<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1998
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Commission file number 0-10691
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CHECK TECHNOLOGY CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1392000
- -------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12500 Whitewater Drive
MINNETONKA, MINNESOTA 55343-9420
- ----------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(612) 939-9000
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Registrant's telephone number, including area code
NOT APPLICABLE
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
COMMON STOCK, $.10 PAR VALUE - - 6,167,038 SHARES AS OF FEBRUARY 8, 1999
1
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INDEX
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - - December 31, 1998 and
September 30, 1998.
Condensed consolidated statements of operations - - Three
months ending December 31, 1998 and 1997.
Condensed consolidated statements of cash flows - - Three months
ending December 31, 1998 and 1997.
Condensed notes to consolidated financial statements - -
December 31, 1998.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
SIGNATURES
2
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Part I. FINANCIAL INFORMATION
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,725,436 $ 2,701,888
Short-term investments 1,583,080 2,582,475
Accounts receivable less allowance for doubtful accounts of $50,000 3,532,765 3,446,982
Inventories
Raw materials and component parts 6,530,727 6,038,828
Work-in-process 616,292 367,160
Finished Goods 3,831,862 3,819,433
------------- --------------
10,978,881 10,225,421
Deferred income taxes 1,469,030 1,309,448
Other current assets 1,087,635 1,085,379
------------- --------------
TOTAL CURRENT ASSETS 21,376,827 21,351,593
EQUIPMENT AND FIXTURES
Machinery and equipment 2,090,192 2,049,557
Furniture and fixtures 1,883,309 1,761,984
Leasehold improvements 317,572 293,906
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4,291,073 4,105,447
Less accumulated depreciation and amortization 3,220,524 3,137,533
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1,070,549 967,914
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------------- --------------
TOTAL ASSETS $22,447,376 $22,319,507
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------------- --------------
</TABLE>
See notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
1998 1998
--------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,052,177 $ 2,322,696
Employee compensation and related taxes 460,562 681,465
Income taxes payable 315,388 317,884
Deferred revenue 397,571 383,556
Current portion of capital lease obligations 12,055 11,721
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TOTAL CURRENT LIABILITIES 4,237,753 3,717,322
Capital lease obligations -- less current portion 33,151 35,059
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TOTAL LIABILITIES 4,270,904 3,752,381
STOCKHOLDERS' EQUITY
Capital Stock
Common Stock--par value $.10 per share--authorized
25,000,000 shares; issued and outstanding
December 31, 1998--6,167,038 shares; 616,704 617,812
September 30, 1998--6,178,120 shares
Additional paid in capital 16,900,676 16,938,385
Accumulated other comprehensive income (955,051) (917,856)
Retained earnings 1,614,143 1,928,785
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TOTAL STOCKHOLDERS' EQUITY 18,176,472 18,567,126
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,447,376 $ 22,319,507
--------------- ---------------
--------------- ---------------
</TABLE>
See notes to consolidated financial statements.
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending
December 31,
1998 1997
------------ -----------
<S> <C> <C>
Sales:
Printing equipment $ 1,620,593 $ 1,592,552
Maintenance, spares and supplies 3,625,950 3,560,188
------------ -----------
Net sales 5,246,543 5,152,740
Costs and expenses:
Cost of sales 2,385,544 2,035,689
Selling, general and administrative 2,772,447 2,768,006
Research and development 626,399 662,180
------------ -----------
5,784,390 5,465,875
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(Loss) income from system sales and service (537,847) (313,135)
Interest (income) (51,864) (94,491)
Unrealized exchange loss (gain) 5,652 1,461
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(Loss) income before taxes (491,635) (220,105)
Income taxes (172,000) (72,000)
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Net (loss) income $ (319,635) $ (148,105)
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(Loss) earnings per common share - basic and diluted $ (0.05) $ (0.02)
Weighted average number of shares and share equivalents outstanding
during the period 6,134,590 6,262,745
Weighted average number of shares and share equivalents outstanding
during the period - assuming dilution 6,134,590 6,262,745
</TABLE>
See notes to consolidated financial statements.
