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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, 1997
Commission File Number: 0-10691
CHECK TECHNOLOGY CORPORATION
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(Exact name of registrant as specified in its charter)
Minnesota 41-1392000
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12500 Whitewater Drive, Minnetonka, Minnesota 55343-9420
- --------------------------------------------- -------------------------
(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 held by nonaffiliates of the
Registrant was approximately 23,434,000 at December 1, 1997 when the closing
price of such stock, as reported by NASDAQ, was 3.875.
There were 6,336,745 shares outstanding of Registrant's $.10 par value common
stock as of December 1, 1997.
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 62 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 competitors'
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, 1997, the Company had an installed base of over 400 systems
located in 48 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 module. 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, 1997, 1996 and 1995, 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.
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 United
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.
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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 H. 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. To date, the
Company has been able to establish itself only in the production of new account
kits, money market checkbooks and other applications which do not require offset
or letterpress quality.
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.
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, 1997, the Company had a backlog of approximately $3,500,000 as
compared to a backlog of $3,909,000 as of December 1, 1996. 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 1997, 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.
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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.
The non-impact alphanumeric printers and associated spare parts and consumables
for both the CHECKTRONIC and the IMAGGIA system are supplied to the Company by
Delphax Systems, which has its manufacturing facilities in Toronto, Canada.
Delphax has been the supplier of the printers used in the Company's systems
since the Company's inception and is considered by the Company's management to
be a reliable supplier. Xerox, one of the Company's competitors, owned a one
third partnership interest in Delphax for many years and in November 1997
acquired the remaining equity of Delphax. In connection with this acquisition,
Xerox has advised the Company that its intention is to have Delphax comply with
all of Delphax's existing contractual obligations to the Company, that Xerox
hopes to expand Delphax's relationship with the Company in the future and that
Xerox does not anticipate that the competitive relationship between the Company
and Xerox will be a factor in the relationship of Delphax with the Company. The
expressed intentions of Xerox could change to the detriment of the Company. No
assurance can be given at this time that the Company will be able to secure a
replacement source of supply for the alphanumeric printers supplied by 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 these hammer banks. The Company made an end-of-life buy
and does not foresee an impact on its operations.
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 $2,521,000, $2,206,000 and
$2,319,000, for the years ended September 30, 1997, 1996 and 1995, respectively.
The Company is completing development of a new family of check production
systems, called IMAGGIA, which is targeted at the high volume U.S. check
market as well as offering potential for increasing the Company's
international business. The Company has selected the Gemini digital printing
technology, which is being developed by Delphax Systems, as the initial print
engine for the Imaggia system. The Company had anticipated introducing this
system to the market during its fiscal 1997 year. However, introduction of
the system has been delayed, due in part to development delays associated
with the Gemini print engine and finalization of the engine's toner
formulation, which are outside of the Company's control. The Company
currently anticipates that the IMAGGIA system will be commercially available
during its fiscal 1998 year. However, no assurances can be given that
further delays will not occur or that the product's launch will be successful.
PATENTS
In July 1997, the Company received a patent covering certain aspects of its
IMAGGIA printing system. In prior years, the Company has received a patent
covering the Model 2000 CHECKTRONIC 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.
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EMPLOYEES
As of December 1, 1997, the Company had 187 full-time employees, including 33 in
executive and administrative positions, 30 in electronic engineering and product
development, 31 in manufacturing, 17 in sales and marketing and 76 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 $387,000, increasing to
$481,000 on September 15, 2005, 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 $195,000, 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
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, 1997.
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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 50
Louise Jalma Vice President of Marketing 45
Peter Wood Vice President of Engineering 55
Dieter Schilling Vice President of Operations and 42
Customer Service
Paul Stephenson Vice President of Finance and Administration 43
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.
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.
PETER WOOD joined the Company as Vice President of Engineering in July 1997.
Mr. Wood has over 30 years experience in the development and user application of
electronic digital product technology. Prior to joining the Company, Mr. Wood
served as Principal Consultant to Vivo Software, Inc. from 1996 to 1997, as Vice
President, Engineering and Technology, for Iris Graphics Inc. from 1995 to 1996
and as President of Vital Imaging Systems, Inc. from 1993 to 1995.
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
interconnects 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
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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, 1997
- -----------------------------
First Quarter $ 10 7/8 $ 7 1/2
Second Quarter $ 8 7/8 $ 5 5/8
Third Quarter $ 8 $ 5 1/4
Fourth Quarter $ 7 7/8 $ 3 7/8
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
HOLDERS
As of December 1, 1997, the Company had 414 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, 1997 30, 1996 30, 1995 30, 1994 30, 1993
- ----------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated
Statement of
Operations Data:
Net sales $22,866,676 $24,718,974 $24,360,654 $22,975,589 $21,343,308
Net income $ 325,979 $ 2,245,713 $ 2,052,986 $ 1,792,519 $ 882,932
Earnings per share $ 0.05 $ 0.35 $ 0.33 $ 0.29 $ 0.15
Weighted average
number of shares
and share equivalents
outstanding (1) 6,416,081 6,355,401 6,270,504 6,145,601 6,032,096
September September September September September
Year Ended 30, 1997 30, 1996 30, 1995 30, 1994 30, 1993
- ----------------------- ----------- ----------- ----------- ----------- -----------
Consolidated
Balance Sheet Data:
Working capital $17,588,576 $17,310,488 $14,585,803 $12,544,594 $10,376,832
Total assets $22,971,493 $22,277,856 $20,103,557 $17,603,636 $14,528,664
Long term liabilities $ 78,903 $ 55,615 $ 106,405 $ 143,104 $ 97,133
Stockholders' equity $18,679,662 $18,408,486 $15,692,230 $13,567,806 $11,350,953
</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, 1997 (fiscal 1997) sales of
document production equipment decreased 26% over the year ended September 30,
1996 (fiscal 1996) compared to an increase of 2% in fiscal 1996 over year ended
September 30, 1995 (fiscal 1995). The decrease in 1997 arose primarily from a
decrease in CHECKTRONIC sales. The Company has held for some time, a dominant
market position, in many of the international markets in which the CHECKTRONIC
is sold. Demand for the CHECKTRONIC product line has softened in some of these
established international markets, and revenues from this product line are now
largely dependent on sales to emerging markets. The increase in 1996 over 1995
arose primarily from sales into Africa and Latin America.
Revenues from maintenance contracts, spare parts, supplies and consumable items
increased 6% in fiscal 1997 over fiscal 1996 compared to a 1% increase in fiscal
1996 over fiscal 1995. Increases in both fiscal 1997 and 1996 were primarily
due to increased volumes of consumable sales.
Gross margin percentages in fiscal 1997 were 60% compared to 61% in fiscal 1996
and 62% in fiscal 1995. The change between fiscal 1997, 1996 and 1995 was
primarily due to differences in product mix and increased pricing pressure.
Selling, general and administrative expenses increased 3% in fiscal 1997 over
fiscal 1996, compared to an increase of 4% in fiscal 1996 over fiscal 1995. The
increase in expenses in fiscal 1997 over fiscal 1996 was due primarily to higher
marketing and personnel expense.
Research and development expenses increased 14% in fiscal 1997 over fiscal 1996
and fiscal 1995 levels. The increase was primarily due to increased
expenditures on the Company's IMAGGIA product development program.
Interest income in fiscal 1997 was flat with 1996. Interest income increased
42% in fiscal 1996 over fiscal 1995 as a result of higher cash and short-term
investment balances.
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 loss was $72,000 in fiscal 1997, compared to a gain of $51,000
in fiscal 1996 and a gain of $30,000 in fiscal 1995. 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 income tax rate was 32% in fiscal 1997 compared to 12% in fiscal 1996 and
20% in fiscal 1995. During the fourth quarter of fiscal 1996 the Company
recorded certain previously unrecognized deferred tax assets amounting to
$693,000. The Company believes recorded net deferred tax assets are recoverable,
based upon its estimates of future sources of taxable income and the expected
timing of temporary difference of reversals. Further information about income
taxes is provided in Note B to the consolidated financial statements.
Net income for the year amounted to $0.05 per share as compared to $0.35 per
share in fiscal 1996 and $0.33 per share in fiscal 1995. The decrease in net
income in fiscal 1997 was primarily due to the decrease in the level of document
production systems revenue, as well as the negative effects of foreign currency
exchange rate swings and a higher tax rate. The increase in net income in
fiscal 1996 over fiscal 1995 was due to a lower tax rate.
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FACTORS AFFECTING RESULTS OF OPERATIONS
The Company is developing a new product line, named the IMAGGIA line, which it
had planned to introduce in fiscal 1997. Introduction of the product line has
been delayed, and the Company now anticipates that the product will be
introduced in fiscal 1998. Achievement of the Company's future revenue plans
depends upon the successful introduction and market acceptance of the IMAGGIA
system. The Company's revenues and operating results may also fluctuate from
period to period 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 affect 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 period to period.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $17,589,000 at September 30, 1997 from $17,310,000
at September 30, 1996. Cash and short-term investments amounted to $8,459,000
at September 30, 1997 compared to $9,810,000 at September 30, 1996.
Stockholders' equity increased to $18,680,000 at September 30, 1997, from
$18,408,000 at September 30, 1996.
The Company maintains a $2.5 million unsecured bank line of credit. At
September 30, 1997, the line was unused. The agreement expires March 31, 1998,
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 1998. At September 30, 1997, 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.
