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 June 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 (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 - - 6,241,977 shares as of July 31, 1996
INDEX
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - - June 30, 1996 and
September 30, 1995
Consolidated statements of operations - - Three months ended
June 30, 1996 and 1995, and nine months ended June 30, 1996
and 1995
Consolidated statements of cash flows - - Nine months ended
June 30, 1996 and 1995
Consolidated statement of stockholders' equity - - Nine months
ended, June 30, 1996
Notes to consolidated financial statements - - June 30, 1996
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
PART II. OTHER INFORMATION
Item 3. Exhibits and reports on Form 8-K
SIGNATURES
Part I. FINANCIAL INFORMATION
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, September 30,
1996 1995
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,370,941 $ 3,390,356
Short-term investments 3,344,349 4,048,704
Accounts receivable less allowance for
doubtful accounts of $50,000 4,843,701 4,865,712
Inventories
Raw materials and component parts 4,633,705 4,406,202
Work-in-process 429,043 102,736
Finished Goods 1,308,931 1,349,725
----------- -----------
6,371,679 5,858,663
Other current assets 701,306 727,290
----------- -----------
TOTAL CURRENT ASSETS 20,631,976 18,890,725
EQUIPMENT AND FIXTURES
Machinery and equipment 1,988,633 1,974,074
Furniture and fixtures 1,607,129 1,438,888
Leasehold improvements 297,107 262,714
----------- -----------
3,892,869 3,675,676
Less accumulated depreciation and amortization 2,664,204 2,462,844
----------- -----------
1,228,665 1,212,832
----------- -----------
TOTAL ASSETS $21,860,641 $20,103,557
=========== ===========
</TABLE>
See notes to consolidated financial statements
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, September 30,
1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,295,597 $ 2,390,906
Employee compensation and related taxes 826,624 889,369
Income taxes payable 543,123 417,777
Deferred revenue 508,289 523,958
Current portion of capital lease obligations 87,818 82,912
------------ ------------
TOTAL CURRENT LIABILITIES 4,261,451 4,304,922
Capital lease obligations -- less current portion 71,450 106,405
------------ ------------
TOTAL LIABILITIES 4,332,901 4,411,327
STOCKHOLDERS' EQUITY
Capital Stock
Common Stock--par value $.10 per share--authorized
25,000,000 shares; issued and outstanding
June 30, 1996--6,241,977 shares;
September 30, 1995--6,112,279 shares 624,198 611,228
Additional paid in capital 16,060,117 15,743,703
Foreign currency translation adjustment (558,087) (453,275)
Retained earnings (deficit) 1,401,512 (209,426)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 17,527,740 15,692,230
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,860,641 $ 20,103,557
============ ============
</TABLE>
See notes to consolidated financial statements
<TABLE>
<CAPTION>
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Period Nine Month Period
Ending June 30, Ending June 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales:
Printing equipment $ 2,629,805 $ 2,305,980 $ 8,547,905 $ 6,963,487
Maintenance, spares and supplies 3,663,797 3,480,413 10,689,518 10,385,565
------------ ------------ ------------ ------------
Net Sales 6,293,602 5,786,393 19,237,423 17,349,052
Costs and expenses:
Cost of sales 2,445,980 2,245,895 7,482,704 6,617,724
Selling, general and administrative 2,710,625 2,424,126 8,186,051 7,358,483
Research and Development 591,262 592,186 1,646,095 1,805,603
------------ ------------ ------------ ------------
5,747,867 5,262,207 17,314,850 15,781,810
------------ ------------ ------------ ------------
Income from system sales and service 545,735 524,186 1,922,573 1,567,242
Interest (income) (85,519) (66,444) (268,737) (177,976)
Unrealized exchange (gain) loss (15,506) 42,025 (31,157) 4,427
------------ ------------ ------------ ------------
Income before taxes 646,760 548,605 2,222,467 1,740,791
Income taxes 124,782 141,000 439,782 355,000
------------ ------------ ------------ ------------
Net Income $ 521,978 $ 407,605 $ 1,782,685 $ 1,385,791
============ ============ ============ ============
