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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, 1997
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Commission file number 0-10691
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CHECK TECHNOLOGY CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1392000
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12500 Whitewater Drive
MINNETONKA, MINNESOTA 55343-9420
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(Address of principal executive offices) (Zip Code)
(612) 939-9000
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Registrant's telephone number, including area code
NOT APPLICABLE
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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 - 6,317,727 SHARES AS OF MAY 14, 1997
1
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INDEX
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -- March 31, 1997 and September 30, 1996
Consolidated statements of operations -- Three months ended
March 31, 1997 and 1996, and six months ended March 31, 1997 and
1996
Consolidated statements of cash flows -- Six months ended March 31,
1997 and 1996
Consolidated statement of stockholders' equity -- Six months ended
March 31, 1997
Notes to consolidated financial statements -- March 31, 1997
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
2
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Part I. FINANCIAL INFORMATION
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, September 30,
1997 1996
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,688,083 $ 4,851,283
Short-term investments 3,727,405 4,959,023
Accounts receivable less allowance
for doubtful accounts of $50,000 4,040,379 3,582,530
Inventories
Raw materials and component parts 5,699,697 5,088,859
Work-in-process 517,776 127,459
Finished Goods 1,299,642 1,383,052
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7,517,115 6,599,370
Other current assets 1,364,932 1,132,217
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TOTAL CURRENT ASSETS 21,337,914 21,124,243
EQUIPMENT AND FIXTURES
Machinery and equipment 1,995,508 1,940,676
Furniture and fixtures 1,687,356 1,643,803
Leasehold improvements 251,657 244,693
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3,934,521 3,829,172
Less accumulated depreciation and
amortization 2,805,748 2,675,559
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1,128,773 1,153,613
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TOTAL ASSETS $ 22,466,687 $ 22,277,856
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See notes to consolidated financial statements.
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LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September 30,
1997 1996
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CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,998,166 $ 1,963,171
Employee compensation and related taxes 598,681 769,750
Income taxes payable 497,347 489,732
Deferred revenue 466,671 499,036
Current portion of capital lease obligations 91,247 92,066
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TOTAL CURRENT LIABILITIES $ 3,652,112 3,813,755
Capital lease obligations -- less current
portion 86,989 55,615
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TOTAL LIABILITIES $ 3,739,101 3,869,370
STOCKHOLDERS' EQUITY
Capital Stock
Common Stock--par value $.10 per
share--authorized 25,000,000 shares;
issued and outstanding March 31, 631,906 623,773
1997--6,319,060 shares; September 30,
1996--6,237,727 shares
Additional paid in capital 17,171,218 16,395,889
Foreign currency translation adjustment (702,655) (513,963)
Retained earnings 1,627,117 1,902,787
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TOTAL STOCKHOLDERS' EQUITY 18,727,586 18,408,486
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,466,687 $ 22,277,856
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See notes to consolidated financial statements.
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ending March 31, Ending March 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales:
Printing equipment $ 2,332,374 $ 3,167,449 $ 4,068,123 $ 5,918,100
Maintenance, spares and supplies 3,868,823 3,503,092 7,620,966 7,025,722
------------- ------------- ------------- -------------
Net Sales 6,201,197 6,670,541 11,689,089 12,943,822
Costs and expenses:
Cost of sales 2,480,966 2,570,830 4,552,221 5,036,724
Selling, general and administrative 2,803,578 2,791,447 5,601,591 5,475,426
Research and Development 592,201 526,267 1,184,066 1,054,833
------------- ------------- ------------- -------------
5,876,745 5,888,544 11,337,878 11,566,983
------------- ------------- ------------- -------------
Income from system sales and service 324,452 781,997 351,211 1,376,839
Interest (income) (82,654) (92,740) (177,247) (183,217)
Unrealized exchange (gain) loss 35,403 (10,508) 31,754 (15,652)
------------- ------------- ------------- -------------
Income before taxes 371,703 885,245 496,704 1,575,708
Income taxes 130,000 177,000 155,000 315,001
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Net Income $ 241,703 $ 708,245 $ 341,704 $ 1,260,707
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------------- ------------- ------------- -------------
Earnings per share $ 0.04 $ 0.11 $ 0.05 $ 0.20
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Weighted average number of shares
and share equivalents outstanding 6,411,279 6,353,952 6,428,354 6,337,523
during the period
</TABLE>
See notes to consolidated financial statements.
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Month Period
Ending March 31,
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 341,704 $ 1,260,707
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 200,326 200,949
Other 55,557 (86,959)
Changes in operating assets and liabilities:
Accounts receivable (517,242) (489,001)
Inventories (1,008,554) (309,728)
Other current assets (248,863) 61,347
Accounts payable and accrued expenses (110,577) (397,368)
Deferred revenue (30,113) 16,468
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NET CASH FROM (USED IN) OPERATING ACTIVITIES (1,317,762) 256,415
INVESTING ACTIVITIES
Purchase of equipment and fixtures (213,582) (289,432)
Proceeds from sale of equipment 28,365 44,046
Purchase of short-term investment (10,523,972) (3,285,821)
Proceeds from sale of short-term investment 11,870,000 4,101,000
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NET CASH FROM (USED IN) INVESTING ACTIVITIES 1,160,811 569,793
FINANCING ACTIVITIES
Proceeds from issuance of common stock 13,462 49,989
Addition of capital leases 87,657 39,097
Repayment of long-term debt and capital leases (55,602) (50,119)
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NET CASH FROM FINANCING ACTIVITIES 45,517 38,967
EFFECT OF EXCHANGE RATE CHANGES ON CASH (51,766) (7,513)
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INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (163,200) 857,662
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 4,851,283 3,390,356
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,688,083 $ 4,248,018
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</TABLE>
See notes to consolidated financial statements.