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, 1998, 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, 1998, 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, 1998, 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, 1997 and 1996 20
Consolidated Statements of Operations--The years ended
September 30, 1997, 1996, and 1995 22
Consolidated Statements of Stockholders' Equity--The years ended
September 30, 1997, 1996, and 1995 23
Consolidated Statements of Cash Flows--The years ended
September 30, 1997, 1996, 1995 25
Notes to Consolidated Financial Statements--September 30, 1997 26
FINANCIAL STATEMENT SCHEDULES
Number Description Page
- ------ ----------- ----
Schedule II Valuation and Qualifying Accounts and Reserves 39
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 OF FORM 8-K
The Company did not file any reports on Form 8-K during the three months ended
September 30, 1997
EXHIBITS
<TABLE>
<CAPTION>
Number Description Page or Incorporated by Reference From
- ------ ----------- --------------------------------------
<S> <C> <C>
3.1 Restated Articles of Incorporation Exhibit 3.1 to Form 10-K for 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
Common Stock Certificates Exhibit 4(b) to Registration Statement on Form
S-1 (No. 2-97193)
4.2 Statement of Rights and Preferences
of Capital Stock Exhibit A to Current Report on Form 8-K dated
May 15, 1990
10.1 Lease for Offices in Crawley England Exhibit 10.9 to Form 10-K for the eight months ended
September 30, 1985
10.2 Bank Line of Credit Agreement,
as amended, effective March 05, 1997 40
10.3 1986 Stock Option Plan Exhibit 10.8 to Form 10-K for fiscal year ended
September 30, 1986
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Number Description Page or Incorporated by Reference From
- ------ ----------- --------------------------------------
<S> <C> <C>
10.4 Form of Indemnification Agreement that the Exhibit 10.10 to Form 10-K for fiscal year
Company has entered into with officers and ended September 30, 1987
directors. Such agreement recites the
provisions of Minnesota Statutes Section
302A.521 and the Company Bylaw provisions
(which are substantially identical to the statute)
10.5 Employment Agreement as of October 1, 1994,
between the Company and Jay A. Herman Exhibit 10.7 to Form 10-K for fiscal year ended
September 30, 1994
10.6 1991 Stock Plan Exhibit 10.10 to Form 10-K for fiscal year ended September 30, 1991
10.7 Lease of Facilities in Minnetonka, Minnesota Exhibit 10.9 to Form 10-K for fiscal year ended September 30, 1994
10.8 1997 Stock Plan 44
10.9 Executive Loan Program as Amended 54
11 Computation of Per Share Earnings 60
21 List of Subsidiaries 61
23 Consent of Independent Auditors 62
</TABLE>
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 18, 1997 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 18, 1997
- --------------------------- ------------------
Robert Reznick
/s/Jay A. Herman President, Director December 18, 1997
- --------------------------- (Principal Executive Officer) ------------------
Jay A. Herman
/s/ Paul Stephenson Vice President, Finance & Administration December 18, 1997
- --------------------------- (Principal Financial & Accounting Officer) ------------------
Paul Stephenson
/s/ Gary Holland Director December 18, 1997
- --------------------------- ------------------
Gary Holland
Director
- --------------------------- ------------------
Thomas H. Garrett III
/s/ Oscar Victor Director December 18, 1997
- -------------------- ------------------
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, 1997
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, 1997 and 1996
Consolidated Statements of Operations -- The years ended
September 30, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity -- September 30,
1997, 1996 and 1995
Consolidated Statements of Cash Flows -- The years ended
September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements -- September 30, 1997
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 and
Reserves
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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1997. 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, 1997 and
1996 and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 1997, 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 21, 1997
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30,
1997 1996
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $3,165,601 $4,851,283
Short-term investments 5,293,849 4,959,023
Accounts receivable less allowance for
doubtful accounts of $50,000 3,526,551 3,582,350
Inventories:
Raw materials and component parts 5,700,807 5,088,859
Work - in - progress 461,529 127,459
Finished goods 1,887,380 1,383,052
------------- -------------
8,049,716 6,599,370
Deferred income taxes 1,092,259 692,669
Other current assets 673,528 439,548
------------- -------------
TOTAL CURRENT ASSETS 21,801,504 21,124,243
EQUIPMENT AND FIXTURES
Machinery and equipment 2,107,739 1,940,676
Furniture and fixtures 1,737,969 1,643,803
Leasehold improvements 252,685 244,693
------------- -------------
4,098,393 3,829,172
Less accumulated depreciation
And amortization 2,928,404 2,675,559
------------- -------------
1,169,989 1,153,613
------------- -------------
TOTAL ASSETS $ 22,971,493 $ 22,277,856
------------- -------------
------------- -------------
See notes to consolidated financial statements.
20
<PAGE>
CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30,
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $2,603,516 $1,963,171
Employee compensation and related taxes 672,492 769,750
Income taxes payable 425,868 489,732
Deferred revenue 469,127 499,036
Current portion of capital lease
obligations 41,925 92,066
------------- -------------
TOTAL CURRENT LIABILITIES 4,212,928 3,813,755
CAPITAL LEASE OBLIGATIONS - less current
portion 78,903 55,615
------------- -------------
TOTAL LIABILITIES 4,291,831 3,869,370
STOCKHOLDERS' EQUITY
Common stock -- par value $.10 per
share --Authorized 25,000,000
shares; issued and Outstanding
1997 -- 6,338,135 shares;
1996 -- 6,237,727 shares 633,814 623,773
Additional paid-in capital 17,151,182 16,395,889
Foreign currency translation adjustment (851,225) (513,963)
Retained earnings 1,745,891 1,902,787
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 18,679,662 18,408,486
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,971,493 $ 22,277,856
------------- -------------
See notes to consolidated financial statements.
21
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Year Ended September 30,
1997 1996 1995
Sales:
Printing equipment $ 7,885,584 $10,636,518 $10,436,169
Maintenance, spares and supplies 14,981,092 14,082,456 13,924,485
----------- ----------- -----------
NET SALES 22,866,676 24,718,974 24,360,654
Costs and Expenses:
Cost of sales 9,047,708 9,578,116 9,333,299
Selling, general and administrative 11,136,029 10,818,900 10,424,527
Research and development 2,521,073 2,206,444 2,318,736
----------- ----------- -----------
22,704,810 22,603,460 22,076,562
----------- ----------- -----------
INCOME FROM SYSTEM SALES AND SERVICE 161,866 2,115,514 2,284,092
Interest expense 22,813 26,110 27,229
Interest (income) (411,531) (402,539) (283,378)
Unrealized exchange loss (gain) 71,605 (50,770) (29,745)
----------- ----------- -----------
INCOME BEFORE TAXES 478,979 2,542,713 2,569,986
Income taxes 153,000 297,000 517,000
----------- ----------- -----------
NET INCOME $325,979 $ 2,245,713 $ 2,052,986
----------- ----------- -----------
----------- ----------- -----------
Earnings per share $ 0.05 $ 0.35 $ 0.33
Weighted average number of common
shares and common share equivalents
outstanding during the period 6,416,081 6,355,401 6,270,504
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, 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 $345,000 105,448 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
Net income --- ---
Exercise of stock options, including tax
benefit of $17,000 20,408 2,041
Issuance of restricted stock 80,000 8,000
Vesting of restricted stock --- ---
Payment - note receivable --- ---
Foreign currency translation --- ---
---------- ----------
Balance September 30, 1997 6,338,135 $ 633,814
---------- ----------
---------- ----------
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)
-------- -------- ------------ ----------- -----------
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
--- --- --- --- 325,979
--- --- (12,320) --- ---
--- --- 762,000 --- (770,000)
--- --- --- --- 287,125
--- --- 5,613 --- ---
--- --- --- (337,262) ---
-------- -------- ------------ ----------- -----------
0 $ 0 $ 17,151,182 $ (851,225) $ 1,745,891
-------- -------- ------------ ----------- -----------
-------- -------- ------------ ----------- -----------
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Year Ended September 30,
1997 1996 1995
---------- ---------- ------------
OPERATING ACTIVITIES
Net income $ 325,979 $ 2,245,713 $ 2,052,986
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 402,272 438,275 433,997
Other 81,746 (111,001) (209,513)
Changes in operating assets and
liabilities:
Accounts receivable (128,305) 1,282,909 (1,679,087)
Inventories (1,705,446) (745,111) 624,730
Other current assets (658,170) (402,574) (353,962)
Accounts payable and accrued
expenses 734,802 (520,939) 308,020
Deferred revenue (15,866) (29,216) 31,175
---------- ---------- ------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (962,988) 2,158,056 1,208,346
INVESTING ACTIVITIES
Purchase of equipment and fixtures (505,626) (442,118) (338,989)
Proceeds from sale of equipment 67,802 82,092 116,273
Purchase of short-term investments (25,269,275) (10,651,726) (4,926,101)
Proceeds from sale of short-term
investments 25,079,552 9,931,000 5,492,840
---------- ---------- ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (627,547) (1,080,752) 344,023
FINANCING ACTIVITIES
Issuance of common stock (10,279) 428,085 49,019
Addition of capital leases 85,757 40,101 63,966
Note receivable from stock sale 5,613 6,646 (68,966)
Repayment of capital leases (100,784) (90,070) (95,336)
---------- ---------- ------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (19,693) 384,762 (51,317)
EFFECT OF EXCHANGE RATE CHANGES
ON CASH (75,454) (1,139) 17,990
---------- ---------- ------------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,685,682) 1,460,927 1,519,042
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 4,851,283 3,390,356 1,871,314
---------- ---------- ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 3,165,601 $ 4,851,283 $ 3,390,356
---------- ---------- ------------
---------- ---------- ------------
See notes to consolidated financial statements.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
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 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: From time to time 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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No.123, ACCOUNTING FOR STOCK-BASED COMPENSATION (Statement
123).
Long-Lived Assets: In Fiscal 1997, the Company adopted SFAS 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 adoption of SFAS 121 had no impact on the Company's
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. 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.
Comprehensive Income: In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, REPORTING COMPREHENSIVE INCOME. SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The new rules
are effective for the Company in fiscal 1999. The adoption of this Statement is
not expected to have a significant impact on the Company.
Segment Reporting: In June 1997, the Financial Accounting Standards Board
issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. This Statement establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements. The Statement requires additional disclosure only,
and will not impact net income or stockholders' equity of the Company. The
Statement is effective for the Company's fiscal year ended September 30, 1999.
The Company is currently assessing the impact of the Statement on its segment
disclosure.
Reclassification: Certain items in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997 presentation.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE B - INCOME TAX
At September 30, 1997, the Company has domestic tax loss carryforwards of
approximately $1,100,000, which expire in 2012 and foreign tax loss
carryforwards of approximately $333,000, which expire in 2002. In addition, the
Company has domestic investment tax credits and research and development credit
carryforwards of approximately $439,000, which are available to offset future
income tax. The credits expire in varying amounts through September 2012.
