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Previous: KEMPER INTERNATIONAL FUND, 485APOS, 2000-12-27 |
Next: CHECK TECHNOLOGY CORP, 10-K405, EX-10.2, 2000-12-27 |
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Annual report pursuant to section 13 or 15(d) of the Securities and Exchange Act of 1934
For the fiscal year ended September 30, 2000
Commission File Number: 0-10691
CHECK TECHNOLOGY CORPORATION
| Minnesota | 41-1392000 | |
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 12500 Whitewater Drive, Minnetonka, Minnesota | 55343-9420 | |
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| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (952) 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 NO 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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.
The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $22,652,490 at December 1, 2000 when the closing price of such stock, as reported by NASDAQ, was $3.750.
There were 6,188,388 shares outstanding of Registrant’s $.10 par value common stock as of December 1, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
| 1. | Portions of the definitive proxy statement to be filed with the Commission by the end of January 2001 are incorporated by reference into Part III |
This Form 10-K consists of 49 pages (including exhibits). The index is set forth on page 14.
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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®, 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. The Company calls these “Checkwriting” applications. 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 between 25 and 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.
During fiscal 1998, the Company launched the Imaggia MG20® system in commercial markets in response to the changing demands of security printers and on-demand printing applications worldwide. In April 1999, the Company completed an agreement with Océ Printing Systems GmbH for worldwide exclusive rights to sell (on a private label basis) and service the PS75 MICR product manufactured by Océ. In addition, the Company obtained certain non-exclusive rights to sell and service other Océ high-performance sheet-fed MICR and non-MICR printing systems.
At September 30, 2000, the Company had an installed base of 432 systems located in 53 countries.
Business
The Company’s business is the design, manufacture, sale and service of computerized financial document production systems. These systems can collate, personalize and encode documents into packages tailored to the customer’s requirements.
Products
Check Technology sells a 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. The Company’s premier cut-sheet system is the Imaggia MG20® system. The Imaggia system utilizes state-of-the-art digital, non-impact technology, offering print quality that is visually indistinguishable from offset print. The Company markets the Imaggia system to customers with high volume folio production and print-on-demand applications. The Imaggia MG20 system operates at a rated speed of 228 pages per minute and accommodates varying paper sizes up to 18.75 inches in width and 22 inches in length. The Imaggia system can be purchased with various input and output paper handling options and provides a high level of flexibility, reliability, and the consistency required to produce high quality documents while reducing production costs. The Company’s other manufactured 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, and 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 has an agreement with Océ Printing Systems GmbH for worldwide exclusive rights to private label, sell, and service the PS75 MICR
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product manufactured by Océ. In addition, the Company has certain non-exclusive rights to private label, sell and service other Océ high-performance sheet-fed MICR and non-MICR printing systems. The Company’s Océ line of products utilize electrophotography imaging technology and markets the Océ systems to customers with medium to high volume folio production, insurance claim, fulfillment and disbursement, and print-on-demand applications. The Model PS75 MICR operates at a rated speed of 75 pages per minute, while the Model PS155 operates at 155 pages per minute and has both simplex and duplex operating modes.
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 Units. In addition to the document production systems, the Company offers a finishing system to complement its cut-sheet product line. The Foliotronic® 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 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, which is consumed in the printing of each MICR code line, and toner, which is consumed in the printing of each document. The Company believes that its service network and spare parts business operated profitably for the years ended September 30, 2000, 1999 and 1998, based upon the economies of scale achieved from the expansion of the installed base of Company 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.
Sales and Marketing
Organization. The Company’s system sales are made predominantly 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 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 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 are difficult to predict. Company studies have shown that other documents produced by the Company’s systems have exhibited higher growth rates over the same period. These documents include payment coupons, tax payment and other installment payment products.
Checkwriting activities 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
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penetrating the largest personal check production markets outside of the United States. These include Australia, Brazil, France, Mexico, Spain and the United Kingdom.
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 sales of the Imaggia system are 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. These major players establish competitive standards for alphanumeric print quality, MICR print quality and delivery time in this segment. 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. In the past, the Company was 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 system was designed to provide entry into the United States check production market. See “Research and Development.” In January 2000, the Company accepted a three-year equipment and service contract for its Imaggia system to be used in the manufacture of checkbooks in the United States.
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, Alabama), Cummins Allison (Indianapolis, Indiana) and Venture Encoding (Dallas, Texas). 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 Océ (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 (United States), Xerox, Océ and Nipson Bull (France).
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, Océ, 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, 2000, the Company had a backlog of approximately $13,590,000, compared to a backlog of $4,082,000 as of December 1, 1999. 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. During most of fiscal 2000, the Company had a significant backlog due to the January 2000 acceptance of a three-year Imaggia system and service contract, valued at approximately $40.0 million. Backlog declined throughout the year as scheduled deliveries were met. 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. The Company expects that from time to time it will continue to have periods during which there may be little or no backlog.
Manufacturing and Sources of Supply
The Company 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
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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 (Delphax), 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 advised the Company that its intention is to have Delphax comply with all of Delphax’s existing contractual obligations to the Company and expand Delphax’s relationship with the Company in the future, indicating that the competitive relationship between the Company and Xerox will not be a factor in the relationship of Delphax with the Company. The expressed intentions of Xerox could change to the detriment of the Company. In February 2000, the Company finalized a purchase agreement with Delphax for the worldwide exclusive rights to sell the Gemini digital printing technology in the blank check and check folio production market until May 25, 2003. 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 continues to develop features for the Imaggia system, 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 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, were outside of the Company’s control.
During fiscal 2000, 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 ongoing. The Company has also continued product engineering on its established product lines. The Company’s research and development expenditures were $2,722,000, $2,710,000 and $2,729,000 for the years ended September 30, 2000, 1999 and 1998, respectively.
Patents
In July 1997, the Company received a patent covering certain aspects of its Imaggia 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 systems, or any components of such systems, 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.
Employees
As of December 1, 2000, the Company had 207 full-time employees, including 36 in executive and administrative positions, 28 in research and development, 32 in manufacturing, 17 in sales and marketing and 94 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.
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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 $418,000, increasing to $481,000 on September 15, 2005 and thereafter, plus operating expenses and real estate taxes incurred by the landlord.
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 $189,000, subject to adjustment every five years, plus a pro rata portion of the operating expenses incurred by the landlord. 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 are 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 MATTERS 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, 2000.
