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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Annual report pursuant to section 13 or 15(d) of the Securities and
Exchange Act of 1934 [Fee Required]
For the fiscal year ended September 30, 1995
Commission File Number: 0-10691
CHECK TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-1392000
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
12500 Whitewater Drive, Minnetonka, Minnesota 55343-9420
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 939-9000
--------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.10 par value)
(Title of Class)
--------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 60 days.
YES X NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. [X]
The aggregate market value of the voting stock (common stock and voting
Convertible Preferred Stock) held by nonaffiliates of the Registrant was
approximately $47,231,896 at December 1, 1995 when the closing price of such
stock, as reported by Nasdaq, was $8.00.
There were 6,138,335 shares outstanding of Registrant's $.10 par value common
stock as of December 1, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the definitive proxy statement to be filed with the Commission
within 120 days after the end of the registrant's fiscal year are
incorporated by reference into Part III
This Form 10-K consists of 43 pages (including exhibits). The index is set forth
on page 13.
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(R)(1), began in 1983.
Within a short time of the introduction of the Checktronic system, the Company
recognized the product's applicability in such areas as insurance claim
production and centralized funds disbursements. The latter includes payroll and
accounts payable checks. These applications are called "Checkwriting"
applications by the Company. Checkwriting typically requires a high level of
security (e.g. secure operator access and the ability to produce an audit trail
after a batch of checks is produced.) The Company developed sophisticated
control software/hardware which met these stringent operating requirements. This
security capability is offered as an option on many of the Company's systems and
differentiates the Company's products from many competitor's products.
The Company has had a significant presence in the international check production
marketplace since 1983. The integration of the check production functions
described above was found to result in the cost effective production of the
small check order sizes common to most markets outside the United States. The
production cost reductions for orders of 25-100 checks as well as the
improvement in printing quality created a demand for the Company's systems in
many international markets.
In order to manage this demand and to provide the necessary technical support of
the products after installation in the field, the Company opened its first
subsidiary, Check Technology Limited, in England in 1983. The Company opened its
French and Australian subsidiaries in 1987. At September 30, 1995, the Company
had an installed base of over 390 systems located in 42 countries.
Business
The Company's business is the design, manufacture, sale and service of
computerized financial document production systems. The systems can collate,
personalize and encode documents into packages tailored to the customers
requirements. The systems are sold through the Company and its international
subsidiaries.
Products
Check Technology sells a complete family of electronic production systems for
use in both cut-sheet and continuous forms production environments. These
systems can be used for four basic applications: folio production, insurance
claims, fulfillments, and disbursements. Folio production includes the printing
of checkbooks and financial payment coupon books. Insurance claim applications
consist of explanation of benefit forms and insurance claim checks. Fulfillment
applications include coupons and rebate checks, while disbursement applications
include accounts payable checks and payroll checks. These electronic production
systems enable companies to easily and quickly transform blank paper stock into
fully collated checks and forms.
Cut Sheet Production Systems. The Company's primary 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 companies
with medium to high volume folio production, insurance claim, fulfillment and
disbursement applications. The Model 1750X operates at a rated speed of 45 pages
per minute, while the Models 2100X, 4000X and 4500X operate at 60, 90 and 120
pages per minute, respectively. The Checktronic series can be optioned with an
advanced security/audit capability. The Company's Checktronic systems provide
their owners with the flexibility, reliability and consistency to produce high
quality documents while reducing production costs.
Continuous Form Production Systems. The Company's CheckPrinter series consists
of continuous form systems. These systems are available as either stand alone
MICR printers or as tandem systems. The Model 930 and Model 960 operate at over
300 and 600 documents per minute, respectively. These two models utilize impact
technology to produce high quality MICR characters.
- ---------------------------
(1) Checktronic(R) is a trademark of Check Technology Corporation registered in
the US Patent and Trademark Office.
2
Finishing Unit. In addition to the document production systems, the Company
offers a finishing system to complement its cut-sheet product line. The
Foliotronic(R)(2) system incorporates a blend of proven concepts with new
designs and advanced microprocessor controls. The Foliotronic system consists of
a guillotine and stitcher/binder modules. 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 those operating materials that are consumed during
normal operation of the Company's systems. Examples of these supplies are MICR
ribbon consumed in the printing of each MICR code line and toner which is
consumed in the personalization of each document. The Company believes that its
service network and spare parts business operated profitably for the years ended
September 30, 1995, 1994 and 1993, based upon the economies of scale achieved
from the expansion of the installed base of the Company's financial document
production equipment.
The Company employs customer engineers throughout the world. After the 90-day
warranty period, which begins after 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 at
approximately 10 percent of the current system sales price. Some customers elect
to provide their own maintenance and service on the system they have purchased.
The cost of providing service during the warranty period has not been
significant to the Company.
Sales and Marketing
Organization. The Company's system sales are made predominately through direct
sales personnel based in the United States and abroad. In addition, the Company
and its subsidiaries utilize a number of commissioned sales representatives in
countries where no direct sales personnel are available. The expansion of the
Company's activities into new countries is increasing the number of sales
generated through commissioned representatives. Marketing activities for the
Company and its subsidiaries are centralized at the Company's headquarters in
Minnetonka, Minnesota USA. These activities include the development and
implementation of product pricing, advertising and public relations strategies.
In addition, the Company utilizes market research and market development
resources in order to anticipate changes in the Company's competitive
environment.
United States Market. The market in the United States for checks and other
financial documents is the largest in the world, notwithstanding the fact that
the annual consumption of checks has shown a slowing growth rate over the last
five years. The Company believes that alternatives to the check document such as
debit and credit cards would reduce the number of checks used, although the size
and rate of reduction is difficult to predict. It is estimated that other
documents produced by the Company's systems have shown higher growth rates over
the same period. These documents include payment coupons, tax payment and other
installment payment products.
- ------------------------------
(2) Foliotronic(R) is a trademark of Check Technology Corporation registered in
the US Patent and Trademark Office.
3
Disbursement activities, such as insurance claims and payroll operations
(collectively called Checkwriting applications by the Company) have been
impacted 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 Untied
States has been primarily in the personalized check production market. The
average personalized check order size in most international markets is between
25 and 100 checks. These small order sizes are cost effectively produced 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 MICR quality printing
capabilities. As a result of these market factors, the Company has had success
in penetrating the largest personal check production markets outside of the
United States. These include Australia, Brazil, France, Mexico, Spain and the
United Kingdom.
In fiscal 1990, the Company installed its first systems into international
checkwriting applications such as insurance claims check production. Although
not as prevalent as in the United States, disbursement activity in international
markets represents additional potential for the Company's products.
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. In 1991 the Company commenced a research and development effort for
the purpose of creating a new family of check production systems and believes
that such development effort is critical to its ability to remain competitive in
the markets it serves. See "Research and Development".