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):
1997 1996
---- ----
Deferred Tax Assets:
Net operating loss $ 517,000 $ 0
Business credit carryforwards and
alternative minimum tax credits 582,000 667,000
Stock compensation 138,000 275,000
Inventory valuation reserves 102,000 122,000
Other U.S. and foreign differences 262,000 222,000
------------ ------------
Gross Deferred Tax Asset 1,601,000 1,286,000
Less Valuation Allowances (508,000) (593,000)
------------ ------------
Net Deferred Tax Asset $ 1,093,000 $ 693,000
------------ ------------
------------ ------------
The components of income tax expense as recorded by the Company are as follows:
1997 1996 1995
---- ---- ----
Current Tax Expense:
Federal $ (25,000) $ 3,000 $ 53,000
State 6,000 16,000 0
Foreign 555,000 626,000 464,000
---------- ---------- ----------
Total 536,000 645,000 517,000
---------- ---------- ----------
Deferred Tax Expense:
Federal (258,000) (231,000) 0
State (14,000) (18,000) 0
Foreign (111,000) (99,000) 0
---------- ---------- ----------
Total (383,000) (348,000) 0
---------- ---------- ----------
Total Tax Expense $ 153,000 $ 297,000 $ 517,000
---------- ---------- ----------
---------- ---------- ----------
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE B - INCOME TAX - CONTINUED
A reconciliation of tax expense to the statutory rate of 34% is as follows:
1997 1996 1995
---- ---- ----
Statutory rate applied to pre-tax
income $ 163,000 $ 865,000 $ 874,000
Net operating loss and tax credits
utilized 0 (220,000) (354,000)
Change in valuation allowance 0 (348,000) 0
Other (10,000) 0 (3,000)
---------- ---------- ----------
$ 153,000 $ 297,000 $ 517,000
---------- ---------- ----------
---------- ---------- ----------
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $3,128,000 at September 30, 1997. 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, 1997, 1996, and 1995 were
$671,000, $570,000 and $470,000, respectively.
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 at September 30, 1997 and 1996.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
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.
Foreign operations include the activities of the three foreign subsidiaries.
<TABLE>
<CAPTION>
Domestic Foreign
Year Ended September 30, 1997 Operations Operations Eliminations Consolidated
- ------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 7,426,624 $ 15,440,052 $ --- $ 22,866,676
Sales to foreign subsidiaries 4,239,162 --- (4,239,162) ---
------------ ------------ ------------ ------------
Net sales $ 11,665,786 $ 15,440,052 $ (4,239,162) $ 22,866,676
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
(Loss) income from system sales and service $ (751,599) $ 912,005 $ 1,460 $ 161,866
Less:
Interest (income) (377,960) (97,303) 63,732 (411,531)
Interest expense 5,002 82,358 (64,547) 22,813
Unrealized exchange loss (gain) --- 71,117 488 71,605
------------ ------------ ------------ ------------
(Loss) income before taxes (378,641) 855,833 1,787 478,979
Income taxes (291,000) 444,000 --- 153,000
------------ ------------ ------------ ------------
Net (loss) income $ (87,641) $ 411,833 $ 1,787 $ 325,979
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Identifiable assets $ 20,282,967 $ 12,463,933 $ (9,775,407) $ 22,971,493
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Total liabilities $ 2,342,860 $ 5,610,139 $ (3,661,168) $ 4,291,831
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES--Continued
<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) ---
------------ ------------ ------------ ------------
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>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
<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) ---
------------ ------------ ------------ ------------
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 loss (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>
The Company's products are marketed worldwide. Domestic operations include
export sales of $3,920,419, $3,383,495 and $1,917,960 for the periods ended
September 30, 1997, 1996, and 1995, respectively.
There were no sales to a single customer in excess of 10% of total sales in
1997, 1996 or in 1995.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE E--LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
September 30,
1997 1996
---------- ----------
Capital lease obligations on automobiles and
equipment, due in monthly installments
varying from $387 to $712, including
interest at 9.2% to 11.6%; automobile and
equipment financed under the lease serve
as security to the lease obligation $120,828 $147,681
Less current portion of lease obligation 41,925 92,066
---------- ----------
$ 78,903 $ 55,615
---------- ----------
---------- ----------
Cash payments of interest were $22,639 in 1997, $24,304 in 1996, and $28,250 in
1995.
Equipment and fixtures includes the following amounts under the capitalized
lease obligations:
September 30,
1997 1996
---- ----
Office furniture, fixtures and equipment $176,125 $219,387
Less allowance for amortization 45,273 74,734
---------- ----------
$130,852 $144,653
---------- ----------
---------- ----------
Future payments for the capital lease obligations (including interest) as of
September 30, 1997 are:
Capital Lease
Obligations
-------------
Year ending September 30:
1998 $ 52,249
1999 27,644
2000 59,521
----------
Total Payments 139,414
Less amounts representing interest 18,586
----------
Present value of lease payments $120,828
----------
----------
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE F--STOCK OPTIONS AND BENEFIT PLAN
During fiscal year 1997, the Company had three stock option programs, the 1986
Stock Option Plan (the 1986 Plan), the 1991 Stock Plan (the 1991 Plan), and the
1997 Stock Plan (the 1997 Plan), for its key employees and non-employee
directors. The 1986 Plan was adopted in October 1986, the 1991 Plan in March
1991 and the 1997 Plan in June 1997. Stock options under the 1986 Plan are
non-qualified while those under the 1991 Plan and the 1997 Plan can be granted
as either non-qualified or incentive stock options. The 1991 Plan and the 1997
Plan also authorize 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 interest bearing, collateralized by the underlying
stock.
A summary of outstanding options and shares reserved under each plan for the
last three years is as follows:
The 1986 Plan
- -------------
Shares Weighted
Reserved Average
For Future Options Exercise Price
Grants Outstanding Per Share
---------- ----------- --------------
Balance September 30, 1994 188,660 198,000 $ 2.23
Options exercised --- (41,750) 2.03
---------- -----------
Balance September 30, 1995 188,660 156,250 2.28
Options exercised --- (103,500) 2.11
---------- -----------
Balance September 30, 1996 188,660 52,750 2.63
Options exercised --- (52,750) 2.63
---------- -----------
Balance September 30, 1997 188,660 0 $ 0.00
---------- -----------
---------- -----------
At September 30, 1997, 1996, and 1995 options to purchase 0,52,750, and
156,250 shares were exercisable, respectively.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
1991 Plan
- ---------------
Shares Weighted
Reserved Average
For Future Options Exercise Price
Grants Outstanding Per Share
---------- ----------- --------------
Balance September 30, 1994 230,500 196,160 $ 3.87
Options exercised --- (13,250) 3.35
Options canceled 1,250 (1,250) 1.75
---------- -----------
Balance September 30, 1995 231,750 181,660 3.93
Options granted (63,500) 63,500 8.88
Options exercised --- (28,508) 2.81
Restricted Stock granted (20,000) --- ---
Restricted Stock canceled 4,250 --- ---
Options canceled 5,625 (5,625) 8.08
---------- -----------
Balance September 30, 1996 158,125 211,027 5.45
Options granted (76,000) 76,000 8.72
Options exercised --- (1,333) 2.50
Restricted Stock granted (80,000) --- ---
---------- -----------
Balance September 30, 1997 2,125 285,694 $ 6.34
---------- -----------
---------- -----------
At September 30, 1997, 1996, and 1995 there were 139,152, 98,777, and 84,326
options, respectively, currently exercisable under the 1991 Plan at prices of
$1.75 to $9.63 per share. The Company issued 80,000, 20,000, and 0 shares at
weighted average fair values of $770,000, 230,000 and 0 in 1997, 1996 and 1995,
respectively. Total compensation expense for stock-based compensation was
$287,125, $96,500 and $36,376 in 1997, 1996 and 1995, respectively.
1997 Plan
- ---------
Shares Weighted
Reserved Average
For Future Options Exercise Price
Grants Outstanding Per Share
---------- ----------- --------------
Shares reserved at inception 750,000 ---
Options granted (10,000) 10,000 $ 6.50
---------- -----------
Balance September 30, 1997 740,000 10,000 $ 6.50
---------- -----------
---------- -----------
At September 30, 1997 there were no options currently exercisable under the 1997
Plan.
Total shares reserved for options and restricted stock are 1,394,229 shares.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1997
and 1996:
1997 1996
---------------- ----------------
Expected dividend yield 0% 0%
Expected stock price volatility 40% 40%
Risk - free interest rate 6.11% 6.60%
Expected life of options 7 years 7 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net earnings and earnings per share were as follows:
1997 1996
---------------- ----------------
Net earnings - pro forma $ 193,475 $ 2,195,045
Earnings per share - pro forma 0.03 0.34
Weighted average fair value of
options granted during the year 4.68 4.44
The pro forma effect on net income and earnings per share is not representative
of the pro forma net earnings in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1996.
The following table summarizes information concerning currently outstanding and
exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Weighted Avg. Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.750 - 4.500 88,694 3.38 $ 3.30 86,194 $ 3.26
5.375 - 7.750 108,500 6.80 6.27 37,500 5.38
8.125 - 9.625 98,500 6.77 9.17 15,458 8.92
$ 1.750 - 9.625 295,694 5.76 $ 6.34 139,152 $ 4.46
</TABLE>
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
The Company has a defined contribution salary deferral plan covering
substantially all U.S. 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. The cost of the plan was $82,766, $78,326, and $32,950
for the years ended September 30, 1997, 1996, and 1995, respectively.
NOTE G--RENTAL COMMITMENTS
Building, equipment and automobile rentals under operating leases were
$1,184,701, $1,039,439, and $846,098 for the years ended September 30, 1997,
1996 and 1995, respectively.
The Company leases its corporate offices under a fifteen-year agreement expiring
on September 15, 2010. Annual rental under the lease is $387,000 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 United Kingdom leases office space under a lease
expiring in 2013. Annual rental under the lease is $192,000, 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 $12,397,412 and are due as follows:
fiscal year ending September 30, 1998--$1,176,059; 1999--$1,109,355;
2000--$887,715; 2001--$834,729; 2002--$842,229; thereafter--$7,547,325.