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The names and ages of all of the Company’s executive officers and the positions held as of the date of this report are:
| Name | Position | Age | ||||
| Jay A. Herman | President and Chief Executive Officer | 53 | ||||
| Peter J. Wood | Vice President of Engineering | 58 | ||||
| Dieter P. Schilling | Vice President of Operations | 45 | ||||
| Robert M. Barniskis | Vice President, Chief Financial Officer | 37 | ||||
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 named Vice President of Operations in November 2000 after having held the position of Vice President of Operations and Customer Service since October of 1989. From October 1986 until October 1989, he held the position of Vice President of Customer Service. Mr. Schilling joined the Company 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.
Robert M. Barniskis joined the Company as Vice President, Chief Financial Officer in November 1999. Prior to joining the Company, Mr. Barniskis spent 14 years in various financial roles within Rosemount Inc., a wholly owned subsidiary of Emerson Electric Company. He was Finance Director, Americas, of Rosemount’s Measurement Division from 1998 to 1999. Between 1996 and 1998, Mr. Barniskis was Finance Director, Asia Pacific, for Fisher-Rosemount Systems, Inc., based in Singapore. Previous to this, Mr. Barniskis was Director of Finance and MIS for Kay-Ray/Sensall, Inc., a wholly owned subsidiary of Rosemount Inc., from 1993 to 1995.
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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.
| High | Low | ||||||||
| Year ended September 30, 2000 | |||||||||
| First quarter | $ | 4.313 | $ | 1.875 | |||||
| Second quarter | 8.375 | 3.563 | |||||||
| Third quarter | 6.375 | 4.250 | |||||||
| Fourth quarter | 5.625 | 4.250 | |||||||
| Year ended September 30, 1999 | |||||||||
| First quarter | 3.875 | 2.188 | |||||||
| Second quarter | 3.000 | 2.125 | |||||||
| Third quarter | 2.563 | 1.500 | |||||||
| Fourth quarter | 3.188 | 2.188 | |||||||
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, 2000, the Company had repurchased 170,500 shares at a cost of $434,400.
Holders
As of December 1, 2000, the Company had 329 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
| Year Ended September 30, | |||||||||||||||||||||
| 2000 | 1999 | 1998 | 1997 | 1996 | |||||||||||||||||
| Consolidated Statement of Operations Data: | |||||||||||||||||||||
| Net sales | $ | 28,781,718 | $ | 22,308,000 | $ | 23,739,528 | $ | 22,866,674 | $ | 24,718,914 | |||||||||||
| Net (loss) income | (290,437 | ) | (1,614,387 | ) | 198,862 | 325,979 | 2,245,713 | ||||||||||||||
| (Loss) earnings per common share(1) | (0.05 | ) | (0.26 | ) | 0.03 | 0.05 | 0.36 | ||||||||||||||
| (Loss) earnings per common share assuming dilution(2) | (0.05 | ) | (0.26 | ) | 0.03 | 0.05 | 0.36 | ||||||||||||||
| Weighted average number of shares outstanding during the period (1) | 6,146,630 | 6,129,225 | 6,273,756 | 6,224,797 | 6,170,778 | ||||||||||||||||
| Weighted average number of shares and equivalents outstanding during the period, assuming dilution (2) | 6,146,630 | 6,129,225 | 6,289,872 | 6,295,073 | 6,286,049 | ||||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||||
| Working capital | $ | 15,036,839 | $ | 15,736,047 | $ | 17,634,271 | $ | 17,588,576 | $ | 17,310,488 | |||||||||||
| Total assets | 24,365,873 | 20,455,869 | 22,319,507 | 22,971,493 | 22,277,856 | ||||||||||||||||
| Long-term liabilities | — | — | 35,059 | 78,903 | 56,615 | ||||||||||||||||
| Stockholders’ equity | 15,923,236 | 16,706,060 | 18,567,126 | 18,679,662 | 18,408,486 | ||||||||||||||||
| (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 outstanding during the period. | |
| (2) | Earnings per share of Common Stock assuming dilution 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, 2000 (fiscal 2000), sales of document production equipment increased 101% over the year ended September 30, 1999 (fiscal 1999), compared to a decrease of 15% in fiscal 1999 over the year ended September 30, 1998 (fiscal 1998). The increase in fiscal 2000 arose primarily from the increased North American sales of the Imaggia system. The Company completed the sale of twenty-two Imaggia systems in fiscal 2000, compared to seven in fiscal 1999, and as of December 1, 2000, had an order backlog of approximately $11.5 million for its Imaggia system, which it expects to ship in fiscal 2001. The decrease in sales of document production equipment in fiscal 1999 was due primarily to the strategic decision to limit sales of its Imaggia product, as well as lower Checktronic sales in Latin America and Asia. 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.
Revenues from maintenance contracts, spare parts, supplies and consumable items decreased 9% in fiscal 2000 over fiscal 1999, compared to a 1% decrease in fiscal 1999 over fiscal 1998. The $1.4 million decrease in fiscal 2000 was due to three evenly distributed factors. First, approximately a third of the fiscal 2000 revenue decline was due to the impact of the stronger U.S. dollar on the translation of foreign currency denominated sales. Second, approximately a third of the fiscal 2000 revenue decline was due to the continued reduction in maintenance and consumables revenue from Pacific Rim customers. The remainder of the fiscal 2000 revenue decline was due to the reduction in consumable revenues from Western European customers. The decrease in fiscal 1999 over fiscal 1998 was primarily due to a reduction in maintenance and consumables revenue from Pacific Rim customers. The Company expects domestic revenues from maintenance contracts, spare parts, supplies and consumable items to increase in fiscal 2001 with the projected growth of the Imaggia product line, offsetting the projected decline in international maintenance and consumable revenues.
The Company’s gross margin percentage in fiscal 2000 was 51%, compared to 53% in fiscal 1999 and 58% in fiscal 1998. The decreases in gross margin percentage each year were primarily due to the 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 in fiscal 2001 will be somewhat lower than fiscal 2000 as revenue from the Imaggia and Océ lines constitutes a larger portion of the Company’s total revenues.
Selling, general and administrative expenses increased $1.3 million in fiscal 2000, compared to fiscal 1999 and were flat in fiscal 1999 as compared to fiscal 1998. The increase in fiscal 2000 was due to the increase in personnel and associated expenses required to support the increase in total revenues. The Company anticipates that its selling, general and administrative expenses in fiscal 2001 may continue to increase to support the projected growth in total revenues, but at a rate less than the projected total revenue rate of growth.
Research and development expenses were flat in fiscal 2000, compared to fiscal 1999 and fiscal 1998.
Net interest income was $117,000 in fiscal 2000, compared to $114,000 in fiscal 1999 and $334,000 in fiscal 1998. The decrease in fiscal 1999 was due to lower cash balances available for investment and lower interest rates.
