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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Annual report pursuant to section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the fiscal year ended September 30, 1997
Commission File Number: 0-10691
CHECK TECHNOLOGY CORPORATION
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1392000
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12500 Whitewater Drive, Minnetonka, Minnesota 55343-9420
- --------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 939-9000
____________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.10 par value)
(Title of Class)
____________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 60 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately 23,434,000 at December 1, 1997 when the closing
price of such stock, as reported by NASDAQ, was 3.875.
There were 6,336,745 shares outstanding of Registrant's $.10 par value common
stock as of December 1, 1997.
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 62 pages (including exhibits). The index is set
forth on page 14.
1
ITEM 1. BUSINESS
COMPANY BACKGROUND
Check Technology Corporation (the Company) was formed in 1981 to design and
manufacture a sophisticated printing system. The original product concept for
the Company was a computerized financial document production system, which
integrated many of the functions required for the production of checkbooks.
These functions included (i) automatic collation of checkbook components, (ii)
high quality alphanumeric and graphics printing for customer personalization and
bank address, and (iii) consistent Magnetic Ink Character Recognition (MICR)
printing for the electronic processing of checks. Shipments of its first
system, the Model 2000 CHECKTRONIC-Registered Trademark-, began in 1983.
Within a short time after the introduction of the CHECKTRONIC system, the
Company recognized the product's applicability in such areas as insurance claim
production and centralized funds disbursements. The latter includes payroll and
accounts payable checks. These 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 competitors'
products.
The Company has had a significant presence in the international check production
marketplace since 1983. The integration of the check production functions
described above was found to result in the cost effective production of the
small check order sizes common to most markets outside the United States. The
production cost reductions for orders of 25-100 checks, as well as the
improvement in printing quality, created a demand for the Company's systems in
many international markets. In order to manage this demand and to provide the
necessary technical support of the products after installation in the field, the
Company opened its first subsidiary, Check Technology Limited, in England in
1983. The Company opened its French and Australian subsidiaries in 1987. At
September 30, 1997, the Company had an installed base of over 400 systems
located in 48 countries.
BUSINESS
The Company's business is the design, manufacture, sale and service of
computerized financial document production systems. The systems can collate,
personalize and encode documents into packages tailored to the customer's
requirements. The systems are sold through the Company and its international
subsidiaries.
PRODUCTS
Check Technology sells a complete family of electronic production systems for
use in both cut-sheet and continuous forms production environments. These
systems can be used for four basic applications: folio production, insurance
claims, fulfillments, and disbursements. Folio production includes the printing
of checkbooks and financial payment coupon books. Insurance claim applications
consist of explanation of benefit forms and insurance claim checks. Fulfillment
applications include coupons and rebate checks, while disbursement applications
include accounts payable checks and payroll checks. These electronic production
systems enable companies 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 purchased
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.
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-Registered Trademark- system incorporates a blend of proven concepts
with new designs and advanced microprocessor controls. The FOLIOTRONIC system
consists of a guillotine and stitcher/binder module. Its rated throughput is up
to 2,000 books per hour. When used with the Company's electronic production
systems, the FOLIOTRONIC system enables customers with folio production
applications to transform blank paper stock into finished books.
Service and Maintenance. Service and maintenance revenue results from the sale
of maintenance contracts, the sale of proprietary consumable and supply items
and the sale of spare parts to customers who have purchased the Company's
equipment. Supplies are operating materials that are consumed during normal
operation of the Company's systems. Examples of these supplies are MICR ribbon
consumed in the printing of each MICR code line and toner, which is consumed in
the personalization of each document. The Company believes that its service
network and spare parts business operated profitably for the years ended
September 30, 1997, 1996 and 1995, 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. For customers who
purchase maintenance contracts 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 will eventually reduce the number of checks used,
although the size and rate of reduction is difficult to predict. It is
estimated that other documents produced by the Company's systems have shown
higher growth rates over the same period. These documents include payment
coupons, tax payment and other installment payment products.
Disbursement activities, such as insurance claims and payroll operations
(collectively called Checkwriting applications by the Company) have been
affected by alternative payment technologies. These substitutes include
Electronic Funds Transfer (EFT) and Electronic Data Interchange (EDI). Although
these alternatives comprise only a small percentage of total payment
transactions in the United States, they are expected to have an increasingly
significant impact on U.S. disbursement activities over the next ten years.
The Company's systems have also been sold in the United States primarily to
check printers, payment coupon producers, service bureaus and large
corporations. These organizations all have requirements for the production of
personalized encoded document packages such as small personal check orders,
installment payment books, payroll, payables and insurance claims checks. The
Company expects to continue to increase its installed system base in the United
States.
