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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 June 30, 1997
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Commission file number 0-10691
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CHECK TECHNOLOGY CORPORATION
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(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
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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 - 6,319,477 shares as of August 07, 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 - - June 30, 1997 and September 30, 1996
Consolidated statements of operations - - Three months ended
June 30, 1997 and 1996, and nine months ended June 30, 1997 and 1996
Consolidated statements of cash flows - - Nine months ended
June 30, 1997 and 1996
Consolidated statement of stockholders' equity - - Nine months ended,
June 30, 1997
Notes to consolidated financial statements - - June 30, 1997
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
PART II. OTHER INFORMATION
Item 3. Exhibits and reports on Form 8-K
SIGNATURES
2
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Part I. FINANCIAL INFORMATION
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, September 30,
1997 1996
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,636,427 $ 4,851,283
Short-term investments 5,362,205 4,959,023
Accounts receivable less allowance
for doubtful accounts of $50,000 4,471,015 3,582,350
Inventories
Raw materials and component parts 5,783,551 5,088,859
Work-in-process 477,819 127,459
Finished Goods 1,026,895 1,383,052
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7,288,265 6,599,370
Other current assets 1,368,449 1,132,217
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TOTAL CURRENT ASSETS 22,126,361 21,124,243
EQUIPMENT AND FIXTURES
Machinery and equipment 1,952,478 1,940,676
Furniture and fixtures 1,710,419 1,643,803
Leasehold improvements 248,213 244,693
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3,911,110 3,829,172
Less accumulated depreciation and
amortization (2,860,942) (2,675,559)
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1,050,168 1,153,613
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TOTAL ASSETS $ 23,176,529 $ 22,277,856
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See notes to consolidated financial statements
3
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LIABILITIES AND STOCKHOLDERS' EQUITY June 30, September 30,
1997 1996
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CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,198,595 $ 1,963,171
Employee compensation and related taxes 688,678 769,750
Income taxes payable 618,881 489,732
Deferred revenue 544,603 499,036
Current portion of capital lease obligations 86,872 92,066
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TOTAL CURRENT LIABILITIES 4,137,629 3,813,755
Capital lease obligations -- less current portion 44,924 55,615
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TOTAL LIABILITIES 4,182,553 3,869,370
STOCKHOLDERS' EQUITY
Capital Stock
Common Stock--par value $.10 per share--
authorized 25,000,000 shares; issued and
outstanding June 30, 1997-6,319,060 shares;
September 30, 1996--6,237,727 shares 631,906 623,773
Additional paid in capital 17,171,218 16,395,889
Foreign currency translation adjustment (775,385) (513,963)
Retained earnings (deficit) 1,966,237 1,902,787
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TOTAL STOCKHOLDERS' EQUITY 18,993,976 18,408,486
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,176,529 $ 22,277,856
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See notes to consolidated financial statements.
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Period, Nine Month Period
Ending June 30, Ending June 30
1997 1996 1997 1996
----------- ----------- ----------- -----------
Sales:
Printing equipment $ 2,841,228 $ 2,629,805 $ 6,909,351 $ 8,547,905
Maintenance, spares
and supplies 3,666,208 3,663,797 11,287,173 10,689,518
----------- ----------- ----------- -----------
Net Sales 6,507,436 6,293,602 18,196,524 19,237,423
Costs and expenses:
Cost of sales 2,686,078 2,445,980 7,238,298 7,482,704
Selling, general and
administrative 2,859,591 2,710,625 8,461,182 8,186,051
Research and
Development 591,835 591,262 1,775,901 1,646,095
----------- ----------- ----------- -----------
6,137,504 5,747,867 17,475,381 17,314,850
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Income from system sales
and service 369,932 545,735 721,143 1,922,573
Interest (income) (95,827) (85,519) (273,074) (268,737)
Unrealized exchange
(gain) loss 46,889 (15,506) 78,643 (31,157)
----------- ----------- ----------- -----------
Income before taxes 418,870 646,760 915,574 2,222,467
Income taxes 147,000 124,782 302,000 439,782
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Net Income $ 271,870 $ 521,978 $ 613,574 $ 1,782,685
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share $ 0.04 $ 0.08 $ 0.10 $ 0.28
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number
of shares and share
equivalents outstanding 6,405,554 6,387,443 6,420,754 6,352,005
during the period
See notes to consolidated financial statements.
