FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 (IRS Employer
incorporation or organization) Identification No.)
12500 Whitewater Drive
Minnetonka, Minnesota 55343-9420
(Address of principal executive offices) (Zip Code)
(612) 939-9000
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year, if changed since last report
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 periods
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common Stock, $.10 Par Value - - 6,221,094 shares as of May 10, 1996
INDEX
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - - March 31, 1996 and September 30, 1995
Consolidated statements of operations - - Three months ended
March 31, 1996 and 1995, and six months ended March 31, 1996 and 1995
Consolidated statements of cash flows - - Six months ended
March 31, 1996 and 1995
Consolidated statement of stockholders' equity - - Six months
ended March 31, 1996
Notes to consolidated financial statements - - March 31, 1996
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and reports on Form 8-K
SIGNATURES
Part I. FINANCIAL INFORMATION
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, September 30
1996 1995
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,248,018 $ 3,390,356
Short-term investments 3,337,201 4,048,704
Accounts receivable less allowance
for doubtful accounts of $50,000 5,300,785 4,865,712
Inventories
Raw materials and component parts 4,409,800 4,406,202
Work-in-process 652,600 102,736
Finished Goods 1,073,313 1,349,725
----------- -----------
6,135,713 5,858,663
Other current assets 661,404 727,290
----------- -----------
TOTAL CURRENT ASSETS 19,683,121 18,890,725
EQUIPMENT AND FIXTURES
Machinery and equipment 1,973,131 1,974,074
Furniture and fixtures 1,577,787 1,438,888
Leasehold improvements 288,965 262,714
----------- -----------
3,839,883 3,675,676
Less accumulated depreciation and amortization 2,562,781 2,462,844
----------- -----------
1,277,102 1,212,832
----------- -----------
TOTAL ASSETS $20,960,223 $20,103,557
=========== ===========
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, September 30
1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,140,151 $ 2,390,906
Employee compensation and related taxes 656,472 889,369
Income taxes payable 492,214 417,777
Deferred revenue 546,092 523,958
Current portion of capital lease obligations 86,961 82,912
------------ ------------
TOTAL CURRENT LIABILITIES 3,921,890 4,304,922
Capital lease obligations -- less current portion 100,050 106,405
------------ ------------
TOTAL LIABILITIES 4,021,940 4,411,327
STOCKHOLDERS' EQUITY
Capital Stock
Common Stock--par value $.10 per share--authorized
25,000,000 shares; issued and outstanding
March 31, 1996--6,205,344 shares; 620,534 611,228
September 30, 1995--6,112,279 shares
Additional paid in capital 15,784,386 15,743,703
Foreign currency translation adjustment (547,421) (453,275)
Retained earnings (deficit) 1,080,784 (209,426)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 16,938,283 15,692,230
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,960,223 $ 20,103,557
============ ============
</TABLE>
See notes to consolidated financial statements.
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ending March 31, Ending March 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales:
Printing equipment $ 3,167,449 $ 2,649,709 $ 5,918,100 $ 4,657,507
Maintenance, spares and supplies 3,503,092 3,351,022 7,025,722 6,905,154
------------ ------------ ------------ ------------
Net Sales 6,670,541 6,000,731 12,943,822 11,562,661
Costs and expenses:
Cost of sales 2,570,830 2,181,319 5,036,724 4,371,829
Selling, general and administrative 2,791,447 2,510,584 5,475,426 4,934,357
Research and Development 526,267 625,435 1,054,833 1,213,418
------------ ------------ ------------ ------------
5,888,544 5,317,338 11,566,983 10,519,604
------------ ------------ ------------ ------------
Income from system sales and service 781,997 683,393 1,376,839 1,043,057
Interest (income) (92,740) (51,372) (183,217) (111,532)
Unrealized exchange (gain) loss (10,508) 5,531 (15,652) (37,598)
------------ ------------ ------------ ------------
Income before taxes 885,245 729,234 1,575,708 1,192,187
Income taxes 177,000 131,000 315,001 214,000
------------ ------------ ------------ ------------
Net Income $ 708,245 $ 598,234 $ 1,260,707 $ 978,187
============ ============ ============ ============
Earnings per share $ 0.11 $ 0.10 $ 0.20 $ 0.16
============ ============ ============ ============
Weighted average number of shares and
share equivalents outstanding during 6,353,952 6,280,183 6,337,523 6,226,974
the period
</TABLE>
See notes to consolidated financial statements.