International Market. The market for the Company's products outside the United
States has been primarily in personalized check production. The average
personalized check order size in most international markets is between 25 and
100 checks. These small order sizes are produced cost effectively on the
Company's products because of their automatic collation capabilities. Stringent
MICR quality standards, enforced by the major clearing banks in most
international markets, are also met by the Company's high quality MICR printing
capabilities. As a result of these market factors, the Company has had success
in penetrating the largest personal check production markets outside of the
United States. These include Australia, Brazil, France, Mexico, Spain and the
United Kingdom.
3
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 H. Harland Company
(Decatur, Georgia), and Clarke American (San Antonio), who are all customers of
Check Technology Corporation. Competitive standards for alphanumeric print
quality, MICR print quality and delivery time in this segment are established
by these major players. All of these market standards must be met or surpassed
by any new market competitor or production technology in order to capture a
substantial share of the United States personal check market. To date, the
Company has been able to establish itself only in the production of new account
kits, money market checkbooks and other applications which do not require offset
or letterpress quality.
The 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.
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, 1997, the Company had a backlog of approximately $3,500,000 as
compared to a backlog of $3,909,000 as of December 1, 1996. 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 1997, 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.
4
MANUFACTURING AND SOURCES OF SUPPLY
Since the Company has not developed a sustained backlog, it has adopted a
manufacturing process to enable it to produce a "generic" product that can be
quickly configured to a customer's specific order without rework. This process
has enabled the Company to begin manufacturing without firm final orders. As a
result, the Company has been able to reduce manufacturing parts and material
inventories while, at the same time, being able to respond quickly to new
orders.
The components of the Company's financial document production systems are
manufactured by outside vendors, tested and then incorporated into the systems
by Company personnel. While the Company uses only one source for many of the
key components of its printing systems, most components, with the exception of
the non-impact alphanumeric printer and the MICR printer hammer bank component,
are available from multiple sources. However, many of the critical components
of the Company's systems would require redesign if new vendors were used.
The non-impact alphanumeric printers and associated spare parts and consumables
for both the CHECKTRONIC and the IMAGGIA system are supplied to the Company by
Delphax Systems, which has its manufacturing facilities in Toronto, Canada.
Delphax has been the supplier of the printers used in the Company's systems
since the Company's inception and is considered by the Company's management to
be a reliable supplier. Xerox, one of the Company's competitors, owned a one
third partnership interest in Delphax for many years and in November 1997
acquired the remaining equity of Delphax. In connection with this acquisition,
Xerox has advised the Company that its intention is to have Delphax comply with
all of Delphax's existing contractual obligations to the Company, that Xerox
hopes to expand Delphax's relationship with the Company in the future and that
Xerox does not anticipate that the competitive relationship between the Company
and Xerox will be a factor in the relationship of Delphax with the Company. The
expressed intentions of Xerox could change to the detriment of the Company. No
assurance can be given at this time that the Company will be able to secure a
replacement source of supply for the alphanumeric printers supplied by Delphax.
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 these hammer banks. The Company made an end-of-life buy
and does not foresee an impact on its operations.
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 $2,521,000, $2,206,000 and
$2,319,000, for the years ended September 30, 1997, 1996 and 1995, respectively.
The Company is completing development of a new family of check production
systems, called IMAGGIA, which is targeted at the high volume U.S. check
market as well as offering potential for increasing the Company's
international business. The Company has selected the Gemini digital printing
technology, which is being developed by Delphax Systems, as the initial print
engine for the Imaggia system. The Company had anticipated introducing this
system to the market during its fiscal 1997 year. However, introduction of
the system has been delayed, 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. The Company
currently anticipates that the IMAGGIA system will be commercially available
during its fiscal 1998 year. However, no assurances can be given that
further delays will not occur or that the product's launch will be successful.
PATENTS
In July 1997, the Company received a patent covering certain aspects of its
IMAGGIA printing system. In prior years, the Company has received a patent
covering the Model 2000 CHECKTRONIC 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.
5
EMPLOYEES
As of December 1, 1997, the Company had 187 full-time employees, including 33 in
executive and administrative positions, 30 in electronic engineering and product
development, 31 in manufacturing, 17 in sales and marketing and 76 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 $387,000, increasing to
$481,000 on September 15, 2005, and thereafter, plus operating expenses and real
estate taxes.
In addition, the Company leases office space for its European sales and service
center in Crawley, England under a lease which expires in 2013 and provides for
annual lease payments of $195,000, 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
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, 1997.
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 50
Louise Jalma Vice President of Marketing 45
Peter Wood Vice President of Engineering 55
Dieter Schilling Vice President of Operations and 42
Customer Service
Paul Stephenson Vice President of Finance and Administration 43
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.
