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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Annual report pursuant to section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the fiscal year ended September 30, 1998
Commission File Number: 0-10691
CHECK TECHNOLOGY CORPORATION
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1392000
- ---------------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
12500 Whitewater Drive, Minnetonka, Minnesota 55343-9420
- --------------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 939-9000
--------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.10 par value)
(Title of Class)
--------------------
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 period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 60 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $19,126,877 at December 1, 1998 when the closing
price of such stock, as reported by NASDAQ, was $3.25.
There were 6,166,240 shares outstanding of Registrant's $.10 par value common
stock as of December 1, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the definitive proxy statement to be filed with the Commission
within 120 days after the end of the registrant's fiscal year are
incorporated by reference into Part III
This Form 10-K consists of 48 pages (including exhibits). The index is set forth
on page 15.
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PART I
ITEM 1. BUSINESS
COMPANY BACKGROUND
Check Technology Corporation (the Company) was formed in 1981 to design and
manufacture a sophisticated printing system. The original product concept for
the Company was a computerized financial document production system, which
integrated many of the functions required for the production of checkbooks.
These functions included (i) automatic collation of checkbook components, (ii)
high quality alphanumeric and graphics printing for customer personalization and
bank address, and (iii) consistent Magnetic Ink Character Recognition (MICR)
printing for the electronic processing of checks. Shipments of its first system,
the Model 2000 CHECKTRONIC -Registered Trademark-, began in 1983.
Within a short time after the introduction of the CHECKTRONIC system, the
Company recognized the product's applicability in such areas as insurance claim
production and centralized funds disbursements. The latter includes payroll and
accounts payable checks. These are called "Checkwriting" applications by the
Company. Checkwriting typically requires a high level of security (e.g., secure
operator access and the ability to produce an audit trail after a batch of
checks is produced). The Company developed sophisticated control
software/hardware, which met these stringent operating requirements. This
security capability is offered as an option on many of the Company's systems and
differentiates the Company's products from many competitors' products.
The Company has had a significant presence in the international check production
marketplace since 1983. The integration of the check production functions
described above was found to result in the cost effective production of the
small check order sizes common to most markets outside the United States. The
production cost reductions for orders of 25-100 checks, as well as the
improvement in printing quality, created a demand for the Company's systems in
many international markets. In order to manage this demand and to provide the
necessary technical support of the products after installation in the field, the
Company opened its first subsidiary, Check Technology Limited, in England in
1983. The Company opened its French and Australian subsidiaries in 1987. At
September 30, 1998, the Company had an installed base of over 400 systems
located in 49 countries.
BUSINESS
The Company's business is the design, manufacture, sale and service of
computerized financial document production systems. The systems can collate,
personalize and encode documents into packages tailored to the customer's
requirements. The systems are sold through the Company and its international
subsidiaries.
PRODUCTS
Check Technology sells a complete family of electronic production systems for
use in both cut-sheet and continuous forms production environments. These
systems can be used for four basic applications: folio production, insurance
claims, fulfillments, and disbursements. Folio production includes the printing
of checkbooks and financial payment coupon books. Insurance claim applications
consist of explanation of benefit forms and insurance claim checks. Fulfillment
applications include coupons and rebate checks, while disbursement applications
include accounts payable checks and payroll checks. These electronic production
systems enable companies, banks and government customers to easily and quickly
transform blank paper stock into fully collated checks and forms.
Cut Sheet Production Systems. During fiscal 1998, the Company launched
commercially the IMAGGIA MG20-Registered Trademark- product. Designed to
respond to the changing demands of security printers and on-demand
applications worldwide, the IMAGGIA system utilizes state-of-the-art digital,
non-impact technology, offering print quality that is visually
indistinguishable from offset print. The Company's other cut-sheet system is
the CHECKTRONIC series. The CHECKTRONIC series uses a combination of
ion-deposition and impact technology. The Company markets four CHECKTRONIC
models to customers with medium to high volume folio production, insurance
claim, fulfillment and disbursement applications. The Model 1750X operates at
a rated speed of 45 pages per minute, while the Models 2100X, 4000X and 4500X
operate at 60, 90 and 120 pages per minute, respectively. The CHECKTRONIC
series can be purchased with advanced security/audit capability. The
Company's CHECKTRONIC systems provide their owners with the flexibility,
reliability and consistency to produce high quality documents while reducing
production costs.
Continuous Form Production Systems. The Company's CheckPrinter series consists
of continuous form systems. These systems are available as either stand-alone
MICR printers or as tandem systems. The Model 930 and Model 960 operate at over
300 and 600 documents per minute, respectively. These two models utilize impact
technology to produce high quality MICR characters.
Finishing Unit. In addition to the document production systems, the Company
offers a finishing system to complement its cut-sheet product line. The
FOLIOTRONIC -Registered Trademark- system incorporates a blend of proven
concepts with new designs and advanced microprocessor controls. The FOLIOTRONIC
system consists of a guillotine and stitcher/binder module. Its rated throughput
is up to
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2,000 books per hour. When used with the Company's electronic production
systems, the FOLIOTRONIC system enables customers with folio production
applications to transform blank paper stock into finished books.
Service and Maintenance. Service and maintenance revenue results from the sale
of maintenance contracts, the sale of proprietary consumable and supply items
and the sale of spare parts to customers who have purchased the Company's
equipment. Supplies are operating materials that are consumed during normal
operation of the Company's systems. Examples of these supplies are MICR ribbon
consumed in the printing of each MICR code line and toner, which is consumed in
the personalization of each document. The Company believes that its service
network and spare parts business operated profitably for the years ended
September 30, 1998, 1997 and 1996, based upon the economies of scale achieved
from the expansion of the installed base of the Company's financial document
production equipment.
The Company employs customer engineers at each of its operating units. For
customers who purchase maintenance contracts after the warranty period, which
typically is 90 days from customer acceptance of a system, the Company provides
ongoing customer support through its service network, for which it charges for
time and materials on an annual service contract basis. Some customers elect to
provide their own maintenance and service on the system they have purchased.
Historically warranty service expense has not been significant to the Company
after the initial units of a new product have been placed with customers. While
the Company believes it will have a similar experience with the IMAGGIA, it does
not yet have the experience base to determine if this will be the case.
SALES AND MARKETING
Organization. The Company's system sales are made predominately through direct
sales personnel based in the United States and abroad. Marketing activities for
the Company and its subsidiaries are centralized at the Company's headquarters
in Minnetonka, Minnesota USA. These activities include the development and
implementation of product pricing, advertising and public relations strategies.
In addition, the Company utilizes market research and market development
resources in order to anticipate changes in the Company's competitive
environment.
United States Market. The market in the United States for checks and other
financial documents is the largest in the world, notwithstanding the fact that
the annual consumption of checks has shown a slowing growth rate over the last
five years. The Company believes that alternatives to the check document such as
debit and credit cards will eventually reduce the number of checks used,
although the size and rate of reduction is difficult to predict. It is estimated
that other documents produced by the Company's systems have shown higher growth
rates over the same period. These documents include payment coupons, tax payment
and other installment payment products.
Disbursement activities, such as insurance claims and payroll operations
(collectively called Checkwriting applications by the Company) have been
affected by alternative payment technologies. These substitutes include
Electronic Funds Transfer (EFT) and Electronic Data Interchange (EDI). Although
these alternatives comprise only a small percentage of total payment
transactions in the United States, they are expected to have an increasingly
significant impact on U.S. disbursement activities over the next ten years.
The Company's systems have also been sold in the United States primarily to
check printers, payment coupon producers, service bureaus and large
corporations. These organizations all have requirements for the production of
personalized encoded document packages such as small personal check orders,
installment payment books, payroll, payables and insurance claims checks. The
Company expects to continue to increase its installed system base in the United
States.
International Market. The market for the Company's products outside the United
States has been primarily in personalized check production. The average
personalized check order size in most international markets is between 25 and
100 checks. These small order sizes are produced cost effectively on the
Company's products because of their automatic collation capabilities. Stringent
MICR quality standards, enforced by the major clearing banks in most
international markets, are also met by the Company's high quality MICR printing
capabilities. As a result of these market factors, the Company has had success
in penetrating the largest personal check production markets outside of the
United States. These include Australia, Brazil, France, Mexico, Spain and the
United Kingdom.
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COMPETITION
The Company's products are sold into a number of different market segments.
Competition will differ depending on the segment and application in which the
Company competes. Many of the Company's competitors are well established and
have significantly greater access to financial, technical and personnel
resources. The Company believes that the sale of the IMAGGIA family of check
production systems is critical to its ability to remain competitive in the
markets it serves. See "Research and Development".
Folio production involves the manufacture of checkbooks and payment coupon
books. In the United States, check production is dominated by a small number of
companies such as Deluxe Corporation (St. Paul, Minnesota), John H. Harland
Company (Decatur, Georgia), and Clarke American (San Antonio, Texas), all of
which are customers of Check Technology Corporation. Competitive standards for
alphanumeric print quality, MICR print quality and delivery time in this segment
are established by these major players. All of these market standards must be
met or surpassed by any new market competitor or production technology in order
to capture a substantial share of the United States personal check market. To
date, the Company has been able to establish itself only in the production of
new account kits, money market checkbooks and other applications which do not
require offset or letterpress quality. The IMAGGIA family of check production
systems has been designed to provide entry into the US check production market.
See "Research and Development".
The Company has had success in the United States folio production segment
involved in the production of personalized payment books such as installment
loan and tax payment books. This market is dominated by a small number of
companies such as NCP (Birmingham), Cummins Allison (Indianapolis) and Venture
Encoding (Dallas). The predominant personal checkbook manufacturers discussed
above also produce payment books. The Company's products have found market
acceptance in this segment because they provide the efficiency, reliability and
production flexibility sought by this segment. Xerox (United States) and Siemens
(West Germany) are presently the Company's major competition for the production
of payment books.
