<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 December 31, 1997
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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
- --------------------------------------------- --------------------
(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 - - 6,343,745 shares as of February 10, 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 -- December 31, 1997 and
September 30, 1997.
Condensed consolidated statements of operations -- Three months
ending December 31, 1997 and 1996.
Condensed consolidated statements of cash flows -- Three months
ending December 31, 1997 and 1996.
Condensed consolidated statements of stockholders' equity -- Three
months ending December 31, 1997 and 1996.
Condensed notes to consolidated financial statements -- December 31,
1997.
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
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,087,072 $ 3,165,601
Short-term investments 4,031,812 5,293,849
Accounts receivable less allowance for doubtful accounts of $50,000 3,574,164 3,526,551
Inventories
Raw materials and component parts 5,161,170 5,700,807
Work-in-process 738,710 461,529
Finished Goods 3,161,251 1,887,380
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9,061,131 8,049,716
Deferred income taxes 1,011,065 1,092,259
Other current assets 774,974 673,528
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TOTAL CURRENT ASSETS 21,540,218 21,801,504
EQUIPMENT AND FIXTURES
Machinery and equipment 2,079,505 2,603,516
Furniture and fixtures 1,743,038 1,737,969
Leasehold improvements 266,839 252,685
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4,089,382 4,089,393
Less accumulated depreciation and amortization 3,009,528 2,928,404
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1,079,854 1,169,989
TOTAL ASSETS $ 22,620,072 $ 22,971,493
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</TABLE>
See notes to consolidated financial statements.
3
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LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,612,550 $ 2,603,516
Employee compensation and related taxes 713,238 672,492
Income taxes payable 268,585 425,868
Deferred revenue 498,204 469,127
Current portion of capital lease obligations 38,251 41,925
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TOTAL CURRENT LIABILITIES 4,130,828 4,212,928
Capital lease obligations -- less current portion 65,657 78,903
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TOTAL LIABILITIES 4,196,485 4,291,831
STOCKHOLDERS' EQUITY
Capital Stock
Common Stock-par value $.10 per share-authorized
25,000,000 shares; issued and outstanding
December 31, 1997--6,336,745 shares;
September 30, 1997--6,338,135 shares 633,675 633,814
Additional paid in capital 17,115,625 17,151,182
Foreign currency translation adjustment (985,936) (851,225)
Retained earnings 1,660,223 1,745,891
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TOTAL STOCKHOLDERS' EQUITY 18,423,587 18,679,662
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,620,072 $ 22,971,493
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</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 Months Ending
December 31,
1997 1996
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<S> <C> <C>
Sales:
Printing equipment $ 1,592,552 $ 1,735,750
Maintenance, spares and supplies 3,560,188 3,752,142
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Net sales 5,152,740 5,487,892
Costs and expenses:
Cost of sales 2,035,689 2,071,255
Selling, general and administrative 2,768,006 2,798,014
Research and development 662,180 591,865
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5,465,875 5,461,134
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(Loss) income from system sales and service (313,135) 26,758
Interest (income) (94,491) (94,593)
Unrealized exchange loss (gain) 1,461 (3,649)
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(Loss) income before taxes (220,105) 125,000
Income taxes (72,000) 25,000
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Net (loss) income $ (148,105) $ 100,000
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(Loss) earnings per common share $ (0.02) $ 0.02
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(Loss) earnings per common share - assuming dilution $ (0.02) $ 0.02
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Weighted average number of shares and share equivalents
outstanding during the period 6,262,745 6,217,727
Weighted average number of shares and share equivalents
outstanding during the period - assuming dilution 6,262,745 6,387,026
</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>
Three Months Ending
December 31,
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (148,105) $ 100,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 98,328 110,218
Other (5,977) 31,480
Changes in operating assets and liabilities:
Accounts receivable (130,474 (1,459,019)
Inventories (1,087,302) (1,374,517)
Other current assets (39,226) (196,456)
Accounts payable and accrued expenses (93,368) 778,396
Deferred revenue 41,547 33,452
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NET CASH (USED IN) OPERATING ACTIVITIES (1,364,577) (1,976,446)
INVESTING ACTIVITIES
Purchase of equipment and fixtures (41,760) (137,818)
Proceeds from sale of equipment 17,277 13,464
Purchase of short-term investments (2,310,144) (6,963,009)
Proceeds from sale of short-term investments 3,658,393 5,881,840
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NET CASH (USED IN) INVESTING ACTIVITIES (1,323,766) (1,205,523)
FINANCING ACTIVITIES
Addition of capital leases 0 60,506
(Purchase) issuance of Common Stock (35,696) 0
Repayment of capital leases (6,671) (25,331)
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NET CASH (USED IN ) FROM FINANCING ACTIVITIES (42,367) 35,175
EFFECT OF EXCHANGE RATE CHANGES ON CASH 4,649 36,590
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(DECREASE) IN CASH & CASH EQUIVALENTS (78,529) (3,110,204)
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 $ 3,087,072 $ 1,741,079
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</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 (148,105)
Purchase of common stock (1390) (139) (6,463)
Vesting of restricted stock
including tax effect of
$(29,100) (29,094) 62,437
Foreign currency translation (134,711)
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Balance December 31, 1997 6,336,745 $ 633,675 17,115,625 $ (985,936) $ 1,660,223
---------- ---------- ---------- ----------- ------------
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</TABLE>
See notes to consolidated financial statements.
