<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Annual report pursuant to section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the fiscal year ended September 30, 1996
Commission File Number: 0-10691
CHECK TECHNOLOGY CORPORATION
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1392000
--------------------------------------------- ----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
12500 Whitewater Drive, Minnetonka, Minnesota 55343-9420
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 939-9000
____________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.10 par value)
(Title of Class)
____________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 60 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. [ X ]
The aggregate market value of the voting stock (common stock and voting
Convertible Preferred Stock) held by nonaffiliates of the Registrant was
approximately $53,343,000 at December 1, 1996 when the closing price of such
stock, as reported by Nasdaq, was $8.875.
There were 6,317,727 shares outstanding of Registrant's $.10 par value common
stock as of December 1, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the definitive proxy statement to be filed with the Commission
within 120 days after the end of the registrant's fiscal year are
incorporated by reference into Part III
This Form 10-K consists of 44 pages (including exhibits). The index is set
forth on page 14.
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ITEM 1. BUSINESS
COMPANY BACKGROUND
Check Technology Corporation (the Company) was formed in 1981 to design and
manufacture a sophisticated printing system. The original product concept for
the Company was a computerized financial document production system which
integrated many of the functions required for the production of checkbooks.
These functions included (i) automatic collation of checkbook components, (ii)
high quality alphanumeric and graphics printing for customer personalization and
bank address, and (iii) consistent Magnetic Ink Character Recognition (MICR)
printing for the electronic processing of checks. Shipments of its first
system, the Model 2000 CHECKTRONIC-Registered Trademark-, began in 1983.
Within a short time after the introduction of the CHECKTRONIC system, the
Company recognized the product's applicability in such areas as insurance claim
production and centralized funds disbursements. The latter includes payroll and
accounts payable checks. These applications are called "Checkwriting"
applications by the Company. Checkwriting typically requires a high level of
security (e.g. secure operator access and the ability to produce an audit trail
after a batch of checks is produced.) The Company developed sophisticated
control software/hardware which met these stringent operating requirements.
This security capability is offered as an option on many of the Company's
systems and differentiates the Company's products from many competitor's
products.
The Company has had a significant presence in the international check production
marketplace since 1983. The integration of the check production functions
described above was found to result in the cost effective production of the
small check order sizes common to most markets outside the United States. The
production cost reductions for orders of 25-100 checks, as well as the
improvement in printing quality, created a demand for the Company's systems in
many international markets.
In order to manage this demand and to provide the necessary technical support of
the products after installation in the field, the Company opened its first
subsidiary, Check Technology Limited, in England in 1983. The Company opened
its French and Australian subsidiaries in 1987. At September 30, 1996, the
Company had an installed base of over 400 systems located in 47 countries.
BUSINESS
The Company's business is the design, manufacture, sale and service of
computerized financial document production systems. The systems can collate,
personalize and encode documents into packages tailored to the customer's
requirements. The systems are sold through the Company and its international
subsidiaries.
PRODUCTS
Check Technology sells a complete family of electronic production systems for
use in both cut-sheet and continuous forms production environments. These
systems can be used for four basic applications: folio production, insurance
claims, fulfillments, and disbursements. Folio production includes the printing
of checkbooks and financial payment coupon books. Insurance claim applications
consist of explanation of benefit forms and insurance claim checks. Fulfillment
applications include coupons and rebate checks, while disbursement applications
include accounts payable checks and payroll checks. These electronic production
systems enable companies to easily and quickly transform blank paper stock into
fully collated checks and forms.
Cut Sheet Production Systems. The Company's primary cut-sheet system is the
CHECKTRONIC series. The CHECKTRONIC series uses a combination of ion-deposition
and impact technology. The Company markets four CHECKTRONIC models to companies
with medium to high volume folio production, insurance claim, fulfillment and
disbursement applications. The Model 1750X operates at a rated speed of 45
pages per minute, while the Models 2100X, 4000X and 4500X operate at 60, 90 and
120 pages per minute, respectively. The CHECKTRONIC series can be purchased
with an advanced security/audit capability. The Company's CHECKTRONIC systems
provide their owners with the flexibility, reliability and consistency to
produce high quality documents while reducing production costs.
Continuous Form Production Systems. The Company's CheckPrinter series consists
of continuous form systems. These systems are available as either stand alone
MICR printers or as tandem systems. The Model 930 and Model 960 operate at over
300 and 600 documents per minute, respectively. These two models utilize impact
technology to produce high quality MICR characters.
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Finishing Unit. In addition to the document production systems, the Company
offers a finishing system to complement its cut-sheet product line. The
FOLIOTRONIC-Registered Trademark- system incorporates a blend of proven concepts
with new designs and advanced microprocessor controls. The FOLIOTRONIC system
consists of a guillotine and stitcher/binder modules. Its rated throughput is
up to 2,000 books per hour. When used with the Company's electronic production
systems, the FOLIOTRONIC system enables customers with folio production
applications to transform blank paper stock into finished books.
Service and Maintenance. Service and maintenance revenue results from the sale
of maintenance contracts, the sale of proprietary consumable and supply items
and the sale of spare parts to customers who have purchased the Company's
equipment. Supplies are operating materials that are consumed during normal
operation of the Company's systems. Examples of these supplies are MICR ribbon
consumed in the printing of each MICR code line and toner which is consumed in
the personalization of each document. The Company believes that its service
network and spare parts business operated profitably for the years ended
September 30, 1996, 1995 and 1994, based upon the economies of scale achieved
from the expansion of the installed base of the Company's financial document
production equipment.
The Company employs customer engineers throughout the world. For Customers who
purchase maintenance contracts after the 90-day warranty period, which begins
after customer acceptance of a system, the Company provides ongoing customer
support through its service network, for which it charges for time and materials
on an annual service contract basis at approximately 10% percent of the current
system sales price. Some customers elect to provide their own maintenance and
service on the system they have purchased. The cost of providing service during
the warranty period has not been significant to the Company.
SALES AND MARKETING
Organization. The Company's system sales are made predominately through direct
sales personnel based in the United States and abroad. In addition, the Company
and its subsidiaries utilize a number of commissioned sales representatives in
countries where no direct sales personnel are available. The expansion of the
Company's activities into new countries is increasing the number of sales
generated through commissioned representatives. Marketing activities for the
Company and its subsidiaries are centralized at the Company's headquarters in
Minnetonka, Minnesota USA. These activities include the development and
implementation of product pricing, advertising and public relations strategies.
In addition, the Company utilizes market research and market development
resources in order to anticipate changes in the Company's competitive
environment.
United States Market. The market in the United States for checks and other
financial documents is the largest in the world, notwithstanding the fact that
the annual consumption of checks has shown a slowing growth rate over the last
five years. The Company believes that alternatives to the check document such
as debit and credit cards will eventually reduce the number of checks used,
although the size and rate of reduction is difficult to predict. It is
estimated that other documents produced by the Company's systems have shown
higher growth rates over the same period. These documents include payment
coupons, tax payment and other installment payment products.
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Disbursement activities, such as insurance claims and payroll operations
(collectively called Checkwriting applications by the Company) have been
affected by alternative payment technologies. These substitutes include
Electronic Funds Transfer (EFT) and Electronic Data Interchange (EDI). Although
these alternatives comprise only a small percentage of total payment
transactions in the United States, they are expected to have an increasingly
significant impact on U.S. disbursement activities over the next ten years.
The Company's systems have also been sold in the United States primarily to
check printers, payment coupon producers, service bureaus and large
corporations. These organizations all have requirements for the production of
personalized encoded document packages such as small personal check orders,
installment payment books, payroll, payables and insurance claims checks. The
Company expects to continue to increase its installed system base in the United
States.
International Market. The market for the Company's products outside the Untied
States has been primarily in personalized check production. The average
personalized check order size in most international markets is between 25 and
100 checks. These small order sizes are produced cost effectively on the
Company's products because of their automatic collation capabilities. Stringent
MICR quality standards, enforced by the major clearing banks in most
international markets, are also met by the Company's high quality MICR printing
capabilities. As a result of these market factors, the Company has had success
in penetrating the largest personal check production markets outside of the
United States. These include Australia, Brazil, France, Mexico, Spain and the
United Kingdom.
COMPETITION
The Company's products are sold into a number of different market segments.
Competition will differ depending on the segment and application in which the
Company competes. Many of the Company's competitors are well established and
have significantly greater access to financial, technical and personnel
resources. In 1991 the Company commenced a research and development effort for
the purpose of creating a new family of check production systems and believes
that such development effort is critical to its ability to remain competitive in
the markets it serves. See "Research and Development".
Folio production involves the manufacture of checkbooks and payment coupon
books. In the United States, check production is dominated by a small number of
companies such as Deluxe Corporation (St. Paul), John J. Harland Company
(Decatur, Georgia), and Clarke American (San Antonio), who are all customers of
Check Technology Corporation. Competitive standards for alphanumeric print
quality, MICR print quality and delivery time in this segment are established by
these major players. All of these market standards must be met or surpassed by
any new market competitor or production technology in order to capture a
substantial share of the United States personal check market. As a result, the
alphanumeric print quality required in this market, at present, must approach
the quality of the offset or letter press printing technologies in use by the
predominant companies. Up to this time, none of the new printing technologies
introduced into this market over the last ten years has been capable of meeting
these stringent quality standards. Only in the production of new account kits,
money market checkbooks and other applications which do not require offset or
letterpress quality, has the Company been able to establish itself in the
personal check application segment.