The Company recorded an income tax benefit of 37% in fiscal 2000, compared to an income tax benefit of 17% in fiscal 1999 and an income tax expense of 33% in fiscal 1998. The fiscal 2000 income tax benefit reflects the recording of approximately $174,000 in deferred tax assets from the net operating losses and tax credits generated in fiscal 2000. The 1999 income tax benefit reflects the recording of approximately $261,000 in deferred tax assets from the net operating losses and tax credits generated in fiscal 1999. Despite the reported cumulative net loss for fiscal 2000, 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. The Company believes it will generate sufficient future taxable income to recover its net deferred tax assets from increased sales of its Imaggia product line, sales of the Océ product line and continued sales of maintenance, spares and supplies. Further information about income taxes is provided in Note B to the consolidated financial statements.
The net loss for fiscal 2000 amounted to $0.05 per share, compared to a net loss of $0.26 per share in fiscal 1999 and net income of $0.03 per share in fiscal 1998. The improvement in the net loss in fiscal 2000 was due to the increase in document production systems revenue, offset by the effect of reduced gross margins, increased selling, general and administrative expenses, and the unfavorable effects of foreign currency exchange rate fluctuations. The net loss in fiscal 1999 was primarily due to the decrease in
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the level of document production systems revenue, the effect of reduced gross margins, and the unfavorable effects of foreign currency exchange rate fluctuations.
Market Risk
The Company presently has three foreign subsidiaries, located in England, France and Australia, does business in 53 countries, and generates approximately 44% of its revenue 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 these markets.
The Company experiences foreign currency gains and loss, which are reflected in 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 arising from this was $293,000 in fiscal 2000, compared to a loss of $120,000 in fiscal 1999 and a gain of $132,000 in fiscal 1998. 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 $7,006,000 and $8,443,000 at September 30, 2000 and 1999, respectively, translated into U.S. dollars using the year-end exchange rates. The potential loss value resulting from a hypothetical 10% change in foreign currency exchange rates was not material in 2000 and 1999. In fiscal 2000 the Company experienced approximately $877,000 in reduced revenues due to the impact of the stronger U.S. dollar on the translation of foreign currency denominated sales and a reduction of approximately $414,000 in related gross profit. 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 and 1998.
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, developed by Delphax, 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 and continued market acceptance of the Imaggia system.
During fiscal 2000, the Company affirmed its agreement with Océ Printing Systems GmbH for worldwide exclusive rights to private label, sell and service the PS75 MICR product. In addition, the Company obtained certain non-exclusive rights to private label, sell and service other Océ high-performance sheet-fed MICR and non-MICR printing systems. The Company anticipates that sales of the Océ products will comprise a larger portion of its document production systems revenue in fiscal 2001.
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 affect 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.
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 is January 1, 1999 to 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 effects on the processes for preparing taxation and accounting records. The Company believes the Euro conversion will not have a material impact on its financial statements.
11
Revenue Recognition
On December 3, 1999, the Securities and Exchange Commission issued SEC Staff Accounting Bulletin Number 101 Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarizes certain of the staff’s views on applying generally accepted accounting principles to revenue recognition in financial statements. SAB 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 this Bulletin.
Liquidity and Capital Resources
Working capital was $15.0 million at September 30, 2000, compared to $15.7 million at September 30, 1999. The decline is primarily due to an increase in accounts receivable and work-in-progress inventory, which was more than offset by increases in accounts payable and deferred revenue. The Company’s inventory levels increased from $10.5 million at September 30, 1999, to $11.8 million at September 30, 2000, primarily due to an increase in Imaggia related inventory. Cash and short-term investments amounted to $3.2 million at September 30, 2000, compared to $3.0 million at September 30, 1999. Deferred revenue increased from $448,000 as of September 30, 1999, to $3,316,000 as of September 30, 2000, primarily due to contractually agreed billing in advance of equipment shipment to one customer. Stockholders’ equity was $15.9 million at September 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 September 30, 2000, the Company had repurchased 170,500 shares at a cost of $434,000. Stockholders’ equity was also affected in 2000 by a negative change of $785,000 in the foreign currency adjustment, arising from the translation of the assets and liabilities of the Company’s subsidiaries from their functional currencies to U.S. dollars.
The Company had no long-term debt as of September 30, 2000 and 1999. The Company maintains a $2.5 million unsecured bank line of credit. The line of credit agreement places certain restrictions on the Company including, among others, requirements as to maintenance for minimum levels of tangible net worth. As of September 30, 2000, the entire line was unused, and the Company was granted a compliance waiver with respect to the total liabilities to tangible net worth covenant as of that date. The credit agreement expires April 30, 2001, and the Company expects to negotiate a new bank line of credit. The Company believes that its current capital resources, unused financing source, and anticipated level of internally generated funds will be sufficient to fund its working capital requirements in fiscal 2001.
As of September 30, 2000, the Company had committed to purchase certain leased office furniture and equipment from the lessor for approximately $61,000.
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 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 sentence of the second paragraph under the subheading “Market Risk” concerning unrealized gains or losses from foreign operations, and (ii) the last sentence of the second 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 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
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.
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, 2001, 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, 2001, 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, 2001, and filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
13
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.
| Description | Page | |||
| Report of Independent Auditors | 19 | |||
| Consolidated Balance Sheets—September 30, 2000 and 1999 | 20 | |||
| Consolidated Statements of Operations—The years ended September 30, 2000, 1999 and 1998 | 22 | |||
| Consolidated Statements of Stockholders’ Equity—The years ended September 30, 2000, 1999 and 1998 | 23 | |||
| Consolidated Statements of Cash Flows—The years ended September 30, 2000, 1999 and 1998 | 24 | |||
| Notes to Consolidated Financial Statements—September 30, 2000 | 25 | |||
Financial Statement Schedules
| Number | Description | Page | ||||
| Schedule II | Valuation and Qualifying Accounts and Reserves | 35 | ||||
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 on Form 8-K.
The Company did not file any reports on Form 8-K during the three months ended September 30, 2000.
