiscal Year ------------------------------ 1997 1996 1995 ---- ---- ----
Current Foreign $2,971 $3,250 $ 929 Federal 296 218 23 State 122 227 49 Deferred Foreign (441) (779) 330 Federal 35 (168) - ------ ------ ------ Total $2,983 $2,748 $1,331 ====== ====== ======
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 ------------------------------ 1997 1996 1995 ---- ---- ----
Federal statutory tax rate 35.0% 35.0% 35.0% Increase (decrease) in tax rate resulting from: State income taxes, less federal benefit 1.2 2.2 1.3 Foreign tax expense 6.0 4.8 4.7 Net operating loss utilized - (6.9) (3.9) Other 0.2 1.1 - ------ ------ ------ Effective income tax rate 42.4% 36.2% 37.1% ====== ====== ======
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 3--INCOME TAXES--(Continued)
March 31, ----------------- 1997 1996 ---- ---- Deferred tax liabilities License repurchase $1,338 $1,922 Intercompany loan revaluation 766 883 Tax benefits for increase in imports 50 87 Other 116 107 ------ ------ 2,270 2,999 ------ ------ Deferred tax assets Retirement benefits 261 219 Local taxes 201 348 Other 227 111 Tax loss carryforwards 9,450 9,800 Valuation allowance (9,450) (9,800) ------ ------ 689 678 ------ ------ Net deferred tax liabilities $1,581 $2,321 ====== ======
At March 31, 1997, the Company had federal net operating loss carryforwards ("NOLs") for tax reporting purposes of $27,000,000 which will expire in 2000 through 2012 if not utilized. These NOLs are only utilizable by Gradco Systems, Inc. and its subsidiary, Venture Engineering, Inc. because Gradco (USA) Inc., the Company's other domestic subsidiary, is required to file a separate tax return. At this time it is not deemed more likely than not that these NOLs can be utilized and therefore a valuation allowance equal to the deferred tax benefit has been established. At March 31, 1997, 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 1998 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, 1997, the Company's share of such undistributed foreign earnings totaled $6,200,000. Foreign withholding taxes of approximately $620,000 would be due upon remittance of these earnings.
NOTE 4--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 $1,004,000, $1,158,000 and $1,436,000 in the years ended March 31, 1997, 1996 and 1995, respectively.
S-12 GRADCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5-- SHORT TERM BORROWING ARRANGEMENTS
GJ's U.S. subsidiary has a $2 million line of credit with Sumitomo Bank, Limited. There were no borrowings under this line at March 31, 1997. Notes payable at March 31, 1997 consist of $12,608,000 due to trade creditors in ninety days and are non-interest bearing.
Information relative to short-term borrowings is as follows (in thousands): Fiscal Year ------------------------------ 1997 1996 1995 ---- ---- ----
Maximum amount outstanding $ - $1,500 $1,500 Average balance outstanding $ - $ 111 $1,500 Weighted average interest rate during the period N/A 6.7% 5.6%
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, 1997). No options may be exercised later than 10 years from the date of grant.
The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized. Had compensation cost been determined consistent with SFAS 123, there would have been no effect on results of operations for fiscal 1996 and the effect on fiscal 1997 would have been immaterial.
The following table summarizes stock option activity: Weighted Average Number Exercise Price ------ ----------------
Outstanding March 31, 1994 284,110 $ 4.47 Granted 55,000 3.38 Forfeited (200) 9.25 ------- Outstanding March 31, 1995 338,910 4.29 Expired (15,000) 9.25 ------- Outstanding March 31, 1996 323,910 4.06
S-13 GRADCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6--EMPLOYEE BENEFITS--(Continued)
Granted 11,500 3.38 ------- Outstanding March 31, 1997 335,410 $ 4.04 =======
Of the options outstanding at March 31, 1995, 1996 and 1997, options to purchase 278,910, 284,743 and 305,576 shares, respectively, were exercisable at weighted average prices of $4.50, $4.16 and $4.10 per share, respectively.
The following table summarizes information concerning currently outstanding and exercisable stock options as of March 31, 1997:
Options Outstanding Options Exercisable --------------------------------------- --------------------- Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Contractual Life Price Exercisable Price - ------------------------------------------------------------------------------- $2.38 to $3.38 206,500 5.6 $3.11 176,666 $3.06 4.25 to 5.88 73,500 3.8 4.32 73,500 4.32 6.75 to 8.31 55,410 2.1 7.13 55,410 7.13 ------- ------- 335,410 305,576 ======= =======
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, 1997, the Company has recorded an intangible pension asset of $228,000 and an accumulated benefit obligation of $730,000. The amount charged to expense in fiscal 1997, 1996 and 1995 was $149,000, $329,000 and $638,000, respectively.
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 plans, the Company may match employee contributions contingent upon the Company's annual earnings performance. In fiscal 1997, the Company contributed $14,000 to the plans. No Company contributions were made during fiscal 1995 and 1996.
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.
S-14 GRADCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7--COMMITMENTS AND CONTINGENCIES--(Continued)
Future minimum lease payments at March 31, 1997, under noncancelable facility and equipment leases with remaining lease terms in excess of one year are as follows:
1998 $ 685,000 1999 604,000 2000 386,000 2001 369,000 2002 376,000 Thereafter - ---------- $2,420,000 ==========
Rent expense, net of sub-lease income, was approximately $914,000, $916,000 and $799,000 for fiscal years 1997, 1996 and 1995, respectively.