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, 1997, 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, 1997. The line of credit expires March 31, 1998.
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.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE J-- SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997 Quarter Ended December 31 March 31 June 30 September 30
- ------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 5,487,892 $ 6,201,197 $ 6,507,436 $ 4,670,151
Gross Profit 3,416,637 3,720,231 3,821,358 2,860,742
Net Income 100,000 241,703 271,870 (287,594)
Earnings Per Share $ 0.02 $ 0.04 $ 0.04 $ (0.04)
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
</TABLE>
(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.
38
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Charged to
Balance at Charged to Other Balance at
Beginning Cost and Accounts (Deductions) End
Description Of Period Expenses Describe Describe Of Period
<S> <C> <C> <C> <C> <C>
1. Allowance for doubtful
accounts
Year ended September
30, 1997 $ 50,000 0 0 0 $ 50,000
Year ended September
30, 1996 $ 50,000 0 0 0 $ 50,000
Year ended September
30, 1995 $ 50,000 0 0 0 $ 50,000
II. Reserve for obsolete
And slow moving
Inventories
Year ended September
30, 1997 $ 334,000 30,000 0 (4,000) $ 360,000
Year ended September
30, 1996 $ 303,000 95,000 0 (64,000) $ 334,000
Year ended September
30, 1995 $ 267,000 60000 0 (24,000) $ 303,000
</TABLE>
39
<PAGE>
Exhibit 10.2.
Original Document on Norwest Bank Minnesota, N.A.
Norwest Banks' Letterhead Bloomington Office
7900 Xerxes Avenue South
Bloomington, Minnesota 55431
612/830-7000
March 5, 1997
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, 1998
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
REQUIREMENTS to the Bank:
40
<PAGE>
Mr. Paul Stephenson
March 5, 1997
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.
41
<PAGE>
Mr. Paul Stephenson
March 5, 1997
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/ Douglas L. Van Metre
- ----------------------------------
Douglas L. Van Metre
Vice President
Accepted By:
CHECK TECHNOLOGY CORPORATION
By: /s/ Paul Stephenson
------------------------------------------------
Its: Vice President - Finance and Administration
------------------------------------------------
Date: March 20, 1997
------------------------------------------------
42
<PAGE>
- -------------------------------------------------------------------------------
Original Document on Commercial-Bus/Ag Note
Norwest Banks' Letterhead
- -------------------------------------------------------------------------------
Borrower's name Date
Check Technology Corporation March 05, 1997
- -------------------------------------------------------------------------------
Choose one of the following
/X/ On March 31, 1998; 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, 1998 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
/X/ This Note is unsecured. Note evidences a revolving
credit facility.
- -------------------------------------------------------------------------------
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
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Exhibit 10.8
CHECK TECHNOLOGY CORPORATION
1997 STOCK PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of this plan is the Check Technology Corporation 1997 Stock
Plan (the "Plan"). The purpose of the Plan is to enable Check Technology
Corporation (the "Company") to retain and attract executives and other key
employees, directors and consultants who contribute to the Company's success
by their ability, ingenuity and industry, and to enable such individuals to
participate in the long-term success and growth of the Company by giving them
a proprietary interest in the Company.
For purposes of the Plan, the following terms shall be defined as set
forth below:
a. "BOARD" means the Board of Directors of the Company as it may be
comprised from time to time.
b. "CAUSE" means a felony conviction of a participant or the failure
of a participant to contest prosecution for a felony, willful
misconduct, dishonesty or intentional violation of a statute, rule
or regulation, any of which, in the judgment of the Company, is
harmful to the business or reputation of the Company.
c. "CODE" means the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute.
d. "COMMITTEE" means the Committee referred to in Section 2 of the
Plan. If at any time no Committee shall be in office, then the
functions of the Committee specified in the Plan shall be exercised
by the Board, unless the Plan specifically states otherwise.
e. "CONSULTANT" means any person, including an advisor, engaged by the
Company or a Parent Corporation or a Subsidiary of the Company to
render services and who is compensated for such services and who
is not an employee of the Company or any Parent Corporation or
Subsidiary of the Company. A director who is not an employee may
serve as a Consultant.
f. "COMPANY" means Check Technology Corporation, a corporation
organized under the laws of the State of Minnesota (or any
successor corporation).
g. "DEFERRED STOCK" means an award made pursuant to Section 8 below of
the right to receive stock at the end of a specified deferral
period.
h. "DISABILITY" means permanent and total disability as determined by
the Committee.
i. "EARLY RETIREMENT" means retirement, with consent of the Committee
at the time of retirement, from active employment with the Company
and any Subsidiary or Parent Corporation of the Company.
j. "FAIR MARKET VALUE" means the value of the Stock on a given date as
determined by the Committee in accordance with the applicable
Treasury Department regulations with respect to "incentive stock
options."
k. "INCENTIVE STOCK OPTION" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of
Section 422 of the Code.
l. "NON-EMPLOYEE DIRECTOR" shall have the meaning set forth in Rule
16b-3(b)(3) as promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended,
or any successor definition adopted by the Commission.
m. "NON-QUALIFIED STOCK OPTION" means any Stock Option that is not an
Incentive Stock Option, and is intended to be and is designated as
a "Non-Qualified Stock Option."
n. "NORMAL RETIREMENT" means retirement from active employment with
the Company and any Subsidiary or Parent Corporation of the Company
on or after age 65.
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o. "OUTSIDE DIRECTOR" means a director who (a) is not a current
employee of the Company or any member of an affiliated group which
includes the Company (other than acting as Secretary for no
compensation as such); (b) is not a former employee of the Company
who receives compensation for prior services (other than benefits
under a tax-qualified retirement plan) during the taxable year; (c)
has not been an officer of the Company (other than acting as
Secretary for no compensation as such); (d) does not receive
remuneration from the Company, either directly or indirectly, in
any capacity other than as a director, except as otherwise
permitted under Code Section 162(m) and regulations thereunder.
For this purpose, remuneration includes any payment in exchange for
goods or services. This definition shall be further governed by
the provisions of Code Section 162(m) and regulations promulgated
thereunder.
p. "PARENT CORPORATION" means any corporation (other than the Company)
in an unbroken chain of corporations ending with the Company if
each of the corporations (other than the Company) owns stock
possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.
q. "RESTRICTED STOCK" means an award of shares of Stock that are
subject to restrictions under Section 7 below.
r. "RETIREMENT" means Normal Retirement or Early Retirement.
s. "STOCK" means the Common Stock of the Company.
t. "STOCK APPRECIATION RIGHT" means the right pursuant to an award
granted under Section 6 below to surrender to the Company all or a
portion of a Stock Option in exchange for an amount equal to the
difference between (i) Fair Market Value, as of the date such Stock
Option or such portion thereof is surrendered, of the shares of
Stock covered by such Stock Option or such portion thereof, and
(ii) the aggregate exercise price of such Stock Option or such
portion thereof.
u. "STOCK OPTION" means any option to purchase shares of Stock granted
pursuant to Section 5 below.
v. "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each
of the corporations (other than the last corporation in the
unbroken chain) owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other
corporations in the chain.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Board of Directors or by a
Committee of not less than two directors, all of whom shall be Non-Employee
Directors upon the Company becoming subject to the insider reporting
requirements of Section 16 of the Securities Exchange Act of 1934, as
amended, and also Outside Directors upon the Company becoming subject to the
requirements of Rule 162(m) of the Code. Committee members shall be
appointed by the Board of Directors of the Company and shall serve at the
pleasure of the Board. Any or all of the functions of the Committee
specified in the Plan may be exercised by the Board, unless the Plan
specifically states otherwise.
The Committee shall have the power and authority to grant to eligible
employees, directors or Consultants, pursuant to the terms of the Plan: (i)
Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, or
(iv) Deferred Stock awards.
In particular, the Committee shall have the authority:
(i) to select the officers, directors and other key employees of
the Company and its Subsidiaries and other eligible persons
to whom Stock Options, Stock Appreciation Rights,
Restricted Stock and Deferred Stock awards may from time to
time be granted hereunder;
(ii) to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation
Rights, Restricted Stock and Deferred Stock awards, or a
combination of the foregoing, are to be granted hereunder;
(iii) to determine the number of shares to be covered by each
such award granted hereunder;
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(iv) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder
(including, but not limited to, any restriction on any
Stock Option or other award and/or the shares of Stock
relating thereto);
(v) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect
to an award under this Plan shall be deferred either
automatically or at the election of the participant.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it
shall, from time to time, deem advisable; to interpret the terms and
provisions of the Plan and any award issued under the Plan (and any
agreements relating thereto); and to otherwise supervise the administration
of the Plan. The Committee may delegate to executive officers of the Company
the authority to exercise the powers specified in (i), (ii), (iii), (iv) and
(v) above with respect to persons who are not executive officers of the
Company.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be final and binding on all persons, including the Company and
Plan participants.
SECTION 3. STOCK SUBJECT TO PLAN.
The total number of shares of Stock reserved and available for
distribution under the Plan shall be 750,000. Such shares may consist, in
whole or in part, of authorized and unissued shares.
Subject to paragraph (b)(iv) of Section 6 below, if any shares that have
been optioned cease to be subject to Stock Options, or if any shares subject
to any Restricted Stock or Deferred Stock award granted hereunder are
forfeited or such award otherwise terminates without a payment being made to
the participant, such shares shall again be available for distribution in
connection with future awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, other change in corporate structure
affecting the Stock, or spin-off or other distribution of assets to
shareholders, such substitution or adjustment shall be made in the aggregate
number of shares reserved for issuance under the Plan, in the number and
option price of shares subject to outstanding options granted under the Plan,
and in the number of shares subject to Restricted Stock or Deferred Stock
awards granted under the Plan as may be determined to be appropriate by the
Committee, in its sole discretion, provided that the number of shares subject
to any award shall always be a whole number. Such adjusted option price
shall also be used to determine the amount payable by the Company upon the
exercise of any Stock Appreciation Right associated with any Option.
SECTION 4. ELIGIBILITY.