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Month Period
Ending June 30,
1997 1996
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OPERATING ACTIVITIES
Net income $ 613,574 $ 1,782,685
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 302,218 321,668
Other 79,538 (94,747)
Changes in operating assets and liabilities:
Accounts receivable (982,428) 13,349
Inventories (883,902) (532,155)
Other current assets (254,873) 23,061
Accounts payable and accrued expenses 407,361 (65,555)
Deferred revenue 56,648 (21,296)
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NET CASH FROM (USED IN) OPERATING ACTIVITIES (661,864) 1,427,010
INVESTING ACTIVITIES
Purchase of equipment and fixtures (278,191) (384,083)
Proceeds from sale of equipment 58,281 70,619
Purchase of short-term investment (17,135,994) (6,105,086)
Proceeds from sale of short-term investment 16,830,418 6,931,788
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NET CASH FROM (USED IN) INVESTING ACTIVITIES (525,486) 513,238
FINANCING ACTIVITIES
Proceeds from issuance of common stock 13,462 99,384
Addition of capital leases 87,019 39,809
Repayment of long-term debt and capital leases (94,941) (79,502)
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NET CASH FROM FINANCING ACTIVITIES 5,540 59,691
EFFECT OF EXCHANGE RATE CHANGES ON CASH (33,046) (19,354)
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INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (1,214,856) 1,980,585
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 $ 3,636,427 $ 5,370,941
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See notes to consolidated financial statements.
6
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<TABLE>
<CAPTION>
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Foreign
Additional Currency Retained
Common Stock Paid-In Translation Earnings
Shares Amount Capital Adjustment (Deficit)
--------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance September 30, 1996 6,237,727 $ 623,773 16,395,889 $ (513,963) $ 1,902,787
Net Income 613,574
Exercise of stock options 1,333 133 3,199
Issuance of restricted stock 80,000 8,000 762,000 (550,124)
Payment of note receivable 10,130
Foreign currency translation (261,422)
--------- ---------- ----------- ----------- ------------
Balance June 30, 1997 6,319,060 $ 631,906 $17,171,218 $ (775,385) $ 1,966,237
--------- ---------- ----------- ----------- ------------
--------- ---------- ----------- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
7
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1997
NOTE A - - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended September 30, 1996
Reclassifications have been made in the prior year to conform with
classifications in the current year.
Income per share of common stock is computed by dividing the net income for the
period by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period.
NOTE B -- Earnings per share:
In February 1997, the Financial Accounting Standards Board issued statement No.
128, "Earnings Per Share." This statement establishes standards for computing
and presenting basic and diluted earnings per share (EPS) for financial
statements issued for periods ending after December 15, 1997. The adoption of
this statement will not have a material effect on the Company's reported EPS.
8
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Item 2
Management's Discussion and Analysis of Results
of Operations and Financial Condition
Results of Operations
The Company's revenues consist of (1) sales of document production systems and
related equipment and (2) maintenance contracts, spare parts, supplies and
consumable items. For the three month period ended June 30, 1997, revenues from
the sale of document production equipment increased 8% primarily due to
increased sales in Mexico and Asia. For the nine month period ended June 30,
1997, revenues from the sale of document production equipment declined 19% over
the comparable period in the prior year, primarily due to reduced sales in
Europe 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 and nine month periods ended June 30, 1997, revenues for
maintenance contracts, spare parts, supplies and consumable items remained
comparable and increased 6% in each period, primarily due to the timing of
purchases of supplies and consumables and the increase in the installed base of
systems.
The gross margin percentage for the three and nine months periods ended June 30,
1997, were 59% and 60% respectively, compared to 61% and 61% in the comparable
prior period. The changes were primarily due to changes in product mix.
Selling, general and administrative expenses during the three and nine month
periods ended June 30, 1997, increased 5 1/2% and 3% over the comparable period
last year as a result of higher personnel and marketing costs.
Research and development expenses for the three month period ending June 30
remained unchanged from the comparable period last year and increased 8% for the
nine month period ended June 30 from the comparable period last year. The
increase was due primarily to the timing of expenditures on the Company's
program to develop a new family of check production systems.
