<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 March 31, 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 (IRS Employer Identification No.)
of incorporation or organization)
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
- -------------------------------------------------------------------------------
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 May 11, 1998
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1
<PAGE>
INDEX
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- March 31, 1998 and September
30, 1997.
Condensed consolidated statements of operations -- Three months ended
March 31, 1998 and 1997, and six months ended March 31, 1998 and 1997.
Condensed consolidated statements of cash flows -- Six months ended
March 31, 1998 and 1997.
Condensed consolidated statements of stockholders' equity -- Six
months ended March 31, 1998.
Condensed notes to consolidated financial statements -- March 31,
1998.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
PART II. OTHER INFORMATION
- --------------------------
Item 4. Submission of Matter to a Vote of Security Holders
Item 6. Exhibits and reports on Form 8-K
SIGNATURES
- ----------
2
<PAGE>
Part I. FINANCIAL INFORMATION
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,583,704 $ 3,165,601
Short-term investments 3,684,911 5,293,849
Accounts receivable less allowance for doubtful accounts
of $50,000 4,559,465 3,526,551
Inventories
Raw materials and component parts 4,938,042 5,700,807
Work-in-process 543,902 461,529
Finished Goods 3,563,570 1,887,380
------------- -------------
9,045,514 8,049,716
Deferred income taxes 996,779 1,092,259
Other current assets 727,828 673,528
------------- -------------
TOTAL CURRENT ASSETS 21,598,201 21,801,504
EQUIPMENT AND FIXTURES
Machinery and equipment 2,084,620 2,107,739
Furniture and fixtures 1,755,300 1,737,969
Leasehold improvements 266,522 252,685
------------- -------------
4,106,442 4,098,393
Less accumulated depreciation and amortization 3,077,289 2,928,404
------------- -------------
1,029,153 1,169,989
------------- -------------
TOTAL ASSETS $ 22,627,354 $ 22,971,493
------------- -------------
------------- -------------
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, September 30,
1998 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,808,634 $ 2,603,516
Employee compensation and related taxes 578,048 672,492
Income taxes payable 157,081 425,868
Deferred revenue 453,212 469,127
Current portion of capital lease obligations 38,577 41,925
------------- -------------
TOTAL CURRENT LIABILITIES 4,035,552 4,212,928
Capital lease obligations -- less current portion 29,333 78,903
------------- -------------
TOTAL LIABILITIES 4,064,885 4,291,831
STOCKHOLDERS' EQUITY
Capital Stock
Common Stock--par value $.10 per share--authorized
25,000,000 shares; issued and outstanding
March 31, 1998--6,338,320 shares;
September 30, 1997--6,338,135 shares 633,832 633,814
Additional paid in capital 17,039,714 17,151,182
Foreign currency translation adjustment (1,046,361) (851,225)
Retained earnings 1,935,284 1,745,891
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TOTAL STOCKHOLDERS' EQUITY 18,562,469 18,679,662
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,627,354 $ 22,971,493
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ending March 31, Ending March 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales:
Printing equipment $ 2,525,089 $ 2,332,374 $ 4,117,641 $ 4,068,123
Maintenance, spares and supplies 3,804,059 3,868,823 7,364,247 7,620,966
------------ ------------ ------------ ------------
Net Sales 6,329,148 6,201,197 11,481,888 11,689,089
Costs and expenses:
Cost of sales 2,700,082 2,480,966 4,735,771 4,552,221
Selling, general and administrative 2,810,500 2,803,578 5,578,506 5,601,591
Research and Development 712,772 592,201 1,374,952 1,184,066
------------ ------------ ------------ ------------
6,223,354 5,876,745 11,689,229 11,337,878
------------ ------------ ------------ ------------
Income from system sales and service 105,794 324,452 (207,341) 351,211
Interest (income) (75,916) (82,654) (170,407) (177,247)
Unrealized exchange loss (gain) 43,908 35,403 45,369 31,754
------------ ------------ ------------ ------------
Income before taxes 137,802 371,703 (82,303) 496,704
Income taxes 50,000 130,000 (22,000) 155,000
------------ ------------ ------------ ------------
Net Income $ 87,802 $ 241,703 $ (60,303) $ 341,704