International folio production markets, like the United States payment book
production market, are also driven more by cost and production efficiency
factors than by alphanumeric print quality standards. In addition, enforcement
of high MICR standards by the clearing banks in most international markets makes
MICR printing quality an extremely important competitive factor. The Company's
CHECKTRONIC family of products has found a high degree of acceptance in the
international market segments because these systems provide the efficiency,
production flexibility and MICR quality sought by the major check producers. The
Company competes in the international marketplace with Troy, Xerox, Siemens and
Nipson Bull.
The centralized high volume production of insurance claims and check
disbursements does not require extensive collation. For this reason the Company
finds many competitors in this market segment. Specific competitors include
Xerox, Siemens, Troy, and IBM (United States). The Company's products offer
security and audit control, which for companies that generate many checks is a
significant advantage as it restricts unauthorized access to data printed on
Check Technology systems. The Company's security/audit capability also
physically tracks the total number of documents printed and maintains a running
total of the dollar amounts printed in each run.
BACKLOG
At December 1, 1998, the Company had a backlog of approximately $3,000,000 as
compared to a backlog of $3,500,000 as of December 1, 1997. The Company defines
its backlog as purchase orders, which are unfilled. Because of customer changes
in delivery schedules and potential cancellation of orders, the Company's
backlog as of any particular date may not be representative of the Company's
actual sales for any succeeding fiscal period. The Company's equipment is
manufactured to orders received, and to date the Company has never been in a
position where it was unable to meet a scheduled shipment date because of
excessive order backlog. During fiscal year 1998, there were periods when the
Company had only a nominal backlog. The Company expects that it will continue to
have periods during which there will be little or no backlog.
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MANUFACTURING AND SOURCES OF SUPPLY
Since the Company has not developed a sustained backlog, it has adopted a
manufacturing process to enable it to produce a "generic" product that can be
quickly configured to a customer's specific order without rework. This process
has enabled the Company to begin manufacturing without firm final orders. As a
result, the Company has been able to reduce manufacturing parts and material
inventories while, at the same time, being able to respond quickly to new
orders.
The components of the Company's financial document production systems are
manufactured by outside vendors, tested and then incorporated into the systems
by Company personnel. While the Company uses only one source for many of the key
components of its printing systems, most components, with the exception of the
non-impact alphanumeric printer and the MICR printer hammer bank component, are
available from multiple sources. However, many of the critical components of the
Company's systems would require redesign if new vendors were used.
The non-impact alphanumeric printers and associated spare parts and consumables
for both the CHECKTRONIC and the IMAGGIA systems are supplied to the Company by
Delphax Systems, which has its manufacturing facilities in Toronto, Canada.
Delphax has been the supplier of the printers used in the Company's systems
since the Company's inception. Xerox, one of the Company's competitors, owned a
one third partnership interest in Delphax for many years and in November 1997
acquired the remaining equity of Delphax. In connection with this acquisition,
Xerox has advised the Company that its intention is to have Delphax comply with
all of Delphax's existing contractual obligations to the Company, that Xerox
hopes to expand Delphax's relationship with the Company in the future and that
Xerox does not anticipate that the competitive relationship between the Company
and Xerox will be a factor in the relationship of Delphax with the Company. The
expressed intentions of Xerox could change to the detriment of the Company. No
assurance can be given at this time that the Company will be able to secure a
replacement source of supply for the alphanumeric printers supplied by Delphax.
RESEARCH AND DEVELOPMENT
Since its formation, the Company's research and development activities have been
focused on the development of computerized printing systems capable of producing
on a precision basis financial documents at required speeds and volumes. The
Company is completing development of a new family of check production systems,
called Imaggia, which is targeted at the high volume U.S. check market as well
as offering potential for increasing the Company's international business. The
Company is using Delphax Systems Gemini digital printing technology as the
initial print engine for the Imaggia system. Delays have occurred in introducing
the system, 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. No assurances can be given that the product will be
successful in the market place or that further product engineering delays will
not occur.
During fiscal 1998 the Company has continued product engineering on the Imaggia
system to improve its performance to meet market demands. The Company expects
that product engineering efforts seeking further improvements and enhancements
will be on-going. The Company has also continued product engineering on its
established product lines. The Company's research and development expenditures
were $2,728,000, $2,521,000 and $2,206,000 for the years ended September 30,
1998, 1997 and 1996 respectively.
PATENTS
In July 1997, the Company received a patent covering certain aspects of its
IMAGGIA printing system. In prior years, the Company has received patents
covering the Model 2000 CHECKTRONIC printing system, its fusing process and the
autotaper for the FOLIOTRONIC system. There is no assurance that such patents
will afford the Company any competitive advantage. The Company believes that its
future success will depend primarily upon the technical competence and creative
skills of its personnel rather than on patents. The Company cannot be assured
that its printing system, or any components of such system, will not be covered
in whole or part by existing patents. Although the Company is not presently
aware of such patents, the Company could be required to obtain patent licenses
in order to conduct its business.
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EMPLOYEES
As of December 1, 1998, the Company had 181 full-time employees, including 31 in
executive and administrative positions, 33 in electronic engineering and product
development, 31 in manufacturing, 15 in sales and marketing and 71 in customer
service.
Many of the Company's employees are highly skilled, and the Company's future
success will depend in part upon its ability to attract and retain such
employees. The Company is not subject to any collective bargaining agreement and
considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's corporate and manufacturing offices are located in Minnetonka, a
suburb of Minneapolis, Minnesota. The company leases a 75,000 square foot
building under a lease that expires on September 15, 2010. The annual rent is
$387,000, increasing to $481,000 on September 15, 2005, and thereafter, plus
operating expenses and real estate taxes.
In addition, the Company leases office space for its European sales and service
center in Crawley, England under a lease which expires in 2013 and provides for
annual lease payments of $198,000, subject to adjustment every five years, plus
a pro rata portion of the operating expenses. The Company leases smaller office
premises for its operations in Australia and France.
The Company believes that its current arrangements for facilities are adequate
to meet its present needs and those for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries is a party to, nor is any of their
property the subject of, any material pending legal proceedings. From time to
time, the Company and its subsidiaries receive complaints from customers with
respect to product performance and occasionally such complaints evolve into
litigation. The Company regards these matters as routine litigation incidental
to its business.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1998.
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EXECUTIVE OFFICERS OF THE COMPANY
The names and ages of all of the Company's executive officers and the positions
held as of the date of this report are:
<TABLE>
<CAPTION>
Name Position Age
- ---- -------- ---
<S> <C> <C>
Jay A. Herman President and Chief Executive Officer 51
Peter J. Wood Vice President of Engineering 56
Dieter P. Schilling Vice President of Operations and 43
Customer Service
Paul W.B. Stephenson Vice President - Chief Financial Officer 44
</TABLE>
Officers of the Company are elected annually by the Board of Directors and serve
until their successors are duly elected and qualified. There are no family
relationships among the Company's officers and directors.
Set forth below is a summary of the business experience of each of the executive
officers of the Company:
JAY A. HERMAN joined the Company as Executive Vice President and Chief Financial
Officer in May of 1988 and was promoted to President in June 1989. Prior to
joining the Company, Mr. Herman was Vice President and Chief Financial Officer
of Gelco Corporation's International Division. He held that post from 1986 to
1988. Between 1979 and 1986, Mr. Herman held positions of Vice President of
Administrative Services for Gelco Corporation and Director of Planning and
Budgets for Gelco's Fleet Leasing Division. Before joining Gelco, Mr. Herman
held several positions with General Mills.
PETER J. WOOD joined the Company as Vice President of Engineering in July 1997.
Mr. Wood has over 30 years experience in the development and user application of
electronic digital product technology. Prior to joining the Company, Mr. Wood
served as Principal Consultant to Vivo Software, Inc. from 1996 to 1997, as Vice
President, Engineering and Technology, for Iris Graphics Inc. from 1995 to 1996
and as President of Vital Imaging Systems, Inc. from 1993 to 1995.
DIETER P. SCHILLING was promoted to Vice President of Operations and Customer
Service in October of 1989. From October 1986 until October 1989 he held the
position of Vice President of Customer Service. Mr. Schilling joined Check
Technology as Director of Field Services in 1985 and was promoted to Director of
Customer Service in April of 1986. Previous to this, Mr. Schilling was a
co-founder and President of Southern California Telephone, a telephone
interconnects company, which was sold to American Telecommunications, Inc.
in 1985.
PAUL W.B. STEPHENSON joined the Company as Vice President of Finance and
Administration in March 1992 and became Chief Financial Officer in 1998. Prior
to joining the Company, he was manager of Audit for Honeywell, Inc. from 1989 to
1992. From 1987 to 1989 he was Controller, Communications Division for Space
Center, Inc. From 1976 to 1987 he held a number of positions with Peat, Marwick,
Mitchell and Co. in England and the United States. He is a Certified Public
Accountant and a Chartered Accountant.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the over-the-counter market and is quoted
on the National Association of Securities Dealers Automated Quotation System
("Nasdaq") under the symbol "CTCQ". The following table sets forth for the
periods indicated the range of high and low closing prices per share as reported
by Nasdaq. The Nasdaq bid quotations represent inter-dealer prices, without
retail markup, markdown, or commissions, and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
YEAR ENDED SEPTEMBER 30, 1998
First Quarter $ 5 3/8 $ 3 1/8
Second Quarter $ 5 1/2 $ 3 11/16
Third Quarter $ 5 3/8 $ 3 3/8
Fourth Quarter $ 4 5/16 $ 1 1/2
YEAR ENDED SEPTEMBER 30, 1997
First Quarter $ 10 7/8 $ 7 1/2
Second Quarter $ 8 7/8 $ 5 5/8
Third Quarter $ 8 $ 5 1/4
Fourth Quarter $ 7 7/8 $ 3 7/8
</TABLE>
STOCK REPURCHASE PROGRAM
In September 1998, the Company announced a stock repurchase program of up to
500,000 shares of common stock. At September 30, 1998, the Company had
repurchased 152,200 shares at a cost of $387,000.
HOLDERS
As of December 1, 1998, the Company had 365 holders of Common Stock of record.