Folio production involves the manufacture of checkbooks and payment coupon
books. In the United States, check production is dominated by a small number of
companies such as Deluxe Corporation (St. Paul), John J. Harland Company
(Decatur, Georgia), and Clarke American Holding (San Antonio) and those
companies are all customers for Check Technology Corporation. Competitive
standards for alphanumeric print quality, MICR print quality and delivery time
in this segment are established by these major players. All of these market
standards must be met or surpassed by any new market competitor or production
technology in order to capture a substantial share of the United States personal
check market. As a result, the alphanumeric print quality required in this
market, at present, must approach the quality of the offset or letter press
printing technologies in use by the predominant companies. Up to this time, none
of the new printing technologies introduced into this market over the last ten
years has been capable of meeting these stringent quality standards. Only in the
production of new account kits, money market checkbooks and other applications
which do not require offset or letterpress quality, has the Company been able to
establish itself in the personal check application segment.
The Company has had success in the United States folio production segment
involved in the production of personalized payment books such as installment
loan and tax payment books. This market is dominated by a small number of
companies such as NCP (Birmingham), Cummins Allison (Indianapolis) and Venture
Encoding (Dallas). The predominant personal checkbook manufacturers discussed
above also produce payment books. The Company's products have found market
acceptance in this segment because they provide the efficiency, reliability and
production flexibility sought by this segment. Xerox (United States) and Siemens
(West Germany) are presently the Company's major competition for the production
of payment books.
International folio production markets, like the United States payment book
production market, are also driven more by cost and production efficiency
factors than by alphanumeric print quality standards. In addition, enforcement
of high MICR standards by the clearing banks in most international markets makes
MICR printing quality an extremely important competitive factor. The Company's
Checktronic family of products has found a high degree of acceptance in the
international market segments because these systems provide the efficiency,
production flexibility and MICR quality sought by the major check producers. The
Company competes in the international marketplace with Troy Division of Pierce
Companies, Inc. (United States), Xerox, Siemens and Nipson Bull.
4
The centralized high volume production of insurance claims and check
disbursements does not require extensive collation. For this reason the Company
finds many competitors in this market segment. Specific competitors include
Xerox, Siemens, Troy, and IBM (United States). The Company's products offer
security and audit control, which for companies that generate many checks, is a
significant advantage as it restricts unauthorized access to data printed on
Check Technology systems. The Company's security/audit capability also
physically tracks the total number of documents printed and maintains a running
total of the dollar amounts printed in each run.
Backlog
At December 1, 1995, the Company had a backlog of approximately $3,594,000 as
compared to a backlog of $3,643,000 as of December 1, 1994. The Company defines
its backlog as purchase orders which are unfilled. Because of customer changes
in delivery schedules and potential cancellation of orders, the Company's
backlog as of any particular date may not be representative of the Company's
actual sales for any succeeding fiscal period. The Company's equipment is
manufactured to orders received, and to date the Company has never been in a
position where it was unable to meet a scheduled shipment date because of
excessive order backlog. During fiscal year 1995, there were periods when the
Company had only a nominal backlog. The Company expects that it will continue to
have periods during which there will be little or no backlog.
Manufacturing and Sources of Supply
Since the Company has not developed a sustained backlog, it has adopted a
manufacturing process to enable it to produce a "generic" product that can be
quickly configured to a customer's specific order without rework. This process
has enabled the Company to begin manufacturing without firm final orders. As a
result, the Company has been able to reduce manufacturing parts and material
inventories while, at the same time, being able to respond quickly to new
orders.
The components of the Company's financial document production systems are
manufactured by outside vendors, tested and then incorporated into the systems
by Company personnel. While the Company uses only one source for many of the key
components of its printing systems, most components, with the exception of the
non-impact alphanumeric printer and the MICR printer hammer bank component, are
available from multiple sources. However, many of the critical components of the
Company's systems would require redesign if new vendors were used.
For the Checktronic system, the Company is solely dependent on Delphax Systems,
which has its manufacturing facilities in Toronto, Canada, for its supply of
non-impact alphanumeric printers. Delphax has been able to meet the Company's
delivery schedules to date and is considered by Company management to be a
reliable supplier. Xerox, one of the Company's competitors, currently owns a
minority interest in Delphax. Data Products Corporation has been the only source
for the Company's MICR hammer bank. In October 1993, Data Products Corporation
announced its decision to terminate production of the MICR hammer bank by early
1994. The Company has made an end-of-life buy and does not foresee any impact on
its operations. The loss in the foreseeable future of Delphax as a supplier, for
any reason, might affect the Company's ability to remain in business. The
Company continues to investigate other sources of supply to replace Delphax
components should it be necessary to do so. No assurance can be given at this
time that the Company will be able to secure a replacement source of supply for
these components.
Research and Development
Since its formation, the Company's research and development activities have been
focused on the development of a computerized printing system which would be able
to produce on a precision basis financial documents at required speeds and
volumes. In the past year, the Company has continued product engineering on this
system as well as expanded its effort to develop new products in related lines.
The Company has continued its research on ways to make its production systems
faster, more reliable, cost effective and "user friendly". The Company's
research and development expenditures were $2,319,000, $2,332,000 and
$2,236,000, for the years ended September 30, 1995, 1994 and 1993, respectively.
Development is expected to continue on enhancements to the Company's existing
family of check printing systems. The Company is undertaking the development of
a new family of check production systems which, by its design and features
capabilities, will target the high volume U.S. check market as well as offering
potential for increasing the Company's international business. The systems are
expected to incorporate state-of-the-art non-impact printing, paper handling and
data communications technologies to enhance the operating efficiencies of check
producers around the world.
The Company's ability to develop this new line of check production systems is
dependent on its ability to fund and staff this engineering effort and on its
ability to obtain a suitable digital engine printing technology for
incorporation into the full system. It is the Company's present intention to
fund its development effort from internal resources. The Company has selected
the Gemini digital printing technology currently under development by Delphax
Systems as the initial print engine for the system. In November 1995, Delphax
Systems advised the Company that there would be a delay of approximately three
months in
5
delivery of the initial production model of the system's print engine. The
Company currently anticipates that the system will be available in late 1996. No
assurances can be given that these development efforts will be successful or
timely, or that either company will have sufficient resources to maintain such
effort.
Patents
The Company has received a patent covering the Model 2000 printing system and a
patent covering its fusing process. The Company also has received a patent
covering the autotaper for the Foliotronic system. There is no assurance that
such patents will afford the Company any competitive advantage. The Company
believes that its future success will depend primarily upon the technical
competence and creative skills of its personnel rather than on patents. The
Company cannot be assured that its printing system, or any components of such
system, will not be covered in whole or part by existing patents. Although the
Company is not presently aware of such patents, the Company could be required to
obtain patent licenses in order to conduct its business.