The Company has had success in the United States folio production segment
involved in the production of personalized payment books such as installment
loan and tax payment books. This market is dominated by a small number of
companies such as NCP (Birmingham), Cummins Allison (Indianapolis) and Venture
Encoding (Dallas). The predominant personal checkbook manufacturers discussed
above also produce payment books. The Company's products have found market
acceptance in this segment because they provide the efficiency, reliability and
production flexibility sought by this segment. Xerox (United States) and
Siemens (West Germany) are presently the Company's major competition for the
production of payment books.
International folio production markets, like the United States payment book
production market, are also driven more by cost and production efficiency
factors than by alphanumeric print quality standards. In addition, enforcement
of high MICR standards by the clearing banks in most international markets makes
MICR printing quality an extremely important competitive factor. The Company's
CHECKTRONIC family of products has found a high degree of acceptance in the
international market segments because these systems provide the efficiency,
production flexibility and MICR quality sought by the major check producers.
The Company competes in the international marketplace with Troy Division of
Pierce Companies, Inc. (United States), Xerox, Siemens and Nipson Bull.
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The centralized high volume production of insurance claims and check
disbursements does not require extensive collation. For this reason the Company
finds many competitors in this market segment. Specific competitors include
Xerox, Siemens, Troy, and IBM (United States). The Company's products offer
security and audit control, which for companies that generate many checks is a
significant advantage as it restricts unauthorized access to data printed on
Check Technology systems. The Company's security/audit capability also
physically tracks the total number of documents printed and maintains a running
total of the dollar amounts printed in each run.
BACKLOG
At December 1, 1996, the Company had a backlog of approximately $3,909,000 as
compared to a backlog of $3,594,000 as of December 1, 1995. The Company defines
its backlog as purchase orders which are unfilled. Because of customer changes
in delivery schedules and potential cancellation of orders, the Company's
backlog as of any particular date may not be representative of the Company's
actual sales for any succeeding fiscal period. The Company's equipment is
manufactured to orders received, and to date the Company has never been in a
position where it was unable to meet a scheduled shipment date because of
excessive order backlog. During fiscal year 1996, there were periods when the
Company had only a nominal backlog. The Company expects that it will continue
to have periods during which there will be little or no backlog.
MANUFACTURING AND SOURCES OF SUPPLY
Since the Company has not developed a sustained backlog, it has adopted a
manufacturing process to enable it to produce a "generic" product that can be
quickly configured to a customer's specific order without rework. This process
has enabled the Company to begin manufacturing without firm final orders. As a
result, the Company has been able to reduce manufacturing parts and material
inventories while, at the same time, being able to respond quickly to new
orders.
The components of the Company's financial document production systems are
manufactured by outside vendors, tested and then incorporated into the systems
by Company personnel. While the Company uses only one source for many of the
key components of its printing systems, most components, with the exception of
the non-impact alphanumeric printer and the MICR printer hammer bank component,
are available from multiple sources. However, many of the critical components
of the Company's systems would require redesign if new vendors were used.
For the CHECKTRONIC system, the Company is solely dependent on Delphax Systems,
which has its manufacturing facilities in Toronto, Canada, for its supply of
non-impact alphanumeric printers. Delphax has been able to meet the Company's
delivery schedules to date and is considered by Company management to be a
reliable supplier. Xerox, one of the Company's competitors, currently owns a
minority interest in Delphax. Data Products Corporation has been the only
source for the Company's MICR hammer bank. In October 1993, Data Products
Corporation announced its decision to terminate production of the MICR hammer
bank by early 1994. The Company has made an end-of-life buy and does not
foresee any impact on its operations. The loss in the foreseeable future of
Delphax as a supplier, for any reason, might affect the Company's ability to
remain in business. No assurance can be given at this time that the Company
will be able to secure a replacement source of supply for these components.
RESEARCH AND DEVELOPMENT
Since its formation, the Company's research and development activities have been
focused on the development of a computerized printing system which would be able
to produce on a precision basis financial documents at required speeds and
volumes. In the past year, the Company has continued product engineering on
this system as well as expanded its effort to develop new products in related
lines. The Company has continued its research on ways to make its production
systems faster, more reliable, cost effective and "user friendly". The
Company's research and development expenditures were $2,206,000, $2,319,000 and
$2,332,000, for the years ended September 30, 1996, 1995 and 1994, respectively.
The Company is developing a new family of check production systems, called the
Imaggia systems, which, by their design and features capabilities will target
the high volume U.S. check market as well as offering potential for increasing
the Company's international business. The Imaggia systems are expected to
incorporate state-of-the-art non-impact printing, paper handling and data
communications technologies to enhance the operating efficiencies of check
producers around the world.
The Company's ability to develop the Imaggia systems is dependent on its ability
to fund and staff this engineering effort and on its ability to obtain a
suitable digital engine printing technology for incorporation into the full
system. The Company has selected the Gemini digital printing technology,
currently under development by Delphax Systems, as the initial print engine for
the Imaggia system.
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The Company currently anticipates that the Imaggia system will be available in
1997. However, availability of the system has been delayed in the past, partly
due to circumstances outside the Company's control, and no assurances can be
given that these development efforts will be successful or timely.
PATENTS
The Company has received a patent covering the Model 2000 printing system and a
patent covering its fusing process. The Company also has received a patent
covering the autotaper for the FOLIOTRONIC system. There is no assurance that
such patents will afford the Company any competitive advantage. The Company
believes that its future success will depend primarily upon the technical
competence and creative skills of its personnel rather than on patents. The
Company cannot be assured that its printing system, or any components of such
system, will not be covered in whole or part by existing patents. Although the
Company is not presently aware of such patents, the Company could be required
to obtain patent licenses in order to conduct its business.
EMPLOYEES
As of December 1, 1996, the Company had 191 full-time employees, including 32 in
executive and administrative positions, 31 in electronic engineering and
product development, 36 in manufacturing, 17 in sales and marketing and 75 in
customer service.
Many of the Company's employees are highly skilled, and the Company's future
success will depend in part upon its ability to attract and retain such
employees. The Company is not subject to any collective bargaining agreement
and considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's corporate and manufacturing offices are located in Minnetonka,
Minnesota. The company leases a 75,000 square foot building under a lease that
expires on September 15, 2010. The annual rent is $379,000 in the first year,
increasing to $481,000 in the eleventh year and thereafter, plus operating
expenses and real estate taxes.
In addition, the Company leases office space for its European sales and service
center in Crawley, England under a lease which expires in 2013 and provides for
annual lease payments of $186,000, subject to adjustment every five years, plus
a pro rata portion of the operating expenses. The Company leases smaller office
premises for its operations in Australia and France.
The Company believes that its current arrangements for facilities are adequate
to meet its present needs and those for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries is a party to, nor is any of their
property the subject of, any pending legal proceedings which meet the
materiality test as set forth in instruction 2 to item 103. From time to time,
the Company and its subsidiaries receive complaints from customers with respect
to product performance and occasionally such complaints evolve into litigation.
The Company regards these matters as routine litigation incidental to its
business. At December 1, 1996 there was one such claim, which the Company
believes to be without merit.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1996.
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EXECUTIVE OFFICERS OF THE COMPANY
The names and ages of all of the Company's executive officers and the positions
held as of the date of this report are:
Name Position Age
- ---- -------- ---
Jay A. Herman President and Chief Executive Officer 49
Robert Bridigum Vice President of Engineering 52
Louise Jalma Vice President of Marketing 44
Dieter Schilling Vice President of Operations and 41
Customer Service
Paul Stephenson Vice President of Finance and 42
Administration
Officers of the Company are elected annually by the Board of Directors and serve
until their successors are duly elected and qualified. There are no family
relationships among the Company's officers and directors.
Set forth below is a summary of the business experience of each of the executive
officers of the Company:
JAY A. HERMAN joined the Company as Executive Vice President and Chief Financial
Officer in May of 1988 and was promoted to President in June 1989. Prior to
joining the Company, Mr. Herman was Vice President and Chief Financial Officer
of Gelco Corporation's International Division. He held that post from 1986 to
1988. Between 1979 and 1986, Mr. Herman held positions of Vice President of
Administrative Services for Gelco Corporation and Director of Planning and
Budgets for Gelco's Fleet Leasing Division. Before joining Gelco, Mr. Herman
held several positions with General Mills.
ROBERT BRIDIGUM joined the Company as Vice President of Engineering in October
1991. Prior to joining the Company, Mr. Bridigum was Director of Grafix Product
Development for Data Card Corporation. He held that position from 1987 to 1991.
Between 1984 and 1987, Mr. Bridigum held the position of Manager of Software
Development for Data Card Corporation. From 1978 to 1984, Mr. Bridigum held
various Engineering and Engineering Management positions for Honeywell Avionics
Division. He holds a Masters Degree in Physics from Old Dominion University and
a Bachelor of Science in Physics from Juniata College.
LOUISE JALMA joined the company as Vice President of Marketing in January 1996.
Prior to joining the company, Ms. Jalma was Senior Vice President of Marketing
for National City Bank, Minneapolis from 1993 to 1996. Previous to this she was
Director of Business Development for Dorsey & Whitney from 1986 to 1993, and
managed Media and Marketing Communications for North Memorial Marketing Center
from 1982 to 1986.