DIVIDENDS
The holders of Common Stock are entitled to receive dividends when and as
declared by the Company's Board of Directors. Since its inception, the Company
has not paid any dividends and does not anticipate paying any dividends in the
foreseeable future. The Company intends to retain any earnings it may generate
to provide for the operation and projected expansion of its business.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
September 30, September 30, September 30, September 30, September 30,
Year Ended 1998 1997 1996 1995 1994
- ---------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Consolidated
Statement of
Operations Data:
Net sales $23,739,528 $22,866,676 $24,718,974 $24,360,654 $22,975,589
Net income 198,862 325,979 2,245,713 2,052,986 1,792,519
Earnings per common
share 0.03 0.05 0.36 0.34 0.31
Earnings per common
share assuming
dilution 0.03 0.05 0.36 0.33 0.30
Weighted average
number of shares
outstanding during
the period (1) 6,273,756 6,224,797 6,170,778 6,007,917 5,764,701
Weighted average
number of shares and
equivalents outstanding
during the period -
assuming dilution (2) 6,289,872 6,295,073 6,286,049 6,178,377 6,056,175
<CAPTION>
September 30, September 30, September 30, September 30, September 30,
Year Ended 1998 1997 1996 1995 1994
- ---------- ------------- ------------- ------------- ------------- -------------
Consolidated
Balance Sheet Data:
Working capital $17,634,271 $17,588,576 $17,310,488 $14,585,803 $12,544,594
Total assets 22,319,507 22,971,493 22,277,856 20,103,557 17,603,636
Long term liabilities 35,059 78,903 55,615 106,405 143,104
Stockholders' equity 18,567,126 18,679,662 18,408,486 15,692,230 13,567,806
</TABLE>
(1) Earnings 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.
(2) Earnings 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
equivalents outstanding during the period.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 year ended September 30, 1998, (fiscal 1998) sales of
document production equipment increased 16% over the year ended September 30,
1997 (fiscal 1997) compared to a decrease of 26% in fiscal 1997 over the year
ended September 30, 1996 (fiscal 1996). The increase in 1998 arose primarily
from the first sales of the Company's new Imaggia product, together with
increased Checktronic sales into Latin America offset by reduced sales by the
Company's Australian and United Kingdom subsidiaries. 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 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 recessionary environments in Asia,
South America and other emerging markets has limited the Company's current
opportunities to sell high-end capital equipment into those regions.
Revenues from maintenance contracts, spare parts, supplies and consumable items
decreased 3% in fiscal 1998 over fiscal 1997 compared to a 6% increase in fiscal
1997 over fiscal 1996. The decrease in fiscal 1998 was primarily due to a
reduction in maintenance and consumables revenue from Pacific Rim customers. The
increase in fiscal 1997 over fiscal 1996 was primarily due to increased volumes
of consumable sales.
The gross margin percentage in fiscal 1998 was 58% compared to 60% in fiscal
1997 and 61% in fiscal 1996. The decreases are primarily due to differences in
product mix, increased pricing pressure and costs associated with introducing
the IMAGGIA product line. The Company anticipates that its gross margin
percentage in fiscal 1999 may be somewhat lower than in fiscal 1998 as revenue
from the IMAGGIA line constitutes a larger portion of the Company's total
revenues.
Selling, general and administrative expenses were flat in fiscal 1998 as
compared to fiscal 1997 and increased 3% in fiscal 1997 over fiscal 1996 due
primarily to higher marketing and personnel expense.
Research and development expenses increased 8% in fiscal 1998 over fiscal 1997
and 14% in fiscal 1997 over fiscal 1996. The increases in both years were
primarily due to expenditures on the Company's Imaggia product development
program.
Net interest income was $334,000 in fiscal 1998 compared to $389,000 in fiscal
1997 and $377,000 in fiscal 1996. The decrease in fiscal 1998 was due to lower
cash balances available for investment and lower interest rates.
The income tax rate was 33% in fiscal 1998 compared to 32% in fiscal 1997 and
12% in fiscal 1996. During the fourth quarter of fiscal 1996 the Company
recorded certain previously unrecognized deferred tax assets amounting to
$693,000. The Company believes recorded net deferred tax assets are more likely
than not to be recoverable, based upon its estimates of future sources of
taxable income and the expected timing of temporary difference reversals.
Further information about income taxes is provided in Note B to the consolidated
financial statements.
Net income for the year amounted to $0.03 per share as compared to $0.05 per
share in fiscal 1997 and $0.35 per share in fiscal 1996. The decrease in fiscal
1998 was primarily attributable to the effect of reduced gross margins and
increased research and development expenditures, offset by the favorable effects
of foreign currency exchange rate swings. The decrease in net income in fiscal
1997 was primarily due to the decrease in the level of document production
systems revenue, as well as the negative effects of foreign currency exchange
rate swings and a higher tax rate.
MARKET RISK
The Company presently has three foreign subsidiaries, located in England, France
and Australia, does business in 49 countries and generates approximately 80% of
its revenues from outside North America. The Company's ability to sell its
products in these foreign markets may be affected by changes in economic,
political or market conditions in the foreign markets in which it does business.
The Company experiences foreign currency gains and losses, which are reflected
on the Company's income statement, due to the strengthening and weakening of the
U.S. dollar against the currencies of the Company's three foreign subsidiaries
and the resulting effect on the valuation of the intercompany accounts and
certain assets of the subsidiaries, which are denominated in U.S. dollars. The
net exchange gain arising from this was $132,000 in fiscal 1998, compared to a
loss of $72,000 in fiscal 1997 and a gain of $51,000 in fiscal 1996. The Company
anticipates that it will continue to have exchange gains or losses from foreign
operations in the future.
The Company's net investment in its foreign subsidiaries was $8,681,000 and
$7,429,000 at September 30, 1998 and 1997 translated into US dollars using the
year end exchange rates. The potential loss in value resulting from a
hypothetical 10%
10
<PAGE>
change in foreign currency exchange rates is not material in 1998 and 1997.
The impact of the stronger US dollar on the translation of foreign currency
denominated sales and related gross profit thereon was not material in 1998
and 1997.
FACTORS AFFECTING RESULTS OF OPERATIONS
The Company is continuing development of the Imaggia system. The Company is
using 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. No assurance can
be given that further delays will not occur, that IMAGGIA will gain market
acceptance or that product development or warranty expenses will not be higher
than anticipated. Achievement of the Company's future revenue plans depends upon
the successful 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.
YEAR 2000
The Company began evaluating the potential impact of the Year 2000 date
conversion on its operations in 1997. This evaluation included three major
elements: (i) information technology (IT) systems, (ii) non-IT, or embedded
technology systems and (iii) relationships with its key business suppliers.
For its IT systems, the Company has assessed its hardware and applications
(software and operating systems) and has substantially finalized its plans to
address all assessed risks. The Company is in the process of completing an
upgrade to its IT systems, which among other benefits is intended to ensure that
the Company's IT systems are Year 2000 compliant. The Company presently expects
this upgrade to be complete by mid 1999.
As a result of its internal evaluation the Company believes that its embedded
technology systems are currently Year 2000 compliant. The Company has identified
its key business partners and has been advised by them that they have programs
in place to ensure that their operations will be Year 2000 compliant in an
appropriate timeframe.
The Company believes it has planned for the most reasonably likely worst case
scenarios. It anticipates that its IT systems will be ready for the Year 2000,
although it may experience isolated incidences of non-compliance. During 1999 it
will continue to follow up with critical business partners to assess their
readiness and establish appropriate contingency plans if necessary. The
Company's cost for achieving Year 2000 compliance is part of the cost of an
overall upgrade of its information technology systems. The Company estimates
that the approximate cost of this upgrade will be $300,000, of which
approximately $200,000 was incurred in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was unchanged at $17.6 million at September 30, 1998 and 1997.
The Company's inventory levels increased from $8 million at September 30, 1997,
to $10.2 million at September 30, 1998 primarily due to an increase in Imaggia
finished goods inventory. Cash and short-term investments amounted to $5.3
million at September 30, 1998, compared to $8.5 million at September 30, 1997.
Stockholders' equity was $18.6 million at September 30, 1998 compared to $18.7
million at September 30, 1997. In September 1998, the Company announced a stock
repurchase program of up to 500,000 shares. At September 30, 1998, the Company
had repurchased 152,500 shares of the Company's common stock at a cost of
$387,000. Stockholders' equity was also affected in 1998 by a negative change of
$67,000 in the foreign currency adjustment arising from the translation of the
assets and liabilities of the Company's subsidiaries from their functional
currencies into U.S. dollars.
The Company's long-term debt to equity ratio was less than 0.01 at September 30,
1998 and September 30, 1997. The Company maintains a $2.5 million unsecured bank
line of credit. At September 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 1999.
At September 30, 1998, the Company had no material commitments for capital
expenditures.
11
<PAGE>
CAUTIONARY STATEMENT
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, in Company's Annual Report, elsewhere 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. Examples of such forward-looking statements
include (i) the last paragraph under the heading "Business - Research and
Development" in the Form 10-K, concerning the development and timing of the
introduction of the Imaggia system, (ii) the last sentence of the second
paragraph under the subheading "Market Risk" concerning unrealized
gains or losses from foreign operations, and (iii) the last two sentences of the
third paragraph under the subheading "Liquidity and Capital Resources"
concerning adequacy of working capital. 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 cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement.
12
<PAGE>
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The qualitative and quantitative disclosures about market risk are included in
Item 7 of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries are
included in a separate section of this report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the section entitled "Election of Directors" included in
the Company's definitive proxy statement to be mailed to stockholders on or
about January 31, 1998, and filed with the Securities and Exchange Commission.
Pursuant to Section 16(a) under the Securities Exchange Act of 1934, executive
officers, directors and 10% shareholders of the Company are required to file
reports on Forms 3, 4 and 5 of their beneficial holdings and transactions in the
Company's common stock.