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending
December 31,
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (319,635) $ (148,105)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 85,789 98,328
Other (5,178) (5,977)
Changes in operating assets and liabilities:
Accounts receivable (101,075) (130,474)
Inventories (758,120) (1,087,302)
Other current assets (156,714) (39,226)
Accounts payable and accrued expenses 515,478 (93,368)
Deferred revenue 12,073 41,547
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NET CASH (USED IN) OPERATING ACTIVITIES (727,382) (1,364,577)
INVESTING ACTIVITIES
Purchase of equipment and fixtures (187,220) (41,760)
Proceeds from sale of equipment -- 17,277
Purchase of short-term investments (726,365) (2,310,144)
Proceeds from sale of short-term investments 1,739,000 3,658,393
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NET CASH FROM (USED IN) INVESTING ACTIVITIES 825,415 1,323,766
FINANCING ACTIVITIES
Addition of capital leases -- --
(Purchase) issuance of Common Stock (60,293) (35,696)
Repayment of capital leases (2,983) (6,671)
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NET CASH (USED IN ) FROM FINANCING ACTIVITIES (63,276) (42,367)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (11,215) 4,649
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INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 23,542 (78,529)
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 2,701,894 3,165,601
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,725,436 $ 3,087,072
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</TABLE>
See notes to consolidated financial statements.
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 1998
NOTE A - - Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended September 30, 1998.
Reclassifications have been made in the prior year to conform with
classifications in the current year.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share (Statement 128). 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 any dilutive effects of stock options, and other
dilutive securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 1998
NOTE B - - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Month Period
Ended December 31,
1998 1997
----------------- -------------------
<S> <C> <C>
Numerator:
Net (Loss) Income (319,635) (148,105)
----------------- -------------------
Numerator for basic and diluted earnings per share -
(loss) income applicable to common stockholders (319,635) (148,105)
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 6,134,590 6,262,745
Effect of dilutive securites:
Employee stock options 0 0
Employee stock grants 0 0
----------------- -------------------
Dilutive potential common shares 0 (a) $ 0 (a)
Denominator for diluted earnings per share -
Adjusted weighted-average shares 6,134,590 6,262,745
----------------- -------------------
----------------- -------------------
(Loss) earnings per common share - basic and diluted $ (0.05) (a) $ (0.02) (a)
----------------- -------------------
----------------- -------------------
</TABLE>
a--No incremental shares related to options are included because the impact
would be antidilutive.
8
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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 1998
NOTE C - - Comprehensive Income
As of October 1, 1998, the Company adopted Statement of Financial Accounting
Standards Number 130 (Statement No. 130) "Reporting Comprehensive Income."
Statement No. 130 establishes standards for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on the Company's net income or stockholders' equity. Statement No.
130 requires foreign currency translation adjustments, which prior to adoption
were reported separately in stockholders' equity, to be included in "other
comprehensive income." Amounts in prior year financial statements have been
reclassified to conform to Statement No. 130.
The components of comprehensive income, net of related tax, for the three-month
periods ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net loss $(319,635) $(148,105)
Foreign currency translation adjustments (37,195) (134,711)
---------- ----------
Comprehensive income $(356,830) $(282,816)
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</TABLE>
9
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Item 2
Management's Discussion and Analysis of Results
of Operations and Financial Condition
Results of Operations
The Company's revenues consist of (i) sales of document production systems and
related equipment and (ii) maintenance contracts, spare parts, supplies and
consumable items. For the three month period ended December 31, 1998, revenues
from the sale of document production equipment were flat with those of the same
period in fiscal 1998. Revenue from document production equipment for the
quarter included approximately $1.1 million from the sale of the Company's
Imaggia product line. The Company has held for some time a dominant position in
many of the international markets in which its Checktronic equipment is sold.
Demand for the Checktronic product line has softened in these 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 countries
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
increased 2% for the three month period ended December 31, 1998, primarily due
to increased volumes of consumable sales.
The gross margin percentage for the three month period ended December 31, 1998,
was 55% compared to 60% in the comparable prior period. The decrease was
primarily due to the change in the Company's product mix, primarily the
increased component in the revenue mix of the Imaggia product line as compared
to the Checktronic product line. The Company anticipates that its gross margin
percentage for the full fiscal 1999 will be somewhat lower than that of the full
fiscal 1998 as revenue from the Imaggia line constitutes a larger portion of the
Company's total revenues.