LOUISE JALMA joined the Company as Vice President of Marketing in January 1996.
Prior to joining the company, Ms. Jalma was Senior Vice President of Marketing
for National City Bank, Minneapolis from 1993 to 1996. Previous to this she was
Director of Business Development for Dorsey & Whitney from 1986 to 1993, and
managed Media and Marketing Communications for North Memorial Marketing Center
from 1982 to 1986.
PETER 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 SCHILLING was promoted to Vice President of Operations and Customer
Service in October of 1989. From October 1986 until October 1989 he held the
position of Vice President of Customer Service. Mr. Schilling joined Check
Technology as Director of Field Services in 1985 and was promoted to Director of
Customer Service in April of 1986. Previous to this, Mr. Schilling was a
co-founder and President of Southern California Telephone, a telephone
interconnects company, which was sold to American Telecommunications, Inc. in
1985.
PAUL 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
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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, 1997
- -----------------------------
First Quarter $ 10 7/8 $ 7 1/2
Second Quarter $ 8 7/8 $ 5 5/8
Third Quarter $ 8 $ 5 1/4
Fourth Quarter $ 7 7/8 $ 3 7/8
Year Ended September 30, 1996
- -----------------------------
First Quarter $ 10 1/4 $ 7 3/8
Second Quarter $ 11 3/4 $ 8
Third Quarter $ 13 1/4 $ 9 3/8
Fourth Quarter $ 10 3/8 $ 8
HOLDERS
As of December 1, 1997, the Company had 414 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, 1997 30, 1996 30, 1995 30, 1994 30, 1993
- ----------------------- ---------- ---------- ---------- ---------- ----------
Consolidated
Statement of
Operations Data:
Net sales $22,866,676 $24,718,974 $24,360,654 $22,975,589 $21,343,308
Net income $ 325,979 $ 2,245,713 $ 2,052,986 $ 1,792,519 $ 882,932
Earnings per share $ 0.05 $ 0.35 $ 0.33 $ 0.29 $ 0.15
Weighted average
number of shares
and share equivalents
outstanding (1) 6,416,081 6,355,401 6,270,504 6,145,601 6,032,096
September September September September September
Year Ended 30, 1997 30, 1996 30, 1995 30, 1994 30, 1993
- ----------------------- ----------- ----------- ----------- ----------- -----------
Consolidated
Balance Sheet Data:
Working capital $17,588,576 $17,310,488 $14,585,803 $12,544,594 $10,376,832
Total assets $22,971,493 $22,277,856 $20,103,557 $17,603,636 $14,528,664
Long term liabilities $ 78,903 $ 55,615 $ 106,405 $ 143,104 $ 97,133
Stockholders' equity $18,679,662 $18,408,486 $15,692,230 $13,567,806 $11,350,953
(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, 1997 (fiscal 1997) sales of
document production equipment decreased 26% over the year ended September 30,
1996 (fiscal 1996) compared to an increase of 2% in fiscal 1996 over year ended
September 30, 1995 (fiscal 1995). The decrease in 1997 arose primarily from a
decrease in CHECKTRONIC sales. The Company has held for some time, a dominant
market position, in many of the international markets in which the CHECKTRONIC
is sold. Demand for the CHECKTRONIC product line has softened in some of these
established international markets, and revenues from this product line are now
largely dependent on sales to emerging markets. The increase in 1996 over 1995
arose primarily from sales into Africa and Latin America.
Revenues from maintenance contracts, spare parts, supplies and consumable items
increased 6% in fiscal 1997 over fiscal 1996 compared to a 1% increase in fiscal
1996 over fiscal 1995. Increases in both fiscal 1997 and 1996 were primarily
due to increased volumes of consumable sales.
Gross margin percentages in fiscal 1997 were 60% compared to 61% in fiscal 1996
and 62% in fiscal 1995. The change between fiscal 1997, 1996 and 1995 was
primarily due to differences in product mix and increased pricing pressure.
Selling, general and administrative expenses increased 3% in fiscal 1997 over
fiscal 1996, compared to an increase of 4% in fiscal 1996 over fiscal 1995. The
increase in expenses in fiscal 1997 over fiscal 1996 was due primarily to higher
marketing and personnel expense.
Research and development expenses increased 14% in fiscal 1997 over fiscal 1996
and fiscal 1995 levels. The increase was primarily due to increased
expenditures on the Company's IMAGGIA product development program.
Interest income in fiscal 1997 was flat with 1996. Interest income increased
42% in fiscal 1996 over fiscal 1995 as a result of higher cash and short-term
investment balances.