DIETER SCHILLING was promoted to Vice President of Operations and Customer
Service in October of 1989. From October 1986 until October 1989 he held the
position of Vice President of Customer Service. Mr. Schilling joined Check
Technology as Director of Field Services in 1985 and was promoted to Director of
Customer Service in April of 1986. Previous to this, Mr. Schilling was a co-
founder and President of Southern California Telephone, a telephone interconnect
company which was sold to American Telecommunications, Inc. in 1985.
PAUL STEPHENSON joined the Company as Vice President of Finance and
Administration in March 1992. Prior to joining the Company, he was manager of
Audit for Honeywell, Inc. from 1989 to 1992. From 1987 to 1989 he was
Controller, Communications Division for Space Center Inc. From 1976 to 1987 he
held a number of positions with Peat, Marwick, Mitchell and Co. in England and
the United States. He is a Certified Public Accountant and a Chartered
Accountant and has an M.A. Degree from Cambridge University, England.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, trades on the over-the-counter market and is quoted
on the National Association of Securities Dealers Automated Quotation System
("Nasdaq") under the symbol "CTCQ". The following table sets forth for the
periods indicated the range of high and low closing prices per share as reported
by Nasdaq. The Nasdaq bid quotations represent inter-dealer prices, without
retail markup, markdown, or commissions, and may not necessarily represent
actual transactions.
High Low
Year Ended September 30, 1996
- -----------------------------
First Quarter $ 10 1/4 $ 7 3/8
Second Quarter $ 11 3/4 $ 8
Third Quarter $ 13 1/4 $ 9 3/8
Fourth Quarter $ 10 3/8 $ 8
Year Ended September 30, 1995
- -----------------------------
First Quarter $ 5 7/8 $ 4 7/8
Second Quarter $ 7 1/8 $ 5 1/4
Third Quarter $ 7 $ 5
Fourth Quarter $ 7 5/8 $ 5 3/4
HOLDERS
As of December 1, 1996, the Company had 447 holders of Common Stock of record.
DIVIDENDS
The holders of Common Stock are entitled to receive dividends when and as
declared by the Company's Board of Directors. Since its inception, the Company
has not paid any dividends and does not anticipate paying any dividends in the
foreseeable future. The Company intends to retain any earnings it may generate
to provide for the operation and projected expansion of its business.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
September September September September September
Year Ended 30, 1996 30, 1995 30, 1994 30, 1993 30, 1992
- --------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Consolidated
Statement of
Operations Data:
Net Sales $24,718,974 $24,360,654 $22,975,589 $21,343,308 $20,010,638
Net Income $ 2,245,713 $ 2,052,986 $ 1,792,519 $ 882,932 $ 650,187
Earnings per share $ 0.35 $ 0.33 $ 0.29 $ 0.15 $ 0.11
Weighted average
number of shares
and share equivalents
outstanding (1) 6,355,401 6,270,504 6,145,601 6,032,096 5,988,865
September September September September September
Year Ended 30, 1996 30, 1995 30, 1994 30, 1993 30, 1992
- --------------- --------- --------- --------- --------- ---------
Consolidated
Balance Sheet Data:
Working Capital $17,310,488 $14,585,803 $12,544,594 $10,376,832 $10,058,985
Total Assets $22,277,856 $20,103,557 $17,603,636 $14,528,664 $14,761,527
Long Term Liabilities $ 55,615 $ 106,405 $ 143,104 $ 97,133 $ 93,607
Stockholders' Equity $18,408,486 $15,692,230 $13,567,806 $11,350,953 $11,078,578
</TABLE>
(1) Earnings per share of Common Stock is computed by dividing the net income
for the period by the weighted average number of shares of Common Stock and
Common Stock equivalents outstanding during the period.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company's revenues consist of (i) sales of document production systems and
related equipment, and (ii) maintenance contracts, spare parts, supplies and
consumable items. For the year ended September 30, 1996 (fiscal 1996) sales of
document production equipment increased 2% over the year ended September 30,
1995 (fiscal 1995) compared to an increase of 11% in fiscal 1995 over year ended
September 30, 1994 (fiscal 1994). The increase in 1996 arose primarily from
sales in Africa and Latin America. The increase in 1995 arose primarily from
the installation of Checktronic and Foliotronic systems in North America and
South Africa.
Revenues from maintenance contracts, spare parts, supplies and consumable items
increased 1% in fiscal 1996 over fiscal 1995 compared to a 2% increase in fiscal
1995 over fiscal 1994. Increases in both fiscal 1996 and 1995 were a result of
a higher cumulative installed system base worldwide.
Gross margin percentages in fiscal 1996 were 61% as compared to 62% in fiscal
1995 and 61% in fiscal 1994. The change was primarily due to differences in
product mix.
Selling, general and administrative expenses increased 4% in fiscal 1996 over
fiscal 1995, compared to an increase of 8% in fiscal 1995 over fiscal 1994. As
a percentage of net sales, selling, general and administrative expenses amounted
to 44% of net sales in fiscal 1996 compared to 43% in fiscal 1995 and 42% in
fiscal 1994. The increase in expenses in fiscal 1996 over fiscal 1995 was due
primarily to higher marketing and personnel expense.
Levels of research and development expenses in fiscal 1996 remained comparable
to prior years.
Interest income increased in each of fiscal 1996, 1995 and 1994 because of
higher cash and short-term investment balances each year.
The Company experiences unrealized currency gains and losses due to the
strengthening and weakening of the U.S. dollar against the currencies of the
Company's foreign subsidiaries and the resulting effect on the valuation of the
intercompany accounts and certain assets, which are denominated in U.S. dollars.
The net exchange gain was $51,000 in fiscal 1996, compared to a gain of $30,000
in fiscal 1995 and a gain of $84,000 in fiscal 1994. The Company anticipates
that it will continue to have unrealized gains or losses from foreign operations
in the future, although strategies to reduce the size of the gains or losses
will be reviewed and implemented whenever economical and practical.
The provision for income taxes was $297,000 in fiscal 1996 compared with
$517,000 in fiscal 1995 and $354,000 in fiscal 1994. During the fourth quarter
of fiscal 1996 the Company recorded certain previously unrecognized deferred tax
assets amounting to $693,000, based upon its estimates of future sources of
taxable income and the expected timing of temporary difference reversals. As a
result income tax expense for the year was favorably affected by $348,000.
Further information about income taxes is provided in Note B to the consolidated
financial statements.
FACTORS AFFECTING RESULTS OF OPERATIONS
The Company holds a dominant market position in many of the international
markets it serves. There has been a softening of demand for the Checktronic
product line from some of these established markets, and future revenues from
this product line will be more dependent on sales to emerging markets. The
Company is developing a new product line, named the IMAGGIA line, and
achievement of the Company's future revenue plans depends upon the successful
introduction of the IMAGGIA system. The Company's revenues and operating
results may also fluctuate from quarter to quarter because: (i) the Company's
sales cycle is relatively long; (ii) the size of orders can vary
significantly; (iii) the availability of financing for customers in some
countries is variable; (iv) customers may postpone or cancel orders; and (v)
economic, political and market conditions in some markets can change with
minimal notice and effect the timing and size of orders. Because the
Company's operating results are based on anticipated revenue levels and a
high percentage of the Company's operating costs are relatively fixed,
variations in the timing of revenue recognition could result in significant
fluctuations in operating results from quarter to quarter.
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LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $17,310,000 at September 30, 1996 from $14,586,000
at September 30, 1995. Cash and short-term investments increased by $2,371,000
at September 30, 1996, to $9,810,000, compared to $7,439,000 at September 30,
1995. Stockholders' equity increased to $18,408,000 at September 30, 1996, from
$15,692,000 at September 30, 1995.
The Company maintains a $2.5 million unsecured bank line of credit. At
September 30, 1996, the line was unused. The agreement expires March 31, 1997,
and the Company presently expects to negotiate a new bank line of credit. The
Company believes that its current funds and anticipated level of internally
generated funds will be sufficient to fund its working capital requirements in
fiscal 1997. At September 30, 1996, the Company had no material commitments for
capital expenditures.
CAUTIONARY STATEMENT
Statements included in this Management's Discussion and Analysis of Financial
condition and Results of Operations, in the letter to shareholders, elsewhere in
the Annual Report, in the company's Form 10-K, in other filings with the
Securities and Exchange commission, in the Company's press releases and in oral
statements made to securities market analysts and stockholders, which are not
historical or current facts are "forward-looking statements" made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Such statements are subject to certain risks and uncertainties that could
cause the Company's actual results to differ materially from historical earnings
and those presently anticipated or projected. Examples of such forward-looking
statements are (i) the last paragraph under the heading "Business-Research and
Development", in the form 10-K, concerning the development and timing of the
introduction of the IMAGGIA system, (ii) the last sentence of the seventh
paragraph under the subheading "Results of Operations" concerning unrealized
gains or losses from foreign operations, and (iii) the last two sentences of the
second paragraph under the subheading "Liquidity and Capital Resources"
concerning adequacy of working capital. The factors mentioned under the
subheading "Factors Affecting Results of Operations" are among those that in
some cases have affected and in the future could affect the Company's actual
results and could cause the Company's actual financial performance to differ
materially from that expressed in any forward-looking statement. The foregoing
should not be construed as exhaustive and the Company disclaims any obligation
subsequently to revise any forward-looking statements to reflect the events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries are
included in a separate section of this report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
12
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the section entitled "Election of Directors" included in
the Company's definitive proxy statement to be mailed to stockholders on or
about January 31, 1997, and filed with the Securities and Exchange Commission.
