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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
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Commission file number 0-10691
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CHECK TECHNOLOGY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1392000
- ---------------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12500 Whitewater Drive
Minnetonka, Minnesota 55343-9420
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(Address of principal executive offices) (Zip Code)
(612) 939-9000
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Registrant's telephone number, including area code
Not Applicable
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common Stock, $.10 Par Value - - 6,317,727 shares as of February 11, 1997
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1
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INDEX
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - - December 31, 1996 and September
30, 1996
Consolidated statements of operations - - Three months ended
December 31, 1996 and 1995.
Consolidated statements of cash flows - - Three months ended
December 31, 1996 and 1995.
Consolidated statement of stockholders' equity - - Three months
ended December 31, 1996
Notes to consolidated financial statements - - December 31, 1996
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
SIGNATURES
2
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Part I. FINANCIAL INFORMATION
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
---------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,741,079 $ 4,851,283
Short-term investments 6,133,414 4,959,023
Accounts receivable less allowance for doubtful accounts of $50,000 5,139,116 3,582,350
Inventories
Raw materials and component parts 6,230,745 5,088,859
Work-in-process 317,757 127,459
Finished Goods 1,512,768 1,383,052
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8,061,270 6,599,370
Other current assets 1,337,602 1,132,217
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TOTAL CURRENT ASSETS 22,412,481 21,124,243
EQUIPMENT AND FIXTURES
Machinery and equipment 2,007,510 1,940,676
Furniture and fixtures 1,689,973 1,643,803
Leasehold improvements 255,974 244,693
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3,953,457 3,829,172
Less accumulated depreciation and amortization 2,782,008 2,675,559
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1,171,449 1,153,613
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TOTAL ASSETS $ 23,583,930 $ 22,277,856
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---------------- -----------------
</TABLE>
See notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1996 1996
---------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,855,927 $ 1,963,171
Employee compensation and related taxes 776,039 769,750
Income taxes payable 487,283 489,732
Deferred revenue 533,730 499,036
Current portion of capital lease obligations 92,475 92,066
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TOTAL CURRENT LIABILITIES 4,745,454 3,813,755
Capital lease obligations -- less current portion 90,971 55,615
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TOTAL LIABILITIES 4,836,425 3,869,370
STOCKHOLDERS' EQUITY
Capital Stock
Common Stock--par value $.10 per share--authorized
25,000,000 shares; issued and outstanding
December 31, 1996--6,317,727 shares;
September 30, 1996--6,237,727 shares 631,773 623,773
Additional paid in capital 17,157,889 16,395,889
Foreign currency translation adjustment (360,320) (513,963)
Retained earnings 1,318,163 1,902,787
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TOTAL STOCKHOLDERS' EQUITY 18,747,505 18,408,486
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,583,930 $ 22,277,856
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</TABLE>
See notes to consolidated financial statements.
4
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period
Ending December 31,
1996 1995
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<S> <C> <C>
Sales:
Printing equipment $ 1,735,750 $ 2,750,650
Maintenance, spares and supplies 3,752,142 3,522,631
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Net Sales 5,487,892 6,273,281
Costs and expenses:
Cost of sales 2,071,255 2,465,894
Selling, general and administrative 2,798,014 2,683,979
Research and development 591,865 528,566
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5,461,134 5,678,439
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Income from system sales and service 26,758 594,842
Interest (income) (94,593) (90,477)
Unrealized exchange (gain) loss (3,649) (5,143)
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Income before taxes 125,000 690,462
Income taxes 25,000 138,000
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Net Income $ 100,000 $ 552,462
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Earnings per share $ 0.02 $ 0.09
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Weighted average number of shares and share equivalents
outstanding during the period 6,447,679 6,337,523
</TABLE>
See notes to consolidated financial statements.
5
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period
Ending December 31,
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 100,000 $ 552,462
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 110,218 94,337
Other 31,480 (44,062)
Changes in operating assets and liabilities:
Accounts receivable (1,459,019) 185,998
Inventories (1,374,517) (247,825)
Other current assets (196,456) 136,692
Accounts payable and accrued expenses 778,396 (236,544)
Deferred revenue 33,452 7,633
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NET CASH FROM (USED IN) OPERATING ACTIVITIES (1,976,446) 448,691
INVESTING ACTIVITIES
Purchase of equipment and fixtures (137,818) (153,835)
Proceeds from sale of equipment 13,464 31,504
Purchase of short-term investment (6,963,009) (2,136,996)
Proceeds from sale of short-term investment 5,881,840 2,051,000
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NET CASH FROM (USED IN) INVESTING ACTIVITIES (1,205,523) (208,327)
FINANCING ACTIVITIES
Addition of capital leases 60,506 38,894
Repayment of capital leases (25,331) (38,284)
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NET CASH FROM FINANCING ACTIVITIES 35,175 610
EFFECT OF EXCHANGE RATE CHANGES ON CASH 36,590 6,326
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INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (3,110,204) 247,300
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 4,851,283 3,390,356
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,741,079 $ 3,637,656
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---------------- -----------------
</TABLE>
See notes to consolidated financial statements.
6
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Additional Currency Retained
Common Stock Paid-In Translation Earnings
Shares Amount Capital Adjustment (Deficit)
------------- ------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance September 30, 1996 6,237,727 $ 623,773 16,395,889 $ (513,963) $ 1,902,787
Net Income 100,000
Exercise of stock options
Issuance of restricted stock 80,000 8,000 762,000 (684,624)
Foreign currency translation 153,643
------------- ------------ -------------- ------------- ---------------
Balance December 31, 1996 6,317,727 $ 631,773 17,157,889 $ (360,320) $ 1,318,163
------------- ------------ -------------- ------------- ---------------
------------- ------------ -------------- ------------- ---------------
</TABLE>
See notes to consolidated financial statements.