ITEM 11. EXECUTIVE COMPENSATION AND TRANSACTIONS
Reference is made to the section entitled "Executive Compensation" included in
the Company's definitive proxy statement to be mailed to stockholders on or
about January 31, 1999, and filed with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the section entitled "Principal Holders of CTC Capital
Shares" included in the Company's definitive proxy statement to be mailed to
stockholders on or about January 31, 1999, and filed with the Securities and
Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
14
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following consolidated financial statements of Check Technology Corporation
and subsidiaries are submitted in a separate financial statement section of this
report.
<TABLE>
<CAPTION>
Description Page
- ----------- ----
<S> <C>
Report of Independent Auditors 20
Consolidated Balance Sheets--September 30, 1998 and 1997 21
Consolidated Statements of Operations--The years ended September 30, 1998, 1997, and 1996 23
Consolidated Statements of Stockholders' Equity--The years ended September 30, 1998, 1997, and 1996 24
Consolidated Statements of Cash Flows--The years ended September 30, 1998, 1997, 1996 26
Notes to Consolidated Financial Statements--September 30, 1998 27
</TABLE>
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Number Description Page
- ------ ----------- ----
<S> <C> <C>
Schedule II Valuation and Qualifying Accounts and Reserves 41
</TABLE>
All other financial statement schedules have been omitted because they are not
applicable, are not required, or the information is included in the financial
statements or notes thereto.
REPORTS OF FORM 8-K
The Company did not file any reports on Form 8-K during the three months ended
September 30, 1998
Exhibits
- --------
<TABLE>
<CAPTION>
Number Description Page or Incorporated by Reference From
- ------ ----------- --------------------------------------
<S> <C> <C>
3.1 Restated Articles of Incorporation Exhibit 3.1 to Form 10-K for fiscal year ended
September 30, 1987
3.2 Amended Bylaws Exhibit 3.2 to Form 10-K for fiscal year ended
September 30, 1994
4.1 Specimen of the Company's Exhibit 4(b) to Registration Statement on Form
Common Stock Certificates S-1 (No. 2-97193)
4.2 Statement of Rights and Preferences Exhibit A to Current Report on Form 8-K dated
of Capital Stock May 15, 1990
10.1 Lease for Offices in Crawley England Exhibit 10.9 to Form 10-K for the eight months
ended September 30, 1985
10.2 Bank Line of Credit Agreement,
as amended, effective March 31, 1998 42
15
<PAGE>
<CAPTION>
Number Description Page or Incorporated by Reference From
- ------ ----------- --------------------------------------
10.3 1986 Stock Option Plan Exhibit 10.8 to Form 10-K for fiscal year ended
September 30, 1986
10.4 Form of Indemnification Agreement that Exhibit 10.10 to Form 10-K for fiscal year ended
the Company has entered into with September 30, 1987
officers and directors. Such agreement
recites the provisions of Minnesota
Statutes Section 302A.521 and the
Company Bylaw provisions (which are
substantially identical to the statute)
10.5 Employment Agreement as of October 1, Exhibit 10.7 to Form 10-K for fiscal year ended
1994, between the Company and Jay A. September 30, 1994
Herman
10.6 1991 Stock Plan Exhibit 10.10 to Form 10-K for fiscal year ended
September 30, 1991
10.7 Lease of Facilities in Minnetonka, Exhibit 10.9 to Form 10-K for fiscal year ended
Minnesota September 30, 1994
10.8 1997 Stock Plan Exhibit 10.8 to Form 10-K for fiscal year ended
September 30, 1997
10.9 Executive Loan Program as Amended Exhibit 10.9 to Form 10-K for fiscal year ended
September 30, 1997
11 Computation of Per Share Earnings 46
21 List of Subsidiaries 47
23.1 Consent of Independent Auditors 48
</TABLE>
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 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
Dated: December 17, 1998 By: /s/ Jay A. Herman
--------------------------------------
Jay A. Herman
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Robert Reznick Chairman of the Board December 17, 1998
- -----------------------------
Robert Reznick
/s/Jay A. Herman President, Director December 17, 1998
- ----------------------------- (Principal Executive Officer)
Jay A. Herman
/s/ Paul Stephenson Vice President, Chief Financial Officer December 17, 1998
- ----------------------------- (Principal Financial & Accounting Officer)
Paul Stephenson
/s/ Gary Holland Director December 17, 1998
- -----------------------------
Gary Holland
/s/ Thomas H. Garrett III Director December 17, 1998
- -----------------------------
Thomas H. Garrett III
/s/ Oscar Victor Director December 17, 1998
- -----------------------------
Oscar Victor
</TABLE>
17
<PAGE>
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2), (c), and (d)
List of Financial Statements and Financial Statement Schedules
Financial Statement Schedules
Certain Exhibits
Year Ended September 30, 1998
Check Technology Corporation
Minnetonka, Minnesota
18
<PAGE>
Form 10-K--Item 14(a)(1) and (2)
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Check Technology Corporation
and subsidiaries are included in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets -- September 30, 1998 and 1997
Consolidated Statements of Operations -- The years ended September 30,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity - The years ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows -- The years ended September 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements -- September 30, 1998
The following consolidated financial statement schedules of Check Technology
Corporation and subsidiaries are included in Item 14(d):
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
Schedule II Valuation and Qualifying Accounts
and Reserves
</TABLE>
All other financial statement schedules have been omitted because they are not
applicable, are not required, or the information is included in the financial
statements or notes thereto.
19
<PAGE>
Original Document on 1400 Pillsbury Center
Ernst & Young LLP Letterhead Minneapolis, MN 55402
Phone: 612/343-1000
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Check Technology Corporation
We have audited the accompanying consolidated balance sheets of Check Technology
Corporation and subsidiaries as of September 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Check
Technology Corporation and subsidiaries at September 30, 1998 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
---------------------------
Ernst & Young LLP
Minneapolis, Minnesota
November 20, 1998
20
<PAGE>
CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30,
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,701,888 $ 3,165,601
Short-term investments 2,582,475 5,293,849
Accounts receivable less allowance for doubtful
accounts of $50,000 3,446,982 3,526,551
Inventories:
Raw materials and component parts 6,038,828 5,700,807
Work - in - progress 367,160 461,529
Finished goods 3,819,433 1,887,380
----------- -----------
10,225,421 8,049,716
Deferred income taxes 1,309,448 1,092,259
Other current assets 1,085,379 673,528
----------- -----------
TOTAL CURRENT ASSETS 21,351,593 21,801,504
EQUIPMENT AND FIXTURES
Machinery and equipment 2,049,557 2,107,739
Furniture and fixtures 1,761,984 1,737,969
Leasehold improvements 293,906 252,685
----------- -----------
4,105,447 4,098,393
Less accumulated depreciation
and amortization 3,137,533 2,928,404
----------- -----------
967,914 1,169,989
----------- -----------
TOTAL ASSETS $22,319,507 $22,971,493
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30,
1998 1997
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,322,696 $ 2,603,516
Employee compensation and related taxes 681,465 672,492
Income taxes payable 317,884 425,868
Deferred revenue 383,556 469,127
Current portion of capital lease obligations 11,721 41,925
----------- -----------
TOTAL CURRENT LIABILITIES 3,717,322 4,212,928
CAPITAL LEASE OBLIGATIONS - less current portion 35,059 78,903
----------- -----------
TOTAL LIABILITIES 3,752,381 4,291,831
STOCKHOLDERS' EQUITY
Common stock -- par value $.10 per share --
Authorized 25,000,000 shares; issued and
Outstanding 1998 - 6,178,120 shares;
1997 -- 6,338,135 shares 617,812 633,814
Additional paid-in capital 16,938,385 17,151,182
Foreign currency translation adjustment (917,856) (851,225)
Retained earnings 1,928,785 1,745,891
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 18,567,126 18,679,662
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,319,507 $22,971,493
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
<S> <C> <C> <C>
Sales: ---- ---- ----
Printing equipment $ 9,145,553 $ 7,885,584 $10,636,518
Maintenance, spares and supplies 14,593,975 14,981,092 14,082,456
----------- ----------- -----------
NET SALES 23,739,528 22,866,676 24,718,974
Costs and Expenses:
Cost of sales 10,078,505 9,047,708 9,578,116
Selling, general and administrative 11,101,002 11,136,029 10,818,900
Research and development 2,728,547 2,521,073 2,206,444
----------- ----------- -----------
23,908,054 22,704,810 22,603,460
----------- ----------- -----------
(LOSS) INCOME FROM SYSTEM SALES
AND SERVICE (168,526) 161,866 2,115,514
Interest expense 18,910 22,813 26,110
Interest (income) (353,307) (411,531) (402,539)
Unrealized exchange (gain) loss (131,991) 71,605 (50,770)
----------- ----------- -----------
INCOME BEFORE TAXES 297,862 478,979 2,542,713
Income taxes 99,000 153,000 297,000
----------- ----------- -----------
NET INCOME $ 198,862 $ 325,979 $ 2,245,713
----------- ----------- -----------
----------- ----------- -----------
Basic and diluted earnings per common share $ 0.03 $ 0.05 $ 0.36
Weighted average number of shares and
equivalents outstanding during the period 6,273,756 6,224,797 6,170,778
Weighted average number of shares and
equivalents outstanding during the period -
assuming dilution 6,289,872 6,295,073 6,286,049
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Common Stock
Shares Amount
--------- --------
<S> <C> <C>
Balance September 30, 1995 6,112,279 $611,228
Net income --- ---
Exercise of stock options, including tax 105,448 10,545
benefit of $345,000
Issuance of restricted stock 20,000 2,000
Vesting of restricted stock --- ---
Payment - note receivable --- ---
Foreign currency translation --- ---
--------- --------
Balance September 30, 1996 6,237,727 623,773
Net income --- ---
Exercise of stock options, including tax
benefit of $17,000 20,408 2,041
Issuance of restricted stock 80,000 8,000
Vesting of restricted stock --- ---
Payment - note receivable --- ---
Foreign currency translation --- ---
--------- --------
Balance September 30, 1997 6,338,135 633,814
Net Income --- ---
Options exercised, including tax
benefit of $41,491 15,000 1,500
Purchase of stock (153,590) (15,359)
Vesting of restricted stock --- ---
Cancellation of restricted stock (21,425) (2,143)
Payment - note receivable --- ---
Foreign currency translation --- ---
--------- --------
Balance September 30, 1998 6,178,120 $617,812
--------- --------
--------- --------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
Foreign
Additional Currency Retained
Paid-In Translation Earnings
Capital Adjustment (Deficit)
--------------- --------------- ---------------
<S> <C> <C>
$15,743,703 $(453,275) $ (209,426)
--- --- 2,245,713
417,540 --- ---
228,000 --- (230,000)
--- --- 96,500
6,646 --- ---
--- (60,688) ---
----------- --------- ----------