Earnings per share $ 0.08 $ 0.06 $ 0.28 $ 0.22
============ ============ ============ ============
Weighted average number of shares and
share equivalents outstanding during 6,387,443 6,281,984 6,352,005 6,262,852
the period
</TABLE>
See notes to consolidated financial statements
<TABLE>
<CAPTION>
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Month Period
Ending June 30,
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,782,685 $ 1,385,791
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 321,668 311,083
Other (94,747) (123,995)
Changes in operating assets and liabilities:
Accounts receivable 13,349 (847,190)
Inventories (532,155) 149,224
Other current assets 23,061 (325,385)
Accounts payable and accrued expenses (65,555) (1,383,467)
Deferred revenue (21,296) 15,300
----------- -----------
NET CASH FROM (USED IN) OPERATING ACTIVITIES 1,427,010 (818,639)
INVESTING ACTIVITIES
Purchase of equipment and fixtures (384,083) (163,133)
Proceeds from sale of equipment 70,619 26,059
Purchase of short-term investment (6,105,086) (2,924,131)
Proceeds from sale of short-term investment 6,931,788 3,491,854
----------- -----------
NET CASH FROM (USED IN) INVESTING ACTIVITIES 513,238 430,649
FINANCING ACTIVITIES
Proceeds from issuance of common stock 99,384 129,129
Addition of capital leases 39,809 64,033
Repayment of long-term debt and capital leases (79,501) (57,374)
----------- -----------
NET CASH FROM FINANCING ACTIVITIES 59,692 135,788
EFFECT OF EXCHANGE RATE CHANGES ON CASH (19,354) 1,866
----------- -----------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 1,980,585 (250,336)
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 3,390,356 1,871,314
=========== ===========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,370,941 $ 1,620,978
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
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 1,782,685
Exercise of stock options 109,698 10,970 81,768
Conversion of Series B
Convertible preferred stock
Conversion of warrants
Issuance of restricted stock 20,000 2,000 228,000 (230,000)
Vesting of restricted stock 58,253
Payment of note receivable 6,646
Foreign currency translation (104,812)
----------- ----------- ----------- ----------- -----------
Balance June 30, 1996 6,241,977 $ 624,198 16,060,117 $ (558,087) $ 1,401,512
</TABLE>
See notes to consolidated financial statements.
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 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 nine month periods ended June 30,
1996 and 1995 are as follows:
Nine-Month Period Ended
June, 30,
-------------------------------------
1996 1995
---------------- ---------------
Current:
Federal $ 13,281 $ (10,000)
State 15,496 6,000
Foreign 411,005 359,000
---------------- ---------------
Total Income Tax Expense $ 439,782 $ 355,000
================ ===============
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 June 30, 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 nine month periods ended June 30, 1996,
revenues from the sale of document production equipment increased 14% and 23%
respectively primarily due to increased sales in the Americas, Europe and Asia.
For the three and nine month periods ended June 30, 1996, revenues for
maintenance contracts, spare parts, supplies and consumable items increased 5%
and 3%, 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 nine months periods ended June 30,
1996, were 61% and 61% respectively, compared to 61% and 62% in the comparable
prior period.
Selling, general and administrative expenses during the three and nine month
periods ended June, 1996, increased 12% and 11% over the comparable period last
year as a result of higher personnel and marketing costs.
Research and development expenses for the three month period ending June 30
remained unchanged from the comparable period last year and decreased 9% for the
nine month period ended June 30 from 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
$16,000 and a gain for the nine months ended June 30, 1996, of $31,000. For the
prior year, the Company had an unrealized exchange loss of $42,000 for the
quarter and a loss of $4,000 for the nine 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.
