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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

CHECK TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

(952) 939-9000

Registrant’s telephone number, including area code

Not Applicable

Former name, former address and former fiscal year, if changed since last report

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INDEX
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

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Part I. FINANCIAL INFORMATION

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See notes to consolidated financial statements.

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LIABILITIES AND STOCKHOLDERS’ EQUITY

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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See notes to consolidated financial statements.

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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to consolidated financial statements.

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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2000

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, 1999.

Reclassifications have been made in the prior year to conform with classifications in the current year.

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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2000

NOTE B – – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

a—No incremental shares related to options are included because the impact would be antidilutive.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2000

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 and nine month periods ended June 30, 2000 and 1999 are as follows:

NOTE D – – Executive Loan

In May 2000, the Company modified the terms of its executive officer loan to extend the term of the loan until May 2001 and forgive the loan on a straight-line basis over the period May 2000 until May 2001.

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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 and nine-month periods ended June 30, 2000, total revenues were up 69 percent and 37 percent respectively, compared with those of the same periods in fiscal 1999. Revenues from the sale of document production equipment for the fiscal 2000 third quarter increased $3.0 million from the same period in fiscal 1999 primarily due to increased North American sales of the Imaggia product line. In the fiscal 2000 third quarter, revenues from document production equipment included approximately $3.0 million from the sale of the Company’s Imaggia product line.

For some time, the Company has held 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 uncertain economic environment in many of the countries within these emerging markets has limited the Company’s current opportunities to sell high-end capital equipment into those regions.

For the three and nine-month periods ended June 30, 2000, revenues from maintenance contracts, spare parts, supplies and consumable items decreased $80,000 and $1.1 million respectively, from the same period a year ago. For the nine-month period ended June 30, 2000, approximately $320,000 of the revenue decline was attributable to the effect of foreign currency exchange. A reduction in consumable revenues from Western European customers and the continued reduction in maintenance and consumables revenue from Pacific Rim customers accounted for the remainder of the decline. The Company expects domestic revenues from maintenance contracts, spare parts, supplies and consumable items to increase with the projected growth of the Imaggia product line and begin to offset the reduced international maintenance and consumables revenues.

The gross margin percentage for the three and nine-month periods ended June 30, 2000, was 50 percent and 51 percent, compared to 52 percent and 53 percent for the same periods a year ago. The decrease was due to a shift in the product mix from the Checktronic product line to the Imaggia product line and the decreased revenue from the sale of maintenance, spares, and supplies. The Company anticipates that its gross margin percentage for fiscal 2000 will be lower than fiscal 1999 as revenue from the Imaggia and Océ lines constitutes a larger portion of the Company’s total revenues.

For the three and nine-month periods ended June 30, 2000, selling, general and administrative expenses were $2.9 million and $8.7 million respectively, compared with $2.7 million and $8.2 million for the same periods a year ago. Research and development expense for the three-month period and nine-month

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period ended June 30, 2000 were $0.7 million and $2.0 million respectively, flat with the research and development expenses for the same periods last year.

Net interest income for the three and nine-month periods ended June 30, 2000, was $39,000 and $91,000 respectively, compared to $13,000 and $99,000 for the same period a year ago. The increase for the three-month period ending June 30, 2000 was due to increased cash balances available for investment.

The net exchange gain for the three-month period ended June 30, 2000 was $7,000 compared to a loss of $58,000 for the same period a year ago. The net exchange loss for the nine-month period ended June 30, 2000 was $143,000 compared to a loss of $182,000 for the same period a year ago. The Company anticipates that it will continue to have exchange gains or losses from foreign operations in the future.

For the three-month period ended June 30, 2000, the income before income taxes was $66,000 compared to the loss before income taxes of $1.2 million for the same period a year ago. For the nine-month period ended June 30, 2000, the loss before income taxes was $356,000 compared to the loss before income taxes of $2.4 million for the same period a year ago. Income taxes for the three and nine-month periods ended June 30, 2000 were a benefit of $65,000 and $160,000 respectively, compared to an expense of $45,000 and a benefit of $401,000 for the same periods respectively last year. The income tax benefit for fiscal 2000 is primarily attributable to the net operating loss generated by foreign operations. In fiscal 1999, the income tax benefit was primarily attributable to the net operating loss generated by domestic operations.