Officers, directors, other key employees of the Company and
Subsidiaries, and Consultants who are responsible for or contribute to the
management, growth and profitability of the business of the Company and its
Subsidiaries are eligible to be granted Stock Options, Stock Appreciation
Rights, Restricted Stock or Deferred Stock awards under the Plan. The
optionees and participants under the Plan shall be selected from time to time
by the Committee, in its sole discretion, from among those eligible, and the
Committee shall determine, in its sole discretion, the number of shares
covered by each award.
Notwithstanding the foregoing, upon the Company becoming subject to the
requirements of Section 162(m) of the Code, no person shall receive grants or
awards under this Plan which exceed 250,000 shares during any fiscal year of
the Company.
SECTION 5. STOCK OPTIONS.
Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve.
The Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive
Stock Options shall be granted under the Plan after the tenth anniversary of
the date this Plan is adopted by the Company's Board of Directors.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, Non-Qualified Stock Options, or both types of options (in each
case with or without Stock Appreciation Rights). To the extent that any
option does not qualify as an Incentive Stock Option, it shall constitute a
separate Non-Qualified Stock Option.
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<PAGE>
Anything in the Plan to the contrary notwithstanding, no term of this
Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify either the Plan or any Incentive Stock Option
under Section 422 of the Code. The preceding sentence shall not preclude any
modification or amendment to an outstanding Incentive Stock Option, whether
or not such modification or amendment results in disqualification of such
Stock Option as an Incentive Stock Option, provided the optionee consents in
writing to the modification or amendment.
Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem
desirable.
(a) OPTION PRICE. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Committee at the time of
grant. In no event shall the option price per share of Stock purchasable
under an Incentive Stock Option be less than 100% of Fair Market Value on the
date the option is granted. If an employee owns or is deemed to own (by
reason of the attribution rules applicable under Section 424(d) of the Code)
more than 10% of the combined voting power of all classes of stock of the
Company or any Parent Corporation or Subsidiary and an Incentive Stock Option
is granted to such employee, the option price shall be no less than 110% of
the Fair Market Value of the Stock on the date the option is granted.
(b) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the option is granted. If an employee owns or is deemed
to own (by reason of the attribution rules of Section 424(d) of the Code)
more than 10% of the combined voting power of all classes of stock of the
Company or any Parent Corporation or Subsidiary and an Incentive Stock Option
is granted to such employee, the term of such option shall be no more than
five years from the date of grant.
(c) EXERCISABILITY. Stock Options shall be exercisable at such time or
times as determined by the Committee at or after grant. If the Committee
provides, in its discretion, that any option is exercisable only in
installments, the Committee may waive such installment exercise provisions at
any time, provided, however, that upon the Company becoming subject to the
requirements of Section 16 of the Securities Exchange Act of 1934, as
amended, a Stock Option granted to an officer, director or 10% shareholder of
the Company shall not be exercisable for a period of six (6) months after the
date of grant UNLESS the Stock Option has been approved by the Board, the
Committee or shareholders of the Company. Notwithstanding anything contained
in the Plan to the contrary, the Committee may, in its discretion, extend or
vary the term of any Stock Option or any installment thereof, whether or not
the optionee is then employed by the Company, if such action is deemed to be
in the best interests of the Company.
Notwithstanding anything contained in the Plan to the contrary, unless
the certificate or agreement evidencing a Stock Option provides otherwise,
any Stock Option granted under this Plan shall be exercisable in full,
without regard to any installment exercise provisions, for a period specified
by the Company, but not to exceed sixty (60) days, prior to the occurrence of
any of the following events: (i) dissolution or liquidation of the Company
other than in conjunction with a bankruptcy of the Company or similar
occurrence; (ii) any merger, consolidation, acquisition, separation,
reorganization, or similar occurrence, where the Company will not be the
surviving entity; or (iii) the transfer of substantially all of the assets of
the Company or 75% or more of the outstanding Stock of the Company.
The grant of a Stock Option pursuant to the Plan shall not limit in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge,
exchange or consolidate or to dissolve, liquidate, sell or transfer all or
any part of its business or assets.
(d) METHOD OF EXERCISE. Stock Options may be exercised in whole or in
part at any time during the option period by giving written notice
of exercise to the Company specifying the number of shares to be
purchased. Such notice shall be accompanied by payment in full of
the purchase price, either by check, or by any other form of legal
consideration deemed sufficient by the Committee and consistent
with the Plan's purpose and applicable law, including promissory
notes or a properly executed exercise notice together with
irrevocable instructions to a broker acceptable to the Company to
promptly deliver to the Company the amount of sale or loan
proceeds to pay the exercise price. As determined by the Committee
at any time in its sole discretion, payment in full or in part may
also be made in the form of Stock already owned by the optionee
(which in the case of Stock acquired upon exercise of an option
have been owned for more than six months on the date of surrender)
or, in the case of the exercise of a Non-Qualified Stock Option,
Restricted Stock or Deferred Stock subject to an award hereunder
(based, in each case, on the Fair Market Value of the Stock on the
date the option is exercised, as determined by the Committee),
provided, however, that in the event payment is made in the form
of shares of Restricted Stock or a Deferred Stock award, the
optionee will receive a portion of the option shares in the form
of, and in an
47
<PAGE>
amount equal to, the Restricted Stock or Deferred Stock award
tendered as payment by the optionee. Unless the terms of an
option prohibit doing so, an optionee may elect to pay all or part
of the option exercise price by having the Company withhold from
the shares of Stock that would otherwise be issued upon exercise
that number of shares of Stock having a Fair Market Value equal to
the aggregate option exercise price for the shares with respect to
which such election is made. No shares of Stock shall be issued
until full payment therefor has been made. An optionee shall
generally have the rights to dividends and other rights of a
shareholder with respect to shares subject to the option when the
optionee has given written notice of exercise, has paid in full
for such shares, and, if requested, has given the representation
described in paragraph (a) of Section 13.
(e) NON-TRANSFERABILITY OF OPTIONS. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution, and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee.
(f) TERMINATION BY DEATH. If an optionee's employment by the Company
and any Subsidiary or Parent Corporation terminates by reason of death, the
Stock Option may thereafter be immediately exercised, to the extent then
exercisable, by the legal representative of the estate or by the legatee of
the optionee under the will of the optionee, for a period of one year from
the date of such death or until the expiration of the stated term of the
option, whichever period is shorter.
(g) TERMINATION BY REASON OF DISABILITY. If an optionee's employment
by the Company and any Subsidiary or Parent Corporation terminates by reason
of Disability, any Stock Option held by such optionee may thereafter be
exercised, to the extent it was exercisable at the time of termination due to
Disability, but may not be exercised after one year from the date of such
termination of employment or the expiration of the stated term of the option,
whichever period is the shorter. In the event of termination of employment
by reason of Disability, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422 of
the Code, the option will thereafter be treated as a Non-Qualified Stock
Option.
(h) TERMINATION BY REASON OF RETIREMENT. If an optionee's employment
by the Company and any Subsidiary or Parent Corporation terminates by reason
of Retirement, any Stock Option held by such optionee may thereafter be
exercised to the extent it was exercisable at the time of such Retirement,
but may not be exercised after one year from the date of such termination of
employment or the expiration of the stated term of the option, whichever
period is the shorter. In the event of termination of employment by reason of
Retirement, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of the Code, the
option will thereafter be treated as a Non-Qualified Stock Option.
(i) OTHER TERMINATION. Unless otherwise determined by the Committee,
in the event an optionee's continuous status as an employee or Consultant
terminates (other than upon the optionee's death, Retirement or Disability),
the Stock Option shall thereupon terminate except that, if the optionee is
involuntarily terminated without Cause by the Company and any Subsidiary or
Parent Corporation, the option may be exercised to the extent it was
exercisable at such termination for the lesser of one month or the balance of
the option's term.
(j) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. The aggregate Fair Market
Value (determined as of the time the Stock Option is granted) of the Common
Stock with respect to which an Incentive Stock Option under this Plan or any
other plan of the Company and any Subsidiary or Parent Corporation is
exercisable for the first time by an optionee during any calendar year shall
not exceed $100,000.
(k) DIRECTORS WHO ARE NOT EMPLOYEES. The Board of Directors may, at its
discretion, amend this Plan to provide for annual automatic grants to
directors who are not employees of the Company upon such terms and conditions
as the Board deems advisable. In the event discretionary Stock Options are
granted to members of the Committee, such Stock Options shall be granted by
the Board.
SECTION 6. STOCK APPRECIATION RIGHTS.
(a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In
the case of a Non-Qualified Stock Option, such rights may be granted either
at or after the time of the grant of such Option. In the case of an
Incentive Stock Option, such rights may be granted only at the time of the
grant of the Stock Option.
In the event Stock Appreciation Rights are granted to members of the
Committee, such rights shall be granted by the Board.
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<PAGE>
A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, except that a
Stock Appreciation Right granted with respect to less than the full number of
shares covered by a related stock Option shall not be reduced until the
exercise or termination of the related Stock Option exceeds the number of
shares not covered by the Stock Appreciation Right.
A Stock Appreciation Right may be exercised by an optionee, in
accordance with paragraph (b) of this Section 6, by surrendering the
applicable portion of the related Stock Option. Upon such exercise and
surrender, the optionee shall be entitled to receive an amount determined in
the manner prescribed in paragraph (b) of this Section 6. Stock Options which
have been so surrendered, in whole or in part, shall no longer be exercisable
to the extent the related Stock Appreciation Rights have been exercised.
(b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject
to such terms and conditions, not inconsistent with the provisions of the
Plan, as shall be determined from time to time by the Committee, including
the following:
(i) Stock Appreciation Rights shall be exercisable only at such time
or times and to the extent that the Stock Options to which they relate
shall be exercisable in accordance with the provisions of Section 5 and
this Section 6 of the Plan.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive up to, but not more than, an amount in cash or
shares of Stock equal in value to the excess of the Fair Market Value of
one share of Stock over the option price per share specified in the related
option multiplied by the number of shares in respect of which the Stock
Appreciation Right shall have been exercised, with the Committee having the
right to determine the form of payment.