Pursuant to Section 16(a) under the Securities Exchange Act of 1934, executive
officers, directors and 10% shareholders of the Company are required to file
reports on Forms 3, 4 and 5 of their beneficial holdings and transactions in the
Company's common stock.
ITEM 11. EXECUTIVE COMPENSATION AND TRANSACTIONS
Reference is made to the section entitled "Executive Compensation" included in
the Company's definitive proxy statement to be mailed to stockholders on or
about January 31, 1997, and filed with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the section entitled "Principal Holders of CTC Capital
Shares" included in the Company's definitive proxy statement to be mailed to
stockholders on or about January 31, 1997, and filed with the Securities and
Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
13
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following consolidated financial statements of Check Technology Corporation
and subsidiaries are submitted in a separate financial statement section of this
report.
Description Page
- ----------- ----
Report of Independent Auditors 19
Consolidated Balance Sheets--September 30, 1996
and 1995 20
Consolidated Statements of Operations--The years ended
September 30, 1996, 1995 and 1994 22
Consolidated Statements of Stockholders' Equity--The
years ended September 30, 1996, 1995 and 1994 23
Consolidated Statements of Cash Flows--The years
ended September 30, 1996, 1995 and 1994 25
Notes to Consolidated Financial Statements--September 30,
1996 26
Financial Statement Schedules
- -----------------------------
Number Description Page
------ ----------- ----
Schedule II Valuation and Qualifying Accounts 37
All other financial statement schedules have been omitted because they are not
applicable, are not required, or the information is included in the financial
statements or notes thereto.
REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three months ended
September 30, 1996.
EXHIBITS
Page or Incorporated
Number Description by Reference From
- ------ ----------- ---------------------
3.1 Restated Articles of Exhibit 3.1 to Form 10-K for
Incorporation fiscal year ended September 30,
1987
3.2 Amended Bylaws Exhibit 3.2 to Form 10-K for fiscal
year ended September 30, 1994
4.1 Specimen of the Company's Exhibit 4(b) to Registration
Common Stock Certificates Statement on Form S-1 (No. 2-
97193)
4.2 Statement of Rights and Exhibit A to Current Report on
Preferences of Capital Stock Form 8-K dated May 15, 1990
4.3 Stock Purchase Agreement Exhibit 4.4 to Form 10-K for fiscal
Series B Convertible year ended September 30, 1990
Preferred Stock
10.2 Lease for Offices in Crawley Exhibit 10.9 to Form 10-K for the
England eight months ended September 30,
1985
14
<PAGE>
Page or Incorporated
Number Description by Reference From
- ------ ----------- ---------------------
10.3 Bank Line of Credit Agreement
as amended, effective
March 15, 1996 38
10.4 1986 Stock Option Plan Exhibit 10.8 to Form 10-K for
fiscal year ended September 30,
1986
10.5 Form of Indemnification Exhibit 10.10 to Form 10-K for
Agreement that the Company fiscal year ended
has entered into with officers September 30, 1987
and directors. Such agreement
recites the provisions of
Minnesota Statutes Section
302A.521 and the Company's
Bylaw provisions (which are
substantially identical to the
statute)
10.6 Employment Agreement as of Exhibit 10.9 to Form 10-K for
October 31, 1991, between fiscal year ended September 30,
the Company and Jay A. Herman 1991
[replaced by exhibit 10.7]
10.7 Employment agreement as of Exhibit 10.7 to Form 10-K for
October 1, 1994, between fiscal year ended September 30,
the Company and Jay A. Herman 1994
10.8 1991 Stock Plan approved Exhibit 10.10 to Form 10-K for
by stockholders on May 14, 1991 fiscal year ended September 30,
1991
10.9 Lease of Facilities in Minnetonka, Exhibit 10.9 to Form 10-K for
Minnesota fiscal year ended September 30,
1994
11 Computation of Per Share
Earnings 42
21 List of Subsidiaries 43
23 Consent of Independent
Auditors 44
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 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.
CHECK TECHNOLOGY CORPORATION
Dated: December 27, 1996 By: /s/ Jay A. Herman
----------------- -------------------------
Jay A. Herman
President
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 in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert Reznick Chairman of the Board December 27, 1996
- ------------------------- ----------------------
Robert Reznick
/s/ Jay A. Herman President, Director December 27, 1996
- ------------------------- (Principal Executive Officer) ----------------------
Jay A. Herman
/s/ Paul Stephenson Vice President, Finance & Administration December 27, 1996
- ------------------------- (Principal Financial & Accounting Officer) ----------------------
Paul Stephenson
/s/ Gary Holland Director December 27, 1996
- ------------------------- ----------------------
Gary Holland
/s/ Thomas H. Garrett III Director December 27, 1996
- ------------------------- ----------------------
Thomas H. Garrett III
/s/ Oscar Victor Director December 27, 1996
- ------------------------- ----------------------
Oscar Victor
</TABLE>
16
<PAGE>
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2), (c), and (d)
List of Financial Statements and Financial Statement Schedules
Financial Statement Schedules
Certain Exhibits
Year Ended September 30, 1996
Check Technology Corporation
Minnetonka, Minnesota
17
<PAGE>
Form 10-K--Item 14(a)(1) and (2)
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Check Technology Corporation
and subsidiaries are included in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets -- September 30, 1996 and 1995
Consolidated Statements of Operations -- The years ended
September 30, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity -- September 30,
1996, 1995 and 1994
Consolidated Statements of Cash Flows -- The years ended
September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements -- September 30, 1996
The following consolidated financial statement schedules of Check Technology
Corporation and subsidiaries are included in Item 14(d):
Number Description
------ -----------
Schedule II Valuation and Qualifying Accounts
All other financial statement schedules have been omitted because they are not
applicable, are not required, or the information is included in the financial
statements or notes thereto.
18
<PAGE>
Original Document on 1400 Pillsbury Center
Ernst & Young LLP Letterhead Minneapolis, MN 55402
Phone: 612/343-1000
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors
Check Technology Corporation
We have audited the accompanying consolidated balance sheets of Check Technology
Corporation and subsidiaries as of September 30, 1996, and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Check
Technology Corporation and subsidiaries at September 30, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
- -------------------------
Ernst & Young LLP
Minneapolis, Minnesota
November 27, 1996
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30,
1996 1995
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,851,283 $ 3,390,356
Short-term investments 4,959,023 4,048,704
Accounts receivable less allowance for
doubtful accounts of $50,000 3,582,350 4,865,712
Inventories
Raw materials and component parts 5,088,859 4,406,202
Work-in-progress 127,459 102,736
Finished goods 1,383,052 1,349,725
----------- -----------
6,599,370 5,858,663
Other current assets 1,132,217 727,290
----------- -----------
TOTAL CURRENT ASSETS 21,124,243 18,890,725
EQUIPMENT AND FIXTURES
Machinery and equipment 1,940,676 1,974,074
Furniture and fixtures 1,643,803 1,438,888
Leasehold improvements 244,693 262,714
----------- -----------
3,829,172 3,675,676
Less accumulated depreciation
and amortization 2,675,559 2,462,844
----------- -----------
1,153,613 1,212,832
----------- -----------
TOTAL ASSETS $22,277,856 $20,103,557
----------- -----------
----------- -----------
See notes to consolidated financial statements.
20
<PAGE>
CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30,
1996 1995
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $1,963,171 $ 2,390,906
Employee compensation and related taxes 769,750 889,369
Income taxes payable 489,732 417,777
Deferred revenue 499,036 523,958
Current portion of capital lease
obligations 92,066 82,912
---------- -----------
TOTAL CURRENT LIABILITIES $3,813,755 $ 4,304,922
CAPITAL LEASE OBLIGATIONS -- less current portion 55,615 $ 106,405
---------- -----------
TOTAL LIABILITIES $3,869,370 $ 4,411,327
STOCKHOLDERS' EQUITY
Common Stock -- par value $.10 per share--
authorized 25,000,000 shares; issued and
outstanding 1996 -- 6,237,727 shares;
1995 -- 6,112,279 shares $ 623,773 611,228
Additional paid-in capital 16,395,889 15,743,703
Foreign currency translation adjustment (513,963) (453,275)
Retained earnings (deficit) 1,902,787 (209,426)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $18,408,486 $15,692,230
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,277,856 $20,103,557
----------- -----------
----------- -----------
COMMITMENTS -- Note G
21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Year Ended September 30,
1996 1995 1994
<S> <C> <C> <C>
Sales:
Printing Equipment $10,636,518 $10,436,169 $ 9,369,808
Maintenance, spares and supplies 14,082,456 13,924,485 13,605,781
----------- ----------- -----------
NET SALES 24,718,974 24,360,654 22,975,589
Costs and Expenses:
Cost of sales 9,578,116 9,333,299 9,052,686
Selling, general and administrative 10,818,900 10,424,527 9,682,963
Research and development 2,206,444 2,318,736 2,332,435
----------- ----------- -----------
22,603,460 22,076,562 21,068,084
----------- ----------- -----------
INCOME FROM SYSTEM SALES AND SERVICE 2,115,514 2,284,092 1,907,505
Interest expense 26,110 27,229 34,502
Interest (income) (402,539) (283,378) (189,387)
Unrealized exchange gain (50,770) (29,745) (84,129)
----------- ----------- -----------
INCOME BEFORE TAXES 2,542,713 2,569,986 2,146,519
Income taxes 297,000 517,000 354,000
----------- ----------- -----------
NET INCOME $ 2,245,713 $ 2,052,986 $ 1,792,519
----------- ----------- -----------
----------- ----------- -----------
Earnings per share 0.35 0.33 0.29
Weighted average number of shares and share
equivalents outstanding during the period 6,355,401 6,270,504 6,145,601
</TABLE>
See notes to consolidated financial statements
22
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Common Stock
Shares Amount
---------- ----------
Balance September 30, 1993 5,729,428 $ 572,942
Net Income --- ---
Exercise of Stock Options 15,090 1,511
Conversion of Series B Convertible Preferred Stock 107,633 10,763
Exercise of Warrants 7,364 736
Vesting of Restricted Stock --- ---
Foreign Currency Translation --- ---
---------- ----------
Balance September 30, 1994 5,859,515 585,952
Net Income --- ---
Exercise of Stock Options 55,000 5,500
Conversion of Series B Convertible Preferred Stock 175,625 17,563
Exercise of Warrants 22,139 2,213
Vesting of Restricted Stock --- ---
Note Receivable from stock sale --- ---
Foreign Currency Translation --- ---
---------- ----------
Balance September 30, 1995 6,112,279 611,228
Net Income --- ---
Exercise of Stock Options, including tax
benefit of $344,847 105,448 10,545
Issuance of Restricted Stock 20,000 2,000
Vesting of Restricted Stock --- ---
Payment - Note Receivable --- ---
Foreign Currency Translation --- ---
---------- ----------
Balance September 30, 1996 $6,237,727 $ 623,773
---------- ----------
---------- ----------
See notes to consolidated financial statements.