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Month Period
Ending March 31,
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,260,707 $ 978,187
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 200,949 207,181
Other (86,959) (92,482)
Changes in operating assets and liabilities:
Accounts receivable (489,001) (1,445,074)
Inventories (309,728) 28,658
Other current assets 61,347 (78,982)
Accounts payable and accrued expenses (397,368) (884,144)
Deferred revenue 16,468 57,434
----------- -----------
NET CASH FROM (USED IN) OPERATING ACTIVITIES 256,415 (1,229,222)
INVESTING ACTIVITIES
Purchase of equipment and fixtures (289,432) (109,843)
Proceeds from sale of equipment 44,046 0
Purchase of short-term investment (3,285,821) (1,940,526)
Proceeds from sale of short-term investment 4,101,000 2,505,942
----------- -----------
NET CASH FROM (USED IN) INVESTING ACTIVITIES 569,793 455,573
FINANCING ACTIVITIES
Proceeds from issuance of common stock 49,989 49,019
Addition of capital leases 39,097 21,657
Repayment of long-term debt and capital leases (50,119) (26,879)
----------- -----------
NET CASH FROM FINANCING ACTIVITIES 38,967 43,797
EFFECT OF EXCHANGE RATE CHANGES ON CASH (7,512) (6,475)
----------- -----------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 857,662 (736,327)
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 3,390,356 1,871,314
=========== ===========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,248,018 $ 1,134,987
=========== ===========
</TABLE>
See notes to consolidated financial statements
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Additional Currency Retained
Common Stock Paid-In Translation Earnings
Shares Amount Capital Adjustment (Deficit)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance September 30, 1995 6,112,279 $ 611,228 15,743,703 $ (453,275) $ (209,426)
Net Income 1,260,707
Exercise of stock options 93,065 9,306 34,037
Conversion of Series B
Convertible preferred stock
Conversion of warrants
Vesting of restricted stock 29,503
Payment of note receivable 6,646
Foreign currency translation (94,146)
----------- ----------- ----------- ----------- -----------
Balance March 31, 1996 6,205,344 $ 620,534 15,784,386 $ (547,421) $ 1,080,784
</TABLE>
See notes to consolidated financial statements.
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1996
NOTE A - - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended September 30, 1995.
Reclassifications have been made in the prior year to conform with
classifications in the current year.
Income 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.
NOTE B -- INCOME TAXES
The components of income tax expenses for the six month periods ended March 31,
1996 and 1995 are as follows:
Six-Month Period Ended
March 31,
-------------------
1996 1995
-------- --------
Current:
Federal $ 18,000 $ 0
State 10,000 5,000
Foreign 287,000 209,000
======== ========
Total Income Tax Expense $315,000 $214,000
======== ========
NOTE C -- LINE OF CREDIT
The Company has an unsecured line of credit agreement with a bank which provides
for a $2,500,000 revolving credit line. Advances under the line of credit bear
interest at the bank's reference rate. Advances made under the line of credit
agreement shall mature no later than March 31, 1997. As of March 31, 1996, the
revolving line of credit was unused.
Item 2
Management's Discussion and Analysis of Results
of Operations and Financial Condition
Results of Operations
The Company's revenues consist of (1) sales of document production systems and
related equipment and (2) maintenance contracts, spare parts, supplies and
consumable items. For the three and six month periods ended March 31, 1996,
revenues from the sale of document production equipment increased 20% and 27%
respectively primarily due to increased sales in the Americas, Europe and
Africa.
For the three and six month periods ended March 31, 1996, revenues for
maintenance contracts, spare parts, supplies and consumable items increased 5%
and 2%, primarily due to the timing of purchases of supplies and consumables and
the increase in the installed base of systems.