(iii) Stock Appreciation Rights shall be transferable only when and to
the extent that the underlying Stock Option would be transferable under
Section 5 of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option
or part thereof to which such Stock Appreciation Right is related shall be
deemed to have been exercised for the purpose of the limitation set forth
in Section 3 of the Plan on the number of shares of Stock to be issued
under the Plan, but only to the extent of the number of shares issued or
issuable under the Stock Appreciation Right at the time of exercise based
on the value of the Stock Appreciation Right at such time.
(v) A Stock Appreciation Right granted in connection with an
Incentive Stock Option may be exercised only if and when the market price
of the Stock subject to the Incentive Stock Option exceeds the exercise
price of such Option.
SECTION 7. RESTRICTED STOCK.
(a) ADMINISTRATION. Shares of Restricted Stock may be issued either
alone or in addition to other awards granted under the Plan. The Committee
shall determine the officers, directors, key employees and Consultants of the
Company and Subsidiaries to whom, and the time or times at which, grants of
Restricted Stock will be made, the number of shares to be awarded, the time
or times within which such awards may be subject to forfeiture, and all other
conditions of the awards. The Committee may also condition the grant of
Restricted Stock upon the attainment of specified performance goals. The
provisions of Restricted Stock awards need not be the same with respect to
each recipient.
In the event Restricted Stock awards are granted to members of the
Committee, such awards shall be granted by the Board.
(b) AWARDS AND CERTIFICATES. The prospective recipient of an award of
shares of Restricted Stock shall not have any rights with respect to such
award, unless and until such recipient has executed an agreement evidencing
the award and has delivered a fully executed copy thereof to the Company, and
has otherwise complied with the then applicable terms and conditions.
(i) Each participant shall be issued a stock certificate in respect
of shares of Restricted Stock awarded under the Plan. Such certificate
shall be registered in the name of the participant, and shall bear an
appropriate legend referring to the terms, conditions, and restrictions
applicable to such award, substantially in the following form:
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"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions
(including forfeiture) of the Check Technology Corporation 1997
Stock Plan and an Agreement entered into between the registered
owner and Check Technology Corporation. Copies of
such Plan and Agreement are on file in the offices of Check
Technology Corporation, 12500 Whitewater Drive, Minnetonka,
Minnesota 55343."
(ii) The Committee shall require that the stock certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock award, the participant shall have delivered a stock power,
endorsed in blank, relating to the Stock covered by such award.
(c) RESTRICTIONS AND CONDITIONS. The shares of Restricted Stock
awarded pursuant to the Plan shall be subject to the following restrictions
and conditions:
(i) Subject to the provisions of this Plan and the award agreement,
during a period set by the Committee commencing with the date of such award
(the "Restriction Period"), the participant shall not be permitted to sell,
transfer, pledge or assign shares of Restricted Stock awarded under the
Plan. In no event shall the Restriction Period be less than one (1) year.
Within these limits, the Committee may provide for the lapse of such
restrictions in installments where deemed appropriate.
(ii) Except as provided in paragraph (c)(i) of this Section 7, the
participant shall have, with respect to the shares of Restricted Stock, all
of the rights of a shareholder of the Company, including the right to vote
the shares and the right to receive any cash dividends. The Committee, in
its sole discretion, may permit or require the payment of cash dividends to
be deferred and, if the Committee so determines, reinvested in additional
shares of Restricted Stock (to the extent shares are available under
Section 3 and subject to paragraph (f) of Section 13). Certificates for
shares of unrestricted Stock shall be delivered to the grantee promptly
after, and only after, the period of forfeiture shall have expired without
forfeiture in respect of such shares of Restricted Stock.
(iii) Subject to the provisions of the award agreement and paragraph
(c)(iv) of this Section 7, upon termination of employment, directorship (if
the award was based on services as a director) or consulting relationship
for any reason during the Restriction Period, all shares still subject to
restriction shall be forfeited by the participant.
(iv) In the event of special hardship circumstances of a participant
whose employment is terminated (other than for Cause), including death,
Disability or Retirement, or in the event of an unforeseeable emergency of
a participant still in service, the Committee may, in its sole discretion,
when it finds that a waiver would be in the best interest of the Company,
waive in whole or in part any or all remaining restrictions with respect to
such participant's shares of Restricted Stock.
(v) Notwithstanding anything contained in the Plan to the contrary,
unless the agreement evidencing a Restricted Stock Award provides
otherwise, all restrictions on an Restricted Stock Award shall lapse sixty
(60) days prior to the occurrence of any of the following events: (i)
dissolution or liquidation of the Company other than in conjunction with a
bankruptcy of the Company or similar occurrence; (ii) any merger,
consolidation, acquisition, separation, reorganization, or similar
occurrence, where the Company will not be the surviving entity; or (iii)
the transfer of substantially all of the assets of the Company or 75% or
more of the outstanding Stock of the Company.
SECTION 8. DEFERRED STOCK AWARDS.
(a) ADMINISTRATION. Deferred Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall
determine the officers, directors, key employees and Consultants of the
Company and Subsidiaries to whom and the time or times at which Deferred
Stock shall be awarded, the number of Shares of Deferred Stock to be awarded
to any participant or group of participants, the duration of the period (the
"Deferral Period") during which, and the conditions under which, receipt of
the Stock will be deferred, and the terms and conditions of the award in
addition to those contained in paragraph (b) of this Section 8. The
Committee may also condition the grant of Deferred Stock upon the attainment
of specified performance goals. The provisions of Deferred Stock awards need
not be the same with respect to each recipient.
In the event Deferred Stock awards are granted to members of the
Committee, such awards shall be granted by the Board.
50
<PAGE>
(b) TERMS AND CONDITIONS.
(i) Subject to the provisions of this Plan and the award agreement,
Deferred Stock awards may not be sold, assigned, transferred, pledged or
otherwise encumbered during the Deferral Period. In no event shall the
Deferral Period be less than one (1) year. At the expiration of the
Deferral Period (or Elective Deferral Period, where applicable), share
certificates shall be delivered to the participant, or his legal
representative, in a number equal to the shares covered by the Deferred
Stock award.
(ii) Amounts equal to any dividends declared during the Deferral
Period with respect to the number of shares covered by a Deferred Stock
award will be paid to the participant currently or deferred and deemed to
be reinvested in additional Deferred Stock or otherwise reinvested, all as
determined at the time of the award by the Committee, in its sole
discretion.
(iii) Subject to the provisions of the award agreement and paragraph
(b)(iv) of this Section 8, upon termination of employment, directorship (if
the award was based on services as a director) or consulting relationship
for any reason during the Deferral Period for a given award, the Deferred
Stock in question shall be forfeited by the participant.
(iv) In the event of special hardship circumstances of a participant
whose employment is terminated (other than for Cause) including death,
Disability or Retirement, or in the event of an unforeseeable emergency of
a participant still in service, the Committee may, in its sole discretion,
when it finds that a waiver would be in the best interest of the Company,
waive in whole or in part any or all of the remaining deferral limitations
imposed hereunder with respect to any or all of the participant's Deferred
Stock.
(v) A participant may elect to further defer receipt of the award for
a specified period or until a specified event (the "Elective Deferral
Period"), subject in each case to the Committee's approval and to such
terms as are determined by the Committee, all in its sole discretion.
Subject to any exceptions adopted by the Committee, such election must
generally be made prior to completion of one half of the Deferral Period
for a Deferred Stock award (or for an installment of such an award).
(vi) Each award shall be confirmed by, and subject to the terms of, a
Deferred Stock agreement executed by the Company and the participant.
SECTION 9. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer of an employee from the Company to a Parent Corporation
or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or
from one Subsidiary to another;
(b) a leave of absence, approved in writing by the Committee, for
military service or sickness, or for any other purpose approved by the
Company if the period of such leave does not exceed ninety (90) days (or such
longer period as the Committee may approve, in its sole discretion); and
(c) a leave of absence in excess of ninety (90) days, approved in
writing by the Committee, but only if the employee's right to reemployment is
guaranteed either by a statute or by contract, and provided that, in the case
of any leave of absence, the employee returns to work within 30 days after
the end of such leave.
SECTION 10. AMENDMENTS AND TERMINATION.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made (i) which would adversely impair
the rights of an optionee or participant under a Stock Option, Restricted
Stock or other Stock-based award theretofore granted, without the optionee's
or participant's consent, or (ii) which without the approval of the
shareholders of the Company would cause the Plan to no longer comply with
Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of the Code
or any other regulatory requirements.
The Committee may amend the terms of any award or option theretofore
granted, prospectively or retroactively to the extent such amendment is
consistent with the terms of this Plan, but no such amendment shall impair
the rights of any holder
51
<PAGE>
without his or her consent except to the extent authorized under the Plan.
The Committee may also substitute new Stock Options for previously granted
Stock Options, including previously granted Stock Options having higher Stock
Option prices.
SECTION 11. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give
any such participant or optionee any rights that are greater than those of a
general creditor of the Company. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements to meet the
obligations created under the Plan to deliver Stock or payments in lieu of or
with respect to awards hereunder, provided, however, that the existence of
such trusts or other arrangements is consistent with the unfunded status of
the Plan.
SECTION 12. ANCILLARY PLANS FOR NON-U.S. EMPLOYEES.
The Committee may from time to time at its discretion create one or more
stock option plans which are ancillary to this Plan and intended for
employees of the Company or any Subsidiary who are located outside the United
States. The Committee shall then allocate from time to time to such
ancillary plans designated portions of the shares available for grant under
this Plan. Such ancillary plans shall be subject to the provisions of this
Plan and to whatever provisions are set forth in the ancillary plan to
satisfy legal and tax requirements of the foreign country to whose residents
the ancillary plan relates.
SECTION 13. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing shares pursuant to
a Stock Option under the Plan to represent to and agree with the Company in
writing that the optionee is acquiring the shares without a view to
distribution thereof. The certificates for such shares may include any
legend which the Committee deems appropriate to reflect any restrictions on
transfer.
All certificates for shares of Stock delivered under the Plan pursuant
to any Restricted Stock, Deferred Stock or other Stock-based awards shall be
subject to such stock-transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations, and other requirements of
the Securities and Exchange Commission, any stock exchange upon which the
Stock is then listed, and any applicable Federal or state securities laws,
and the Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
(b) Subject to paragraph (d) below, recipients of Restricted Stock,
Deferred Stock and other Stock-based awards under the Plan (other than Stock
Options) are not required to make any payment or provide consideration other
than the rendering of services.