23
<PAGE>
Foreign
Series A & B Convertible Additional Currency Retained
Preferred Stock Paid-In Translation Earnings
Shares Amount Capital Adjustment (Deficit)
------------- ----------- ------------- ----------- -----------
------------- ----------- ------------- ----------- -----------
283,258 28,326 15,722,507 (845,136) (4,127,686)
--- --- --- --- 1,792,519
--- --- 29,341 --- ---
(107,633) (10,763) --- --- ---
--- --- 19,515 --- ---
--- --- --- --- 36,379
--- --- --- 336,852 ---
------------- ----------- ------------- ----------- -----------
175,625 17,563 15,771,363 (508,284) (2,298,788)
--- --- --- --- 2,052,986
--- --- 123,531 --- ---
(175,625) (17,563) --- --- ---
--- --- (2,225) --- ---
--- --- --- --- 36,376
--- --- (148,966) --- ---
--- --- --- 55,009 ---
------------- ----------- ------------- ----------- -----------
0 0 15,743,703 (453,275) (209,426)
--- --- --- --- 2,245,713
--- --- 417,540 --- ---
--- --- 228,000 --- (230,000)
--- --- --- --- 96,500
--- --- 6,646 --- ---
--- --- --- (60,688) ---
------------- ----------- ------------- ----------- -----------
0 $ 0 $ 16,395,889 $ (513,963) $ 1,902,787
------------- ----------- ------------- ----------- -----------
------------- ----------- ------------- ----------- -----------
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Year Ended September 30,
1996 1995 1994
----------------------------------------
OPERATING ACTIVITIES
Net Income $ 2,245,713 $ 2,052,986 $ 1,792,519
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 438,275 433,997 401,822
Other (111,001) (209,513) (1,943)
Changes in operating assets
and liabilities:
Accounts receivable 1,282,909 (1,679,087) 535,834
Inventories (745,111) 624,730 (959,362)
Other current assets (402,574) (353,962) 204,801
Accounts payable and
accrued expenses (520,939) 308,020 497,665
Deferred revenue (29,216) 31,175 28,603
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 2,158,056 1,208,346 2,499,939
INVESTING ACTIVITIES
Purchase of equipment and fixtures (442,118) (338,989) (505,152)
Proceeds from sale of equipment 82,092 116,273 50,149
Purchase of short-term investments (10,651,726) (4,926,101) (6,840,509)
Proceeds from sale of short-term
investments 9,931,000 5,492,840 2,482,292
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES $ (1,080,752) 344,023 (4,813,220)
FINANCING ACTIVITIES
Issuance of Common Stock 428,085 49,019 51,103
Addition of capital leases 40,101 63,966 122,023
Note receivable from stock sale 6,646 (68,966) ------
Repayment of capital leases (90,070) (95,336) (103,634)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES $ 384,762 (51,317) 69,492
EFFECT OF EXCHANGE RATE CHANGES
ON CASH (1,139) 17,990 41,944
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,460,927 1,519,042 (2,201,845)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 3,390,356 1,871,314 4,073,159
------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 4,851,283 $ 3,390,356 $ 1,871,314
------------ ------------ ------------
------------ ------------ ------------
See notes to consolidated financial statements.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Check Technology Corporation's business is the design,
manufacture, sale and service of computerized financial document production
systems. The systems can collate personalize and encode documents into packages
tailored to the customers requirements. The systems are sold through the
Company and its international subsidiaries. In excess of 50% of the total
revenues of the Company are related to service and support provided after the
sale. The Company has had a significant presence in the international check
production marketplace. These personal check production markets outside of the
United States include Australia, Latin America , Europe and Asia.
Principles of Consolidation: The financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Check Technology Ltd., Check
Technology Pty. Ltd., and Check Technology France S.A. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents and Short-Term Investments: The Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents. Short-term investments consist principally of held-to-
maturity debt securities. The Company determines the appropriate classification
of debt securities at the time of purchase. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost, adjusted for amortization of premiums and accretion of discounts to
maturity. Cash equivalents and short-term investments are carried at amounts
that approximate market value. Interest on securities is included in interest
income.
Inventories: Inventories are carried at the lower of cost or market determined
under the first-in, first-out (FIFO) method.
Equipment and Fixtures: Equipment and fixtures are stated on the basis of cost
and include the cost of assets held under capital lease obligations.
Demonstration equipment not expected to be resold is carried in equipment on a
cost basis.
The Company provides for depreciation and amortization of equipment and fixtures
by charges to operations at rates calculated to amortize the cost of the
property over its estimated useful life using the straight-line method.
Amortization expense of items under capital lease is included in depreciation
expense.
Deferred Revenue: Amounts billed to customers under maintenance contracts are
recognized in income over the term of the maintenance agreement.
Foreign Currency Translation: The Company's wholly-owned foreign subsidiaries'
financial statements are measured in their functional currency before
translating to U.S. dollars. Gains and losses resulting from the translation
are recorded as a component of stockholders' equity.
Foreign Exchange Contracts: The Company enters into foreign exchange contracts
as a hedge against specific foreign currency receivables. Market value gains
and losses are recognized, and the resulting credit or debit offsets foreign
exchange gains or losses on those receivables.
Income Taxes: The liability method is used to account for income tax expense.
Deferred tax assets and liabilities are recorded based on the differences
between financial statement and tax bases of assets and liabilities and the tax
rates in effect when these differences are expected to reverse. The deferred
tax asset is reduced by a valuation allowance to a net amount which the Company
believes it more likely than not will realize, based on the Company's estimates
of its future earnings and the expected timing of temporary difference
reversals. Investment tax credits are accounted for under the flow-through
method thereby reducing income taxes in the year in which the credits are
realized.
26
<PAGE>
Stock Based Compensation: The Company follows Accounting Principles Board
Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
when the exercise price of employee stock options equal the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
In October 1995, Financial Accounting Standards Board Statement No. 123
(FAS123), "ACCOUNTING FOR STOCK-BASED COMPENSATION" was issued, which is
effective for fiscal years beginning after December 15, 1995. FAS 123
encourages companies to adopt a fair value based method of accounting for
employee stock options, but allows companies to continue to account for those
plans using the accounting prescribed by APB 25. The Company will adopt the
disclosure requirements of FAS 123 in 1997 and plans to continue accounting for
stock compensation using APB 25, making pro forma disclosures of net earnings
and earnings per share as if the fair value based method had been applied.
Long-Lived Assets: In March 1995, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Standards No. 121 (FAS 121), ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF. This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events of changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company will apply this statement in the
first quarter of fiscal 1997. The Company, however, does not believe the
adoption of FAS 121 will have an adverse effect on its consolidated financial
statements.
Earnings Per Share: Earnings per share of Common Stock is computed by dividing
the net income for the period by the weighted average number of shares of Common
Stock and Common Stock equivalents outstanding during the period. Common stock
equivalents include dilutive stock options, warrants and Series B Convertible
Preferred Stock using the treasury stock method.
Reclassification: Certain items in the 1995 and 1994 Consolidated financial
statements have been reclassified to conform to the 1996 presentation.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1996
NOTE B - INCOME TAX
At September 30, 1996, the Company has domestic investment tax credits and
research and development credit carryforwards of approximately $524,000 which
are available to offset future income tax. The credits expire in varying
amounts through September 2011. Domestic alternative minimum tax credits of
approximately $143,000 are available to offset future income tax with no
expiration date. These tax benefits, together with future tax deductions from
the reversal of temporary differences, comprise the net deferred tax assets.
The deferred tax asset has been offset by a valuation allowance as deemed
necessary based on the Company's estimates of its future sources of taxable
income and the expected timing of temporary difference reversals.