16,395,889 (513,963) 1,902,787
--- --- 325,979
(12,320) --- ---
762,000 --- (770,000)
--- --- 287,125
5,613 --- ---
--- (337,262) ---
----------- --------- ----------
17,151,182 (851,225) 1,745,891
--- --- 198,862
(5,491) --- ---
(6,464) --- (371,842)
--- --- 146,986
(206,745) --- 208,888
5,903 --- ---
--- (66,631) ---
----------- --------- ----------
$16,938,385 $(917,856) $1,928,785
----------- --------- ----------
----------- --------- ----------
</TABLE>
25
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 198,862 $ 325,979 $ 2,245,713
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 369,059 402,272 438,275
Other (46,328) 81,746 (111,001)
Changes in operating assets and liabilities:
Accounts receivable 33,864 (128,305) 1,282,909
Inventories (2,226,009) (1,705,446) (745,111)
Other current assets (660,347) (658,170) (402,574)
Accounts payable and accrued expenses (396,471) 734,802 (520,939)
Deferred revenue (67,055) (15,866) (29,216)
----------- ------------ ------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES $(2,794,425) (962,988) 2,158,056
INVESTING ACTIVITIES
Purchase of equipment and fixtures (246,498) (505,626) (442,118)
Proceeds from sale of equipment 53,236 67,802 82,092
Purchase of short term investments (8,926,101) (25,269,275) (10,651,726)
Proceeds from sale of short term investments 11,907,089 25,079,552 9,931,000
----------- ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES $ 2,787,726 (627,547) (1,080,752)
FINANCING ACTIVITIES
Repurchase/Issuance of common stock (438,107) (10,279) 428,085
Addition of capital leases 0 85,757 40,101
Repayment of note receivable from stock sale 5,903 5,613 6,646
Repayment of long-term debt and
capital leases (57,265) (100,784) (90,070)
----------- ------------ ------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES $ (489,469) (19,693) 384,762
EFFECT OF EXCHANGE RATE CHANGES
ON CASH 32,455 (75,454) (1,139)
----------- ------------ ------------
(DECREASE) INCREASE IN CASH AND
EQUIVALENTS (463,713) (1,685,682) 1,460,927
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 3,165,601 4,851,283 3,390,356
----------- ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,701,888 $ 3,165,601 $ 4,851,283
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See notes to consolidated financial statements
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Check Technology Corporation's business is the design,
manufacture, sale and service of computerized financial document production
systems. The systems can collate, personalize and encode documents into packages
tailored to the customers' requirements. The systems are sold through the
Company and its international subsidiaries. In excess of 50% of the total
revenues of the Company are related to service and support provided after the
sale. The Company has a significant presence in the international check
production marketplace in Europe, Australia, Latin America, Asia and the Middle
East.
Principles of Consolidation: The financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Check Technology Ltd., Check
Technology Pty. Ltd., and Check Technology France S.A. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents and Short-Term Investments: The Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents. Short-term investments consist principally of held-to-maturity
debt securities. The Company determines the appropriate classification of debt
securities at the time of purchase. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost, adjusted for amortization of premiums and accretion of discounts to
maturity. Cash equivalents and short-term investments are carried at amounts
that approximate market value. Interest on securities is included in interest
income.
Inventories: Inventories are carried at the lower of cost or market determined
under the first-in, first-out (FIFO) method.
Equipment and Fixtures: Equipment and fixtures are stated on the basis of cost
and include the cost of assets held under capital lease obligations.
Demonstration equipment not expected to be resold is carried in equipment on a
cost basis.
The Company provides for depreciation and amortization of equipment and fixtures
by charges to operations at rates calculated to amortize the cost of the
property over its estimated useful life using the straight-line method.
Amortization expense of items under capital lease is included in depreciation
expense.
Deferred Revenue: Amounts billed to customers under maintenance contracts are
recognized in income over the term of the maintenance agreement.
Foreign Currency Translation: The Company's wholly-owned foreign subsidiaries'
financial statements are measured in their functional currency before
translating to U.S. dollars. Gains and losses resulting from the translation are
recorded as a component of stockholders' equity.
Foreign Exchange Contracts: From time to time the Company enters into foreign
exchange contracts as a hedge against specific foreign currency receivables.
Market value gains and losses are recognized, and the resulting credit or debit
offsets foreign exchange gains or losses on those receivables.
Income Taxes: The liability method is used to account for income tax expense.
Deferred tax assets and liabilities are recorded based on the differences
between financial statement and tax bases of assets and liabilities and the tax
rates in effect when these differences are expected to reverse. The deferred tax
asset is reduced by a valuation allowance to a net amount which the Company
believes it more likely than not will realize, based on the Company's estimates
of its future earnings and the expected timing of temporary difference
reversals. Investment tax credits are accounted for under the flow-through
method thereby reducing income taxes in the year in which the credits are
realized.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Stock Based Compensation: The Company follows Accounting Principles Board
Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25, when
the exercise price of employee stock options equal the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No.123, ACCOUNTING FOR STOCK-BASED COMPENSATION (Statement
123).
Long-Lived Assets: In Fiscal 1998, the Company adopted SFAS 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of SFAS 121 had no impact on the Company's
consolidated financial statements.
Earnings per Share: In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings Per Share, (Statement 128). Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes the dilutive effect of stock options and other
dilutive securities. Dilutive earnings per share is very similar to the
preciously reported fully diluted earnings per share. All earnings per share
amounts for all periods presented have been restated, where necessary, to
conform to the Statement 128 requirements. A reconciliation of the denominator
in the basic and diluted earnings per share calculation is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Denominator for Basic earnings per share
Weighted average shares 6,273,756 6,224,797 6,170,778
Effect of dilutive securities:
Employee stock options 11,753 66,051 114,614
Employee stock grants 4,363 4,225 656
--------- --------- ---------
Dilutive potential common shares 16,116 70,276 115,270
Denominator for Diluted earnings per share
Adjusted weighted average shares 6,289,872 6,295,073 6,286,048
--------- --------- ---------
</TABLE>
Comprehensive Income: In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, REPORTING COMPREHENSIVE INCOME. SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The new rules
are effective for the Company in fiscal 1999. The adoption of this Statement is
not expected to have a significant impact on the Company.
Segment Reporting: In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. This Statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements. The Statement requires additional disclosure only, and
will not impact net income or stockholders' equity of the Company. The Statement
is effective for the Company's fiscal year ended September 30, 1999. The Company
is currently assessing the impact of the Statement on its segment disclosure.
Reclassification: Certain items in the 1997 and 1996 consolidated financial
statements have been reclassified to conform to the 1998 presentation.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE B - INCOME TAX
At September 30, 1998, the Company has domestic tax loss carryforwards of
approximately $892,000 which expire in 2012 and foreign tax loss carryforwards
of approximately $555,000 which expire in 2003. In addition, the Company has
domestic investment tax credits and research and development credit
carryforwards of approximately $416,000 which are available to offset future
income tax. The credits expire in varying amounts through September 2013.
Domestic alternative minimum tax credits of approximately $143,000 are available
to offset future income tax with no expiration date. These tax benefits,
together with future tax deductions from the reversal of temporary differences,
comprise the net deferred tax assets. The deferred tax asset has been offset by
a valuation allowance as deemed necessary based on the Company's estimates of
its future sources of taxable income and the expected timing of temporary
difference reversals.
Significant components of deferred tax assets and liabilities as of September 30
are as follows:
FEDERAL AND STATE NET DEFERRED TAX ASSETS (LIABILITIES):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred Tax Assets:
Net operating loss $ 533,000 $ 517,000
Business credit carryforwards and
alternative minimum tax credits 559,000 582,000
Stock compensation 111,000 138,000
Inventory valuation reserves 112,000 102,000
Other U.S. and foreign differences 502,000 262,000
----------- -----------
Gross Deferred Tax Asset 1,817,000 1,601,000
Less Valuation Allowances (508,000) (508,000)
----------- -----------
Net Deferred Tax Asset $ 1,309,000 $ 1,093,000
----------- -----------
----------- -----------
</TABLE>
The components of income tax expense as recorded by the Company are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current Tax Expense:
Federal $ 0 $ (25,000) $ 3,000
State 10,000 6,000 16,000
Foreign 347,000 555,000 626,000
---------- ---------- ----------
Total 357,000 536,000 645,000
Deferred Tax Expense:
Federal 28,000 (258,000) (231,000)
State 0 (14,000) (18,000)
Foreign (286,000) (111,000) (99,000)
---------- ---------- ----------
Total (258,000) (383,000) (348,000)
---------- ---------- ----------
Total Tax Expense $ 99,000 $ 153,000 $ 297,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE B - INCOME TAX - CONTINUED
A reconciliation of tax expense to the statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate applied to pre-tax income $ 101,000 $ 163,000 $ 865,000
Net operating loss and tax credits utilized 0 0 (220,000)
Change in valuation allowance 0 0 (348,000)
Other (2,000) (10,000) 0
--------- --------- ---------
$ 99,000 $ 153,000 $ 297,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $3,898,000 at September 30, 1998. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. Federal and
State income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of unrecognized deferred U.S. income tax liability is not practical
because of the complexities of the calculation.
Cash tax payments for the years ended September 30, 1998, 1997, and 1996 were
$653,000, $671,000 and $570,000 respectively.