Factors Affecting Results of Operations
The company's revenues and operating results can vary substantially from quarter
to quarter. Revenues in any quarter are substantially affected by the level of
equipment sales booked and shipped in that quarter. This activity is difficult
to forecast for a variety of reasons including: (i) the duration of the
Company's sales cycle is relatively long; (ii) the size of transactions can vary
significantly; (iii) financing constraints in some of the countries where the
Company does business may delay the completion of transactions beyond the
customer's expectations; (iv) postponement or cancellation of customer orders;
and (v) changes in economic, political and market conditions, which can affect
business opportunities with minimal notice. Because the Company's operating
expenses are based on anticipated revenue levels and a high percentage of the
Company's operating expenses are relatively fixed, a variation in the timing of
the recognition of revenues could result in significant variations in operating
results from quarter to quarter. The Company's operations may in the future
experience significant fluctuations from period to period as a consequence of
changing industry patterns, general economic conditions affecting the timing of
orders from major customers and other factors affecting capital spending. There
can be no assurance that such factors will not have a material effect on the
Company's business, operating results or financial condition. The Company's
continued success is primarily dependent on its continued ability to introduce,
develop and market new and enhanced versions of its products, although there can
be no assurance that such ability can be maintained.
This document contains a number of forward-looking statements including: (i) the
entire paragraph immediately preceding, (ii) the last sentence of the sixth
paragraph under the caption "Results of Operations" and (iii) the last two
sentences of the second paragraph under the caption "Liquidity and Capital
Resources". In addition, the Company may from time to time make oral
forward-looking statements to securities market analysts and other investors who
utilize such forward-looking statements to prepare and publish forecasts of the
Company's future operating results. The factors set forth in the Annual Report
on Form 10-K for the year ending September 30, 1995 in Part 1, Item 1 "Business"
and Part II Item 5 "Market for Registrant's Common Equity and Related
Stockholder Matters" as well as those mentioned in this section are important
factors that could cause actual results to differ materially from those
projected in any such forward looking statements.
Liquidity and Capital Resources
Working capital increased from $14,586,000 at September 30, 1995, to $16,731,000
at June 30, 1996. Stockholders' equity increased to $17,528,000 at June 30,
1996, compared to $15,692,000 at September 30, 1995.
The Company's long-term debt to equity ratio was less than 0.01 at June 30,
1996, and September 30, 1995. The Company maintains a $2.5 million unsecured
bank line of credit. At June 30, 1996, the line was unused. The credit agreement
expires March 31, 1997 and the Company presently expects to negotiate a new bank
line of credit. 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 June 30, 1996, the Company had no material commitments for capital
expenditures.
PART II. OTHER INFORMATION
Item 3. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
The Company did not file any reports on Form 8-K during the three months ended
June 30, 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 August 9, 1996 /s/ Jay A. Herman
-------------------------------- -------------------
Jay A. Herman
President and Chief Executive Officer
Date August 9, 1996 /s/ Paul W.B. Stephenson
-------------------------------- --------------------------
Paul W.B. Stephenson
Vice President, Finance and Administration
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,370,941
<SECURITIES> 3,344,349
<RECEIVABLES> 4,894,701
<ALLOWANCES> 50,000
<INVENTORY> 6,371,679
<CURRENT-ASSETS> 701,306
<PP&E> 3,892,869
<DEPRECIATION> 2,664,204
<TOTAL-ASSETS> 21,860,641
<CURRENT-LIABILITIES> 4,261,451
<BONDS> 71,450
0
0
<COMMON> 624,198
<OTHER-SE> 16,903,542
<TOTAL-LIABILITY-AND-EQUITY> 21,860,641
<SALES> 19,237,423
<TOTAL-REVENUES> 19,237,423
<CGS> 7,482,704
<TOTAL-COSTS> 9,832,146
<OTHER-EXPENSES> (299,894)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,222,467
<INCOME-TAX> 439,782
<INCOME-CONTINUING> 1,782,685
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,782,685
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