Significant components of deferred tax assets and liabilities as of September 30
are as follows:
FEDERAL AND STATE NET DEFERRED TAX ASSETS (LIABILITIES):
Deferred Tax Assets: 1996 1995
------------ -----------
Net operating loss and business
credit carryforwards $ 524,000 $ 524,000
Alternative minimum tax credits 143,000 140,000
Stock compensation 275,000 68,000
Inventory valuation reserves 122,000 89,000
Other U.S. and foreign differences 222,000 208,000
------------ -----------
Gross Deferred Tax Asset 1,286,000 1,213,000
Less Valuation Allowances (593,000) (1,213,000)
------------ -----------
Net Deferred Tax Asset $ 693,000 $ 0
------------ -----------
------------ -----------
The components of income tax expense as recorded by the Company are as follows:
1996 1995 1994
----------- ---------- ----------
Current Tax Expense:
Federal $ 3,000 $ 53,000 $ 7,000
State 16,000 0 33,000
Foreign 626,000 464,000 304,000
----------- ---------- ----------
Total $ 645,000 $ 517,000 $ 354,000
----------- ---------- ----------
Deferred Tax Expense:
Federal $ (231,000) $ --- $ ---
State (18,000) --- ---
Foreign (99,000) --- ---
----------- ---------- ----------
Total $ (348,000) $ --- $ ---
----------- ---------- ----------
Total Tax Expense $ 297,000 $ 517,000 $ 354,000
----------- ---------- ----------
----------- ---------- ----------
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1996
NOTE B - INCOME TAX - Continued
A reconciliation of tax expense to the statutory rate of 34% is as follows:
1996 1995 1994
---------- ---------- ----------
Statutory rate applied to pre-tax income $ 865,000 $ 874,000 $ 730,000
Net operating loss and tax credits utilized (220,000) (354,000) (437,000)
Change in valuation allowance (348,000) ---- ----
Other ---- (3,000) 61,000
---------- ---------- ----------
$ 297,000 $ 517,000 $ 354,000
---------- ---------- ----------
---------- ---------- ----------
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $2,080,000 at September 30, 1996. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. Federal
and State income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of
the amount of unrecognized deferred U.S. income tax liability is not practical
because of the complexities of the calculation.
Cash tax payments for the years ended September 30, 1996, 1995, and 1994, were
$570,000, $470,000 and $168,000 respectively.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1996
NOTE C - FINANCIAL INSTRUMENTS
Foreign Currency Instruments and Hedging Activities: From time to time, the
Company may enter into foreign exchange contracts to manage its exposure to
fluctuations in foreign currency exchange rates. These contracts involve the
exchange of foreign currencies for U.S. dollars at a specified rate at future
dates. Counterparties to these contracts are major international financial
institutions. Maturities of these instruments are typically one year or less
from the transaction date. Gains or losses from these contracts are included in
other expense and are intended to partially offset fluctuations in net sales due
to currency rate changes.
No contracts were outstanding September 30, 1996. The Company had contracts
totaling $270,000 at September 30, 1995, to exchange French francs into U.S.
dollars. These instruments were recorded at their fair value at September 30,
1995.
NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES
The Company operates in one business segment, which is the sale of printing
equipment and related maintenance, spares and supplies. The Company has
developed computer-controlled printing systems to produce a variety of documents
for the financial services industry. Its primary products provide operating
flexibility and efficiency through sophisticated software and paper handling
mechanisms and produce quality alphanumeric and machine-readable print. The
Company is solely dependent on one vendor for the supply of non-impact
alphanumeric printers used in the printing systems sold by the Company. The
vendor has been able to meet the Company's delivery schedules to date and is
considered by Company management to be a reliable supplier.
The Company's manufacturing operations are located in the United States. Sales
and service operations are located in the United Kingdom, France, and Australia.
<TABLE>
<CAPTION>
Domestic Foreign
Year Ended September 30, 1996 Operations Operations Eliminations Consolidated
- ----------------------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 7,279,398 $17,439,576 $ --- $24,718,974
Sales to foreign subsidiaries 5,435,350 --- (5,435,350) --- 0
----------- ----------- ----------- -----------
Net Sales $12,714,748 $17,439,576 $(5,435,350) $24,718,974
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income from system sales and service $ 557,288 $ 1,426,266 $ 131,960 $ 2,115,514
Less:
Interest (income) (401,552) (50,077) (49,090) (402,539)
Interest expense 6,072 69,128 49,090 26,110
Unrealized exchange loss (gain) 18,999 (69,769) --- (50,770)
----------- ----------- ----------- -----------
Income before taxes 933,769 1,476,984 131,960 2,542,713
Income taxes (230,464) 527,464 --- 297,000
----------- ----------- ----------- -----------
Net Income $ 1,164,233 $ 949,520 $ 131,960 $ 2,245,713
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Identifiable assets $19,692,227 $10,342,786 $ 7,757,157 $22,277,856
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Total liabilities $ 1,798,567 $ 3,916,837 $ 1,846,034 $ 3,869,370
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1996
NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES--CONTINUED
<TABLE>
<CAPTION>
Domestic Foreign
Year Ended September 30, 1995 Operations Operations Eliminations Consolidated
- ----------------------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 7,537,883 $16,822,771 $ --- $24,360,654
Sales to foreign subsidiaries 4,564,096 --- 4,564,096 0
----------- ----------- ----------- -----------
Net Sales 12,101,979 16,822,771 4,564,096 24,360,654
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income from system sales and service $ 513,811 $ 1,839,612 $ 69,331 $ 2,284,092
Less:
Interest (income) (390,040) (17,107) (123,769) (283,378)
Interest expense 6,232 144,766 123,769 27,229
Unrealized exchange (gain) (1,738) (28,007) --- (29,745)
----------- ----------- ----------- -----------
Income before taxes 899,357 1,739,960 69,331 2,569,986
Income taxes 53,381 463,619 --- 517,000
----------- ----------- ----------- -----------
Net Income $ 845,976 $ 1,276,341 $ 69,331 $ 2,052,986
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Identifiable assets $17,863,334 $ 9,852,804 $ 7,612,581 $20,103,557
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Total liabilities $ 1,662,913 $ 4,291,905 $ 1,543,491 $ 4,411,327
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1996
NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES -- CONTINUED
<TABLE>
<CAPTION>
Domestic Foreign
Year Ended September 30, 1994 Operations Operations Eliminations Consolidated
- ----------------------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 7,607,524 $15,368,065 $ ---- $22,975,589
Sales to foreign subsidiaries 5,034,738 ---- 5,034,738 0
----------- ----------- ----------- -----------
Net Sales 12,642,262 15,368,065 5,034,738 22,975,589
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income from system sales and service $ 544,501 $ 1,365,600 $ 2,596 $ 1,907,505
Less:
Interest (income) (293,072) (12,636) (116,321) (189,387)
Interest expense 7,474 143,349 116,321 34,502
Unrealized exchange (gain) (3,887) (80,242) --- (84,129)
----------- ----------- ----------- -----------
Income before taxes 833,986 1,315,129 2,596 2,146,519
Income taxes 25,205 328,795 --- 354,000
----------- ----------- ----------- -----------
Net Income $ 808,781 $ 986,334 $ 2,596 $ 1,792,519
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Identifiable assets $17,514,111 $ 9,094,415 $ 9,004,890 $17,603,636
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Total liabilities $ 2,053,339 $ 4,764,481 $ 2,781,990 $ 4,035,830
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The Company's products are marketed worldwide. Domestic operations include
export sales in the western hemisphere, and foreign operations include the
activities of the three foreign subsidiaries. Export sales, including those of
the Company's overseas subsidiaries, were $20,823,071 or 84% of net sales for
the year ended September 30, 1996, compared to $18,740,731, or 77% of net sales
for the year ended September 30, 1995, and $18,075,377, or 79% of net sales for
the year ended September 30, 1994.
There were no sales to any customer in excess of 10% of total sales in 1996 or
in 1995. There was one customer with sales in excess of 10% of total sales in
1994.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1996
NOTE E--LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
September 30,
1996 1995
----------------------
<S> <C> <C>
Capital lease obligations on automobiles and equipment, due in monthly
installments varying from $160 to $785, including interest at 9.5% to
11.6%, automobile and equipment financed under the lease serve as
security to the lease obligation $ 147,681 $189,317
Less current portion of lease obligation 92,066 82,912
--------- --------
$ 55,615 $106,405
--------- ---------
--------- ---------
Cash payments of interest were $24,304 in 1996, $28,250 in 1995, and
$30,878 in 1994.