NOTE C - FINANCIAL INSTRUMENTS
Foreign Currency Instruments and Hedging Activities: From time to time, the
Company may enter into foreign exchange contracts to manage its exposure to
fluctuations in foreign currency exchange rates. These contracts involve the
exchange of foreign currencies for U.S. dollars at future dates. Counterparties
to these contracts are major international financial institutions. Maturities of
these instruments are typically one year or less from the transaction date.
Gains or losses from these contracts are included in other expense and are
intended to partially offset fluctuations in net sales due to currency rate
changes.
No foreign exchange contracts were outstanding at September 30, 1998 and 1997.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES
The Company operates in one business segment, which is the sale of printing
equipment and related maintenance, spares and supplies. The Company has
developed computer-controlled printing systems to produce a variety of documents
for the financial services industry. Its primary products provide operating
flexibility and efficiency through sophisticated software and paper handling
mechanisms and produce quality alphanumeric and machine-readable print. The
Company is solely dependent on one vendor for the supply of non-impact
alphanumeric printers used in the printing systems sold by the Company.
The Company's manufacturing operations are located in the United States. Sales
and service operations are located in the United Kingdom, France, and Australia.
Foreign operations include the activities of the three foreign subsidiaries.
<TABLE>
<CAPTION>
Domestic Foreign
Year Ended September 30, 1998 Operations Operations Eliminations Consolidated
- --------------------------------------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 9,057,846 $ 14,681,682 $ --- $ 23,739,528
Sales to foreign subsidiaries 4,171,584 --- (4,171,584) ---
------------ ------------ ------------ ------------
Net sales $ 13,229,430 $ 14,681,682 $ (4,171,584) $ 23,739,528
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
(Loss) Income from system sales
and service $ (110,209) $ 460,064 $ (518,381) $ (168,526)
Less:
Interest (income) (237,632) (115,675) --- (353,307)
Interest expense 5,000 42,618 (28,708) 18,910
Unrealized exchange loss --- (131,991) --- (131,991)
------------ ------------ ------------ ------------
Income before taxes 122,423 665,112 (489,673) 297,862
Income taxes 38,000 61,000 --- 99,000
------------ ------------ ------------ ------------
Net income $ 84,423 $ 400,112 $ (285,673) $ 198,862
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Identifiable assets $ 19,306,172 $ 12,890,128 $ (9,876,793) $ 22,319,507
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Total liabilities $ 2,153,610 $ 5,621,222 $ (4,022,451) $ 3,752,381
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES--CONTINUED
<TABLE>
<CAPTION>
Domestic Foreign
Year Ended September 30, 1997 Operations Operations Eliminations Consolidated
- --------------------------------------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 7,426,624 $ 15,440,052 $ --- $ 22,866,676
Sales to foreign subsidiaries 4,239,162 --- (4,239,162) ---
------------ ------------ ------------ ------------
Net sales $ 11,665,786 $ 15,440,052 $ (4,239,162) $ 22,866,676
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
(Loss) income from system sales and
service $ (751,599) $ 912,005 $ 1,460 $ 161,866
Less:
Interest (income) (377,960) (97,303) 63,732 (411,531)
Interest expense 5,002 82,358 (64,547) 22,813
Unrealized exchange loss (gain) --- 71,117 488 71,605
------------ ------------ ------------ ------------
Income (loss) before taxes (378,641) 855,833 1,787 478,979
Income taxes (291,000) 444,000 --- 153,000
------------ ------------ ------------ ------------
Net income (loss) $ (87,641) $ 411,833 $ 1,787 $ 325,979
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Identifiable assets $ 20,282,967 $ 12,463,933 $ (9,775,407) $ 22,971,493
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Total liabilities $ 2,342,860 $ 5,610,139 $ (3,661,168) $ 4,291,831
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES - -CONTINUED
<TABLE>
<CAPTION>
Domestic Foreign
Year Ended September 30, 1996 Operations Operations Eliminations Consolidated
- --------------------------------------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 7,279,398 $ 17,439,576 $ --- $ 24,718,974
Sales to foreign subsidiaries 5,435,350 --- (5,435,350) ---
------------ ------------ ------------ ------------
Net sales $ 12,714,748 $ 17,439,576 $ (5,435,350) $ 24,718,974
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income from system sales and service $ 557,288 $ 1,426,266 $ 131,960 $ 2,115,514
Less:
Interest (income) (401,552) (50,077) 49,090 (402,539)
Interest expense 6,072 69,128 (49,090) 26,110
Unrealized exchange loss (gain) 18,999 (69,769) --- (50,770)
------------ ------------ ------------ ------------
Income before taxes 933,769 1,476,984 131,960 2,542,713
Income taxes (230,464) 527,464 --- 297,000
------------ ------------ ------------ ------------
Net income $ 1,164,233 $ 949,520 $ 131,960 $ 2,245,713
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Identifiable assets $ 19,692,227 $ 10,342,786 $ (7,757,157) $ 22,277,856
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Total liabilities $ 1,798,567 $ 3,916,837 $ (1,846,034) $ 3,869,370
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The Company's products are marketed worldwide. Domestic operations include
export sales of $ 4,697,278, $3,920,419 and $3,383,495 for the periods ended
September 30, 1998, 1997, and 1996, respectively.
There were no sales to a single customer in excess of 10% of total sales in
1998, 1997 or in 1996.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE E--LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
September 30,
1998 1997
-------- --------
<S> <C> <C>
Capital lease obligations on automobiles and equipment, due in monthly
installments varying from $478 to $551, including interest at
9.2% to 11.6%; automobile and equipment financed under the lease
serve as security to the lease obligation $ 46,780 $120,828
Less current portion of lease obligation 11,721 41,925
-------- --------
$ 35,059 $ 78,903
-------- --------
-------- --------
</TABLE>
Cash payments of interest were $18,910 in 1998, $22,639 in 1997 and $24,304 in
1996.
Equipment and fixtures includes the following amounts under the capitalized
lease obligations:
<TABLE>
<CAPTION>
September 30,
1998 1997
-------- ---------
<S> <C> <C>
Office furniture, fixtures and equipment $ 65,885 $ 176,125
Less allowance for amortization 19,562 45,273
-------- ---------
$ 46,323 $ 130,852
-------- ---------
-------- ---------
</TABLE>
Future payments for the capital lease obligations (including interest) as of
September 30, 1998 are:
<TABLE>
<CAPTION>
Capital Lease
Obligations
-------------
<S> <C>
Year ending September 30:
1999 $ 15,672
2000 35,947
2001 0
---------
Total Payments 51,619
Less amounts representing interest 4,839
---------
Present value of lease payments $ 46,780
---------
---------
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE F--STOCK OPTIONS AND BENEFIT PLAN
During fiscal year 1998, the Company had three stock option programs, the 1986
Stock Option Plan (the 1986 Plan), the 1991 Stock Plan (the 1991 Plan), and the
1997 Stock Plan (the 1997 Plan), for its key employees and non-employee
directors. The 1986 Plan was adopted in October 1986, the 1991 Plan in March
1991 and the 1997 Plan in June 1997. Stock options under the 1986 Plan are
non-qualified while those under the 1991 Plan and the 1997 Plan can be granted
as either non-qualified or incentive stock options. The 1991 Plan and the 1997
Plan also authorize the granting of awards in the forms of stock appreciation
rights, restricted stock or deferred stock. In all cases, subject to the
provisions of the plans, the board of directors has complete discretion in
establishing the terms and conditions of each option granted to the employees of
the Company. During fiscal year 1995, an officer exercised stock options for a
$148,966 note. The note is interest bearing, collateralized by the underlying
stock.
A summary of outstanding options and shares reserved under each plan for the
last three years is as follows:
THE 1986 PLAN
<TABLE>
<CAPTION>
Shares Weighted
Reserved Average
For Future Options Exercise Price
Grants Outstanding Per Share
---------- ----------- --------------
<S> <C> <C> <C>
Balance September 30, 1995 188,660 156,250 $ 2.28
Options exercised --- (103,500) 2.11
------- --------
Balance September 30, 1996 188,660 52,750 2.63
Options exercised --- (52,750) 2.63
------- --------
Balance September 30, 1997 188,660 --- ---
Options exercised
------- --------
Balance September 30, 1998 188,660 --- $ ---
------- --------
------- --------
</TABLE>
At September 30, 1998, 1997 and 1996 there were 0, 0, and 52,750 options,
respectively, currently exercisable under the 1986 Plan at prices of $2.00 to
$2.625 per share.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE F--STOCK OPTIONS AND BENEFIT PLAN--CONTINUED
1991 Plan
---------
<TABLE>
<CAPTION>
Shares Weighted
Reserved Average
For Future Options Exercise Price
Grants Outstanding Per Share
------------ ------------- ----------------
<S> <C> <C> <C>
Balance September 30, 1995 231,750 181,660 3.93
Options granted (63,500) 63,500 8.88
Options exercised --- (28,508) 2.81
Restricted Stock granted (20,000) --- ---
Restricted Stock canceled 4,250 --- ---
Options canceled 5,625 (5,625) 8.08
------------ -------------
Balance September 30, 1996 158,125 211,027 5.45
Options granted (76,000) 76,000 8.72
Options exercised --- (1,333) 2.50
Restricted Stock granted (80,000) --- ---
------------ -------------
Balance September 30, 1997 2,125 285,694 6.34
Options exercised (15,000) 2.50
Restricted Stock canceled 21,425 --- ---
Options canceled 23,500 (23,500) 8.51
------------ -------------
Balance September 30, 1998 47,050 247,194 6.36
------------ -------------
------------ -------------
</TABLE>
At September 30, 1998, 1997 and 1996 there were 164,611, 139,152 and 98,777
options, respectively, currently exercisable under the 1991 Plan at prices of
$1.75 to $9.63 per share. The Company issued 0, 80,000 and 20,000 shares at
weighted average fair values of $0, $770,000 and 230,000 in 1998, 1997 and
1996, respectively. Total compensation expense for stock-based compensation
was $146,987, $287,125 and $96,500 in 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
1997 Plan
- --------- Shares Weighted
Reserved Average
For Future Options Exercise Price
Grants Outstanding Per Share
------------ ------------- ----------------
<S> <C> <C> <C>
Shares reserved at inception 750,000 ---
Options granted (10,000) 10,000 6.50
------------ -------------
Balance September 30, 1997 740,000 10,000 6.50
Options granted (97,500) 97,500 4.70
Options canceled 20,000 (20,000) 4.75
------------ -------------
Balance September 30, 1998 662,500 87,500 4.90
------------ -------------
------------ -------------
</TABLE>
At September 30, 1998 and 1997 there were 2,500 and 0 options, respectively,
currently exercisable under the 1997 plan, at a price of $6.50 per share.