Operating expenses during the three month period ended December 31, 1998, were
flat with those of the comparable quarter a year ago. Net interest income for
the quarter was $52,000 compared to $95,000 for the comparable prior quarter.
The decrease was due to lower cash balances available for investment and lower
interest rates.
For the quarter, the Company reported a net loss of $0.05 per share as compared
to a net loss of $0.02 per share in the comparable period last year. The
decrease was primarily attributable to the effect of the reduction in gross
margins.
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 loss was $6,000 for the current quarter, compared to a loss of
$1,000 in the comparable period last year.
10
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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 $8,895,000 and
$8,681,000 at December 31, 1998, and September 30, 1998, translated into U.S.
dollars at the closing exchange rates. The potential loss in value resulting
from a hypothetical 10% change in foreign exchange rates is not material. The
impact of the stronger U.S. dollar on the translation of foreign currency
denominated sales and related gross profit thereon was not material in 1998 or
in the first quarter of fiscal 1999.
Factors Affecting Results of Operations:
The Company is continuing development of the Imaggia system, including improving
its overall reliability and robustness. The Company is using the Gemini digital
print technology, which has been 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 change with miminal 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 that 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.
11
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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 prior to fiscal 1999.
Liquidity and Capital Resources:
Working capital was $17.1 million at December 31, 1998, compared to $17.6
million at September 30, 1998. The Company's inventory levels increased from
$10.2 million at September 30, 1998, to $10.9 million at December 31, 1998,
primarily due to an increase in Imaggia related inventory. Cash and short-term
investments amounted to $4.3 million at December 31, 1998, compared to $5.3
million at September 30, 1998.
Stockholders' equity was $18.2 million at December 31, 1998, compared to $18.6
million at September 30, 1998. In September 1998, the Company announced a stock
repurchase program of up to 500,000 shares. At December 31, 1998, the Company
had repurchased 160,500 shares at a cost of $410,000.
The Company's long-term debt to equity ratio was less than 0.01 at December 31,
1998, and September 30, 1998. The Company maintains a $2.5 million unsecured
bank line of credit. At December 31, 1998, the line was unused. The credit
agreement expires March 31, 1999, and the Company presently expects to negotiate
a new bank line of credit. The Company believes that its current financial
arrangements and anticipated level of internally funds will be sufficient to
fund its working capital requirements in fiscal 1999.
At December 31, 1998, the Company had no material commitments for capital
expenditures.
Cautionary Statement:
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, in the Company's Annual Report, in the
Company's Form 10-K, in other filings with the Securities and Exchange
Commission, in the Company's press releases and in oral statements made to
securities market analysts and stockholders, which are not historical or current
facts, are "forward-looking statements" made pursuant to the safe harbour
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties that could cause the
Company's actual results to differ materially from historical earnings and those
presently anticipated or projected.
The factors mentioned under the subheading "Factors Affecting Results of
Operations" are among those that in some cases have affected and in the future
could affect the Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement.
12
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended
December 31, 1998.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHECK TECHNOLOGY CORPORATION
-------------------------------------
Registrant
Date FEBRUARY 12, 1999 /S/ JAY A. HERMAN
------------------------------ --------------------------
Jay A. Herman
President and Chief Executive Officer
Date FEBRUARY 12, 1999 /S/ PAUL W.B. STEPHENSON
------------------------------ --------------------------------------
Paul W.B. Stephenson
Vice President, Finance and Administration
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,725,436
<SECURITIES> 1,583,080
<RECEIVABLES> 3,582,765
<ALLOWANCES> 50,000
<INVENTORY> 10,978,881
<CURRENT-ASSETS> 21,376,827
<PP&E> 4,291,073
<DEPRECIATION> 3,220,524
<TOTAL-ASSETS> 22,447,376
<CURRENT-LIABILITIES> 4,237,753
<BONDS> 0
0
0
<COMMON> 616,704
<OTHER-SE> 17,559,768
<TOTAL-LIABILITY-AND-EQUITY> 22,447,376
<SALES> 5,246,543
<TOTAL-REVENUES> 5,246,543
<CGS> 2,385,544
<TOTAL-COSTS> 5,784,390
<OTHER-EXPENSES> (46,212)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (491,635)
<INCOME-TAX> (172,000)
<INCOME-CONTINUING> (319,635)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (319,635)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