Employees
As of December 1, 1995, the Company had 182 full-time employees, including 31 in
executive and administrative positions, 25 in electronic engineering and product
development, 29 in manufacturing, 20 in sales and marketing and 77 in customer
service.
Many of the Company's employees are highly skilled, and the Company's future
success will depend in part upon its ability to attract and retain such
employees. The Company is not subject to any collective bargaining agreement and
considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's corporate and manufacturing offices are located in Minnetonka,
Minnesota. The company leases a 75,000 square foot building under a lease that
expires on September 15, 2010. The annual rent is $379,000 in the first year,
increasing to $473,000 in the eleventh year and thereafter, plus operating
expenses and real estate taxes.
In addition, the Company leases office space for its European sales and service
center in Crawley, England under a lease which expires in 2013 and provides for
annual lease payments of $186,000, subject to adjustment every five years, plus
a pro rata portion of the operating expenses. The Company leases smaller office
premises for its operations in Australia and France.
The Company believes that its current arrangements for facilities are adequate
to meet its present needs and those for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries is a party to, nor is any of their
property the subject of, any pending legal proceedings which meet the
materiality test as set forth in instruction 2 to item 103. 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. At December 1, 1995 there was one such claim which the Company
believes to be without merit.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1995.
6
Executive Officers of the Company
The names and ages of all of the Company's executive officers and the positions
held as of the date of this report are:
Name Position Age
Jay A. Herman President and Chief Executive Officer 48
Robert Bridigum Vice President of Engineering 51
Ian Jaggard Vice President and Managing Director of 51
Check Technology Limited
Dieter Schilling Vice President of Operations and 40
Customer Service
Paul Stephenson Vice President of Finance and 41
Administration
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.
Robert Bridigum joined the Company as Vice President of Engineering in October
1991. Prior to joining the Company, Mr. Bridigum was Director of Grafix Product
Development for Data Card Corporation. He held that position from 1987 to 1991.
Between 1984 and 1987, Mr. Bridigum held the position of Manager of Software
Development for Data Card Corporation. From 1978 to 1984, Mr. Bridigum held
various Engineering and Engineering Management positions for Honeywell Avionics
Division. He holds a Masters Degree in Physics from Old Dominion University and
a Bachelor of Science in Physics from Juniata College.
Ian Jaggard was promoted to Vice President of Marketing and Sales Development in
October 1992. From January 1992 to October 1992, Mr. Jaggard held the position
of Vice President of Marketing. Prior to that Mr. Jaggard was the Sales and
Marketing Director for Check Technology Limited (CTL), the Company's United
Kingdom subsidiary. Mr. Jaggard joined CTL in December 1986, following ten years
as U.K. Sales Manager for Thomas De La Rue & Co. Ltd. Prior to that, he held a
number of sales positions for the British Post Office, including a senior role
in the Post Office Girobank.
Dieter Schilling was promoted to Vice President of Operations and Customer
Service in October of 1989. From October 1986 until October 1989 he held the
position of Vice President of Customer Service. Mr. Schilling joined Check
Technology as Director of Field Services in 1985 and was promoted to Director of
Customer Service in April of 1986. Previous to this, Mr. Schilling was a
co-founder and President of Southern California Telephone, a telephone
interconnect company which was sold to American Telecommunications, Inc. in
1985.
Paul Stephenson joined the Company as Vice President of Finance and
Administration in March 1992. Prior to joining the Company, he was manager of
Audit for Honeywell, Inc. from 1989 to 1992. From 1987 to 1989 he was
Controller, Communications Division for Space Center Inc. From 1976 to 1987 he
held a number of positions with Peat, Marwick, Mitchell and Co. in England and
the United States. He is a Certified Public Accountant and a Chartered
Accountant and has an M.A. Degree from Cambridge University, England.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded in the over-the-counter market and
quoted on the National Association of Securities Dealers Automated
Quotation-National Market System ("Nasdaq") under the symbol "CTCQ" since July
20, 1982. 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, 1995
First Quarter $ 5 7/8 $ 4 7/8
Second Quarter $ 7 1/8 $ 5 1/4
Third Quarter $ 7 $ 5
Fourth Quarter $ 7 5/8 $ 5 3/4
Year Ended September 30, 1994
First Quarter $ 3 1/2 $ 2 1/4
Second Quarter $ 5 1/8 $ 3
Third Quarter $ 5 1/4 $ 3 7/8
Fourth Quarter $ 5 3/4 $ 3 3/4
Holders
As of December 1, 1995, the Company had 470 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.
8
ITEM 6. SELECTED FINANCIAL DATA
September September September September September
Year Ended 30, 1995 30, 1994 30, 1993 30, 1992 30, 1991
- ---------------------- --------------- --------------- ---------------- ---------------- -----------
Consolidated
Statement of
Operations Data:
Net Sales $ 24,360,654 $22,975,589 $21,343,308 $20,010,638 $21,643,695
Net Income $ 2,052,986 $ 1,792,519 $ 882,932 $ 650,187 $ 2,043,113
Earnings per share $ 0.33 $ 0.29 $ 0.15 $ 0.11 $ 0.34
Weighted average
number of shares
and share equivalents
outstanding (1) 6,270,504 6,145,601 6,032,096 5,988,865 6,021,443
September September September September September
Year Ended 30, 1995 30, 1994 30, 1993 30, 1992 30, 1991
- ---------------------- --------------- --------------- ---------------- ---------------- -----------
Consolidated
Balance Sheet Data:
Working Capital $14,585,803 $12,544,594 $10,376,832 $10,058,985 $ 9,283,726
Total Assets $20,103,557 $17,603,636 $14,528,664 $14,761,527 $14,026,369
Long Term Liabilities $ 106,405 $ 143,104 $ 97,133 $ 93,607 $ 163,164
Stockholders' Equity $15,692,230 $13,567,806 $11,350,953 $11,078,578 $10,261,345
(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 and
Common Stock equivalents outstanding during the period.
9
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, 1995 (fiscal 1995) sales of
document production equipment increased 11% over the year ended September 30,
1994 (fiscal 1994) compared to an increase of 12% in fiscal 1994 over year ended
September 30, 1993 (fiscal 1993). The increase in fiscal 1995 arose primarily
from the installation of Checktronic and Foliotronic systems in North America
and South Africa. The increase in fiscal 1994 over fiscal 1993 was due primarily
to increased sales of upgrades and other enhancements to existing Checktronic
installations. The increase arose primarily from installations in the Americas,
Europe, the Middle East and the Asian Pacific region.
Revenues from maintenance contracts, spare parts, supplies and consumable items
increased by 2% in fiscal 1995 over fiscal 1994 compared to a 5% increase in
fiscal 1994 over fiscal 1993. Increases in both fiscal 1995 and 1994 were a
result of a higher cumulative installed system base worldwide.