In the following litigation, material claims have been asserted against the Company:
HAMMA V. GRADCO SYSTEMS INC. ET AL., DUBOIS V. GRADCO SYSTEMS INC. ET AL. The Company and its (now former) president, Mr. Keith Stewart, have been sued in the U.S. District Court in Connecticut by John C. Hamma and R. Clark DuBois, both of whom are former employees of the Company. Complaints in the two cases, which were consolidated for certain pretrial purposes, primarily allege misrepresentation and fraudulent concealment by Gradco and Mr. Stewart in connection with agreements entered into in 1982 with Mr. Hamma and in 1983 with Mr. DuBois terminating and releasing the Company from royalty obligations under prior royalty agreements. The complaints, which have been amended a number of times, seek unspecified damages and other relief. For each of these cases, the Court bifurcated the liability and damages issues so that a first trial would determine whether there is any liability and, if so, a second trial would determine damages.
In March 1992, each of the plaintiffs filed an Application for Prejudgment Remedy against the Company and Gradco (Japan) Ltd. seeking to attach $10,000,000 of assets of each of these two defendants. This Application was dismissed as respects GJ. In November 1992, the Company and the plaintiffs agreed in principle to a Consent Order instead of proceeding with a hearing on the Application. If during the pendency of the lawsuits the Company desires to sell, transfer or take any other action which would affect its ownership of stock in GJ, it has agreed to give 30 days prior notice to the plaintiffs, who will then be permitted, if they so request, to renew the Application within the 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.
S-15 GRADCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7--COMMITMENTS AND CONTINGENCIES--(Continued)
In June 1995, a jury found the Company to have liability in the lawsuit filed by John C. Hamma. The Company filed a motion in August 1995 to reverse the verdict. After a determination by the Court on the Company's motion, a separate proceeding to determine the amount of damages will be required, with respect to such portion of the verdict, if any, as remains in effect.
In July 1995, the plaintiffs filed another Application for a Prejudgment Remedy ("July PJR Application") seeking to attach Gradco Systems' assets. The July PJR Application sets forth various theories of damages including a theory calling for treble damages under Connecticut law in the amount of $70,500,000. The July PJR Application asserts that there is probable cause that a verdict in an amount greater than $70,500,000 will be rendered in the damages part of the case after trial on those issues. It is Gradco's belief that damages based on applicable law would result in a significantly smaller damages award even if the motion by Gradco for judgment as a matter of law is denied. The Court has determined that it will rule on the July PJR Application only after ruling on the August 1995 motion for judgment as a matter of law.
In November 1995, the Court ordered the plaintiffs to submit a memorandum regarding the legal theories on which they based their damages claims and for the defendants to respond. This issue is also under consideration by the Court. If Gradco's view prevails, the magnitude of damages, even should the August 1995 motion prove unavailing, will be reduced substantially from the amount sought in the July PJR Application.
The Company is presently unable to determine the amount of damages which are likely to be awarded, but the amount of damages sought by the plaintiffs, including punitive damages, could only be settled from assets of Gradco Systems, Inc. (which consist primarily of its investment in GJ). An award of damages of the magnitude sought by the plaintiffs could have a material adverse effect on the Company's financial position and might threaten the Company's existence as an ongoing enterprise. Gradco (Japan) Ltd., Gradco (USA) Inc. and Venture Engineering, Inc. are not parties to the lawsuit and any judgment awarded will not affect their operations, since those operations are independent of Gradco Systems, Inc.
There are substantial differences between the Hamma and DuBois cases. Although the DuBois case will also be tried before a jury so that there are substantial elements of uncertainty, the Company continues to believe that the DuBois case alone will not have a material adverse effect on its consolidated financial position, or on its results of operations or liquidity.
S-16 GRADCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8--CUSTOMER INFORMATION AND GEOGRAPHIC DATA
The Company had sales to major customers (in excess of 10% of revenues) in each fiscal year as follows:
Fiscal Year ------------------------------ 1997 1996 1995 ---- ---- ----
Xerox 26% 29% 16% Rank Xerox 17% 16% N/A Mita 11% 13% 19% Lanier 11% 11% N/A Sharp N/A N/A 11%
Geographic data follows (in thousands):
Domestic Europe Asia Eliminations Consolidated -------- ------ ------ ------------ ------------ March 31, 1997 - -------------- Net sales $63,304 $ 134 $86,388 $(52,879) $96,897 Net earnings 600 1 2,578 (327) 2,852 Assets 18,377 73 51,958 (12,322) 58,086
March 31, 1996 - -------------- Net sales $62,194 $ 89 $86,186 $(52,310) $96,159 Net earnings 647 3 2,610 - 3,260 Assets 19,411 67 53,908 (15,371) 58,015
March 31, 1995 - -------------- Net sales $34,968 $ 94 $72,572 (28,496) $79,138 Net earnings (72) 1 1,523 - 1,452 Assets 20,037 82 61,120 (16,856) 64,383
For the years ended March 31, 1997, 1996 and 1995 export sales were $18,618,000, $16,279,000 and $8,426,000, respectively, consisting principally of sales to Europe and Canada.
S-17 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) - ---- Net sales $25,546 $25,601 $21,950 $23,800 $96,897 Gross margin 5,003 4,619 4,181 4,763 18,566 Earnings before income taxes 1,716 1,301 1,382 2,630 7,029 Net earnings 792 550 625 885 2,852 Net earnings per common share $ .10 $ .07 $ .08 $ .11 $ .36
- ---- 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
S-18 SCHEDULE II
GRADCO SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
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, 1995: - -------------------------- Allowance for doubtful accounts $174,000 $ 18,000 $153,000 $ 39,000
Year ended March 31, 1996: - -------------------------- Allowance for doubtful accounts $ 39,000 $ 64,000 $ - $103,000
Year ended March 31, 1997: - -------------------------- Allowance for doubtful accounts $103,000 $240,000 $284,000 $ 59,000
S-19