Exhibits
| Number | Description | Page or Incorporated by Reference From | ||||
| 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 Common Stock Certificates | Exhibit 4(b) to Registration Statement on Form S-1 (No. 2-97193) | ||||
| 4.2 | Statement of Rights and Preferences of Capital Stock | Exhibit A to Current Report on Form 8-K dated May 15, 1990 | ||||
| 10.1 | Lease for Offices in Crawley, England Bank | Exhibit 10.9 to Form 10-K for the eight months ended September 30, 1985 | ||||
| 10.2 | Line of Credit Agreement, as amended, effective March 31, 2000 | Exhibit 10.2 filed herewith | ||||
14
| 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 the Company has entered into with 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) | Exhibit 10.10 to Form 10-K for fiscal year ended September 30, 1987 | ||||
| 10.5 | Employment Agreement as of October 1, 2000, between the Company and Jay A. Herman | Exhibit 10.5 filed herewith | ||||
| 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, Minnesota | Exhibit 10.9 to Form 10-K for fiscal year ended 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 | ||||
| 21 | List of Subsidiaries | Exhibit 21 filed herewith | ||||
| 23.1 | Consent of Independent Auditors | Exhibit 23.1 filed herewith | ||||
| 27 | Financial Data Schedule | Exhibit 27 filed herewith | ||||
15
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 5, 2000 | 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.
| SIGNATURE | TITLE | DATE | ||
| President, Director | ||||
| /s/ Jay A. Herman | (Principal Executive Officer) | December 5, 2000 | ||
| Jay A. Herman | ||||
| Vice President, Chief Financial Officer | ||||
| /s/ Robert M. Barniskis | (Principal Financial & Accounting Officer) | December, 5, 2000 | ||
| Robert M. Barniskis | ||||
| /s/ Gary Holland | Director | December 5, 2000 | ||
| Gary Holland | ||||
| /s/ Thomas H. Garrett III | Director | December 5, 2000 | ||
| Thomas H. Garrett III | ||||
| /s/ R. Stephen Armstrong | Director | December 5, 2000 | ||
| R. Stephen Armstrong |
16
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, 2000
Check Technology Corporation
Minnetonka, Minnesota
17
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, 2000 and 1999
Consolidated Statements of Operations — The years ended September 30, 2000, 1999 and 1998
Consolidated Statements of Stockholders’ Equity —The years ended September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows — The years ended September 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements — September 30, 2000
The following consolidated financial statement schedules of Check Technology Corporation and subsidiaries are included in Item 14(d):
| Number | Description | |
| Schedule II | Valuation and Qualifying Accounts and Reserves |
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.
18
Board of Directors
Check Technology Corporation
We have audited the accompanying consolidated balance sheets of Check Technology Corporation and subsidiaries as of September 30, 2000 and 1999, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended September 30, 2000. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States. 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 22, 2000
19
CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
| September 30, | ||||||||||
| 2000 | 1999 | |||||||||
| ASSETS | ||||||||||
| CURRENT ASSETS | ||||||||||
| Cash and cash equivalents | $ | 3,043,754 | $ | 2,882,618 | ||||||
| Short-term investments | 108,760 | 164,380 | ||||||||
| Accounts receivable, less allowance for doubtful accounts of $51,697 and $50,000 as of September 30, 2000 and 1999, respectively | 5,398,986 | 3,542,350 | ||||||||
| Inventory: | ||||||||||
| Raw materials and component parts | 6,318,199 | 6,128,748 | ||||||||
| Work-in-progress | 1,217,165 | 107,622 | ||||||||
| Finished goods | 4,269,391 | 4,218,621 | ||||||||
| 11,804,755 | 10,454,991 | |||||||||
|
| ||||||||||
| Deferred income taxes | 1,743,519 | 1,570,884 | ||||||||
| Other current assets | 1,379,702 | 870,633 | ||||||||
| TOTAL CURRENT ASSETS | 23,479,476 | 19,485,856 | ||||||||
| EQUIPMENT AND FIXTURES | ||||||||||
| Machinery and equipment | 1,983,899 | 2,005,512 | ||||||||
| Furniture and fixtures | 2,169,434 | 1,985,732 | ||||||||
| Leasehold improvements | 315,995 | 316,850 | ||||||||
| 4,469,328 | 4,308,094 | |||||||||
| Less accumulated depreciation and amortization | 3,582,931 | 3,338,081 | ||||||||
| 886,397 | 970,013 | |||||||||
| TOTAL ASSETS | $ | 24,365,873 | $ | 20,455,869 | ||||||
See notes to consolidated financial statements.
20
CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
| September 30, | |||||||||||
| 2000 | 1999 | ||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| CURRENT LIABILITIES | |||||||||||
| Accounts payable and accrued expenses | $ | 4,242,943 | $ | 2,533,952 | |||||||
| Employee compensation and related taxes | 868,362 | 553,185 | |||||||||
| Income taxes payable | 15,247 | 175,449 | |||||||||
| Deferred revenue | 3,316,085 | 448,335 | |||||||||
| Current portion of capital lease obligations | — | 38,888 | |||||||||
| TOTAL CURRENT LIABILITIES | 8,442,637 | 3,749,809 | |||||||||
| TOTAL LIABILITIES | 8,442,637 | 3,749,809 | |||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||
| Common stock — par value $.10 per share — authorized 25,000,000 shares; issued and outstanding: | |||||||||||
| 6,190,978 and 6,154,157 as of September 30, 2000 and 1999, respectively | 619,098 | 615,416 | |||||||||
| Additional paid-in capital | 17,063,384 | 16,861,417 | |||||||||
| Accumulated other comprehensive loss | (1,968,736 | ) | (1,184,070 | ) | |||||||
| Retained earnings | 209,490 | 413,297 | |||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 15,923,236 | 16,706,060 | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 24,365,873 | $ | 20,455,869 | |||||||
See notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF OPERATIONS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
| Year Ended September 30, | |||||||||||||||||||||
| 2000 | 1999 | 1998 | |||||||||||||||||||
| Sales: | |||||||||||||||||||||
| Printing equipment | $ | 15,625,836 | $ | 7,790,870 | $ | 9,145,553 | |||||||||||||||
| Maintenance, spares and supplies | 13,155,882 | 14,517,130 | 14,593,975 | ||||||||||||||||||
| NET SALES | 28,781,718 | 22,308,000 | 23,739,528 | ||||||||||||||||||
| Costs and Expenses: | |||||||||||||||||||||
| Cost of sales | 14,106,518 | 10,583,208 | 10,078,505 | ||||||||||||||||||
| Selling, general and administrative | 12,235,438 | 10,949,967 | 11,101,002 | ||||||||||||||||||
| Research and development | 2,722,404 | 2,709,716 | 2,728,547 | ||||||||||||||||||
| 29,064,360 | 24,242,891 | 23,908,054 | |||||||||||||||||||
| (LOSS) FROM SYSTEM SALES AND SERVICE | (282,642 | ) | (1,934,891 | ) | (168,526 | ) | |||||||||||||||
| Interest expense | 8,214 | 10,900 | 18,910 | ||||||||||||||||||
| Interest (income) | (125,243 | ) | (124,469 | ) | (353,307 | ) | |||||||||||||||
| Unrealized exchange loss (gain) | 292,824 | 120,065 | (131,991 | ) | |||||||||||||||||