Gross margin percentages in fiscal 1995 were 62% as compared to 61% in fiscal
1994 and 60% in fiscal 1993. The change was primarily due to differences in
product mix.
Selling, general and administrative expenses increased 8% in fiscal 1995 over
fiscal 1994, compared to an increase of 5% in fiscal 1994 over fiscal 1993. As a
percentage of net sales, selling, general and administrative expenses amounted
to 43% of net sales in fiscal 1995 compared to 42% in fiscal 1994 and 43% in
fiscal 1993. The increase in expenses in fiscal 1995 over fiscal 1994 was due
primarily to higher marketing and personnel expenses. The increase in fiscal
1994 over fiscal 1993 was due mainly to higher personnel, commission and
incentive compensation expense.
Research and development expenses were flat in fiscal 1995 over fiscal 1994,
compared to an increase of 4% in fiscal 1994 over fiscal 1993. As a percentage
of net sales, research and development expenses were 10% in fiscal 1995, 1994
and 1993. The increase in expense levels in fiscal 1994 over fiscal 1993 was due
primarily to increased spending on the Company's program to develop a new family
of check production systems, together with continued spending to enhance
existing products.
Interest income increased in fiscal 1995 over fiscal 1994 and in fiscal 1994
over fiscal 1993 because of higher cash and short-term investment balances.
The unrealized exchange gains or losses are related to the Company's foreign
operations. These unrealized currency gains and losses are due to the
strengthening and weakening of the U.S. dollar against the currencies of the
Company's foreign subsidiaries and the resulting effect on the valuation of the
intercompany accounts and certain assets, which are denominated in U.S. dollars.
The net exchange gain was $30,000 in fiscal 1995, compared to a gain of $84,000
in fiscal 1994 and a loss of $336,000 in fiscal 1993. The Company anticipates
that it will continue to have unrealized gains or losses from foreign operations
in the future, although strategies to reduce the size of the gains or losses
will be reviewed and implemented whenever economical and practical.
The provision for income taxes was $517,000 in fiscal 1995 compared with
$354,000 in fiscal 1994 and $164,000 in fiscal 1993. Further information about
income taxes is provided in Note B to the consolidated financial statements.
Liquidity and Capital Resources
Working capital increased from $12,545,000 at September 30, 1994 to $14,586,000
at September 30, 1995. Cash and short-term investments increased by $1,171,000
to $7,439,000 at September 30, 1995, compared to $6,268,000 at September 30,
1994. Stockholders' equity increased to $15,692,000 at September 30, 1995, from
$13,568,000 at September 30, 1994.
The Company maintains a $2.5 million unsecured bank line of credit. At September
30, 1995, the line was unused. The agreement expires March 31, 1996, and the
Company presently expects to negotiate a new bank line of credit. The Company
believes that its current financial arrangements and anticipated level of
internally generated funds will be sufficient to fund its working capital
requirements in fiscal 1996. At September 30, 1995, the Company had no material
commitments for capital expenditures.
10
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.
11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the section entitled "Election of Directors" included in
the Company's definitive proxy statement to be mailed to stockholders on or
about January 31, 1996, 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, 1996, 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, 1996, and filed with the Securities and
Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
The following consolidated financial statements of Check Technology Corporation
and subsidiaries are submitted in a separate financial statement section of this
report.
Description Page
Report of Independent Auditors 18
Consolidated Balance Sheets--September 30, 1995
and 1994 19
Consolidated Statements of Operations--The years ended
September 30, 1995, 1994 and 1993 21
Consolidated Statements of Stockholders' Equity--The
years ended September 30, 1995, 1994 and 1993 22
Consolidated Statements of Cash Flows--The years
ended September 30, 1995, 1994 and 1993 24
Notes to Consolidated Financial Statements--September 30,
1995 25
Financial Statement Schedules
Number Description Page
Schedule II Valuation and Qualifying Accounts 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, 1995.
Exhibits
Page or Incorporated
Number Description by Reference From
3.1 Restated Articles of Exhibit 3.1 to Form 10-K for
Incorporation fiscal year ended September 30, 1987
3.2 Amended Bylaws Exhibit 3.2 to Form 10-K for fiscal year
ended September 30, 1994
4.1 Specimen of the Company's Exhibit 4(b) to Registration
Common Stock Certificates Statement on Form S-1 (No. 2-97193)
4.2 Statement of Rights and Exhibit A to Current Report on
Preferences of Capital Stock Form 8-K dated May 15, 1990
4.3 Stock Purchase Agreement Exhibit 4.4 to Form 10-K for fiscal
Series B Convertible year ended September 30, 1990
Preferred Stock
10.2 Lease for Offices in Crawley Exhibit 10.9 to Form 10-K for the eight
England months ended September 30, 1985
13
Page or Incorporated
Number Description by Reference From
10.3 Bank Line of Credit Agreement 36
as amended, effective
March 15, 1995
10.4 1986 Stock Option Plan Exhibit 10.8 to Form 10-K for fiscal year ended
September 30, 1986
10.5 Form of Indemnification Exhibit 10.10 to Form 10-K for fiscal year ended
Agreement that the Company September 30, 1987
has entered into with officers
and directors. Such agreement
recites the provisions of
Minnesota Statutes Section
302A.521 and the Company's
Bylaw provisions (which are
substantially identical to the
statute)
10.6 Employment Agreement as of Exhibit 10.9 to Form 10-K for fiscal year
October 31, 1991, between the ended September 30, 1991
Company and Jay A. Herman
[replaced by exhibit 10.7]
10.7 Employment agreement as of Exhibit 10.7 to Form 10-K for fiscal year
October 1, 1994, between ended September 30, 1994
the Company and Jay A. Herman
10.8 1991 Stock Plan approved Exhibit 10.10 to Form 10-K for fiscal year
by stockholders on May 14, 1991 ended September 30, 1991
10.9 Lease of Facilities in Exhibit 10.9 to Form 10-K for fiscal year
Minnetonka, Minnesota ended September 30, 1994
11 Computation of Per Share 40
Earnings
22 List of Subsidiaries 41
23 Consent of Independent 42
Auditors
27 Financial Data Schedule 43
(For SEC use only)
14
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 27, 1995 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
/s/ Robert Reznick Chairman of the Board December 27, 1995
- ------------------------------------ -----------------------
Robert Reznick
/s/ Jay A. Herman President, Director December 27, 1995
- ------------------------------------ (Principal Executive Officer) -----------------------
Jay A. Herman
/s/ Paul Stephenson Vice President, Finance & Administration December 27, 1995
- ------------------------------------ (Principal Financial & Accounting Officer) -----------------------
Paul Stephenson
/s/ Gary Holland Director December 27, 1995
- ------------------------------------ -----------------------
Gary Holland
/s/ Thomas H. Garrett III Director December 27, 1995
- ------------------------------------ -----------------------
Thomas H. Garrett III
/s/ Oscar Victor Director December 27, 1995
- ------------------------------------ -----------------------
Oscar Victor
15
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, 1995
Check Technology Corporation
Minnetonka, Minnesota
16
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, 1995 and 1994
Consolidated Statements of Operations -- The years ended
September 30, 1995, 1994 and 1993
Consolidated Statement of Stockholders' Equity -- September 30, 1995, 1994
and 1993
Consolidated Statements of Cash Flows -- The years ended
September 30, 1995, 1994 and 1993
Notes to Consolidated Financial Statements -- September 30, 1995
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
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.