(c) Nothing contained in this Plan shall prevent the Board of Directors
from adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required; and such arrangements may
be either generally applicable or applicable only in specific cases. The
adoption of the Plan shall not confer upon any employee of the Company or any
Subsidiary any right to continued employment with the Company or a
Subsidiary, as the case may be, nor shall it interfere in any way with the
right of the Company or a Subsidiary to terminate the employment of any of
its employees at any time.
(d) Each participant shall, no later than the date as of which any part
of the value of an award first becomes includible as compensation in the
gross income of the participant for Federal income tax purposes, pay to the
Company, or make arrangements satisfactory to the Committee regarding payment
of, any Federal, state, or local taxes of any kind required by law to be
withheld with respect to the award. The obligations of the Company under the
Plan shall be conditional on such payment or arrangements and the Company and
Subsidiaries shall, to the extent permitted by law, have the right to deduct
any such taxes from any payment of any kind otherwise due to the participant.
With respect to any award under the Plan, if the terms of such award so
permit, a participant may elect by written notice to the Company to satisfy
part or all of the withholding tax requirements associated with the award by
(i) authorizing the Company to retain from the number of shares of Stock that
would otherwise be deliverable to the participant, or (ii) delivering to the
Company from shares of Stock already owned by the participant, that number of
shares having an aggregate Fair Market Value equal to part or all of the tax
payable by the participant under this Section 13(d). Any such election shall
be in accordance with, and subject to, applicable tax and securities laws,
regulations and rulings.
(e) At the time of grant, the Committee may provide in connection with any
grant made under this Plan that the shares of Stock received as a result of such
grant shall be subject to a repurchase right in favor of the Company, pursuant
to which the participant shall be required to offer to the Company upon
termination of employment for any reason any shares that the
52
<PAGE>
participant acquired under the Plan, with the price being the then Fair
Market Value of the Stock or, in the case of a termination for Cause, an
amount equal to the cash consideration paid for the Stock, subject to such
other terms and conditions as the Committee may specify at the time of grant.
The Committee may, at the time of the grant of an award under the Plan,
provide the Company with the right to repurchase, or require the forfeiture
of, shares of Stock acquired pursuant to the Plan by any participant who, at
any time within two years after termination of employment with the Company,
directly or indirectly competes with, or is employed by a competitor of, the
Company.
(f) The reinvestment of dividends in additional Restricted Stock (or in
Deferred Stock or other types of Plan awards) at the time of any dividend
payment shall only be permissible if the Committee (or the Company's chief
financial officer) certifies in writing that under Section 3 sufficient
shares are available for such reinvestment (taking into account then
outstanding Stock Options and other Plan awards).
(g) The Plan is expressly made subject to the approval by shareholders
of the Company. If the Plan is not so approved by the shareholders on or
before one year after this Plan's adoption by the Board of Directors, then no
further awards shall be made under this Plan, any existing Non-Qualified
Stock Options shall remain in force in accordance with their terms under this
Plan, and any existing Incentive Stock Options shall become and be
Non-Qualified Stock Options.
Adopted by Board of Directors: June 28, 1997
Adopted by Stockholders:
--------------
53
<PAGE>
Exhibit 10.9
CHECK TECHNOLOGY CORPORATION
EXECUTIVE OPTION EXERCISE LOAN PROGRAM
(AS ADOPTED MARCH 14, 1995 AND AMENDED JUNE 26, 1997)
PURPOSE:
The purpose of The Check Technology Corporation Executive Option
Exercise Loan Program (the "Program") is to more closely align the goals and
motivation of management with those of other Company shareholders and to
provide key personnel with a long-term capital accumulation opportunity.
This purpose is accomplished by providing selected management employees with
loans to permit them to exercise their Company stock options and pay federal
and state taxes realized upon such exercises.
DEFINITIONS:
"Board" shall mean the Board of Directors of Check Technology
Corporation as constituted from time to time.
"Common Stock" shall mean the common stock of the Company, par value
$.10 per share.
"Company" shall mean Check Technology Corporation or any subsidiary
thereof.
"Compensation Committee" shall mean the Compensation Committee of the
Board of Directors of the Company as constituted from time to time; provided,
however, each member of the Compensation Committee shall be a "disinterested"
person within the meaning of Rule 16b-3 as then in effect under the
Securities Exchange Act of 1934. The Board shall administer the Program
unless it shall delegate such administration to the Compensation Committee.
"Eligible Employee" shall mean any executive officer of the Company that
the Board has determined may be granted a loan pursuant to the Program.
"Loan" shall mean a loan made to a Participant pursuant to this Program
and evidenced by a Promissory Note.
"Participant" shall refer to an Eligible Employee that has a Loan
outstanding.
"Program Administrator" shall mean the person or persons designated as
such by the Board. If no person has been designated, the Program
Administrator shall be the Secretary of the Company.
"Promissory Note" shall mean a Limited Recourse Promissory Note
evidencing a Loan made to a Participant by the Company pursuant to the terms
of this Program.
"Purchased Shares" shall mean all of the shares of Common Stock
purchased by a Participant at the time a Loan was made to such Participant
hereunder.
PROGRAM:
1. SELECTION OF ELIGIBLE EMPLOYEES. From time to time, the Board shall
determine the Eligible Employees who may be granted Loans hereunder and the
maximum amount of the Loans, which amount will be stated in terms of the
maximum number of Company stock option shares that each may exercise
utilizing Loans as provided hereunder. As soon as possible after the
determination by the Board, the Program Administrator will notify each
Eligible Employee in writing of his or her eligibility and the options that
he or she may exercise utilizing Loans under the terms of the Program. An
Eligible Employee shall cease being an Eligible Employee on the date on which
he or she ceases to be an employee of the Company. The rights of an Eligible
Employee to borrow money hereunder are not transferable and may not be
exercised by any person other than the Eligible Employee. The Board may
revoke or reduce an Eligible Employee's borrowing authority at any time.
2. THE LOAN. An Eligible Employee may borrow from the Company 100% of
the cost of exercising one or more Company stock options held by such
Eligible Employee (vested portions only) plus 100% of the amount of any
federal and state tax payable by the Eligible Employee as a result of the
exercise. The Eligible Employee may only borrow the funds from the Company
if they are used to exercise Company options and pay taxes. The Loan will be
evidenced by a Promissory Note. The terms of the Promissory Note will be:
54
<PAGE>
(a) The unpaid principal balance will accrue simple interest at a
floating rate equal to the lesser of (i) the average interest rate charged
under the Company's bank line of credit or the prime rate if the Company
has no line of credit; or (ii) the average rate of interest on the
Company's investment of its cash and other liquid funds. Interest is due
annually.
(b) The Company will have the option of declaring the payment of all
accrued and unpaid interest and the unpaid principal balance due, in part
or in full, on the earlier to occur of (i) a date determined by the Board,
which date shall not be later than the fifth anniversary of the
Determination Date; (ii) the Participant's termination of employment with
the Company for any reason; or (iii) the date Participant sells or
otherwise disposes or attempts to dispose of all of the Purchased Shares.
If a portion of the Purchased Shares is to be sold, the Participant may
request that only a pro rata portion of the proceeds be utilized to pay off
the Loan. The Participant may retain proceeds representing the
Participant's level of equity in the Purchased Shares sold.
(c) The Promissory Note will be secured by a Security Agreement
granting the Company a first lien security interest in the Purchased
Shares.
(d) The Promissory Note will limit recourse against the Participant
who made the Promissory Note to the Purchased Shares and any proceeds
thereof.
(e) Any cash dividends paid with respect to the Purchased Shares will
be applied by the Company in payment on the Promissory Note. Any non-cash
dividends, distributions or stock splits made with respect to the Purchased
Shares shall be retained by the Company as additional security for the
Loan.
(f) At the discretion of the Board, up to 50% of the proceeds of any
bonus earned by the Participant shall not be paid to the Participant but
shall be applied directly by the Company in payment on the Promissory Note.
(g) Sections 415 and 401(a)(17) of the Internal Revenue Code restrict
the ability of certain highly compensated Employees from receiving their
full benefits under certain employee benefit plans sponsored by the
Company. As a result, amounts equal to the value of the number of shares
or dollars the Participant would have been allocated under any and all
employee benefit plans sponsored by the Company but for the limitations
under Sections 415 and 401(a)(17) will be applied by the Company in payment
on the Promissory Note at the time such allocations would have been made to
the Participant.
(h) The Participant may prepay the Loan in whole or in part at any
time without penalty. At the option of the Board, Loans could be repaid by
the tender of Company Common Stock already owned by the Participant.
(i) All payments made or applied on the Promissory Note shall be used
first to pay the accrued but unpaid interest and then to reduce the unpaid
principal balance.
(j) The current form of Promissory Note and Security Agreement are
Exhibits 1 and 2 hereto.
3. EXERCISE OF OPTIONS. Following the Determination Date, an Eligible
Employee may borrow funds as set forth above to purchase shares of Common
Stock by means of the exercise of outstanding and vested options granted by
the Company on the following terms:
(a) An Eligible Employee that wishes to borrow funds pursuant to this
Program to acquire Common Stock by means of exercising options may do so by
giving written notice to the Program Administrator indicating the Eligible
Employee's name, the number of shares of Common Stock he or she desires to
acquire hereunder and any other information reasonably requested by the
Program Administrator.
(b) As soon as the exercise of the option requested by the Eligible
Employee has been approved by the Program Administrator, the Eligible
Employee will (i) execute and deliver the Promissory Note to the Program
Administrator; and (ii) execute and deliver the Security Agreement to the
Program Administrator.
(c) The certificate(s) representing the Purchased Shares will be
registered in the name of the Participant, but will be held by the Company
and pledged to the Company under the Security Agreement to secure payment
of the
55
<PAGE>
Promissory Note. So long as the Participant owns the Purchased Shares
and is not in default under the Loan, he or she shall retain the right
to vote the Purchased Shares.
