Gradco Reports Loss Of $28 Million, Sues Xerox Over a Patent
Gradco Systems Inc., battered by the loss of its largest customer, reported a $28.6-million loss for the fourth quarter ended March 31 and said that a group of Japanese investors had agreed to buy a 27% stake in its pivotal Japanese subsidiary.
The Irvine-based manufacturer of sorters for copying machines and printers also disclosed that it has filed a patent-infringement lawsuit against Xerox Corp., which with its two foreign affiliates had accounted for more than a third of Gradco’s business. Xerox now manufacturers its own sorters.
Gradco’s poor fourth-quarter performance resulted in a $28.1-million loss on revenues of $89.5 million for the fiscal year, compared to $5.6 million in net earnings on revenues of $115.1 million in the previous year. The loss was due largely to a one-time, $23-million fourth-quarter charge resulting from a major restructuring announced earlier this year.
The reorganization, which followed a failed effort by Gradco chairman Keith Stewart to take the company private in a leveraged buyout, resulted in the shutdown of a Santa Ana manufacturing facility and the transfer of all responsibility for copier products--which account for 70% of the company’s business--to Gradco Japan.
Gradco said the $26.5-million investment in Gradco Japan would come from a group of Japanese institutional investors led by Japan Associated Finance Co. Ltd., or JAFCO. Stewart, in a statement, called the deal “another step in the process of taking Gradco Japan public on the Japanese over-the-counter market.”
Stewart has in the past discussed the possibility of making such a public offering in Japan, though he had previously described such a step as only one of a number of financing measures under consideration.
The company said the JAFCO transaction would result in an $18-million gain for the first quarter ended June 30, and that the cash would be used to retire debt and for working capital.
Stewart and other officials could not be reached for comment after Monday’s announcement, which was made more than a month later than normal and after stock exchanges had closed. The company’s shares closed up 50 cents at $11.50 in over-the-counter trading Monday.
Although Gradco said when it announced the restructuring that it would hurt earnings, the $23-million figure was far higher than anticipated and far above the $10 million that chief financial officer Steve Nabor acknowledged as a ballpark estimate in April.
Stewart confirmed in February that the company had lost a major contract with Xerox, and Gradco said Monday that it had lost $21 million in sales as a result of Xerox’s efforts to make its own sorters.
Gradco said it was seeking damages and an injunction against Xerox Corp. in its patent-infringement lawsuit, claiming that it had lost “in excess of $100 million” as a result of Xerox’s actions. Although Stewart said in February that Fuji Xerox, a major Japanese maker of copiers, was still a major customer, Gradco said Monday that Fuji Xerox and Rank Xerox of the United Kingdom were also infringing its patents.
Because of the loss of the Xerox business, revenues for the quarter were down sharply. Stewart said that “the company will continue to feel the effect of the loss of the Xerox business in the first half of the new fiscal year. However, we expect a strong second half as we commence delivery of several new products in both the copier and printer markets.”
However, when Gradco in February reported an unexpected loss for the third quarter, Stewart called it a “temporary decline” that “will not have a lasting effect into next year.”
Gradco, which went public in 1983, was once a favorite growth stock on Wall Street but has experienced wild fluctuations in both its earnings performance and stock price over the years. The stock traded as high as $18.50 last September on the strength of the buyout possibility but later plunged below $9.
The Pritzker family of Chicago controls about 6% of Gradco’s shares and has periodically been rumored to be contemplating a buyout. Plenum Publishing Corp. of New York took an 8% stake in the company last year. And Stewart has been discussing buyout possibilities with Japanese investors since early last year.
Gradco has long relied on its patented moving-bin sorter for mid-sized copying machines as its core product, and investors were attracted by the strength of that technology and the broad potential in paper-handling equipment for copiers, printers and fax machines.
But despite a string of acquisitions in the printer field, the moving-bin sorter still accounts for a majority of Gradco’s revenues. Analysts have said the company could be vulnerable if copier manufacturers such as Xerox were able to develop an effective sorter that did not infringe on Gradco’s patents.
GRADCO’S PERFORMANCE
In the fourth quarter ended March 31, Gradco Systems Inc. reported a loss of $28.7 million as its revenues plunged 36% to $18.5 million. The company attributed the loss to a one-time $23 million restructuring charge.
Figures are in thousands except per share data.
4th Qtr 4th Qtr 12 Months 12 Months 1990 1989 1990 1989 Revenue $18,495 $28,861 $89,505 $115,138 Net income (loss) (28,658) 1,755 (28,108) 5,635 Per share (loss) ($3.79) $.27 ($4.02) $.88
Source: Gradco Systems Inc.