| (LOSS) INCOME BEFORE TAXES | (458,437 | ) | (1,941,387 | ) | 297,862 | ||||||||||||||||
| Income tax (benefit) expense | (168,000 | ) | (327,000 | ) | 99,000 | ||||||||||||||||
| NET (LOSS) INCOME | $ | (290,437 | ) | $ | (1,614,387 | ) | $ | 198,862 | |||||||||||||
| Basic and diluted (loss) earnings per common share | $ | (0.05 | ) | $ | (0.26 | ) | $ | 0.03 | |||||||||||||
| Weighted average number of shares and equivalents outstanding during the period | 6,146,630 | 6,129,225 | 6,273,756 | ||||||||||||||||||
| Weighted average number of shares and equivalents outstanding during the period, assuming dilution | 6,146,630 | 6,129,225 | 6,289,872 | ||||||||||||||||||
|
| |||||||||||||||||||||
| See notes to consolidated financial statements | |||||||||||||||||||||
22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
| Accumulated | |||||||||||||||||||||||||||||
| Additional | Other | ||||||||||||||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Retained | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Income | Earnings | Total | ||||||||||||||||||||||||
| Balance, September 30, 1997 | 6,338,135 | $ | 633,814 | $ | 17,151,182 | $ | (851,225 | ) | $ | 1,745,891 | $ | 18,679,662 | |||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | 198,862 | 198,862 | |||||||||||||||||||||||
| Translation adjustment | — | — | — | (66,631 | ) | — | (66,631 | ) | |||||||||||||||||||||
| Total comprehensive income | 132,231 | ||||||||||||||||||||||||||||
| Exercise of stock options, Including tax benefit of $41,491 | 15,000 | 1,500 | (5,491 | ) | — | — | (3,991 | ) | |||||||||||||||||||||
| Purchase of stock | (153,590 | ) | (15,359 | ) | (6,464 | ) | — | (371,842 | ) | (393,665 | ) | ||||||||||||||||||
| Vesting of restricted stock | — | — | — | — | 146,986 | 146,986 | |||||||||||||||||||||||
| Cancellation of restricted stock | (21,425 | ) | (2,143 | ) | (206,745 | ) | — | 208,888 | — | ||||||||||||||||||||
| Payment, note receivable | — | — | 5,903 | — | — | 5,903 | |||||||||||||||||||||||
| Balance, September 30, 1998 | 6,178,120 | 617,812 | 16,938,385 | (917,856 | ) | 1,928,785 | 18,567,126 | ||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (1,614,387 | ) | (1,614,387 | ) | |||||||||||||||||||||
| Translation adjustment | — | — | — | (266,214 | ) | — | (266,214 | ) | |||||||||||||||||||||
| Total comprehensive loss | (1,880,601 | ) | |||||||||||||||||||||||||||
| Exercise of stock options, including tax benefit of $26,649 | 3,917 | 392 | (23,933 | ) | — | — | (23,541 | ) | |||||||||||||||||||||
| Purchase of stock | (21,880 | ) | (2,188 | ) | (9,934 | ) | — | (45,476 | ) | (57,598 | ) | ||||||||||||||||||
| Vesting of restricted stock | — | — | — | — | 86,625 | 86,625 | |||||||||||||||||||||||
| Cancellation of restricted stock | (6,000 | ) | (600 | ) | (57,150 | ) | — | 57,750 | — | ||||||||||||||||||||
| Payment, note receivable | — | — | 14,049 | — | — | 14,049 | |||||||||||||||||||||||
| Balance, September 30, 1999 | 6,154,157 | 615,416 | 16,861,417 | (1,184,070 | ) | 413,297 | 16,706,060 | ||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (290,437 | ) | (290,437 | ) | ||||||||||||||||||||||
| Translation adjustment | — | — | — | (784,666 | ) | — | (784,666 | ) | |||||||||||||||||||||
| Total comprehensive loss | (1,075,103 | ) | |||||||||||||||||||||||||||
| Exercise of stock options, including tax benefit of $13,761 | 37,983 | 3,798 | 115,160 | — | — | 118,958 | |||||||||||||||||||||||
| Purchase of stock | (1,162 | ) | (116 | ) | (3,007 | ) | — | — | (3,123 | ) | |||||||||||||||||||
| Vesting of restricted stock | — | — | — | — | 86,630 | 86,630 | |||||||||||||||||||||||
| Forgiveness of executive officer note | — | — | 89,814 | — | — | 89,814 | |||||||||||||||||||||||
| Balance, September 30, 2000 | 6,190,978 | $ | 619,098 | $ | 17,063,384 | $ | (1,968,736 | ) | $ | 209,490 | $ | 15,923,236 | |||||||||||||||||
| See notes to consolidated
financial statements |
|||||||||||||||||||||||||||||
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
| Year Ended September 30, | |||||||||||||
| 2000 | 1999 | 1998 | |||||||||||
| OPERATING ACTIVITIES | |||||||||||||
| Net (loss) income | $ | (290,437 | ) | $ | (1,614,387 | ) | $ | 198,862 | |||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||||
| Depreciation and amortization | 388,145 | 364,261 | 369,059 | ||||||||||
| Provision for bad debts | (1,862 | ) | — | — | |||||||||
| Forgiveness of executive officer note | 89,814 | — | — | ||||||||||
| Other | 71,313 | 91,434 | (46,328 | ) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||||
| Accounts receivable | (2,284,022 | ) | (197,755 | ) | 33,864 | ||||||||
| Inventory | (1,494,726 | ) | (376,655 | ) | (2,226,009 | ) | |||||||
| Other current assets | (889,700 | ) | (41,713 | ) | (660,347 | ) | |||||||
| Accounts payable and accrued expenses | 2,070,076 | (2,399 | ) | (396,471 | ) | ||||||||
| Deferred revenue | 2,884,708 | 60,148 | (67,055 | ) | |||||||||
| NET CASH PROVIDED BY (USED IN) OPERATING | |||||||||||||
| ACTIVITIES | 543,309 | (1,717,066 | ) | (2,794,425 | ) | ||||||||
| INVESTING ACTIVITIES | |||||||||||||
| Purchase of equipment and fixtures | (394,533 | ) | (370,750 | ) | (246,498 | ) | |||||||
| Proceeds from sale of equipment | 60,387 | 9,193 | 53,236 | ||||||||||
| Purchase of short-term investments | (718,519 | ) | (1,634,700 | ) | (8,926,101 | ) | |||||||
| Proceeds from sale of short-term investments | 781,252 | 4,068,501 | 11,907,089 | ||||||||||
| NET CASH (USED IN) PROVIDED BY INVESTING | |||||||||||||
| ACTIVITIES | (271,413 | ) | 2,072,244 | 2,787,726 | |||||||||
| FINANCING ACTIVITIES | |||||||||||||
| Repurchase/issuance of common stock | 105,441 | (138,889 | ) | (438,107 | ) | ||||||||
| Repayment of note receivable from stock sale | 10,394 | 14,049 | 5,903 | ||||||||||
| Repayment of long-term debt and capital leases | (36,156 | ) | (12,673 | ) | (57,265 | ) | |||||||
| NET CASH PROVIDED BY (USED IN) FINANCING | |||||||||||||
| ACTIVITIES | 79,679 | (137,513 | ) | (489,469 | ) | ||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | (190,439 | ) | (36,935 | ) | 32,455 | ||||||||
| INCREASE (DECREASE) IN CASH AND EQUIVALENTS | 161,136 | 180,730 | (463,713 | ) | |||||||||
| CASH AND CASH EQUIVALENTS AT | |||||||||||||
| BEGINNING OF YEAR | 2,882,618 | 2,701,888 | 3,165,601 | ||||||||||
| CASH AND CASH EQUIVALENTS AT | |||||||||||||
| END OF YEAR | $ | 3,043,754 | $ | 2,882,618 | $ | 2,701,888 | |||||||
| Supplemental Schedule | |||||||||||||
| Forgiveness of executive officer note | $ | 89,814 | $ | — | $ | — | |||||||
See notes to consolidated financial statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 2000
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. A significant portion of the total revenues of the Company is 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. Depreciation is provided on the straight-line method over estimated useful lives of 3 to 5 years for machinery and equipment and furniture and fixtures and over 10 years for leasehold improvements. Amortization expense of items under capital lease is included in depreciation expense.