4. MISCELLANEOUS.
(a) The Board of the Company may amend or terminate this Program at
any time; provided, however, no such termination or amendment shall affect
any Loan or Promissory Note outstanding at the time the Program is amended
by the Board unless the Participant who obtained the Loan and issued the
Promissory Note being modified agrees.
(b) The Plan Administrator may make Loans hereunder upon the
authority of the Board or the unanimous approval of the Executive Committee
of the Board.
APPROVALS:
The foregoing Program was adopted by the Board of Directors of the
Company at its meeting on March 14, 1995 and amended on June 26, 1997.
----------------------------------
Thomas H. Garrett, Secretary
56
<PAGE>
PROMISSORY NOTE
$
- ---------------- ---------------
(amount) (date)
FOR VALUE RECEIVED, _________________ (the "Promisor") hereby promises to
pay to the order of Check Technology Corporation (the "Holder") the principal
sum of _____________ Dollars ($_________), plus interest accrued at a floating
rate computed on the unpaid principal balance commencing on the date hereof and
equal to the lesser of (i) the average interest rate charged under the Company's
bank line of credit, or the prime rate if the Company has no line of credit; or
(ii) the average rate of interest on the Company's investment of its cash and
other liquid funds. At the date hereof, the interest rate was _______ percent
(___%) and adjustments, if any, shall be made at the end of each calendar
quarter thereafter. Such principal and interest shall be paid on or before the
earlier of the _______ anniversary date hereof or the date Promisor ceases to be
employed by the Holder.
The Promisor reserves and shall have the right to prepay at any time the
unpaid principal balance of this Note, together with accrued interest to date,
without premium or penalty.
The unpaid principal balance of this Note shall, at the option of the
Holder hereof, immediately due and payable in the case of any one or more of the
following events occurring:
(a) the Promisor shall make a general assignment for the benefit of
creditors;
(b) the Promisor shall become or be adjudicated bankrupt or shall
voluntarily file a petition for bankruptcy; or
(c) the Promisor shall apply for the appointment of a receiver or a
trustee for any substantial portion of Promisor's property or assets or
shall permit the appointment of any such receiver or trustee who is not
discharged within a period of 30 days after such appointment.
The Promisor hereby waives demand, presentment, notice of non-payment,
protest, notice of protest, notice of dishonor and diligence in collection.
Furthermore, in any action or proceeding based upon the Note, the Holder
shall be entitled to recover reasonable attorneys' fees and all other
reasonable costs of collection.
THIS NOTE IS SECURED BY A SECURITY AGREEMENT OF EVEN DATE HEREOF BETWEEN
THE HOLDER AND THE PROMISSOR. NOTWITHSTANDING THE ABOVE PROVISIONS OF THIS
NOTE, THE PROMISSORY'S LIABILITY TO PAY THE AMOUNTS AMOUNT DUE UNDER THIS
NOTE IS LIMITED TO THE COLLATERAL NOW OR HEREAFTER HELD BY THE HOLDER
PURSTANT TO THE SECURITY AGREEMENT. IN NO EVENT SHALL THE PROMISSORY BE
PERSONALLY LIABLE FOR ANY DEFICIENCY RESULTING FROM THE SALE OF SUCH
COLLATERAL, NOR SHALL ANY ACTION OR PROCEEDING IN ANY EVENT BE BROUGHT BY
HOLDER AGAINST PROMISSOR TO OBTAIN A PERSONAL JUDGMENT AGAINST PROMISSOR FOR
ANY AMOUNT DUE UNDER THIS NOTE.
------------------------------
Promisor
57
<PAGE>
SECURITY AGREEMENT
____________________, (the "Borrower") hereby grants to Check Technology
Corporation (the "Secured Party") a security interest in those certain assets of
Borrower described in Section 1 below (collectively referred to hereinafter as
the "Collateral"). This security interest is to secure payment to the Secured
Party of that certain Promissory Note dated _______________________ in the
aggregate amount of ______________ Dollars ($________________) (the "Secured
Obligations").
1. COLLATERAL. The Collateral subject to this Agreement consists of
__________ shares (the "Pledged Shares") of Check Technology Corporation common
stock, all certificates representing the Pledged Shares, and all proceeds of any
of the foregoing, including any dividends or distributions in respect of the
Pledged Shares and any property issued in exchange or substitution for the
Pledged Shares (all of the foregoing being collectively referred to herein as
the "Collateral").
2. BORROWER'S SPECIFIC AGREEMENTS. Borrower agrees that:
(a) All certificates or instruments representing or evidencing the
Collateral shall be delivered to and held by or on behalf of Secured Party.
Unless there is then existing an Event of Default (as defined below) by
Borrower, the Pledgor shall be entitled to vote the Pledged Shares. Upon the
occurrence of any Event of Default, all voting rights shall revert of the
Secured Party.
(b) The Borrower agrees to from time to time promptly execute and
deliver all further instruments and documents, and take all further action,
that Secured Party may reasonably request in order to exercise and enforce
his rights and remedies under this Agreement.
(c) The Borrower agrees that until the Secured Obligations have been
paid in full, Borrower will not sell, assign or otherwise dispose of, or
grant any option with respect to, any of the Collateral, or create or permit
to exist any lien, security interest, option or other charge or encumbrance
upon any of the Collateral, except for this Security Agreement.
3. EVENTS OF DEFAULT. The Secured Obligations shall become immediately
due and payable without notice or demand upon the occurrence of any of the
following events of default:
(a) Borrower shall make a general assignment for the benefit of
creditors.
(b) Borrower shall become or be adjudicated bankrupt or shall
voluntarily file a petition for bankruptcy.
(c) Borrower shall apply for the appointment of a receiver or a trustee
for any substantial portion of his or her property or assets or shall permit
the appointment of any such receiver or trustee who is not discharged within
a period of 30 days after such appointment.
(d) Borrower shall cease to be an employee of Check Technology
Corporation.
4. REMEDIES.
(a) Borrower recognizes that, in the event he or she violates any of
the warranties, covenants, terms and conditions of this Agreement, no remedy
at law will provide adequate relief to the Secured Party and Borrower hereby
agrees that the Secured Party shall be entitled to temporary and permanent
injunctive relief in case of any breach without the necessity of proving
actual damages.
(b) Upon the occurrence of any such event of default, and at any time
thereafter, the Secured Party shall have the rights and remedies of a secured
party under the Minnesota Uniform Commercial Code and under any and all other
laws in addition to the rights and remedies provided herein or in any other
instrument or paper executed by Borrower. All rights, powers and remedies
hereunder or in any other instrument provided are cumulative and none is
exclusive.
5. TERM; BINDING EFFECT; GOVERNING LAW.
58
<PAGE>
(a) This Agreement, on acceptance by the Secured Party, shall continue
in effect until the Secured Obligations have been paid in full.
(b) This Security Agreement shall be binding and inure to the benefit
of the parties hereto and their respective heirs, successors, representatives
and assigns.
(c) The validity, interpretation, enforcement and effect of this
Security Agreement shall be governed by the laws of the State of Minnesota.
6. SEPARABILITY. In the event that any provision hereof be deemed to
be invalid by reason of the operation of any law or by reason of the
interpretation placed thereon by any court, this Agreement shall be construed
as not containing such provision and the invalidity of such provision shall
not affect the validity of any provision hereof and any and all provisions
hereof which are otherwise lawful and valid shall remain in full force and
effect.
This Agreement has been executed and delivered at _________________________,
Minnesota this _____ day of ________________, 199___.
------------------------------
Borrower
Accepted at ________________, Minnesota this _____ day of _______________,
19___.
CHECK TECHNOLOGY CORPORATION
By
---------------------------
Its
---------------------------
59
<PAGE>
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
9/30/97 9/30/96 9/30/95
------------- ------------ --------------
<S> <C> <C> <C>
PRIMARY
Average shares outstanding 6,323,247 6,185,395 6,083,414
Net effect of dilutive stock options and
Warrants--based on the treasury stock
Method using average market price 92,834 170,006 187,090
------------- ------------ --------------
6,416,081 6,355,401 6,270,504
------------- ------------ --------------
------------- ------------ --------------
Net income $ 325,979 $ 2,245,713 $ 2,052,986
------------- ------------ --------------
------------- ------------ --------------
Earnings per share $ 0.05 $ 0.35 $ 0.33
------------- ------------ --------------
------------- ------------ --------------
FULLY DILUTED
Average shares outstanding 6,323,247 6,185,395 6,083,414
Net effect of dilutive stock options and
warrants--based on the treasury stock
method using the higher of the ending
or average market price 96,575 176,055 190,254
------------- ------------ --------------
6,419,822 6,361,450 6,273,668
------------- ------------ --------------
------------- ------------ --------------
Net income $ 325,979 $ 2,245,713 $ 2,052,986
------------- ------------ --------------
------------- ------------ --------------
Earnings per share $ 0.05 $ 0.35 $ 0.33
------------- ------------ --------------
------------- ------------ --------------
</TABLE>
60
<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
61
<PAGE>
EXHIBIT 23--CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements (No.
33-44872 and 33-33491) on Form S-8 of our report dated November 21, 1997, 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, 1997.
/s/ Ernst & Young LLP
- ----------------------------
Ernst & Young LLP
Minneapolis, Minnesota
December 23, 1997
62
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 3,165,601
<SECURITIES> 5,293,849
<RECEIVABLES> 3,576,551
<ALLOWANCES> 50,000
<INVENTORY> 8,049,716
<CURRENT-ASSETS> 21,801,504
<PP&E> 4,098,393
<DEPRECIATION> 2,928,404
<TOTAL-ASSETS> 22,971,493
<CURRENT-LIABILITIES> 4,212,928
<BONDS> 0
0
0
<COMMON> 633,814
<OTHER-SE> 18,045,848
<TOTAL-LIABILITY-AND-EQUITY> 22,971,493
<SALES> 22,866,676
<TOTAL-REVENUES> 22,866,676
<CGS> 9,047,708
<TOTAL-COSTS> 22,704,810
<OTHER-EXPENSES> (339,926)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,813
<INCOME-PRETAX> 478,979
<INCOME-TAX> 153,000
<INCOME-CONTINUING> 325,979
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 325,979
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