Equipment and fixtures includes the following amounts under the capitalized lease obligations:
September 30,
1996 1995
----------------------
Office furniture, fixtures and equipment $ 219,387 $ 264,663
Less allowance for amortization 74,734 79,152
--------- ---------
$ 144,653 $ 185,511
--------- ---------
--------- ---------
</TABLE>
Future payments for the capital lease obligations (including interest) as of
September 30, 1996 are:
Capital Lease
Year ending September 30: Obligations
-------------
1997 $ 102,618
1998 36,283
1999 9,346
2000 17,185
-------------
Total Payments 165,432
Less amounts representing interest 17,751
-------------
Present value of lease payments $ 147,681
-------------
-------------
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1996
NOTE F--STOCK OPTIONS AND BENEFIT PLAN
During fiscal year 1995, the Company had two stock option programs, the 1986
Stock Option Plan (the 1986 Plan) and the 1991 Stock Plan (the 1991 Plan), for
its key employees and non-employee directors. The 1986 Plan was adopted in
October 1986 and the 1991 Plan in March 1991. Stock Options under the 1986 Plan
are non-qualified while those under the 1991 Plan can be granted as either non-
qualified or incentive stock options. The 1991 Plan also authorizes the
granting of awards in the forms of stock appreciation rights, restricted stock
or deferred stock. In all cases, subject to the provisions of the plans, the
board of directors has complete discretion in establishing the terms and
conditions of each option granted to the employees of the company. During
fiscal year 1995, an officer exercised stock options for a $148,966 note. The
note is a full recourse promissory note and is collateralized by the stock
issued upon exercise of the stock options.
A Summary of outstanding options and shares reserved under each plan is as
follows:
The 1986 Plan
- -------------
Shares
Reserved
For Future Options Price
Grants Outstanding Per Share
----------- ----------- ---------------
Balance September 30, 1994 188,660 198,000 $2.00 to $2.625
Options exercised --- (41,750) 2.00 to 2.625
----------- -----------
Balance September 30, 1995 188,660 156,250 2.00 to 2.625
Options exercised --- (103,500) 2.00 to 2.625
----------- -----------
Balance September 30, 1996 188,660 52,750
----------- -----------
----------- -----------
At September 30, 1996 and 1995, there were 52,750 and 156,250 options,
respectively, currently exercisable under the 1986 Plan at prices of $2.00 to
$2.625 per share.
1991 Plan
- -----------
Shares
Reserved
For Future Options Price
Grants Outstanding Per Share
----------- ----------- ---------------
Balance September 30, 1994 230,500 286,160 $1.75 to $5.38
Options exercised --- 13,250 1.75 to 4.38
Options canceled 1,250 (1,250) 1.75
----------- -----------
Balance September 30, 1995 231,750 253,660 1.75 to 5.38
Options granted (63,500) 63,500 8.13 to 9.63
Options exercised --- (28,508) 1.75 to 4.38
Restricted Stock granted (20,000) 20,000 0
Restricted Stock canceled 4,250 (4,250) 0
Options canceled 5,625 (5,625) $1.75 to $8.88
----------- -----------
----------- -----------
Balance September 30, 1996 158,125 298,777
----------- -----------
----------- -----------
At September 30, 1996 and 1995, there were 98,777 and 84,326 options,
respectively, currently exercisable under the 1991 Plan at prices of $1.75 to
$5.38 per share.
Total shares reserved for options and restricted stock are 698,312 shares.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1996
The Company has a defined contribution salary deferral plan covering
substantially all employees under Section 401(k) of the Internal Revenue Code.
The Plan allows eligible employees to make contributions up to the maximum
amount provided under the Code. The Company makes an annual minimum
contribution equal to 50% of the participants' before-tax contributions up to 6%
of base salary.
NOTE G--RENTAL COMMITMENTS
Building, equipment and automobile rentals under operating leases were
$1,039,439, $846,098, and $805,853 for the years ended September 30, 1996, 1995
and 1994, respectively.
The Company leases its corporate offices under a fifteen year agreement expiring
on September 15, 2010. Annual rental under the lease is $379,000 in the first
year increasing to $481,000 in the eleventh year and thereafter. The Company is
obligated to pay operating expenses and real estate taxes incurred by the
landlord. The Company has the right to terminate such lease at the end of the
10th lease year, subject to a termination fee.
The Company's subsidiary in the Untied Kingdom leases office space under a lease
expiring in 2013. Annual rental under the lease is $186,000, subject to
adjustment every five years, plus a pro rata share of operating expenses
incurred by the landlord.
Total future minimum rental commitments for operating leases of facilities,
sales offices, equipment and automobiles are $12,011,676 and are due as follows:
fiscal year ending September 30, 1997--$1,045,397; 1998--$965,145; 1999--
$876,555; 2000--$687,466; 2001 $655,345; thereafter--$6,742,333.
NOTE H--LINE OF CREDIT AND NOTES PAYABLE
The Company has a $2,500,000 revolving line of credit with a bank. At September
30, 1996, the entire line was unused. The line of credit agreement is in the
form of an unsecured note. Advances under the line of credit bear interest at
the bank's reference rate. The line has a 0.20% annual commitment fee.
The line of credit agreement places certain restrictions on the Company
including requirements as to maintenance for minimum levels of tangible net
worth and specified others. The Company was in compliance with these covenants
at September 30, 1996. The line of credit expires March 31, 1997.
In addition to the line of credit agreement, the Company's United Kingdom
subsidiary has a guarantee facility with a bank to provide a VAT Deferred Bond.
There is no security deposit requirement under the agreement.
NOTE I--CAPITAL STOCK
The Company has authorized two series of convertible preferred stock. The
1,000,000 shares of Series A and the 1,091,000 shares of Series B Preferred
Stock are convertible into Common Stock on a one-share-for-one-share basis. All
remaining shares of Series A Preferred Stock and Series B Preferred Stock were
converted into Common Stock by early 1993 and 1995, respectively.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1996
NOTE J-- SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1996 Quarter Ended December 31 March 31 June 30 September 30
------------------ ----------- ----------- ----------- ------------
Net Sales $ 6,273,281 $ 6,670,541 $ 6,293,601 $ 5,481,551
Gross Profit 3,807,387 4,099,711 3,847,621 3,386,139
Net Income (1) 552,462 708,245 521,978 463,028
Earnings Per
Share $ 0.09 $ 0.11 $ 0.08 $ 0.07
1995 Quarter Ended December 31 March 31 June 30 September 30
------------------ ----------- ----------- ----------- ------------
Net Sales $ 5,561,930 $ 6,000,731 $ 5,786,393 $ 7,011,600
Gross Profit 3,371,420 3,819,412 3,540,498 4,296,025
Net Income 379,953 598,234 407,605 667,194
Earnings Per
Share $ 0.06 $ 0.10 $ 0.06 $ 0.11
(1) The income tax rate for the fourth quarter of 1996 was impacted by the
adjustment to the effective annual rate and the recognition of certain deferred
tax assets.
36
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
COL. A COL. B COL. C COL. D COL. E COL. F
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts (Deductions) End
Description of Period Expenses Describe Describe of Period
- ------------------------ --------- --------- -------- ----------- ---------
I. Allowance for
Doubtful Accounts
Year ended September
30, 1996: $ 50,000 ------ ------ ------ $ 50,000
Year ended September
30, 1995: $ 50,000 ------ ------ ------ $ 50,000
Year ended September
30, 1994: $ 50,000 ------ ------ ------ $ 50,000
II.Reserve for obsolete
and slow moving
inventories
Year ended September
30, 1996: $ 303,000 95,000 ------ (64,000) $ 334,000
Year ended September
30, 1995: $ 267,000 60,000 ------ (24,000) $ 303,000
Year ended September
30, 1994: $ 261,000 125,000 ------ (119,000) $ 267,000
37
<PAGE>
Exhibit 10.3.
Original Document on Norwest Bank Minnesota, N.A.
Norwest Banks' Letterhead Bloomington Office
7900 Xerxes Avenue South
Bloomington, Minnesota 55431
612/830-7000
March 04, 1996
Mr. Paul Stephenson
Vice President of Finance and Administration
Check Technology Corporation
12500 Whitewater Drive
Minnetonka, MN. 55343-9420
Dear Paul:
I am pleased to inform you that Norwest Bank Minnesota, N.A. (the "Bank") has
approved a committed line of credit (the "Line") in the amount of $2,500,000.00
to be offered to Check Technology Corporation. The availability of the Line is
subject to the Borrower's execution of a new promissory note (the "Note") and
our mutual execution of this letter agreement. The following terms and
conditions shall apply to the Line:
BORROWER Check Technology Corporation (the "Borrower").
TYPE Committed revolving line of credit.
AMOUNT $2,500,000.00
EXPIRATION March 31, 1997
PRICING Borrowings, if any, will accrue interest at the Bank's base
rate, payable monthly. Additional funding choices, at the
Borrower's option, will be available at a rate of 1.75% over
the available reserve-adjusted LIBOR or CD rate of like
maturity at the date of request.
FEE The Borrower will pay a 0.20% per annum fee on the unused
portion of the line of credit, payable quarterly in arrears.
The Borrower has the option to elect a compensating balance
arrangement instead of the fee on the unused portion of the
line.
The compensating balance arrangement requires that the
Borrower maintain, in its primary Norwest depository account,
average collected balances of 4% of the unused portion of the
line of credit. Please note that the compensating balances
are not eligible to receive earnings credit for the purpose of
offsetting Bank service charges.
COLLATERAL Unsecured.
REPORTING The Borrower agrees to deliver the following information to
REQUIREMENTS the Bank:
38
<PAGE>
Mr. Paul Stephenson
March 04, 1996
Page 2
1. Quarterly financial statements on both a consolidated and
consolidating basis, within 55 days of quarter end.
2. Quarterly financial covenant compliance certificate, within
55 days of quarter end.
3. An annual audited financial statement within 120 days of
fiscal year end.
4. Annual financial projections for the immediately succeeding
year, within 120 days of fiscal year end.
5. Copies of all information and correspondence sent by Borrower
to its collective shareholders upon its original
distribution.