17
Original Document on 1400 Pillsbury Center
Ernst & Young LLP Letterhead Minneapolis, MN 55402
Phone: 612/343-1000
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Check Technology Corporation
We have audited the accompanying consolidated balance sheets of Check Technology
Corporation and subsidiaries as of September 30, 1995, and 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1995. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Check
Technology Corporation and subsidiaries at September 30, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1995, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
- ---------------------
Ernst & Young LLP
November 17, 1995
18
CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30
1995 1994
-------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,390,356 $ 1,871,314
Short-term investments 4,048,704 4,396,535
Accounts receivable less allowance for doubtful
accounts of $50,000 4,865,712 3,110,852
Inventories
Raw materials and component parts 4,406,202 4,511,412
Work-in-progress 102,736 259,822
Finished goods 1,349,725 1,922,046
----------- -----------
5,858,663 6,693,280
Other current assets 727,290 365,339
----------- -----------
TOTAL CURRENT ASSETS 18,890,725 16,437,320
EQUIPMENT AND FIXTURES
Machinery and equipment 1,974,074 1,974,868
Furniture and fixtures 1,438,888 2,468,243
Leasehold improvements 262,714 209,663
----------- -----------
3,675,676 4,652,774
Less accumulated depreciation
and amortization 2,462,844 3,486,458
----------- -----------
1,212,832 1,166,316
TOTAL ASSETS $20,103,557 $17,603,636
=========== ===========
See notes to consolidated financial statements.
19
CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30
1995 1994
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,390,906 $ 2,111,652
Employee compensation and related taxes 889,369 837,451
Income taxes payable 417,777 379,173
Deferred revenue 523,958 489,909
Current portion of capital lease obligations 82,912 74,541
------------ ----------
TOTAL CURRENT LIABILITIES $ 4,304,922 $ 3,892,726
CAPITAL LEASE OBLIGATIONS -- less current portion 106,405 143,104
------------ ----------
TOTAL LIABILITIES $ 4,411,327 $ 4,035, 830
STOCKHOLDERS' EQUITY
Capital Stock:
Series B Convertible Preferred Stock -- par value $.10 per share
-- authorized 1,091,000 shares; issued and outstanding
1995 -- None; 1994 -- 175,625 shares -- 17,563
Common Stock -- par value $.10 per share -- authorized 7,000,000
shares; issued and outstanding 1995 -- 6,112,279 shares;
1994 -- 5,859,515 shares 611,228 585,952
Additional paid-in capital 15,743,703 15,771,363
Foreign currency translation adjustment (453,275) (508,284)
Retained earnings (deficit) (209,426) (2,298,788)
------------ ----------
TOTAL STOCKHOLDERS' EQUITY $ 15,692,230 13,567,806
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,103,557 $ 17,603,636
============ ============
COMMITMENTS -- Note G
20
CONSOLIDATED STATEMENT OF OPERATIONS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Year Ended September 30,
1995 1994 1993
--------------------------------------------
Sales:
Printing Equipment $10,436,169 $9,369,808 $8,392,404
Maintenance, spares and supplies 13,924,485 13,605,781 12,950,904
------------ ------------ ------------
NET SALES 24,360,654 22,975,589 21,343,308
Costs and Expenses:
Cost of sales 9,333,299 9,052,686 8,605,379
Selling, general and administrative 10,424,527 9,682,963 9,184,605
Research and development 2,318,736 2,332,435 2,235,966
------------ ------------ ------------
22,076,562 21,068,084 20,025,950
------------ ------------ ------------
INCOME FROM SYSTEM SALES AND SERVICE 2,284,092 1,907,505 1,317,358
Interest expense 27,229 34,502 38,952
Interest (income) (283,378) (189,387) (104,792)
Unrealized exchange (gain) loss (29,745) (84,129) 336,266
------------ ------------ ------------
INCOME BEFORE TAXES 2,569,986 2,146,519 1,046,932
Income taxes 517,000 354,000 164,000
------------ ------------ ------------
NET INCOME $ 2,052,986 $ 1,792,519 $ 882,932
============ ============ ============
Earnings per share $0.33 $0.29 $0.15
Weighted average number of shares and share
equivalents outstanding during the period 6,270,504 6,145,601 6,032,096
See notes to consolidated financial statements
21
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Common Stock
Shares Amount
--------- --------
Balance September 30, 1992 4,956,200 $495,620
Net Income -- --
Conversion of Series A and B Convertible Preferred Stock 726,228 72,622
Issuance of Restricted Stock 47,000 4,700
Vesting of Restricted Stock -- --
Foreign Currency Translation -- --
--------- -------
Balance September 30, 1993 5,729,428 572,942
Net Income -- --
Exercise of Stock Options 15,090 1,511
Conversion of Series B Convertible Preferred Stock 107,633 10,763
Exercise of Warrants 7,364 736
Vesting of Restricted Stock -- --
Foreign Currency Translation -- --
--------- -------
Balance September 30, 1994 5,859,515 585,952
Net Income -- --
Exercise of Stock Options 55,000 5,500
Conversion of Series B Convertible Preferred Stock 175,625 17,563
Exercise of warrants 22,139 2,213
Vesting of Restricted Stock -- --
Note Receivable from stock sale -- --
Foreign Currency Translation -- --
--------- -------
Balance September 30, 1995 6,112,279 $611,228
========= =========
See notes to consolidated financial statements.