6
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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, 1996 6,237,727 $ 623,773 16,395,889 $ (513,963) $ 1,902,787
Net Income 341,704
Exercise of stock options 1,333 133 3,199
Issuance of restricted stock 80,000 8,000 762,000 (617,374)
Payment of note receivable 10,130
Foreign currency translation (188,692)
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Balance March 31, 1997 6,319,060 $ 631,906 17,171,218 $ (702,655) $ 1,627,117
</TABLE>
See notes to consolidated financial statements.
7
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1997
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, 1996
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 -- Earnings per share:
In February 1997, the Financial Accounting Standards Board issued statement No.
128, "Earnings Per Share." This statement establishes standards for computing
and presenting basic and diluted earnings per share (EPS) for financial
statements issued for periods ending after December 15, 1997. The adoption of
this statement will not have a material effect on the Company's reported EPS.
8
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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, 1997,
revenues from the sale of document production equipment declined 26% and 31%
respectively primarily due to reduced sales in the Americas and Europe. Because
of the nature of the company's document production equipment, which involves the
sale of low unit volume, high price capital equipment, sales of document
production equipment often fluctuate considerably on a quarter to quarter basis.
For the three and six month periods ended March 31, 1997, revenues for
maintenance contracts, spare parts, supplies and consumable items increased 10%
and 8%, primarily due to the timing of purchases of supplies and consumables and
the increase in the installed base of systems.
The gross margin percentages for the three and six months periods ended March
31, 1997, were 60% and 61% respectively, compared to 61% and 61% 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, 1997, was relatively unchanged and increased 2% over the
comparable period last year as a result of higher personnel and marketing costs.
Research and development expenses increased 13% and 12% over the comparable
period last year. The increase 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 loss for the current quarter of
$35,000 and a loss for the six months ended March 31, 1997, of $32,000. For the
prior year, the Company had an unrealized exchange gain of $11,000 for the
quarter and a gain of $16,000 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.
The income tax rate was 35% and 31% for the three months and six months ended
March 31, 1997, respectively, compared to 20% in the comparable periods. The
increase in the tax rate over the prior periods was principally due to a benefit
realized in a prior period for a reduction in the valuation reserve on the
deferred tax asset.
Net income for the quarter amounted to $0.04 per share as compared to $0.11 per
share in the comparable period. For the six month period, net income amounted
to $0.05 per share as compared to $0.20 per share for the 1996 six months. The
change in net income for both the quarter and six month periods is due primarily
to the effect of reduced sales of document production equipment and higher
research and development expenditures.
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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 expenses 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.
Liquidity and Capital Resources
Working capital increased from $17,310,000 at September 30, 1996 , to
$17,686,000 at March 31, 1997. Accounts receivable increased by $458,000,
primarily due to the timing of revenue sales in the quarter. Inventories
increased by $918,000, primarily due to the purchase of inventories for the
company's new IMAGGIA product line. Stockholders' equity increased to
$18,727,000 at March 31, 1997, compared to $18,408,000 at September 30, 1996.
The Company's long-term debt to equity ratio was less than 0.01 at March 31,
1997, and September 30, 1996. The Company maintains a $2.5 million unsecured
bank line of credit. At March 31, 1997, the line was unused. The credit
agreement expires March 31, 1998 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 1997.
At March 31, 1997, the Company had no material commitments for capital
expenditures.
10
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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 20, 1997. The
shareholders took the following actions: (i) The shareholders elected five
directors to serve for a term ending in 1998 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
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Robert Reznick 5,466,675 38,801
Jay A. Herman 5,470,640 34,836
Thomas H. Garrett, III 5,464,735 40,741
Gary R. Holland 5,471,640 33,836
Oscar Victor 5,460,790 44,686
(ii) The shareholders approved the selection of Ernst & Young as the Company's
independent public accountants for 1997. 5,475,294 votes were cast for the
resolution; 16,800 votes were cast against the resolution; 13,382 shares
represent votes 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, 1997.
11
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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 15, 1997 /s/ Jay A. Herman
----------------------- ---------------------------------------
Jay A. Herman
President and Chief Executive Officer
Date May 15, 1997 /s/ Paul W.B. Stephenson
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Paul W.B. Stephenson
Vice President, Finance and Administration
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 4,688,083
<SECURITIES> 3,727,405
<RECEIVABLES> 4,090,399
<ALLOWANCES> 50,000
<INVENTORY> 7,517,115
<CURRENT-ASSETS> 21,337,914
<PP&E> 3,934,521
<DEPRECIATION> 2,805,748
<TOTAL-ASSETS> 22,466,687
<CURRENT-LIABILITIES> 3,652,112
<BONDS> 0
0
0
<COMMON> 631,906
<OTHER-SE> 18,095,680
<TOTAL-LIABILITY-AND-EQUITY> 22,466,687
<SALES> 6,201,197
<TOTAL-REVENUES> 11,689,089
<CGS> 4,552,221
<TOTAL-COSTS> 6,785,657
<OTHER-EXPENSES> (145,493)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 496,704
<INCOME-TAX> 155,000
<INCOME-CONTINUING> 341,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 341,704
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