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings (loss) per common share $ 0.01 $ 0.04 $ (0.01) $ 0.05
------------ ------------ ------------ ------------
Earnings (loss) per common share -
assuming dilution $ 0.01 $ 0.04 $ (0.01) $ 0.05
------------ ------------ ------------ ------------
Weighted average number of shares
and share equivalents outstanding
during the period 6,279,534 6,217,905 6,271,047 6,217,815
Weighted average number of shares and
share equivalents outstanding during
the period - assuming dilution 6,312,434 6,345,105 6,271,047 6,367,311
</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>
Six Months Ending
March 31,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (60,303) $ 341,704
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 185,040 200,326
Other 124,169 55,557
Changes in operating assets and liabilities:
Accounts receivable (1,087,221) (517,242)
Inventories (1,143,881) (1,008,554)
Other current assets 23,865 (248,863)
Accounts payable and accrued expenses (136,043) (110,577)
Deferred revenue (6,461) (30,113)
------------- -------------
NET CASH (USED IN) OPERATING ACTIVITIES (2,100,835) (1,317,762)
INVESTING ACTIVITIES
Purchase of equipment and fixtures (97,619) (213,582)
Proceeds from sale of equipment 38,396 28,365
Purchase of short-term investments (4,093,361) (10,523,972)
Proceeds from sale of short-term investments 5,833,980 11,870,000
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NET CASH PROVIDED BY INVESTING ACTIVITIES 1,681,396 1,160,811
FINANCING ACTIVITIES
Addition of capital leases 87,657
(Purchase) issuance of common stock (121,692) 3,332
Repayment of note receivable from stock sale 10,242 10,130
Repayment of capital leases (44,410) (55,602)
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NET CASH (USED IN ) FROM FINANCING ACTIVITIES (155,860) 45,517
EFFECT OF EXCHANGE RATE CHANGES ON CASH (6,598) (51,766)
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(DECREASE) IN CASH & CASH EQUIVALENTS (581,897) (163,200)
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 $ 2,583,704 $ 4,688,083
------------- -------------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Additional Paid- Currency
Common Stock 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 (60,303)
Exercise of stock options
including tax benefit
of $8,393 15,000 1,500 44,392
Purchase of common stock (1,390) (139) (6,463)
Cancellation of restricted stock (13,425) (1,343) (130,545) 131,888
Payment of note receivable 10,242
Vesting of restricted stock
including tax effect
of $(29,094) (29,094) 117,808
Foreign currency translation (195,136)
---------- ------------- ----------------- ------------ ------------
Balance March 31, 1998 6,338,320 $ 633,832 $ 17,039,714 $ (1,046,361) $ 1,935,284
---------- ------------- ----------------- ------------ ------------
---------- ------------- ----------------- ------------ ------------
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 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 123
replaced the previously reported primary and 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)
March 31, 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 Six Month Period
Ended March 31, Ended March 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net Income (Loss) 87,802 241,703 (60,303) 341,704
------------ ------------ ------------ ------------
Numerator for basic and
diluted earnings per share -
income(loss) applicable to
common stockholders 87,802 241,703 (60,303) 341,704
Denominator:
Denominator for basic
earnings per share -
Weighted-average shares 6,279,534 6,217,905 6,271,047 6,217,815
Effect of dilutive securites:
Employee stock options 17,292 120,350 0 142,278
Employee stock grants 15,608 6,850 0 7,218
------------ ------------ ------------ ------------
Dilutive potential common shares 32,900 127,200 0 (a) 149,496
Denominator for diluted
earnings per share -
Adjusted weighted-
average shares 6,312,434 6,345,105 6,271,047 6,367,311
------------ ------------ ------------ ------------
Earnings (loss) per common share $ 0.01 $ 0.04 $ (0.01) $ 0.05
------------ ------------ ------------ ------------
Earnings (loss) per common share -
assuming dilution $ 0.01 $ 0.04 $ (0.01) (a) $ 0.05
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
a--No incremental shares related to options are included because the impact
would be antidilutive.
