<PAGE>
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, 1998
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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
incorporation or organization) Identification No.)
12500 Whitewater Drive
Minnetonka, Minnesota 55343-9420
- ----------------------------------------- ----------------------------
(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 - - 6,338,320 shares as of August 12, 1998
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1
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INDEX
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- June 30, 1998 and
September 30, 1997.
Condensed consolidated statements of operations -- Three months
ended June 30, 1998 and 1997, and nine months ended June 30, 1998
and 1997.
Condensed consolidated statements of cash flows -- Nine months
ended June 30, 1998 and 1997.
Condensed consolidated statements of stockholders' equity --
Nine months ended June 30, 1998.
Condensed notes to consolidated financial statements -- June 30,
1998.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
PART II. OTHER INFORMATION
Item 5. 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
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,354,416 $ 3,165,601
Short-term investments 2,470,993 5,293,849
Accounts receivable less allowance for doubtful accounts of $50,000 3,391,535 3,526,551
Inventories
Raw materials and component parts 4,949,744 5,700,807
Work-in-process 810,034 461,529
Finished Goods 3,394,848 1,887,380
----------- -----------
9,154,626 8,049,716
Deferred income taxes 1,031,996 1,092,259
Other current assets 848,793 673,528
----------- -----------
TOTAL CURRENT ASSETS 22,252,359 21,801,504
EQUIPMENT AND FIXTURES
Machinery and equipment 2,037,102 2,107,739
Furniture and fixtures 1,780,726 1,737,969
Leasehold improvements 264,132 252,685
----------- -----------
4,081,960 4,098,393
Less accumulated depreciation and amortization 3,099,193 2,928,404
----------- -----------
982,767 1,169,989
----------- -----------
TOTAL ASSETS $23,235,126 $22,971,493
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, September 30,
1998 1997
----------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,316,765 $ 2,603,516
Employee compensation and related taxes 708,200 672,492
Income taxes payable 253,293 425,868
Deferred revenue 1,275,507 469,127
Current portion of capital lease obligations 35,364 41,925
----------- -----------
TOTAL CURRENT LIABILITIES 4,589,129 4,212,928
Capital lease obligations -- less current portion 15,580 78,903
----------- -----------
TOTAL LIABILITIES 4,604,709 4,291,831
STOCKHOLDERS' EQUITY
Capital Stock
Common Stock--par value $.10 per share--authorized
25,000,000 shares; issued and outstanding
June 30, 1998--6,330,320 shares;
September 30, 1997--6,338,135 shares 633,032 633,814
Additional paid in capital 16,963,514 17,151,182
Foreign currency translation adjustment (1,181,091) (851,225)
Retained earnings 2,214,962 1,745,891
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 18,630,417 18,679,662
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,235,126 $22,971,493
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
4
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Ninth Month Period
Ending June 30, Ending June 30,
1998 1997 1998 1997
------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales:
Printing equipment $ 2,719,679 $ 2,841,228 $ 6,837,320 $ 6,909,351
Maintenance, spares and supplies 3,613,927 3,666,208 10,978,174 11,287,173
----------- ------------ ------------ ------------
Net Sales 6,333,606 6,507,436 17,815,494 18,196,524
Costs and expenses:
Cost of sales 2,753,528 2,686,078 7,489,299 7,238,298
Selling, general and administrative 2,717,117 2,859,591 8,295,623 8,461,182
Research and Development 693,234 591,835 2,068,186 1,775,901
----------- ------------ ------------ ------------
6,163,879 6,137,504 17,853,108 17,475,381
----------- ------------ ------------ ------------
Income from system sales and service 169,727 369,932 (37,614) 721,143
Interest (income) (81,402) (95,827) (251,809) (273,074)
Unrealized exchange (gain) loss (38,960) 46,889 6,409 78,643
----------- ------------ ------------ ------------
Income before taxes 290,089 418,870 207,786 915,574
Income taxes 102,000 147,000 80,000 302,000
----------- ------------ ------------ ------------
Net Income $ 188,089 $ 271,870 $ 127,786 $ 613,574
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Earnings (loss) per common share $ 0.03 $ 0.04 $ .02 $ 0.10
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Earnings ( loss) per common share -
assuming dilution $ 0.03 $ 0.04 $ .02 $ 0.10
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Weighted average number of shares
and share equivalents
outstanding during the period 6,281,005 6,228,291 6,274,366 6,221,307
Weighted average number of shares
and share equivalents outstanding during
the period - assuming dilution 6,304,783 6,348,304 6,307,536 6,360,975
</TABLE>
See notes to consolidated financial statements.