7
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 1996
NOTE A - - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended September 30, 1996.
Reclassifications have been made in the prior year to conform with
classifications in the current year.
Income per share of common stock is computed by dividing the net income for the
period by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period.
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Item 2
Management's Discussion and Analysis of Results
of Operations and Financial Condition
Results of Operations
The Company's revenues consist of (i) sales of document production systems and
related equipment and (ii) maintenance contracts, spare parts, supplies and
consumable items. For the three month period ended December 31, 1996, revenues
from the sale of document production equipment declined 37% over the comparable
quarter in the prior year, primarily due to reduced sales in Asia and Latin
America. Because of the nature of the company's document production equipment,
which involves the sale of low unit volume, high price capital equipment, sales
of document production equipment often fluctuate considerably on a quarter to
quarter basis.
For the three month period ended December 31, 1996, revenues for maintenance
contracts, spare parts, supplies and consumable items increased 7% over the
comparable quarter in the prior year, primarily due to the timing of purchases
of supplies and consumables by certain major customers.
The gross margin percentage for the three month period ended December 31, 1996,
was 62% compared to 61% in the comparable prior period. The changes were
primarily due to changes in product mix.
Selling, general and administrative expenses during the three month period ended
December 31, 1996, increased 4% over the comparable period last year as a result
of higher personnel and marketing costs.
Research and development expenses increased 12% over the comparable period last
year. The increase was due primarily to the timing of expenditures on the
Company's program to develop a new family of check production systems.
The Company had an unrealized currency exchange gain for the current quarter of
$4,000 compared to an unrealized exchange gain of $5,000 in the comparable
period last year. These unrealized currency gains and losses are due to the
strengthening and weakening of the U.S. dollar against the currencies of the
countries in which the Company's foreign subsidiaries are located and the
resulting effect on the valuation of the intercompany accounts and certain
assets, which are denominated in U.S. dollars. The Company anticipates that it
will continue to have unrealized currency exchange gains or losses.
Net income for the quarter amounted to $0.02 per share as compared to $0.09 per
share in the comparable period last year. The decrease was primarily
attributable to the effect of the reduction in sales of document production
equipment.
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Factors Affecting Results of Operations
The Company holds a dominant market position in many of the international market
it serves. There has been a softening of demand for the Checktronic product
line from some of these established markets, and future revenues from this
product line will be more dependent on sales to emerging markets. The Company
is developing a new product line, named the IMAGGIA line, and achievement of the
Company's future revenue plans depends upon the successful introduction of the
IMAGGIA system. The Company's revenues and operating results may also fluctuate
from quarter to quarter because: (i) the Company's sales cycle is relatively
long; (ii) the size of orders can vary significantly; (iii) the availability of
financing for customers in some countries is variable; (iv) customers may
postpone or cancel orders; and (v) economic, political and market conditions in
some markets can change with minimal notice and effect the timing and size of
orders. Because the Company's operating expenses are based on anticipated
revenue levels and a high percentage of the Company's operating costs are
relatively fixed, variations in the timing of revenue recognition could result
in significant fluctuations in operating results from quarter to quarter.
Liquidity and Capital Resources
Working capital increased from $17,310,000 at September 30, 1996 , to
$17,667,000 at December 31, 1996. Accounts receivable increased by $1.5
million, primarily due to the timing of revenue sales in the quarter.
Inventories increased by $1.4 million, primarily due to purchase of inventories
for the company's new IMAGGIA product line. Stockholders' equity increased to
$18,748,000 at December 31, 1996, compared to $18,408,000 at September 30, 1996.
The Company's long-term debt to equity ratio was less than 0.01 at December 31,
1996, and at September 30, 1996. The Company maintains a $2.5 million unsecured
bank line of credit. At December 31, 1996, the line was unused. The credit
agreement expires March 31, 1997 and the Company presently expects to negotiate
a new bank line of credit. The Company believes that its current financial
arrangements and anticipated level of internally generated funds will be
sufficient to fund its working capital requirements in fiscal 1997.
At December 31, 1996, the Company had no material commitments for capital
expenditures.
10
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended
December 31, 1996.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHECK TECHNOLOGY CORPORATION
Registrant
Date February 14, 1996 /s/ Jay A. Herman
-------------------------- ----------------------------------------
Jay A. Herman
President and Chief Executive Officer
Date February 14, 1996 /s/ Paul W. B. Stephenson
-------------------------- ----------------------------------------
Paul W.B. Stephenson
Vice President, Finance and
Administration
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,741,079
<SECURITIES> 6,133,414
<RECEIVABLES> 5,189,116
<ALLOWANCES> 50,000
<INVENTORY> 8,061,070
<CURRENT-ASSETS> 22,412,481
<PP&E> 3,953,457
<DEPRECIATION> 2,782,008
<TOTAL-ASSETS> 23,583,930
<CURRENT-LIABILITIES> 4,745,454
<BONDS> 0
0
0
<COMMON> 631,773
<OTHER-SE> 18,115,732
<TOTAL-LIABILITY-AND-EQUITY> 23,583,930
<SALES> 5,487,892
<TOTAL-REVENUES> 5,487,892
<CGS> 2,071,255
<TOTAL-COSTS> 5,461,134
<OTHER-EXPENSES> (98,242)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 125,000
<INCOME-TAX> 25,000
<INCOME-CONTINUING> 100,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,000
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