Revenue Recognition: Revenue is recognized when systems are shipped or services are rendered. Amounts billed to customers under maintenance contracts are recorded as deferred revenue and recognized in income over the term of the maintenance agreement. Customer billings in advance of system shipment are recorded as deferred revenue and recognized upon shipment of the system.
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.
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.
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 equals 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 (SFAS 123).
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 2000
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
Earnings per Share: The basic earnings per share amounts are determined based on the weighted average common shares outstanding, while the diluted earnings per share amounts also give effect to the common shares dilutive potential. A reconciliation of the denominator in the basic and diluted earnings per share calculation is as follows:
| 2000 | 1999 | 1998 | |||||||||||
| Denominator for basic earnings per share, weighted average shares | 6,146,630 | 6,129,225 | 6,273,756 | ||||||||||
| Effect of dilutive securities: | |||||||||||||
| Employee stock options | — | — | 11,753 | ||||||||||
| Employee stock grants | — | — | 4,363 | ||||||||||
| Dilutive potential common shares | — | — | 16,116 | ||||||||||
| Denominator for diluted earnings per share, adjusted weighted average shares | 6,146,630 | 6,129,225 | 6,289,872 | ||||||||||
Employee stock options and grants totaling 139,006 and 10,261 in 2000 and 1999, respectively, were excluded from diluted weighted average shares because their impact would be antidilutive.
Comprehensive Income: As of October 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). SFAS. 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. SFAS 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 SFAS 130.
Derivatives and Hedging Activities: In June 1998, The FASB issued Statement No. 133, Accounting for Derivatives and Similar Financial Instruments and Hedging Activities. The Statement will significantly change the way companies account for derivatives and hedging activities, including the following two elements: (i) all derivatives will be measured at fair value and recognized in the balance sheets as assets or liabilities, and (ii) derivatives meeting certain criteria could be specifically designated as a hedge. The Statement is effective for the Company in fiscal 2001, and the Company does not believe adoption will have either a significant cumulative effect or a material impact on current operating results.
Revenue Recognition in Financial Statements: On December 3, 1999, the Securities and Exchange Commission issued SEC Staff Accounting Bulletin Number 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarizes certain of the staff’s views on applying generally accepted accounting principles to revenue recognition in financial statements. SAB 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 this Bulletin.
Reclassification: Certain items in the 1999 and 1998 consolidated financial statements have been reclassified to conform to the 2000 presentation.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 2000
NOTE B — INCOME TAX
Income tax (benefit) expense was based on (loss) income before income taxes as follows:
| Year Ended September 30, | ||||||||||||
| 2000 | 1999 | 1998 | ||||||||||
| Domestic | $ | 575,232 | $ | (1,573,280 | ) | $ | 122,423 | |||||
| Foreign | (1,033,669 | ) | (368,107 | ) | 175,439 | |||||||
| (Loss) income before income taxes | $ | (458,437 | ) | $ | (1,941,387 | ) | $ | 297,862 | ||||
The components of income tax (benefit) expense as recorded by the Company are as follows:
| Year Ended September 30, | |||||||||||||
| 2000 | 1999 | 1998 | |||||||||||
| Current: | |||||||||||||
| Federal | $ | — | $ | — | $ | — | |||||||
| State | 6,000 | (1,000 | ) | 10,000 | |||||||||
| Foreign | — | (38,000 | ) | 347,000 | |||||||||
| 6,000 | (39,000 | ) | 357,000 | ||||||||||
| Deferred: | |||||||||||||
| Federal | 145,000 | (293,000 | ) | 25,000 | |||||||||
| State | 14,000 | (29,000 | ) | 3,000 | |||||||||
| Foreign | (333,000 | ) | 34,000 | (286,000 | ) | ||||||||
| (174,000 | ) | (288,000 | ) | (258,000 | ) | ||||||||
| Total income tax (benefit) expense | $ | (168,000 | ) | $ | (327,000 | ) | $ | 99,000 | |||||
A reconciliation of income tax (benefit) expense to the statutory rate of 34% is as follows:
| Year Ended September 30, | |||||||||||||
| 2000 | 1999 | 1998 | |||||||||||
| Statutory rate applied to pre-tax income | $ | (156,000 | ) | $ | (660,000 | ) | $ | 101,000 | |||||
| Tax credits | (72,000 | ) | — | — | |||||||||
| Change in valuation allowance | 36,000 | 258,000 | — | ||||||||||
| Other | 24,000 | 75,000 | (2,000 | ) | |||||||||
| Total income tax (benefit) expense | $ | (168,000 | ) | $ | (327,000 | ) | $ | 99,000 | |||||
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 2000
NOTE B — INCOME TAX — Continued
Significant components of federal and state deferred tax assets as of September 30 are as follows:
| September 30, | |||||||||
| 2000 | 1999 | ||||||||
| Deferred tax assets: | |||||||||
| Net operating loss | $ | 1,513,000 | $ | 1,265,000 | |||||
| Business credit carryforwards and alternative minimum tax credits | 682,000 | 610,000 | |||||||
| Stock compensation | 32,000 | 32,000 | |||||||
| Inventory valuation reserves | 110,000 | 121,000 | |||||||
| Other domestic and foreign differences | 209,000 | 308,000 | |||||||
| Gross deferred tax assets | 2,546,000 | 2,336,000 | |||||||
| Valuation allowances | (802,000 | ) | (766,000 | ) | |||||
| Net deferred tax assets | $ | 1,744,000 | $ | 1,570,000 | |||||
At September 30, 2000, the Company has domestic tax loss carryforwards of approximately $2,315,000, which expire in 2015, and foreign tax loss carryforwards of approximately $1,743,000, which expire in 2005. In addition, the Company has domestic investment tax credits and research and development credit carryforwards of approximately $539,000, which are available to offset future income tax. The credits expire in varying amounts through September 2019. 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. Deferred tax assets have 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. Despite the reported cumulative net loss for fiscal 2000, 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.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $2,223,000 at September 30, 2000. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. 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 (receipts) for the years ended September 30, 2000, 1999 and 1998 were $57,500, $(29,000) and $653,000, respectively.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 2000
NOTE C — BUSINESS, OPERATIONS, AND GEOGRAPHIC INFORMATION
Effective October 1, 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). SFAS 131 establishes standards for the way public business enterprises report information about operating segments in financial reports issued to stockholders. Based on the Company’s organizational structure and the manner in which performance is assessed and operating decisions are made, the Company operates in one worldwide business segment – 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 vendor has been able to meet the Company’s delivery schedules to date.