Total shares reserved for options and restricted stock are 1,379,229 shares.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE F--STOCK OPTIONS AND BENEFIT PLAN--CONTINUED
Pro forma information regarding net income and earnings per share is required
by Statement of Financial Accounting Standards No. 123, and has been
determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement.
The fair value of each option grant is established on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 51% 40% 40%
Risk - free interest rate 4.37% 6.11% 6.60%
Expected life of options 7 years 7 years 7 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma net earnings and earnings per share were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -------------
<S> <C> <C> <C>
Net earnings (loss)- pro forma $ 83,046 $ 193,475 $ 2,195,045
Earnings (loss) per share - pro forma 0.01 0.03 0.34
Weighted average fair value of options granted
during the year 3.37 4.44 4.68
</TABLE>
The pro forma effect on net income and earnings per share is not
representative of the pro forma net earnings in future years because it does
not take into consideration pro forma compensation expense related to grants
made prior to 1996.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE F--STOCK OPTIONS AND BENEFIT PLAN--CONTINUED
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------------
Weighted Avg. Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
------------------ ------------- --------------- ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C>
$ 1.750 - 4.750 146,194 4.46 $ 4.06 73,694 $ 3.46
5.063 - 7.750 112,500 5.83 6.20 61,250 5.76
8.125 - 9.625 76,000 6.22 9.35 32,167 9.31
------------------ ------------- --------------- ------------ ---------------- -------------
$ 1.750 - 9.625 334,694 5.32 $ 5.98 167,111 $ 5.43
</TABLE>
The Company has a defined contribution salary deferral plan covering
substantially all U.S. employees under Section 401(k) of the Internal Revenue
Code. The Plan allows eligible employees to make contributions up to the
maximum amount provided under the Code. The Company makes an annual minimum
contribution equal to 50% of the participants' before-tax contributions up to
6% of base salary. The cost of the plan was $106,594, $82,766, and $78,326
for the years ended September 30, 1998, 1997 and 1996, respectively.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE G--RENTAL COMMITMENTS
Building, equipment and automobile rentals under operating leases were
$1,234,065, $1,184,701 and $1,039,439 for the years ended September 30, 1998,
1997 and 1996, respectively.
The Company leases its corporate offices under a fifteen-year agreement
expiring on September 15, 2010. Annual rental under the lease is $387,000
increasing to $481,000 in the eleventh year and thereafter. The Company is
obligated to pay operating expenses and real estate taxes incurred by the
landlord. The Company has the right to terminate such lease at the end of the
10th lease year, subject to a termination fee.
The Company's subsidiary in the United Kingdom leases office space under a
lease expiring in 2013. Annual rental under the lease is $198,000, subject to
adjustment every five years, plus a pro rata share of operating expenses
incurred by the landlord.
Total future minimum rental commitments for operating leases of facilities,
sales offices, equipment and automobiles are $11,427,342 and are due as
follows: fiscal year ending September 30, 1999 -- $1,162,817; 2000 --
$958,088; 2001 --$858,749; 2002 -- $855,406; 2003 -- $855,823; thereafter --
$6,736,459.
NOTE H--LINE OF CREDIT AND NOTES PAYABLE
The Company has a $2,500,000 revolving line of credit with a bank. At
September 30, 1998, the entire line was unused. The line of credit agreement
is in the form of an unsecured note. Advances under the line of credit bear
interest at the bank's reference rate. The line has a .20% annual commitment
fee.
The line of credit agreement places certain restrictions on the Company
including requirements as to maintenance for minimum levels of tangible net
worth and specified others. The Company was in compliance with these
covenants at September 30, 1998. The line of credit expires March 31, 1999.
In addition to the line of credit agreement, the Company's United Kingdom
subsidiary has a guarantee facility with a bank to provide a VAT Deferred
Bond. There is no security deposit requirement under the agreement.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1998
NOTE I-- SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1998 Quarter Ended December 31 March 31 June 30 September 30
- ------------------ ----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Net Sales $ 5,152,740 $ 6,329,148 $ 6,333,606 $ 5,924,034
Gross Profit 3,117,051 3,629,066 3,580,078 3,334,828
Net Income (148,105) 87,802 188,089 71,076
Basic Earnings per Share $ (0.02) $ 0.01 $ 0.03 $ 0.01
Diluted Earnings per Share $ (0.02) $ 0.01 $ 0.03 $ 0.01
1997 Quarter Ended December 31 March 31 June 30 September 30
- ------------------ ----------- -------- ------- ------------
Net Sales $ 5,487,892 $ 6,201,197 $ 6,507,436 $ 4,670,151
Gross Profit 3,416,637 3,720,231 3,821,358 2,860,742
Net Income 100,000 241,703 271,870 (287,594)
Basic Earnings per Share $ 0.02 $ 0.04 $ 0.04 $ (0.05)
Diluted Earnings per Share $ 0.02 $ 0.04 $ 0.04 $ (0.05)
</TABLE>
40
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Cost and Other End
Description Of Period Expenses Accounts (Deductions) Of Period
<C> <S> <C> <C> <C> <C> <C>
1. Allowance for doubtful
accounts
Year ended September 30, 1998 $ 50,000 0 0 0 $ 50,000
Year ended September 30, 1997 $ 50,000 0 0 0 $ 50,000
Year ended September 30, 1996 $ 50,000 0 0 0 $ 50,000
II. Reserve for obsolete
And slow moving
Inventories
Year ended September 30, 1998 $ 360,000 56,000 0 (16,000) $ 400,000
Year ended September 30, 1997 $ 334,000 30,000 0 (4,000) $ 360,000
Year ended September 30, 1996 $ 303,000 95,000 0 (64,000) $ 334,000
</TABLE>
41
<PAGE>
Exhibit 10.2.
Original Document on Norwest Bank Minnesota, N.A.
Norwest Banks' Letterhead Bloomington Office
7900 Xerxes Avenue South
Bloomington, Minnesota 55431
612/830-7000
April 28, 1998
Mr. Paul Stephenson
Vice President of Finance and Administration
Check Technology Corporation
12500 Whitewater Drive
Minnetonka, MN. 55343-9420
Dear Mr. Stephenson:
I am pleased to inform you that Norwest Bank Minnesota, N.A. (the "Bank") has
approved the renewal of a committed line of credit (the "Line") in the amount
of $2,500,000.00 to be offered to Check Technology Corporation. The
availability of the Line is subject to the Bank's receipt of a new executed
promissory note (the "Note") and our mutual execution of this letter
agreement. The following terms and conditions shall apply to the Line:
BORROWER Check Technology Corporation (the "Borrower").
TYPE One year, committed line of credit, with an initial maturity date
of March 31, 1999
AMOUNT $2,500,000.00
PURPOSE To finance working capital needs of the Borrower.
INTEREST With each advance, the Borrower will have the following interest
rate options:
(1) Norwest Base Rate, floating, or
(2) LIBOR plus 1.75% for 30, 60, 90 and 180 days periods.
Interest will be payable at the end of each month for each Base
Rate advance. Interest will be payable on maturity for each
LIBOR advance, or at the end of 90 days in the case of interest
contract periods of more than 90 days. If the Borrower elects
the LIBOR rate option, each advance shall be in an amount not
less than $100,000.
PREPAYMENTS Prepayments of principal may be made at any time by the Borrower
without penalty; however, any payments of LIBOR borrowing
contracts made prior to the stated contractual maturity of the
contract will be subject to reimbursement to Bank for reasonable
redeployment costs.
COLLATERAL Unsecured, however, all current assets of Borrower must remain
free of liens or encumbrances.
42
<PAGE>
Mr. Paul Stephenson
April 28, 1998
Page 2
FACILITY FEE A facility fee of one-fifth of one percent (20 basis points) per
annum computed on a 360-day basis will be applied to the unused
portion of the revolving, one-year line of credit. This fee
shall be paid in arrears at the end of each calendar quarter.
COVENANTS The Borrower agrees to comply with the following:
1.) Preserve its corporate existence and, along with all
subsidiaries, adequately maintain and insure its properties.
Additionally, the Borrower will not, nor will it permit any
subsidiary to sell, dispose of, or transfer away any material
portion of its assets or properties necessary or desirable for
the proper conduct of its business.
2.) All corporate assets, including all subsidiary assets, must
be kept free and clear of liens, except for currently existing
liens and purchase money security interests.
3.) The Borrower and each of its subsidiaries must refrain from
issuing a corporate guaranty or becoming contingently liable in
connection with any obligation of any other person or entity.
4.) On a consolidated basis and in accordance with GAAP, the
financial performance and conditions of the Borrower must remain
within the following bounds at all times:
(a) TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. Maintain a
ratio of total liabilities to Tangible Net Worth of less than 1.0
to 1.0 at all times.
"Tangible Net Worth" means total assets less total
liabilities and less the following types of assets: (1) leasehold
improvements; (2) receivables and other investments in or amounts
due from any shareholder, director, officer, employee or other
person or entity related to or affiliated with the Borrower; (3)
goodwill, patents, copyrights, mailing lists, trade names,
trademarks, servicing rights, organizational and franchise costs,
bond underwriting costs and other like assets properly classified
as intangible.
(b) CURRENT RATIO. Maintain a ratio of Current Assets to Current
Liabilities of at least 2.0 to 1.0 at all times.
"Current Assets" means current assets less receivables and
investments in or other amounts due from any shareholder,
director, officer, employee or any person or entity related to or
affiliated with the Borrower.