7
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 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, 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)
December 31, 1997
NOTE B -- Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Month Period
Ended December 31,
1997 1996
----------- -----------
<S> <C> <C>
Numerator:
Net (Loss) Income (148,105) 100,000
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Numerator for basic and diluted earnings per share -
(loss) income applicable to common stockholders (148,105) 100,000
Denominator:
Denominator for basic earnings per share -
weighted-average shares 6,262,745 6,217,727
Effect of dilutive securites:
Employee stock options 0 161,721
Employee stock grants 0 7,578
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Dilutive potential common shares 0 (a) $ 169,299
Denominator for diluted earnings per share -
adjusted weighted-average shares 6,262,745 6,387,026
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(Loss) earnings per common share $ (0.02) $ 0.02
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(Loss) earnings per common share - assuming dilution $ (0.02) (a) $ 0.02
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</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 month period ended December 31, 1997,
revenues from the sale of document production equipment declined 9% over the
comparable quarter in the prior year. The decrease 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, 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 month period ended December 31, 1997, revenues for maintenance
contracts, spare parts, supplies and consumable items decreased 5% over the
comparable quarter in the prior year, primarily due to the effect of exchange
rates and timing of purchases of supplies and consumables by certain major
customers.
The gross margin percentage for the three month period ended December 31, 1997,
was 60% compared to 62% 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, 1997, decreased 1% over the comparable period last year.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 loss for the current quarter of
$1,500 compared to an unrealized exchange gain of $4,000 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 loss for the quarter amounted to $(0.02) per share as compared to net income
of $0.02 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.
10
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Factors Affecting Results of Operations
The Company is developing a new product line, named the IMAGGIA line, 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 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 period to period.
Liquidity and Capital Resources
Working capital decreased from $17,589,000 at September 30, 1997, to $17,409,000
at December 31, 1997. Cash and short term investments amounted to $7,119,000 at
December 31, 1997, compared to $8,459,000 at September 30, 1997. Stockholders'
equity was $18,424,000 at December 31, 1997, compared to $18,680,000 at
September 30, 1997.
The Company's long-term debt to equity ratio was less than 0.01 at December
31, 1997, and at September 30, 1997. The Company maintains a $2.5 million
unsecured bank line of credit. At December 31, 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
1998.
At December 31, 1997, the Company had no material commitments for capital
expenditures.
11
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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, 1997.
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 February 13, 1998 /s/ Jay A. Herman
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Jay A. Herman
President and Chief Executive Officer
Date February 13, 1998 /s/ Paul W. B. Stephenson
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Paul W.B. Stephenson
Vice President, Finance and
Administration
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000350692
<NAME> CHECK TECHNOLOGY CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,087,072
<SECURITIES> 4,031,812
<RECEIVABLES> 3,624,164
<ALLOWANCES> 50,000
<INVENTORY> 9,061,131
<CURRENT-ASSETS> 21,540,218
<PP&E> 4,089,382
<DEPRECIATION> 3,009,528
<TOTAL-ASSETS> 22,620,072
<CURRENT-LIABILITIES> 4,130,828
<BONDS> 0
0
0
<COMMON> 633,675
<OTHER-SE> 17,789,912
<TOTAL-LIABILITY-AND-EQUITY> 22,620,072
<SALES> 5,152,740
<TOTAL-REVENUES> 5,152,740
<CGS> 2,035,689
<TOTAL-COSTS> 5,465,875
<OTHER-EXPENSES> (93,030)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (220,105)
<INCOME-TAX> (72,000)
<INCOME-CONTINUING> (148,105)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (148,105)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