For the three-month period ended June 30, 2000, the Company reported net earnings of $0.02 per share as compared to a net loss of $0.20 per share for the same period a year ago. The improvement was primarily attributable to the increase in equipment revenue, the unrealized foreign currency exchange gain, and the income tax benefit. For the nine-month period ended June 30, 2000, the Company reported a net loss of $0.03 per share as compared to a net loss of $0.33 per share for the same period a year ago. The improvement was primarily attributable to the increase in equipment revenue offset by a reduction in the income tax benefit.

Market Risk:

The Company presently has three foreign subsidiaries, located in England, France and Australia, does business in 51 countries, and generates approximately 50 percent 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 Company’s net investment in its foreign subsidiaries was $7,805,000 and $8,443,000 at June 30, 2000, and September 30, 1999, 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 1999. For the first nine-months of fiscal 2000 the Company experienced approximately $320,000 in reduced revenues due to the impact of the stronger U.S. dollar on

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the translation of foreign currency denominated sales and a reduction of approximately $115,000 in related gross profit.

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 or that product development or warranty expenses will not be higher than anticipated.

In January 2000, the Company accepted a three-year equipment and service contract, valued at approximately $40.0 million, for its Imaggia system. The contract value includes the sale of document production systems and related equipment, maintenance, spare parts, supplies and consumable items for the three-year period. Equipment deliveries under the contract began in the second quarter of fiscal 2000 with delivery completion expected during the fourth quarter of fiscal 2001. Achievement of the Company’s future revenue plans depends upon the successful completion of the three-year contract.

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 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 satisfactorily completed its Year 2000 readiness work. Since entering the Year 2000, the Company has not experienced any major disruptions to its business nor is it aware of any significant Year 2000-related disruptions impacting its customers or suppliers. The Company will continue to monitor its critical systems during the calendar year 2000 but does not anticipate any significant impacts due to Year 2000 exposures from its internal systems or from the activities of its suppliers or customers. Costs incurred to achieve Year 2000 readiness were approximately $300 thousand.

Euro Conversion:

On January 1, 1999, certain member countries of the European Union established fixed conversion rates between their existing currencies and the European Union’s common currency (Euro). The transition period for the introduction of the Euro will be between January 1, 1999 and January 1, 2002. The Company has prepared for the introduction of the Euro and has evaluated methods to address the many issues involved with the introduction of the Euro, including the conversion of information technology systems, recalculating currency risk, strategies concerning continuity of contracts, and impacts on the

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processes for preparing taxation and accounting records. The Company believes the Euro conversion will not have a material impact on its financial statements.

Revenue Recognition:

On December 3, 1999, the Securities and Exchange Commission issued SEC Staff Accounting Bulletin Number 101 (SAB No.101) “Revenue Recognition in Financial Statements.” SAB No. 101 summarizes certain of the staff’s views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB No. 101 will be effective for the Company in the fourth quarter of fiscal 2001. The Company is in the process of determining the impact of SAB No. 101.

Liquidity and Capital Resources:

Working capital was $15.2 million at June 30, 2000, compared to $15.7 million at September 30, 1999. The Company’s inventory levels decreased from $10.5 million at September 30, 1999, to $10.4 million at June 30, 2000. Cash and short-term investments amounted to $2.7 million at June 30, 2000, compared to $3.0 million at September 30, 1999.

Stockholders’ equity was $16.1 million at June 30, 2000, compared to $16.7 million at September 30, 1999. In September 1998, the Company announced a stock repurchase program of up to 500,000 shares. At June 30, 2000, the Company had repurchased 170,500 shares at a cost of $434,000.

The Company’s long-term debt to equity ratio was less than 0.01 at June 30, 2000, and September 30, 1999. The Company maintains a $2.5 million unsecured bank line of credit expiring March 31, 2001. At June 30, 2000, the line was unused. 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 2000.

At June 30, 2000, 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, the Company’s Annual Report, the Company’s Form 10-K, in other filings with the Securities and Exchange Commission, in the Company’s press releases and in oral statements made to securities market analysts and stockholders, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause the Company’s actual results to differ materially from historical earnings and those presently anticipated or projected.

The factors mentioned under the subheading “Factors Affecting Results of Operations” are among those that in some cases have affected and in the future could affect the Company’s actual results and could cause the Company’s actual financial performance to differ materially from that expressed in any forward-looking statement.

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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 June 30, 2000.

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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.

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