COVENANTS The Borrower agrees to comply with the following:
1. Preserve its corporate existence and, along with all
subsidiaries, adequately maintain and insure its properties.
Additionally, the Borrower will not, nor will it permit any
subsidiary to sell, dispose of, or transfer away any material
portion of its assets or properties necessary or desirable
for the proper conduct of its business.
2. All corporate assets, including all subsidiary assets, must
be kept free and clear of liens, except for currently
existing liens and purchase money security interests.
3. The Borrower and each of its subsidiaries must refrain from
issuing a corporate guaranty or becoming contingently liable
in connection with any obligation of any other person or
entity.
4. On a consolidated basis and in accordance with GAAP, the
financial performance and condition of the Borrower must
remain within the following bounds at all times:
a. Minimum funds flow coverage ratio, on a rolling 12 month
basis, of 0.30:1.0. The funds flow coverage ratio is
defined as net income (independent of unrealized foreign
exchange gains or losses) + depreciation + amortization
divided by the sum of all short term and long term
interest bearing obligations (including capital lease
obligations).
5. Promptly notify the Bank upon knowledge of the occurrence of
an event of default hereunder or under the Note.
39
<PAGE>
Mr. Paul Stephenson
March 04, 1996
Page 3
6. Supply the Bank with such other information as the Bank may
from time to time reasonably request, and permit the Bank to
have access to its books, records, properties, and principal
officers as it may reasonably request.
CONDITIONS
PRECEDENT Prior to the making of the first advance under the Line, the
Borrower shall deliver, at the Bank's request, certified
borrowing resolutions and an incumbency certificate, duly
executed by the corporate secretary of the Borrower and in form
and content acceptable to the Bank. Furthermore, the Bank has
the right to not consider any requests for advances under the
Line if, as of the date of such request, there exists an event
of default under the Note.
DEFAULT The Bank may declare the Line terminated and declare the unpaid
principal, accrued interest and all other amounts payable under
the Note to be immediately due and payable, if the Borrower
fails in the observance or performance of any covenant or
agreement contained herein, and continuance for more than 30
days. In addition, the Note contains events of default that are
incorporated herein by reference.
If the provisions of this Letter Agreement are acceptable, please sign below and
return to me. Please call at
830-8933, if you have any questions.
Sincerely,
/s/ Tracy L. Smith
- ----------------------
Tracy L. Smith
Assistant Vice President
Accepted By:
CHECK TECHNOLOGY CORPORATION
By: /s/ Paul Stephenson
-------------------------------------------------
Its: Vice President - Finance and Administration
-------------------------------------------------
Date: March 29, 1996
-------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
Original Document on Commercial-Bus/Ag Note
Norwest Banks' Letterhead
- --------------------------------------------------------------------------------
Borrower's name Date
Check Technology Corporation March 04, 1996
- --------------------------------------------------------------------------------
Choose one of the following
/X/ On March 31 , 1997; or
---------------------- -----
/ / ----------------------------- after date, for value received, the
undersigned (if more than one,jointly and severally) promise (s) to pay to
the order of Norwest Bank Minnesota, National Association
(the "Bank") at 7900 Xerxes Avenue South
Bloomington, Minnesota 55431-2206
or at any other place designated at any time by the holder hereof, in lawful
money of the United States of America, the principal sum of
Two Million Five Hundred Thousand and no/100 - - - - - - Dollars ($2,500,000.00
- --------------------------------------------------------- ---------------
or so much thereof as is disbursed and remains outstanding hereunder on the due
date hereof, as shown by the Bank's liability record or on the reverse side
hereof, as the case may be, together with interest (calculated on the basis of
actual days elapsed in a __360_____day year) on the unpaid balance hereof from
the date hereof until this Note is fully paid, at the following rate:
/ / an annual rate of ______%
/ / an annual rate equal to ______% above the Base Rate from time to time,
each change in the interest rate hereon to become effective on the day
the corresponding change in the Base Rate becomes effective;
/ / an annual rate which, for any particular month, shall be _____ % above
the Base Rate in effect on the _____ day of the immediately preceding
month;
/X/ an annual rate equal to the variable Base Rate or a fixed rate equal
to 1.75% over the available reserve-adjusted LIBOR or CD rate of like
maturity at the date of request.
provided, however, that if this Note has a variable rate of interest, the annual
rate (i) shall at no time be less than N/A %, and (ii) shall at no time exceed
an annual rate, if one be specified: / / of N/A% / / that is N/A % above the
discount rate on 90-day commercial paper in effect from time to time at the
Federal Reserve Bank of Minneapolis.
and provided further that if the original principal amount hereof is less than
$100,000, this Note shall bear the same interest rate after it becomes due as
was in effect on such due date. As used herein, "Base Rate" means the rate of
interest established by The Bank from time to time as its "base" or "prime"
rate; and "due date" means the maturity date hereof (whether it be the stated
maturity date or such earlier date by reason of acceleration) or, if this Note
is payable upon demand, the date of demand.
/ / Interest shall be payable at maturity.
/X/ Interest shall be payable monthly commencing April 30, 1996 and also
on demand.
If interest hereon is not paid when due, or if any other indebtedness of
the undersigned to the Bank is not paid when due, or if a garnishment summons
or a writ of attachment is issued against or served upon the Bank for attachment
of any property of the undersigned in the Bank's possession or any indebtedness
owing to the undersigned, or if the holder hereof shall at any time in good
faith believe that the prospect of due and punctual payment of this Note is
impaired, then, in any such event, the holder hereof may, at its option, declare
this Note to be immediately due and payable and thereupon this Note shall be
immediately due and payable, together with all unpaid interest accrued hereon,
without notice or demand; provided, however, that if this Note is payable on
demand, nothing herein contained shall preclude or limit the holder hereof from
demanding payment of this Note at any time and for any reason, without notice.
If this Note is not paid on the due date, the Bank shall also have the right to
set off the indebtedness evidenced by this Note against any indebtedness of Bank
to the undersigned. This Note shall also become automatically due and payable
(including unpaid interest accrued thereon) without notice or demand should the
undersigned die (an individual) or should a petition be filed by or against the
undersigned under the United States Bankruptcy code.
Unless prohibited by law, the undersigned agree(s) to pay all costs of
collection, including reasonable attorneys' fees and legal expenses, incurred by
the holder hereof in the event this Note is not duly paid. The holder hereof
may at any time renew this Note or extend its maturity date for any period and
release any security for, or any party to , this Note, all without notice to or
consent of and without releasing any accommodation maker, endorser or guarantor
from liability on this Note. Presentment or other demand for payment, notice of
dishonor and protest are hereby waived by the undersigned and each endorser and
guarantor. The undersigned agree(s) that each provision whose box is checked is
part of this Note. This Note shall be governed by the substantive laws of the
State Of Minnesota, except insofar as the Bank may rely on the laws of the
United States to justify the interest rate charged hereunder.
/ / This Note is secured. /X/ If this box is checked this Note
evidences a revolving credit facility.
/X/ This Note is unsecured.
- --------------------------------------------------------------------------------
Purpose of loan Borrower's name
General Corporate Purposes Check Technology Corporation
- --------------------------------------------------------------------------------
Address Signature Title
12500 Whitewater Drive X /S/ Paul Stephenson V. P. Finance
Minnetonka, MN. 55343-9420
41
<PAGE>
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Year Year Year
Ended Ended Ended
9/30/96 9/30/95 9/30/94
----------- ----------- -----------
PRIMARY
Average shares outstanding $ 6,185,395 $ 6,083,414 $ 6,022,375
Net effect of dilutive stock
options and warrants--based
on the treasury stock method
using average market price 170,006 187,090 123,226
----------- ----------- -----------
6,355,401 6,270,504 6,145,601
----------- ----------- -----------
----------- ----------- -----------
Net income $ 2,245,713 $ 2,052,986 $ 1,792,519
----------- ----------- -----------
----------- ----------- -----------
Earnings per share $ 0.35 $ 0.33 $ 0.29
----------- ----------- -----------
----------- ----------- -----------
FULLY DILUTED
Average shares outstanding 6,185,395 6,083,414 6,022,375
Net effect of dilutive stock
options and warrants--based
on the treasury stock method
using the higher of the ending
or average market price 176,055 190,254 129,377
----------- ----------- -----------
6,361,450 6,273,668 6,151,752
----------- ----------- -----------
----------- ----------- -----------
Net income $ 2,245,713 $ 2,052,986 $ 1,792,519
----------- ----------- -----------
----------- ----------- -----------
Earnings per share $ 0.35 $ 0.33 $ 0.29
----------- ----------- -----------
----------- ----------- -----------
42
<PAGE>
EXHIBIT 21 -- SUBSIDIARIES
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
The Company's subsidiaries, all of which are wholly-owned, are as follows:
Check Technology Limited
Check Technology France S.A.
Check Technology Pty Limited
GTI Holdings
GTI Ventures
43
<PAGE>
EXHIBIT 23--CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(No. 33-44872 and 33-33491) on Form S-8 of our report dated November 27, 1996,
with respect to the financial statements and schedule of Check Technology
Corporation included in the Annual Report (Form 10-K) for the year ended
September 30, 1996.
/s/ Ernst & Young LLP
- -------------------------
Ernst & Young LLP
Minneapolis, Minnesota
December 27, 1996
44
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<NAME> CHECK TECHNOLOGY CORPORATION
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