The Company had an unrealized currency exchange loss of $47,000 for the current
quarter and $79,000 for the nine months ended June 30, 1997. For the prior
year, the Company had an unrealized exchange gain of $16,000 for the quarter and
a gain of $31,000 for the nine month period. These unrealized currency gains
and losses are due to the strengthening and weakening of the U.S. dollar against
the currencies of the countries in which the Company's foreign subsidiaries are
located and the resulting effect on the valuation of the intercompany accounts
and certain assets, which are denominated in U.S. dollars. The Company
anticipates that it will continue to have unrealized currency exchange gains or
losses.
The income tax rate was 35% and 33% for the three months and nine months ended
June 30, 1997, respectively, compared to 20% in the comparable periods. The
increase in tax rate over the prior periods was principally due to a benefit
realized in a prior period for a reduction in the valuation reserve on the
deferred tax asset.
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Net income for the quarter amounted to $0.04 per share as compared to $0.08 per
share in the comparable period. For the nine month period, net income amounted
to $0.10 per share as compared to $0.28 per share for the 1996 nine months. Net
income for the quarter was affected by the mix of products sold, currency
swings, the increase in selling, general and administrative expenses and the
increase in the tax rate compared to the same quarter last year. For the nine
month period, net income was primarily affected by reduced sales of document
production equipment as well as currency swings and a higher tax rate.
Factors Affecting Results of Operations
The Company holds a dominant market position in many of the international
markets it serves. There has been a softening of demand for the Checktronic
product line from some of these established markets, and future revenues from
this product line will be more dependent on sales to emerging markets. The
Company is developing a new product line, named the IMAGGIA line, and
achievement of the Company's future revenue plans depends upon the successful
introduction of the IMAGGIA system. The Company's revenues and operating
results may also fluctuate from quarter to quarter because: (i) the Company's
sales cycle is relatively long; (ii) the size of orders can vary significantly;
(iii) the availability of financing for customers in some countries is variable;
(iv) customers may postpone or cancel orders; and (v) economic, political and
market conditions in some markets can change with minimal notice and effect the
timing and size of orders. Because the Company's operating expenses are based on
anticipated revenue levels and a high percentage of the Company's operating
costs are relatively fixed, variations in the timing of revenue recognition
could result in significant fluctuations in operating results from quarter to
quarter.
Liquidity and Capital Resources
Working capital increased from $17,310,000 at September 30, 1996 , to
$17,990,000 at June 30, 1997. Accounts receivable increased by $889,000,
primarily due to the timing of revenue sales in the quarter. Inventories
increased by $689,000, primarily due to the purchase of inventories for the
company's new IMAGGIA product line. Stockholders' equity increased to
$18,994,000 at June 30, 1997, compared to $18,408,000 at September 30, 1996.
The Company's long-term debt to equity ratio was less than 0.01 at June 30,
1997, and September 30, 1996. The Company maintains a $2.5 million unsecured
bank line of credit. At June 30, 1997, the line was unused. The credit
agreement expires March 31, 1998 and the Company presently expects to negotiate
a new bank line of credit. The Company believes that its current financial
arrangements and anticipated level of internally generated funds will be
sufficient to fund its working capital requirements in fiscal 1997.
At June 30, 1997, the Company had no material commitments for capital
expenditures.
10
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PART II. OTHER INFORMATION
Item 3. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended
June 30, 1997.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHECK TECHNOLOGY CORPORATION
Registrant
Date August 12, 1997 /s/ Jay A. Herman
- ------------------------ -------------------------------------
Jay A. Herman
President and Chief Executive Officer
Date August 12, 1997 /s/ Paul W.B. Stephenson
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Paul W.B. Stephenson
Vice President, Finance and
Administration
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 3,636,427
<SECURITIES> 5,362,205
<RECEIVABLES> 4,521,015
<ALLOWANCES> 50,000
<INVENTORY> 7,288,265
<CURRENT-ASSETS> 22,126,361
<PP&E> 3,911,110
<DEPRECIATION> 2,860,942
<TOTAL-ASSETS> 23,176,529
<CURRENT-LIABILITIES> 4,137,629
<BONDS> 0
0
0
<COMMON> 631,906
<OTHER-SE> 18,362,070
<TOTAL-LIABILITY-AND-EQUITY> 23,176,529
<SALES> 18,196,524
<TOTAL-REVENUES> 18,196,524
<CGS> 7,238,298
<TOTAL-COSTS> 17,475,381
<OTHER-EXPENSES> (194,431)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 915,574
<INCOME-TAX> 302,000
<INCOME-CONTINUING> 613,574
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 613,574
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