22
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
(TABLE CONTINUED FROM PREVIOUS PAGE)
Foreign
Series A & B Convertible Additional Currency Retained
Preferred Stock Paid-In Translation Earnings
Shares Amount Capital Adjustment (Deficit)
- -------------- ------------ ------------- ------------- ---------------
1,009,486 $100,948 $15,644,207 $(218,954) $(4,943,243)
-- -- -- -- 882,932
(726,228) (72,622) -- -- --
-- -- 78,300 -- (83,000)
-- -- -- -- 15,625
-- -- -- (626,182) --
- -------------- ------------ ------------- ------------- ---------------
283,258 28,326 15,722,507 (845,136) (4,127,686)
-- -- -- -- 1,792,519
-- -- 29,341 -- --
(107,633) (10,763) -- -- --
-- -- 19,515 -- --
-- -- -- -- 36,379
-- -- -- 336,852 --
175,625 17,563 15,771,363 (508,284) (2,298,788)
-- -- -- -- 2,052,986
-- -- 123,531 -- --
- -------------- ------------ ------------- ------------- ---------------
(175,625) (17,563) -- --
-- -- (2,225) -- --
-- -- -- -- 36,376
-- -- (148,966) -- --
-- -- -- 55,009 --
- -------------- ------------ ------------- ------------- ---------------
0 $0 $15,743,703 $(453,275) $(209,426)
============== ============ ============= ============= ===============
23
CONSOLIDATED STATEMENTS OF CASH FLOW
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Year Ended September 30,
1995 1994 1993
-----------------------------------------
OPERATING ACTIVITIES
Net Income $ 2,052,986 $ 1,792,519 $ 882,932
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 433,997 401,822 372,121
Other (209,513) (1,943) 15,625
Changes in operating assets and liabilities:
Accounts receivable (1,679,087) 535,834 842,460
Inventories 624,730 (959,362) (389,162)
Other current assets (353,962) 204,801 69,789
Accounts payable and
accrued expenses 308,020 497,665 180,418
Deferred revenue 31,175 28,603 (44,973)
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,208,346 2,499,939 1,929,210
INVESTING ACTIVITIES
Purchase of equipment and fixtures (338,989) (505,152) (442,537)
Proceeds from sale of equipment 116,273 50,149 36,247
Purchase of short-term investments (4,926,101) (6,840,509) --
Proceeds from sale of short-term
investments 5,492,840 2,482,292 --
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 344,023 (4,813,220) (406,290)
FINANCING ACTIVITIES
Issuance of Common Stock 49,019 51,103 --
Addition of capital leases 63,966 122,023 96,258
Note receivable from stock sale (68,966) -- --
Repayment of long-term debt and
capital leases (95,336) (103,634) (77,352)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (51,317) 69,492 18,906
EFFECT OF EXCHANGE RATE CHANGES
ON CASH 17,990 41,944 (104,647)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,519,042 (2,201,845) 1,437,179
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,871,314 4,073,159 2,635,980
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 3,390,356 $ 1,871,314 $ 4,073,159
=========== =========== ===========
See notes to consolidated financial statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Cash Equivalents and Short-Term Investments: The Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents. Short-term investments consist principally of held-to-maturity
debt securities. The Company determines the appropriate classification of debt
securities at the time of purchase. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost, adjusted for amortization of premiums and accretion of discounts to
maturity. Cash equivalents and short-term investments are carried at amounts
that approximate market value. Interest on securities is included in interest
income.
Inventories: Inventories are carried at the lower of cost or market determined
under the first-in, first-out (FIFO) method.
Equipment and Fixtures: Equipment and fixtures are stated on the basis of cost
and include the cost of assets held under capital lease obligations.
Demonstration equipment not expected to be resold is carried in equipment on a
cost basis.
The Company provides for depreciation and amortization of equipment and fixtures
by charges to operations at rates calculated to amortize the cost of the
property over its estimated useful life using the straight-line method.
Amortization expense of items under capital lease is included in depreciation
expense.
Deferred Revenue: Amounts billed to customers under maintenance contracts are
recognized in income over the term of the maintenance agreement.
Foreign Currency Translation: The Company's wholly-owned foreign subsidiaries'
financial statements are measured in their functional currency before
translating to U.S. dollars. Gains and losses resulting from the translation are
recorded as a component of stockholders' equity.
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. Investment tax
credits are accounted for under the flow-through method thereby reducing income
taxes in the year in which the credits are realized.
Earnings Per Share: Earnings per share of Common Stock is computed by dividing
the net income for the period by the weighted average number of shares of Common
Stock and Common Stock equivalents outstanding during the period. When
outstanding, the Series B Convertible Preferred Stock was considered a common
stock equivalent.
Reclassification: Certain prior years' amounts have been reclassified to conform
to the 1995 presentation.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1995
NOTE B - INCOME TAX
Effective October 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." As permitted under the Statement, the Company has
elected not to restate the financial statements of prior years.
Statement 109 requires the liability method for computing income tax expenses.
Under this method, deferred tax assets and liabilities are determined based on
temporary differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Prior to adopting
Statement 109, the Company used the liability method as prescribed by Statement
96 to determine income tax expenses. Among other changes, Statement 109 changes
the recognition and measurement criteria for deferred tax assets included in
Statement 96. There was no cumulative effect from adopting Statement 109 as of
October 1, 1993 on net income for the year ended September 30, 1994.
At September 30, 1995, the Company has domestic tax operating loss carry
forwards of approximately $627,000. These operating loss carry forwards expire
in 2003. In addition, domestic investment tax credits and research and
development credit carry-forwards of approximately $495,000 are available to
offset future income taxes and expire in varying amounts through September 2008.
Domestic alternative minimum tax credits of approximately $140,000 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 which have been
offset by a valuation allowance as deemed necessary based on the Company's
estimates of its future sources of taxable income.
Significant components of deferred tax assets and liabilities as of September
30 are as follows:
Federal and State Net Deferred Tax Assets (Liabilities):
Deferred Tax Assets: 1995 1994
----------- -----------
Net operating loss carry-forwards $ 213,000 $ 485,000
Business credit carry-forwards 495,000 488,000
Alternative minimum tax credits 140,000 136,000
Other temporary differences 290,000 291,000
----------- -----------
Total 1,138,000 1,400,000
Less Valuation Allowances (1,138,000) (1,400,000)
----------- -----------
Net Deferred Tax Asset $ 0 $ 0
=========== ===========
Foreign Net Deferred Tax Assets (Liabilities):
Deferred Tax Assets: 1995 1994
----------- -----------
Net operating loss carry-forwards $ 0 $ 71,000
Other temporary differences 75,000 70,000
----------- -----------
Total 75,000 141,000
Less Valuation Allowances (75,000) (141,000)
----------- -----------
Net Deferred Tax Asset $ 0 $ 0
=========== ===========
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1995
NOTE B - INCOME TAX - Continued
The provisions for income tax expenses consisted of the following:
1995 1994 1993
-------- -------- --------
Current Tax Expense:
Federal $ 53,000 $ 17,000 $ 500
State 0 33,000 12,400
Foreign 464,000 304,000 151,100
-------- -------- --------
Total $517,000 $354,000 $164,000
======== ======== ========
A reconciliation of tax expense to the statutory rate of 34% is as follows:
1995 1994 1993
--------- --------- ---------
Statutory rate applied to pre-tax income $ 874,000 $ 730,000 $ 356,000
Foreign income taxed at a rate different
from statutory rate (2,000) 67,000 109,200
Foreign loss for which no current benefit
available 0 0 (38,800)
Net operating loss utilization (354,000) (437,000) (265,600)
Other (1,000) (6,000) 3,200
--------- --------- ---------
$ 517,000 $ 354,000 $ 164,000
========= ========= =========
Cash tax payments for the years ended September 30, 1995, 1994, and 1993, were
$470,000, $168,000 and $66,000, respectively.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1995
NOTE C - FINANCIAL INSTRUMENTS
Foreign Currency Instruments and Hedging Activities: From time to time, the
Company may enter into foreign exchange contracts to manage its exposure to
fluctuations in foreign currency exchange rates. These contracts involve the
exchange of foreign currencies for U.S. dollars at a specified rate at future
dates. Counterparties to these contracts are major international financial
institutions. Maturities of these instruments are typically one year or less
from the transaction date. Gains or losses from these contracts are included in
other expense and are intended to partially offset fluctuations in net sales due
to currency rate changes.