"Current Liabilities" means current liabilities less any
portion of such current liabilities that constitute Subordinated
Debt.
"Subordinated Debt" means debt that is expressly
subordinated to the Bank in a writing acceptable to the Bank.
5.) Provide the Bank with annual audited financial statements
within 120 days of the Borrower's fiscal year end, quarterly
financial statements within 45 days of quarter end, and quarterly
compliance certificates during periods of borrowing.
43
<PAGE>
Mr. Paul Stephenson
April 28, 1998
Page 3
6.) Promptly notify the Bank upon knowledge of the occurrence of
an event of default hereunder or under the Note.
7.) Supply the Bank with such other information as the Bank may
from time to time reasonably request, and permit the Bank to have
access to its books, records, properties, and principal officers
as it may reasonably request.
CONDITIONS
PRECEDENT Prior to the making of the first advance under the Line, the
Borrower shall deliver, at the Bank's request, certified
borrowing resolutions and an incumbency certificate, duly
executed by the corporate secretary of the Borrower and in form
and content acceptable to the Bank. Furthermore, the Bank has
the right to not consider any requests for advances under the
Line if, as of the date of such request, there exists an event of
default under the Note.
DEFAULT The Bank may declare the Line terminated and declare the unpaid
principal, accrued interest and all other amounts payable under
the Note to be immediately due and payable, if the Borrower fails
in the observance or performance of any covenant or agreement
contained herein, and continuance for more than 30 days. In
addition, the Note contains events of default that are
incorporated herein by reference.
If the provisions of this Letter Agreement are acceptable, please sign below
and return to me at Norwest. Please Contact either signer below if you have
any questions.
Sincerely,
/s/ Douglas L. Van Metre /s/ Jill S. Fedoruk
- ------------------------- --------------------
Douglas L. Van Metre Jill S. Fedoruk
Vice President Portfolio Manager
830-8933 830-8936
Accepted By:
CHECK TECHNOLOGY CORPORATION
By: /s/ Paul Stephenson
----------------------------------------------
Its: Vice President - Finance and Administration
---------------------------------------------
Date: April 28, 1998
--------------------------------------------
44
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Original Document on Commercial Note
Norwest Banks' Letterhead
- -------------------------------------------------------------------------------
Name Date
Check Technology Corporation April 30, 1998
- -------------------------------------------------------------------------------
Choose one of the following
/X/ On the earlier of demand or March 31 , 1999 ; or / / on ,
19 ; or / / days
after Date, the resulting choice being the "Due Date," which also means the
date, if any, on which this note is accelerated.
For value received, the undersigned (if more than one, jointly, and severally)
promise(s) to pay to the order of Norwest Bank Minnesota, National Association
(the "Bank") at 7900 Xerxes Ave. So., Bloomington, MN 55431-2206 or at any
other place designated at any time by the holder of this Note, in lawful money
of the United States of America, the principal sum of Two Million Five Hundred
Thousand - - - - - - - - - - - - - - - - - and no/100 Dollars ($2,500,00.00),
or as much as has been disbursed and remains outstanding on this Note at the Due
Date, as is shown by the Bank's records, together with interest (calculated on
the basis of actual days elapsed in a year of 360 days) on the unpaid principal
of this Note from the Date until this Note is fully paid, at the following rate:
(Choose one of the following):
/ / an annual rate of ________% (the "Note Rate").
/ / an annual rate equal to _______% in excess of the Base Rate, each
change in the interest rate to become effective on the day the corresponding
change in the Base Rate becomes effective (the "Note Rate").
/ / an annual rate equal to _______% in excess of the Base Rate, with an
initial rate to be tied to the Base Rate in effect on the date this Note is
signed and the rate for each month thereafter to be tied to the Base Rate in
effect on the day of the immediately preceeding month (the "Note Rate").
/X/ an annual rate EQUAL TO THE VARIABLE BASE RATE, OR A FIXED RATE EQUAL
TO 1.75% OVER THE AVAILABLE RESERVE ADJUSTED LIBOR OF LIKE MATURITY AT THE DATE
OF REQUEST (the "Note Rate").
"Base Rate" means the rate of interest established by from time to time as its
"base" or "prime" rate or "______________________________________________" rate.
If this / / is checked, the Note Rate shall never be less than % and
shall never to greater than ___%.
After the Due Date, the unpaid principal and interest on this Note shall bear
interest until paid at the rate of _______% per annum in excess of the Note
Rate in effect on the Due Date except that, if the Bank is located in Minnesota
and the original principal amount of this Note is less than $100,000.00, or the
Bank is located in North Dakota, this Note shall bear the same interest rate
after its Due Date as was in effect on the Due Date. The interest rate on this
Note shall never exceed the maximum rate permitted by law.
/ / Interest shall be payable on the Due Date.
/X/ Interest shall be payable monthly commencing May 31, 1998, and on the
same day of each succeeding month, and on the Due Date.
If this / / is checked, if any payment required by this Note is not paid within
____ days after the payment is due, Borrower will make an additional payment to
the Bank of (Choose one) / / $_________; / / $_________% of the amount of
the late payment (the "Late Fee").
The undersigned may, at any time, prepay this Note, in whole or from time to
time in part: (Choose one)
/ / without premium or penalty, upon written or telephonic notice to
the Bank; or,
/ / provided that, upon prepayment, the Bank will be entitled to receive a
prepayment penalty equal to _____% of the principal amount to be prepaid.
/ / In addition, the undersigned shall pay to the Bank a nonrefundable:
(Mark the applicable fee type(s)) / / commitment fee,
/ / facility fee, / / documentation fee, / / application and loan
processing fee of (Choose one) / / $__________;
/ / _________% of the principal amount of this Note, at the time this Note
is signed.
(Check if applicable)
/X/ The undersigned may borrow, prepay and reborrow under this Note until
the Due Date within the limits of this Note and subject to the terms and
conditions in any other agreements between the undersigned and the bank.
/ / Any advances made under this Note shall be at the sole discretion of
the Bank and the Bank is not obligated to make any advance.
THE REVERSE SIDE OF THIS NOTE CONTAINS IMPORTANT, ADDITIONAL PROVISIONS, ALL OF
WHICH ARE MADE A PART HEREOF.
The proceeds of this loan will be used for business or agricultural purposes
only.
- -------------------------------------------------------------------------------
Name By:
Check Technology Corporation Paul Stephenson
- -------------------------------------------------------------------------------
Street Address Its:
12500 Whitewater Drive V.P. -- Chief Financial Officer
----------------------------------------
By:
- -------------------------------------------------------------------------------
City, State and Zip Its:
Minnetonka, MN 55343-0420
- -------------------------------------------------------------------------------
45
<PAGE>
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
9/30/98 9/30/97 9/30/96
---------- ------------ -----------
<S> <C> <C> <C>
Basic
Average shares outstanding 6,273,756 6,244,797 6,170,778
Net income $ 198,862 $ 325,979 $2,245,713
---------- ------------ -----------
Basic Earnings per Share $ 0.03 $ 0.05 $ 0.36
---------- ------------ -----------
Diluted
Average shares outstanding 6,273,756 6,224,797 6,170,778
Net effect of dilutive stock options and
grants - based on the treasury stock
method 16,116 70,276 115,271
---------- ------------ -----------
Diluted shares outstanding 6,289,872 6,295,073 6,286,049
---------- ------------ -----------
---------- ------------ -----------
Net income $ 198,862 $ 325,979 $2,245,713
---------- ------------ -----------
---------- ------------ -----------
Diluted Earnings per Share $ 0.03 $ 0.05 $ 0.36
---------- ------------ -----------
---------- ------------ -----------
</TABLE>
46
<PAGE>
EXHIBIT 21 -- SUBSIDIARIES
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
The Company's subsidiaries, all of which are wholly owned, are as follows:
Check Technology Limited
Check Technology France S.A.
Check Technology Pty Limited
GTI Holdings
GTI Ventures
47
<PAGE>
EXHIBIT 23.1--CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements (Nos.
334-4872 and 333-3491) on Form S-8 of our report dated November 20, 1998 with
respect to the financial statements and schedule of Check Technology
Corporation included in the Annual Report (Form 10-K) for the year ended
September 30, 1998.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Minneapolis, Minnesota
December 22, 1998
48
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 2,701,888
<SECURITIES> 2,582,475
<RECEIVABLES> 3,496,982
<ALLOWANCES> 50,000
<INVENTORY> 10,225,421
<CURRENT-ASSETS> 21,351,593
<PP&E> 4,105,447
<DEPRECIATION> 3,137,533
<TOTAL-ASSETS> 22,319,507
<CURRENT-LIABILITIES> 3,717,322
<BONDS> 0
0
0
<COMMON> 617,812
<OTHER-SE> 17,949,314
<TOTAL-LIABILITY-AND-EQUITY> 22,319,507
<SALES> 23,739,528
<TOTAL-REVENUES> 23,739,528
<CGS> 10,078,505
<TOTAL-COSTS> 23,908,054
<OTHER-EXPENSES> (485,298)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,910
<INCOME-PRETAX> 297,862
<INCOME-TAX> 99,000
<INCOME-CONTINUING> 198,862
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 198,862
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 4,851,283
<SECURITIES> 4,959,023
<RECEIVABLES> 3,632,350
<ALLOWANCES> 50,000
<INVENTORY> 6,599,370
<CURRENT-ASSETS> 21,124,243
<PP&E> 3,829,172
<DEPRECIATION> 2,675,559
<TOTAL-ASSETS> 22,277,856
<CURRENT-LIABILITIES> 3,813,755
<BONDS> 0
0
0
<COMMON> 623,773
<OTHER-SE> 17,784,713
<TOTAL-LIABILITY-AND-EQUITY> 18,408,486
<SALES> 24,718,974
<TOTAL-REVENUES> 24,718,974
<CGS> 9,578,116
<TOTAL-COSTS> 22,603,460
<OTHER-EXPENSES> (453,309)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,110
<INCOME-PRETAX> 2,542,713
<INCOME-TAX> 297,000
<INCOME-CONTINUING> 2,245,713
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,245,713
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