5
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ending
June 30,
1998 1997
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 127,786 $ 613,574
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 259,697 302,218
Other 164,373 79,538
Changes in operating assets and liabilities:
Accounts receivable 12,260 (982,428)
Inventories (1,275,234) (883,902)
Other current assets (158,773) (254,873)
Accounts payable and accrued expenses (399,420) 407,361
Deferred revenue 825,818 56,648
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NET CASH (USED IN) OPERATING ACTIVITIES (443,493) (661,864)
INVESTING ACTIVITIES
Purchase of equipment and fixtures (138,194) (278,191)
Proceeds from sale of equipment 39,132 58,281
Purchase of short-term investments (5,496,498) (17,135,994)
Proceeds from sale of short-term investments 8,500,142 16,830,418
------------ -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,904,582 (525,486)
FINANCING ACTIVITIES
Addition of capital leases 87,019
(Purchase) issuance of common stock (198,692) 3,332
Repayment of note receivable from stock sale 10,242 10,130
Repayment of capital leases (55,626) (94,941)
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NET CASH (USED IN ) FROM FINANCING ACTIVITIES (244,076) 5,540
EFFECT OF EXCHANGE RATE CHANGES ON CASH (28,198) (33,046)
------------ -----------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 2,188,815 (1,214,856)
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 3,165,601 4,851,283
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,354,416 $ 3,636,427
------------ -----------
</TABLE>
See notes to consolidated financial statements.
6
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Additional Currency
Common Stock Paid-In Translation Retained
Shares Amount Capital Adjustment Earnings
------------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance September 30, 1997 6,338,135 $ 633,814 $ 17,151,182 $ (851,225) $1,745,891
Net (Loss) Income 127,786
Exercise of stock options including tax 15,000 1,500 44,392
benefit of $8,393
Purchase of common stock (1,390) (139) (6,463)
Cancellation of restricted stock (21,425) (2,143) (206,745) 208,888
Payment of note receivable 10,242
Vesting of restricted stock including tax
effect of $(29,094) (29,094) 132,397
Foreign currency translation (329,866)
------------ ---------- ------------ ------------ ----------
Balance June 30, 1998 6,330,320 $ 633,032 $ 16,963,514 $(1,181,091) $2,214,962
------------ ---------- ------------ ------------ ----------
------------ ---------- ------------ ------------ ----------
</TABLE>
See notes to consolidated financial statements.
7
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
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, 1997.
Reclassifications have been made in the prior year to conform with
classifications in the current year.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
8
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
NOTE B - - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended June 30, Ended June 30,
1998 1997 1998 1997
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Numerator:
Net Income (Loss) 188,089 271,870 127,786 613,574
-------- -------- -------- -------
Numerator for basic
and diluted earnings per share-
income(loss) applicable 188,089 271,870 127,786 613,574
to common stockholders
Denominator:
Denominator for basic
earnings per share -
Weighted-average shares 6,281,005 6,228,291 6,274,366 6,221,307
Effect of dilutive securites:
Employee stock options 22,770 111,273 23,669 131,943
Employee stock grants 1,008 8,740 9,501 7,725
-------- -------- -------- -------
Dilutive potential common
shares 23,778 120,013 33,170 139,668
Denominator for diluted
earnings per share-
Adjusted weighted-
average shares 6,304,783 6,348,304 6,307,536 6,360,975
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings (loss) per common share $ 0.03 $ 0.04 $ 0.02 $ 0.10
-------- -------- -------- -------
-------- -------- -------- -------
Earnings (loss) per common share-
assuming dilution $ 0.03 $ 0.04 $ 0.02 $ 0.10
-------- -------- -------- -------
-------- -------- -------- -------
</TABLE>
9
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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 and nine month periods ended June 30,
1998, revenues from the sale of document production equipment decreased 4%
and 1%, respectively, primarily due to reduced sales by the Company's
Australian and United Kingdom subsidiaries offset by increased sales into
Latin America. 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, such as Latin America, Asia and
Africa. The present currency crisis in Asia has limited the Company's current
opportunities to sell high-end capital equipment into that region. Document
production revenues for the third quarter of fiscal 1998 include
approximately $1,500,000 from the sale of the first three units of the
Company's new Imaggia product line.