9
<PAGE>
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 six month periods ended March 31,
1998, revenues from the sale of document production equipment increased 8%
and 1% respectively, primarily due to improved sales in the North and South
American market, offset by reduced sales in the Asian market. 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.
For the three and six month periods ended March 31, 1998, revenues for
maintenance contracts, spare parts, supplies and consumable items decreased
2% and 3% , primarily due to the effect of exchange rates and timing of
purchases of supplies and consumables by certain major customers.
The gross margin percentages for the three and six month periods ended March
31, 1998, were 57% and 59% respectively, compared to 60% and 61% in the
comparable prior period. The changes were primarily due to changes in
product mix.
Selling, general and administrative expenses during the three and six month
periods ended March 31, 1998, remained unchanged over the comparable period
last year. Research and development expenses increased 20% and 16% over the
comparable period last year. The increase was due primarily to the timing of
expenditures on the Company's program to develop a new family of check
production systems.
The Company had an unrealized currency exchange loss for the current quarter
of $44,000 and a loss for the six months ended March 31, 1998, of $45,000.
For the prior year the Company had an unrealized exchange loss of $35,000 and
$32,000, 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 $0.01 per share as compared to net
income of $0.04 per share in the comparable period. For the sixth month
period, net loss amounted to $(0.01) per share as compared to net income of
$0.05 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 $17,563,000 at March 31, 1998. Cash and short term
investments amounted to $6,269,000 at March 31, 1998, compared to $8,459,000
at September 30, 1997. Stockholders' equity was $18,562,000 at March 31,
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 March 31,
1998, and at September 30, 1997. The Company maintains a $2.5 million
unsecured bank line of credit. At March 31, 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 March 31, 1998, the Company had no material commitments for capital
expenditures.
11
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on March 19, 1998. The
shareholders took the following actions: (i) The shareholders elected five
directors to serve for a term ending in 1999 and until their successors are
elected. The shareholders present in person or by proxy cast the following
numbers of votes in connection with the election of directors, resulting in
the election of all of the nominees:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
Robert Reznick 4,779,537 117,490
Jay A. Herman 4,785,258 111,769
Thomas H. Garrett, III 4,820,758 76,269
Gary R. Holland 4,780,258 116,769
Oscar Victor 4,774,337 122,690
</TABLE>
(ii) The shareholders approved the selection of Ernst & Young as the
Company's independent public accountants for 1998. 4,843,259 votes were cast
for the resolution; 42,815 votes were cast against the resolution; 10,953
shares represent votes abstained.
(iii) The shareholders ratified and approved the adoption of the 1997 Stock
Plan. 2,155,226 votes were cast against for the resolution; 851,669 votes
were cast against the resolution; 88,544 shares represent votes abstained;
1,801,558 shares represent broker non-vote.
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended March 31, 1998.
12
<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 May 13, 1998 /s/ Jay A. Herman
- --------------------------- ----------------------------
Jay A. Herman
President and Chief Executive Officer
Date May 13, 1998 /s/ Paul W. B. Stephenson
- --------------------------- ----------------------------
Paul W.B. Stephenson
Vice President, Finance and Administration
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 2,583,704
<SECURITIES> 3,684,911
<RECEIVABLES> 4,609,465
<ALLOWANCES> 50,000
<INVENTORY> 9,045,514
<CURRENT-ASSETS> 21,598,201
<PP&E> 4,106,442
<DEPRECIATION> 3,077,289
<TOTAL-ASSETS> 22,627,354
<CURRENT-LIABILITIES> 4,035,552
<BONDS> 0
0
0
<COMMON> 633,832
<OTHER-SE> 17,928,637
<TOTAL-LIABILITY-AND-EQUITY> 22,627,354
<SALES> 11,481,888
<TOTAL-REVENUES> 11,481,888
<CGS> 4,735,771
<TOTAL-COSTS> 6,953,458
<OTHER-EXPENSES> (125,038)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (82,303)
<INCOME-TAX> (22,000)
<INCOME-CONTINUING> (60,303)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60,303)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>