The Company had contracts totalling $270,000 at September 30, 1995, to exchange
French Francs into U.S. dollars. No contracts existed at September 30, 1994.
These instruments were recorded at their fair value at September 30, 1995.
NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES
The Company operates in one business segment, which is the sale of printing
equipment and related maintenance, spares and supplies. The Company has
developed computer-controlled printing systems to produce a variety of documents
for the financial services industry. Its primary products provide operating
flexibility and efficiency through sophisticated software and paper handling
mechanisms and produce quality alphanumeric and machine-readable print.
The Company's manufacturing operations are located in the United States. Sales
and service operations are located in the United Kingdom, France, and Australia.
Domestic Foreign
Year Ended September 30, 1995 Operations Operations Eliminations Consolidated
- ----------------------------- ---------- ---------- ------------ ------------
Sales to unaffiliated customers $ 7,537,883 $ 16,822,771 $ -- $ 24,360,654
Sales to foreign subsidiaries 4,564,096 -- 4,564,096 0
------------ ------------ ------------ ------------
Net Sales 12,101,979 16,822,771 4,464,096 24,360,654
============ ============ ============ ============
Income from system sales and service $ 513,811 $ 1,839,612 $ 69,331 $ 2,284,092
Less:
Interest (income) (390,040) (17,107) (123,769) (283,378)
Interest expense 6,232 144,766 123,769 27,229
Unrealized exchange (gain) (1,738) (28,007) -- (29,745)
------------ ------------ ------------ ------------
Income before taxes 899,357 1,739,960 69,331 2,569,986
Income taxes 53,381 463,619 -- 517,000
------------ ------------ ------------ ------------
Net Income $ 845,976 $ 1,276,341 $ 69,331 $ 2,052,986
============ ============ ============ ============
Identifiable assets $ 18,012,300 $ 9,852,804 $ 7,612,581 $ 20,252,523
============ ============ ============ ============
Total liabilities $ 1,662,913 $ 4,291,905 $ 1,543,491 $ 4,411,327
============ ============ ============ ============
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1995
NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES--Continued
Domestic Foreign
Year Ended September 30, 1995 Operations Operations Eliminations Consolidated
- ----------------------------- ---------- ---------- ------------ ------------
Sales to unaffiliated customers $ 7,607,524 $ 15,368,065 $ -- $ 22,975,589
Sales to foreign subsidiaries 5,034,738 -- 5,034,738 0
------------ ------------ ------------ ------------
Net Sales 12,642,262 15,368,065 5,034,738 22,975,589
============ ============ ============ ============
Income from system sales and service $ 544,501 $ 1,365,600 $ 2,596 $ 1,907,505
Less:
Interest (income) (293,072) (12,636) (116,321) (189,387)
Interest expense 7,474 143,349 116,321 34,502
Unrealized exchange (gain) (3,887) (80,242) -- (84,129)
------------ ------------ ------------ ------------
Income before taxes 833,986 1,315,129 2,596 2,146,519
Income taxes 25,205 328,795 -- 354,000
------------ ------------ ------------ ------------
Net Income $ 808,781 $ 986,334 $ 2,596 $ 1,792,519
============ ============ ============ ============
Identifiable assets $ 17,514,111 $ 9,094,415 $ 9,004,890 $ 17,603,636
============ ============ ============ ============
Total liabilities $ 2,053,339 $ 4,764,481 $ 2,781,990 $ 4,035,830
============ ============ ============ ============
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1995
NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES--Continued
Domestic Foreign
Year Ended September 30, 1995 Operations Operations Eliminations Consolidated
- ----------------------------- ---------- ---------- ------------ ------------
Sales to unaffiliated customers $ 8,292,380 $ 13,050,928 $ -- $ 21,343,308
Sales to foreign subsidiaries 3,397,669 -- 3,397,669 0
------------ ------------ ------------ ------------
Net Sales 11,690,049 13,050,928 3,397,669 21,343,308
============ ============ ============ ============
Income from system sales and service $ 588,862 $ 884,682 $ 156,186 $ 1,317,358
Less:
Interest (income) (229,455) (20,850) (145,513) (104,792)
Interest expense 11,259 173,206 145,513 38,952
Unrealized exchange loss 24,924 311,342 -- 336,266
------------ ------------ ------------ ------------
Income before taxes 782,134 420,984 156,186 1,046,932
Income taxes 12,900 151,100 -- 164,000
------------ ------------ ------------ ------------
Net Income $ 769,234 $ 269,884 $ 156,186 $ 882,932
============ ============ ============ ============
Identifiable assets $ 16,606,773 $ 7,879,268 $ 9,957,377 $ 14,528,664
============ ============ ============ ============
Total liabilities $ 1,906,410 $ 5,113,383 $ 3,842,082 $ 3,177,711
============ ============ ============ ============
The Company's products are marketed worldwide. Domestic operations include
export sales in the western hemisphere, and foreign operations include the
activities of the three foreign subsidiaries. Export sales, including those of
the Company's overseas subsidiaries, were $18,740,731, or 77% of net sales for
the year ended September 30, 1995, compared to $18,075,377, or 79% of net sales
for the year ended September 30, 1994, and $17,031,289, or 80% of net sales for
the year ended September 30, 1993.
There were no sales to any customer in excess of 10% of total sales in 1995.
There was one customer with sales in excess of 10% of total sales in 1994 and
none in 1993.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1995
NOTE E--LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
September 30,
1995 1994
--------------------
Capital lease obligations on automobiles and equipment, due in monthly
installments varying from $160 to $715, including interest at 9.5% to 11.6%,
automobile and equipment financed under the lease serve as
security to the lease obligation $189,317 $217,645
Less current portion of lease obligation 82,912 74,541
-------- --------
$106,405 $143,104
======== ========
Cash payments of interest were $28,250 in 1995, $30,878 in 1994, and $36,903 in
1993.