For the three and nine month periods ended June 30, 1998, revenues for
maintenance contracts, spare parts, supplies and consumable items decreased
1% and 3% respectively, primarily due to the timing of purchases of supplies
and consumables by certain major customers, a reduction in maintenance and
consumables revenue from Pacific Rim customers and the effect of exchange
rates.
The gross margin percentages for the three and nine month periods ended June
30, 1998, were 57% and 58% respectively, compared to 59% and 60% in the
comparable prior periods. 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, 1998, decreased 5% and 2% respectively over the
comparable periods last year. Research and development expenses increased 17%
and 16% over the comparable periods 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 $39,000 and a loss for the nine months ended June 30, 1998, of $6,000. For
the prior year the Company had an unrealized exchange loss of $47,000 and
$79,000, respectively. 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 $0.03 per share as compared to net
income of $0.04 per share in the comparable period. For the nine month
period, net income amounted to $0.02 per share as compared to net income of
$0.10 per share in the comparable period last year. The decrease was
primarily attributable to the effect of the reduction in gross margins and
the increased level of research and development expenses.
10
<PAGE>
Factors Affecting Results of Operations
The Company is completing development of a new family of check production
systems, called IMAGGIA. The Company has selected the Gemini digital print
technology, which is being developed by Delphax Systems, as the print engine
for the IMAGGIA system. Over the course of the development, the Company has
experienced delays 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 assurance can be given that further delays will not occur
or that the product's launch will be successful. 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 quarter to quarter because: (i) the Company's
sales cycle is relatively long; (ii) the size of orders may 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 period to period.
Liquidity and Capital Resources
Working capital was essentially unchanged at $17,589,000 at September 30,
1997, compared to $17,663,000 at June 30, 1998. Cash and short-term
investments amounted to $7,825,000 at June 30, 1998, compared to $8,459,000
at September 30, 1997. Stockholders' equity was $18,630,000 at June 30, 1998,
compared to $18,680,000 at September 30, 1997.
The Company's long-term debt to equity ratio was less than 0.01 at June 30,
1998, and at September 30, 1997. The Company maintains a $2.5 million
unsecured bank line of credit. At June 30, 1998, the line was unused. The
credit agreement expires March 31, 1999 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 1998.
At June 30, 1998, the Company had no material commitments for capital
expenditures.
11
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Cautionary Statement
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, in the Company's 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.
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.
12
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
The deadline for submission of shareholder proposals pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended, for inclusion in the
Company's proxy statement for its 1999 Annual Meeting of Shareholders is
October 2, 1998. Additionally, if the Company receives notice of a
shareholder proposal before January 2, 1999 or after January 27, 1999, such
proposal will be considered untimely pursuant to Rules 14a-4 and 14a-5(e) and
the persons named in proxies solicited by the Board of Directors of the
Company for its 1999 Annual Meeting of Shareholders may exercise
discretionary voting power with respect to such proposal.
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 June 30, 1998.
13
<PAGE>
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 14, 1998 /s/ Jay A. Herman
-------------------------- ---------------------------------
Jay A. Herman
President and Chief Executive Officer
Date August 14, 1998 /s/ Paul W. B. Stephenson
-------------------------- ---------------------------------
Paul W.B. Stephenson
Vice President, Finance and Administration
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 5,354,416
<SECURITIES> 2,470,993
<RECEIVABLES> 3,441,535
<ALLOWANCES> 50,000
<INVENTORY> 9,154,626
<CURRENT-ASSETS> 22,252,359
<PP&E> 4,081,960
<DEPRECIATION> 3,099,193
<TOTAL-ASSETS> 23,235,126
<CURRENT-LIABILITIES> 4,604,709
<BONDS> 0
0
0
<COMMON> 633,032
<OTHER-SE> 17,997,385
<TOTAL-LIABILITY-AND-EQUITY> 23,235,126
<SALES> 17,815,494
<TOTAL-REVENUES> 17,815,494
<CGS> 7,489,299
<TOTAL-COSTS> 17,853,108
<OTHER-EXPENSES> (245,400)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 207,786
<INCOME-TAX> 80,000
<INCOME-CONTINUING> 127,786
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 127,786
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