The Company’s manufacturing operations are located in the United States. Sales and service operations are located in the United States, United Kingdom, France and Australia. The Company’s products are marketed worldwide. The following is a summary of the Company’s revenues and long-lived assets for the geographic areas in which the Company has operations:
| Year Ended September 30, 2000 | |||||||||||||
| 2000 | 1999 | 1998 | |||||||||||
| Total revenues (a): | |||||||||||||
| United States | $ | 16,328,127 | $ | 8,250,760 | $ | 9,057,847 | |||||||
| United Kingdom | 6,602,508 | 8,058,088 | 7,581,151 | ||||||||||
| France | 4,133,805 | 4,060,672 | 4,972,730 | ||||||||||
| Australia | 1,717,278 | 1,938,480 | 2,127,800 | ||||||||||
| Consolidated revenues | $ | 28,781,718 | $ | 22,308,000 | $ | 23,739,528 | |||||||
| September 30, 2000 | |||||||||||||
| 2000 | 1999 | 1998 | |||||||||||
| Long-lived assets: | |||||||||||||
| United States | $ | 684,185 | $ | 728,691 | $ | 709,520 | |||||||
| United Kingdom | 98,543 | 91,866 | 101,862 | ||||||||||
| France | 25,254 | 31,594 | 43,061 | ||||||||||
| Australia | 78,415 | 117,862 | 113,471 | ||||||||||
| Consolidated long-lived assets | $ | 886,397 | $ | 970,013 | $ | 967,914 | |||||||
| (a) | Revenues are attributed to countries based on the location of each country’s operations. |
Export sales to customers were $2,963,000, $3,408,000 and $4,895,000 for the years ended September 30, 2000, 1999 and 1998, respectively.
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 included 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. In fiscal 2000, sales to this customer were $9,265,000, or 32% of total sales for the year. At September 30, 2000, accounts receivable from this customer totaled $1,059,000, or 20% of total trade accounts receivable as of that date. In addition, as of September 30, 2000, the Company recorded deferred revenue of $2,932,000 related to this customer. In fiscal 1999 and 1998, there were no sales to a single customer in excess of 10% of total sales.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 2000
NOTE D — STOCK OPTIONS AND BENEFIT PLAN
During fiscal year 2000, 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 1995, an executive officer exercised stock options for a $148,966 interest-bearing note, collateralized by the underlying stock. During fiscal 2000, the Company converted the note to a stock option grant valued at $225,000 to be earned and recognized as compensation expense over a twelve-month period. For the fiscal year ended September 30, 2000, $89,814 was recognized as selling, general and administrative expenses.
A summary of outstanding options and shares reserved under each plan for the last three years is as follows:
The 1986 Plan
At September 30, 2000, 1999 and 1998 there were no options outstanding under the 1986 Plan, with 188,660 shares reserved for future grants.
The 1991 Plan
| Weighted | |||||||||||||
| Shares | Average | ||||||||||||
| Reserved | Exercise | ||||||||||||
| for Future | Options | Price | |||||||||||
| Grants | Outstanding | per Share | |||||||||||
| 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 | ||||||||||
| Options exercised | — | (17,500 | ) | 2.46 | |||||||||
| Restricted stock canceled | 6,000 | — | — | ||||||||||
| Options canceled | 17,000 | (17,000 | ) | 5.99 | |||||||||
| Balance, September 30, 1999 | 70,050 | 212,694 | 6.71 | ||||||||||
| Options exercised | — | (17,700 | ) | 3.65 | |||||||||
| Options canceled | 47,160 | (47,160 | ) | 7.26 | |||||||||
| Balance, September 30, 2000 | 117,210 | 147,834 | $ | 6.91 | |||||||||
At September 30, 2000, 1999 and 1998, there were 140,709, 176,569 and 164,611 options, respectively, currently exercisable under the 1991 Plan at prices of $4.38 to $9.63 per share. No options were granted under the 1991 Plan in 2000, 1999 or 1998; total compensation expense for stock-based compensation was $86,630, $86,625 and $146,987 in each of the three years, respectively.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 2000
NOTE D — STOCK OPTIONS AND BENEFIT PLAN—Continued
The 1997 Plan
| Weighted | |||||||||||||
| Shares | Average | ||||||||||||
| Reserved | Exercise | ||||||||||||
| for Future | Options | Price | |||||||||||
| Grants | Outstanding | per Share | |||||||||||
| 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 | ||||||||||
| Options granted | (405,000 | ) | 405,000 | 2.62 | |||||||||
| Options canceled | 58,800 | (58,800 | ) | 3.20 | |||||||||
| Balance, September 30, 1999 | 316,300 | 433,700 | 3.00 | ||||||||||
| Options exercised | — | (20,283 | ) | 3.15 | |||||||||
| Options granted | (108,500 | ) | 108,500 | 2.77 | |||||||||
| Options canceled | 75,167 | (75,167 | ) | 2.78 | |||||||||
| Balance, September 30, 2000 | 282,967 | 446,750 | $ | 2.99 | |||||||||
At September 30, 2000, 1999 and 1998, there were 70,767, 60,625 and 2,500 options, respectively, currently exercisable under the 1997 Plan, at prices of $2.63 to $6.50 per share.