Equipment and fixtures includes the following amounts under the capitalized
lease obligations:
September 30,
1995 1994
--------------------
Office furniture, fixtures and equipment $264,663 $290,346
Less allowance for amortization 79,152 75,323
-------- --------
$185,511 $215,023
======== ========
Future payments for the capital lease obligations (including interest) as of
September 30, 1995 are:
Capital Lease
Year ending September 30: Obligations
-------------
1996 $ 97,069
1997 88,827
1998 25,652
------------
Total Payments 211,548
Less amounts representing interest 22,231
-------------
Present value of lease payments $189,317
=============
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1995
NOTE F--STOCK OPTIONS AND WARRANTS
During fiscal year 1995, the Company had two stock option programs, the 1986
Stock Option Plan (the 1986 Plan) and the 1991 Stock Plan (the 1991 Plan), for
its key employees and non-employee directors. The 1986 Plan was adopted in
October 1986 and the 1991 Plan in March 1991. Stock Options under the 1986 Plan
are non-qualified while those under the 1991 Plan can be granted as either
non-qualified or incentive stock options. The 1991 Plan also authorizes the
granting of awards in the forms of stock appreciation rights, restricted stock
or deferred stock. In all cases, subject to the provisions of the plans, the
board of directors has complete discretion in establishing the terms and
conditions of each option granted to the employees of the company. During fiscal
year 1995, an officer exercised stock options for a $148,966 note. The note is a
full recourse promissory note and is collateralized by the stock issued upon
exercise of the stock options.
A Summary of outstanding options and shares reserved under each plan is as
follows:
The 1986 Plan
-------------
Shares
Reserved
For Future Options Price
Grants Outstanding Per Share
---------------- ----------------- ----------------
Balance September 30, 1993 188,660 211,750 $2.00 to $ 2.625
Options exercised ---- (13,750) 2.00 to 2.625
---------------- -----------------
Balance September 30, 1994 188,660 198,000 2.00 to 2.625
Options exercised ---- (41,750) 2.00 to 2.625
---------------- -----------------
Balance September 30, 1995 188,660 156,250 $2.00 to $ 2.625
================ ==================
At September 30, 1995 and 1994, there were 156,250 and 198,000 options,
respectively, currently exercisable under the 1986 Plan at prices of $2.00 to
$2.625 per share.
1991 Plan
Shares Restricted
Reserved Stock &
For Future Options Price
Grants Outstanding Per Share
--------------- ----------------- --------------
Balance September 30, 1993 333,000 167,000 $1.75 to $3.50
Options Granted (102,500) 102,500 4.38 to 5.38
Options exercised ---- (1,340) 2.50
---------------- ------------------
Balance September 30, 1994 230,500 268,160 1.75 to 5.38
Options exercised ---- (13,250) 1.75 to 4.38
Options canceled 1,250 (1,250) 1.75
---------------- ------------------
Balance September 30, 1995 231,750 253,660 $1.75 to $5.38
================ ==================
At September 30, 1995 and 1994, there were 84,326 and 51,493 options,
respectively, currently exercisable under the 1991 Plan at prices of $1.75 to
$5.38 per share.
In June 1990, warrants for a total of 49,095 shares were issued to an agent, in
connection with the Company's sale of Series B Convertible Preferred Stock. The
warrants were at a price of $2.75 per share. 7,364 shares of such warrants were
exercised in March 1994 and the remaining in January 1995.
Total shares reserved for options and restricted stock are 830,320 shares.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1995
NOTE G--RENTAL COMMITMENTS
Building, equipment and automobile rentals under operating leases were $846,098,
$805,853, and $821,480 for the years ended September 30, 1995, 1994 and 1993,
respectively.
The Company leases its corporate offices under a fifteen year agreement expiring
on September 15, 2010. Annual rental under the lease is $379,000 in the first
year increasing to $473,000 in the eleventh year and thereafter. The Company is
obligated to pay operating expenses and real estate taxes incurred by the
landlord. The Company has the right to terminate such lease at the end of the
10th lease year, subject to a termination fee.
The Company's subsidiary in the Untied Kingdom leases office space under a lease
expiring in 2013. Annual rental under the lease is $186,000, 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 $10,755,844 and are due as follows:
fiscal year ending September 30, 1996--$881,861; 1997--$836,794; 1998--$757,117;
1999--$739,821; 2000--$624,770; thereafter--$6,915,481
NOTE H--LINE OF CREDIT AND NOTES PAYABLE
The Company has a $2,500,000 revolving line of credit with a bank. At September
30, 1995, the entire line was unused. The line of credit agreement is in the
form of an unsecured note. Advances under the line of credit bear interest at
the bank's reference rate. The line has a 0.20% annual commitment fee.
The line of credit agreement places certain restrictions on the Company
including requirements as to maintenance for minimum levels of tangible net
worth and specified others. The Company was in compliance with these covenants
at September 30, 1995. The line of credit expires March 31, 1996.
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.
NOTE I--CAPITAL STOCK
The Company has authorized two series of convertible preferred stock. The
1,000,000 shares of Series A and the 1,091,000 shares of Series B Preferred
Stock are convertible into Common Stock on a one-share-for-one-share basis. All
remaining shares of Series A Preferred Stock and Series B Preferred Stock were
converted into Common Stock by early 1993 and 1995, respectively.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1995
NOTE J-- SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1995 Quarter Ended December 31 March 31 June 30 September 30
- ------------------ ------------- ------------ ------------ --------------
Net Sales $5,561,930 $6,000,731 $5,786,393 $7,011,600
Gross Profit 3,371,420 3,819,412 3,540,498 4,296,025
Net Income (1) 379,953 598,234 407,605 667,194
Earnings Per Share $ 0.06 $ 0.10 $ 0.06 $ 0.11
1994 Quarter Ended December 31 March 31 June 30 September 30
- ------------------ ------------- ------------ ------------ --------------
Net Sales $6,316,878 $6,461,121 $5,617,259 $4,580,331
Gross Profit 3,683,109 3,940,903 3,455,994 2,842,897
Net Income (1) 517,331 619,528 426,128 229,532
Earnings Per Share $ 0.09 $ 0.10 $ 0.07 $ 0.04
(1) The income tax rate for the fourth quarter of 1994 was impacted by the
adjustment to the effective annual rate.
34
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
COL. A COL. B COL. C COL. D COL. E COL. F
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts (Deductions) End
Description of Period Expenses Describe Describe of Period
- ----------- ---------- ---------- ---------- ----------- ----------
I. Allowance for
Doubtful Accounts
Year ended September
30, 1995: $ 50,000 ------ ------ ------ $ 50,000
Year ended September
30, 1994: $ 50,000 ------ ------ ------ $ 50,000
Year ended September
30, 1993: $ 50,000 ------ ------ ------ $ 50,000
II. Reserve for obsolete
and slow moving
inventories
Year ended September
30, 1995: $267,000 60,000 ------ (24,000) $303,000
Year ended September
30, 1994: $261,000 125,000 ------ (119,000) $267,000
Year ended September
30, 1993: $228,000 107,000 ------ (74,000) $261,000