The gross margin percentage for the three and six months periods ended March 31,
1996, were 61% and 61% respectively, compared to 64% and 62% in the comparable
prior period. The changes were primarily due to changes in product mix.
Selling, general and administrative expenses during the three and six month
periods ended March 31, 1996, increased 11% and 11% over the comparable period
last year as a result of higher personnel and marketing costs.
Research and development expenses decreased 16% and 13% over the comparable
period last year. The decrease was due primarily to the timing of expenditures
on the Company's program to develop a new family of check production systems.
The Company had an unrealized currency exchange gain for the current quarter of
$11,000 and a gain for the six months ended March 31, 1996, of $16,000. For the
prior year, the Company had an unrealized exchange loss of $6,000 for the
quarter and a gain of $38,000 for the six month period. These unrealized
currency gains and losses are due to the strengthening and weakening of the U.S.
dollar against the currencies of the countries in which the Company's foreign
subsidiaries are located and the resulting effect on the valuation of the
intercompany accounts and certain assets, which are denominated in U.S. dollars.
The Company anticipates that it will continue to have unrealized currency
exchange gains or losses.
Liquidity and Capital Resources
Working capital increased from $14,586,000 at September 30, 1995 , to
$15,661,000 at March 31, 1996. Stockholders' equity increased to $16,938,000 at
March 31, 1996, compared to $15,692,000 at September 30, 1995.
The Company's long-term debt to equity ratio was 0.01 at March 31, 1996, and
September 30, 1995. The Company maintains a $2.5 million unsecured bank line of
credit. At March 31, 1996, the line was unused. The credit agreement expires
March 31, 1997. The Company believes that its current financial arrangements and
anticipated level of internally generated funds will be sufficient to fund its
working capital requirements in fiscal 1996.
At March 31, 1996, the Company had no material commitments for capital
expenditures.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on March 21, 1996. The
shareholders took the following actions: (i) The shareholders elected five
directors to serve for a term ending in 1997 and until their successors are
elected. The shareholders present in person or by proxy cast the following
numbers of votes in connection with the election of directors, resulting in the
election of all of the nominees:
Votes For Votes Withheld
Robert Reznick 5,295,310 330,242
Jay A. Herman 5,602,471 23,081
Thomas H. Garrett, III 5,296,675 328,877
Gary R. Holland 5,600,323 25,229
Oscar Victor 5,603,406 22,146
(ii) The shareholders approved the selection of Ernst & Young as the Company's
independent public accountants for 1996. 5,599,207 votes were cast for the
resolution; 11,894 votes were cast against the resolution; 14,451 shares
represent votes abstained.
(iii) The shareholders approved the amendment to the Company's Articles of
Incorporation to increase the total number of authorized shares of common stock
from 7,000,000 shares to 25,000,000 shares. 5,081,816 shares were voted in favor
of said proposal; 506,879 shares were cast against the proposal, and 36,857
shares abstained.
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended
March 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHECK TECHNOLOGY CORPORATION
Registrant
Date May 14, 1996 /s/ Jay A. Herman
Jay A. Herman
President and Chief Executive Officer
Date May 14 , 1996 /s/ Paul W.B. Stephenson
Paul W.B. Stephenson
Vice President, Finance and
Administration
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 4,248,018
<SECURITIES> 3,337,201
<RECEIVABLES> 5,350,785
<ALLOWANCES> 50,000
<INVENTORY> 6,135,713
<CURRENT-ASSETS> 661,404
<PP&E> 3,839,883
<DEPRECIATION> 2,562,781
<TOTAL-ASSETS> 20,960,223
<CURRENT-LIABILITIES> 3,921,890
<BONDS> 0
0
0
<COMMON> 620,534
<OTHER-SE> 16,317,749
<TOTAL-LIABILITY-AND-EQUITY> 20,960,223
<SALES> 12,943,822
<TOTAL-REVENUES> 12,943,822
<CGS> 5,036,724
<TOTAL-COSTS> 6,530,259
<OTHER-EXPENSES> (198,869)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,575,708
<INCOME-TAX> 315,001
<INCOME-CONTINUING> 1,260,707
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,260,707
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