Total shares under all plans reserved for options and restricted stock are 1,183,421 shares.
Pro forma information regarding net income and earnings per share is required by SFAS 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 2000, 1999 and 1998:
| 2000 | 1999 | 1998 | ||||||||||
| Expected dividend yield | 0 | % | 0 | % | 0 | % | ||||||
| Expected stock price volatility | 50 | 49 | 51 | |||||||||
| Risk-free interest rate | 5.92 | 6.18 | 4.37 | |||||||||
| Expected life of options | 7 years | 7 years | 7 years | |||||||||
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 2000
NOTE D — STOCK OPTIONS AND BENEFIT PLAN—Continued
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that 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 loss or income, and net loss or earnings per share, for each of the three years ended September 30, 2000, 1999 and 1998, respectively, were as follows:
| Year Ended September 30, | ||||||||||||
| 2000 | 1999 | 1998 | ||||||||||
| Net (loss) income, pro forma | $ | (400,180 | ) | $ | (1,830,483 | ) | $ | 83,046 | ||||
| (Loss) earnings per share, pro forma | (0.07 | ) | (0.30 | ) | 0.01 | |||||||
| Weighted average fair value of options granted during the year | 1.68 | 1.69 | 3.37 | |||||||||
The pro forma effect on net loss or income, and net loss or 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.
The following table summarizes information concerning currently outstanding and exercisable options:
| Options Outstanding | Options Exercisable | ||||||||||||||||||||
| Weighted | Weighted | Weighted | |||||||||||||||||||
| Average | Average | Average | |||||||||||||||||||
| Remaining | Exercise | Exercise | |||||||||||||||||||
| Range of | Number | Contractual | Price | Number | Price | ||||||||||||||||
| Exercise Prices | Outstanding | Life in Years | per Share | Outstanding | per Share | ||||||||||||||||
| $ 1.750 - 4.750 | 444,084 | 6.05 | $ | 2.92 | 76,601 | $ 3.63 | |||||||||||||||
| 5.063 - 7.750 | 107,000 | 4.11 | 6.11 | 91,375 | 6.02 | ||||||||||||||||
| 8.125 - 9.625 | 43,500 | 4.22 | 9.31 | 43,500 | 9.31 | ||||||||||||||||
| $ 1.750 - 9.625 | 594,584 | 5.57 | $ | 3.96 | 211,476 | $ 5.83 | |||||||||||||||
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 expense related to the plan was $119,811, $124,455 and $106,594, for the years ended September 30, 2000, 1999 and 1998, respectively.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 2000
NOTE E — COMMITMENTS AND CONTINGENCIES
Building, equipment and automobile rentals under operating leases were $1,235,598, $1,249,909 and $1,234,065 for the years ended September 30, 2000, 1999 and 1998, respectively. As of September 30, 2000, the Company had committed to purchase certain leased office furniture and equipment from the lessor for approximately $61,000.
The Company leases its corporate offices under a fifteen-year agreement expiring on September 15, 2010. Annual rental under the lease is $418,000 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 tenth 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 $189,000, 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 $9,176,672 and are due as follows: fiscal years ending September 30, 2001 — $991,295; 2002 — $918,994; 2003 — $875,957; 2004 — $860,565; 2005 — $848,425; thereafter — $4,681,436.
In April 1999, the Company completed an agreement with Océ Printing Systems GmbH for worldwide exclusive rights to private label sell and service the PS75 MICR product. The Company guarantees to purchase a minimum quantity of PS75 product. The Company is subject to a minimum commitment fee, contingent on quantities sold, not to exceed DM 700,000.
NOTE F — LINE OF CREDIT AND NOTES PAYABLE
The Company has a $2,500,000 revolving line of credit with a bank. 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 and expires April 30, 2001.
The line of credit agreement places certain restrictions on the Company, including, among others, requirements as to maintenance for minimum levels of tangible net worth. As of September 30, 2000, the entire line was unused, and the Company was granted a compliance waiver with respect to the total liabilities to tangible net worth covenant as of that date.
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.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 2000
NOTE G — SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
| Quarter Ended | ||||||||||||||||
| December 31 | March 31 | June 30 | September 30 | |||||||||||||
| 2000 | ||||||||||||||||
| Net sales | $ | 6,345,437 | $ | 6,864,600 | $ | 7,117,615 | $ | 8,454,066 | ||||||||
| Gross profit | 3,491,819 | 3,336,314 | 3,594,138 | 4,252,929 | ||||||||||||
| Net (loss) income | (119,855 | ) | (207,513 | ) | 131,471 | (94,540 | ) | |||||||||
| Basic (loss) earnings per share | (0.02 | ) | (0.03 | ) | 0.02 | (0.02 | ) | |||||||||
| Diluted (loss) earnings per share | (0.02 | ) | (0.03 | ) | 0.02 | (0.02 | ) | |||||||||
| 1999 | ||||||||||||||||
| Net sales | 5,246,543 | 5,320,200 | 4,219,751 | 7,521,506 | ||||||||||||
| Gross profit | 2,860,999 | 2,834,716 | 2,182,688 | 3,846,388 | ||||||||||||
| Net (loss) income | (319,635 | ) | (509,882 | ) | (1,215,085 | ) | 430,213 | |||||||||
| Basic (loss) earnings per share | (0.05 | ) | (0.08 | ) | (0.20 | ) | 0.07 | |||||||||
| Diluted (loss) earnings per share | (0.05 | ) | (0.08 | ) | (0.20 | ) | 0.07 | |||||||||
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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
| Balance at | Charged to | Charged to | Balance at | |||||||||||||||
| Beginning | Costs and | Other | End | |||||||||||||||
| Description | of Period | Expenses | Accounts | (Deductions) | of Period | |||||||||||||
| I. | Allowance for doubtful accounts | |||||||||||||||||
| Year ended September 30, 2000 | $ | 50,000 | 1,697 | - | - | $ | 51,697 | |||||||||||
| Year ended September 30, 1999 | $ | 50,000 | - | - | - | $ | 50,000 | |||||||||||
| Year ended September 30, 1998 | $ | 50,000 | - | - | - | $ | 50,000 | |||||||||||
| II. | Reserve for obsolete and slow moving inventory | |||||||||||||||||
| Year ended September 30, 2000 | $ | 480,000 | 62,000 | - | (47,000 | ) | $ | 495,000 | ||||||||||
| Year ended September 30, 1999 | $ | 400,000 | 86,000 | - | (6,000 | ) | $ | 480,000 | ||||||||||
| Year ended September 30, 1998 | $ | 360,000 | 56,000 | - | (16,000 | ) | $ | 400,000 | ||||||||||
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