The Company experiences unrealized currency gains and losses 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 loss was $72,000 in fiscal 1997, compared to a gain of $51,000
in fiscal 1996 and a gain of $30,000 in fiscal 1995. 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 income tax rate was 32% in fiscal 1997 compared to 12% in fiscal 1996 and
20% in fiscal 1995. During the fourth quarter of fiscal 1996 the Company
recorded certain previously unrecognized deferred tax assets amounting to
$693,000. The Company believes recorded net deferred tax assets are recoverable,
based upon its estimates of future sources of taxable income and the expected
timing of temporary difference of reversals. Further information about income
taxes is provided in Note B to the consolidated financial statements.
Net income for the year amounted to $0.05 per share as compared to $0.35 per
share in fiscal 1996 and $0.33 per share in fiscal 1995. The decrease in net
income in fiscal 1997 was primarily due to the decrease in the level of document
production systems revenue, as well as the negative effects of foreign currency
exchange rate swings and a higher tax rate. The increase in net income in
fiscal 1996 over fiscal 1995 was due to a lower tax rate.
10
FACTORS AFFECTING RESULTS OF OPERATIONS
The Company is developing a new product line, named the IMAGGIA line, which it
had planned to introduce in fiscal 1997. Introduction of the product line has
been delayed, and the Company now anticipates that the product will be
introduced in fiscal 1998. Achievement of the Company's future revenue plans
depends upon the successful introduction and market acceptance of the IMAGGIA
system. The Company's revenues and operating results may also fluctuate from
period to period because: (i) the Company's sales cycle is relatively long; (ii)
the size of orders can vary significantly; (iii) the availability of financing
for customers in some countries is variable; (iv) customers may postpone or
cancel orders; and (v) economic, political and market conditions in some markets
can change with minimal notice and 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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $17,589,000 at September 30, 1997 from $17,310,000
at September 30, 1996. Cash and short-term investments amounted to $8,459,000
at September 30, 1997 compared to $9,810,000 at September 30, 1996.
Stockholders' equity increased to $18,680,000 at September 30, 1997, from
$18,408,000 at September 30, 1996.
The Company maintains a $2.5 million unsecured bank line of credit. At
September 30, 1997, the line was unused. The agreement expires March 31, 1998,
and the Company presently expects to negotiate a new bank line of credit. The
Company believes that its current funds and anticipated level of internally
generated funds will be sufficient to fund its working capital requirements in
fiscal 1998. At September 30, 1997, the Company had no material commitments for
capital expenditures.
CAUTIONARY STATEMENT
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, in the letter to shareholders, elsewhere in
the 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 are (i) the last paragraph under the heading "Business-Research and
Development", in the Form 10-K, concerning the development and timing of the
introduction of the IMAGGIA system, (ii) the last sentence of the seventh
paragraph under the subheading "Results of Operations" concerning unrealized
gains or losses from foreign operations, and (iii) the last two sentences 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.
11
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.
12
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the section entitled "Election of Directors" included in
the Company's definitive proxy statement to be mailed to stockholders on or
about January 31, 1998, and filed with the Securities and Exchange Commission.
Pursuant to Section 16(a) under the Securities Exchange Act of 1934, executive
officers, directors and 10% shareholders of the Company are required to file
reports on Forms 3, 4 and 5 of their beneficial holdings and transactions in the
Company's common stock.
ITEM 11. EXECUTIVE COMPENSATION AND TRANSACTIONS
Reference is made to the section entitled "Executive Compensation" included in
the Company's definitive proxy statement to be mailed to stockholders on or
about January 31, 1998, 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, 1998, and filed with the Securities and
Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
13
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 19
Consolidated Balance Sheets--September 30, 1997 and 1996 20
Consolidated Statements of Operations--The years ended
September 30, 1997, 1996, and 1995 22
Consolidated Statements of Stockholders' Equity--The years ended
September 30, 1997, 1996, and 1995 23
Consolidated Statements of Cash Flows--The years ended
September 30, 1997, 1996, 1995 25
Notes to Consolidated Financial Statements--September 30, 1997 26
FINANCIAL STATEMENT SCHEDULES
Number Description Page
- ------ ----------- ----
Schedule II Valuation and Qualifying Accounts and Reserves 39
All other financial statement schedules have been omitted because they are not
applicable, are not required, or the information is included in the financial
statements or notes thereto.
REPORTS OF FORM 8-K
The Company did not file any reports on Form 8-K during the three months ended
September 30, 1997
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 Exhibit 10.9 to Form 10-K for the eight months ended
September 30, 1985
10.2 Bank Line of Credit Agreement,
as amended, effective March 05, 1997 40
10.3 1986 Stock Option Plan Exhibit 10.8 to Form 10-K for fiscal year ended
September 30, 1986
14
Number Description Page or Incorporated by Reference From
- ------ ----------- --------------------------------------
10.4 Form of Indemnification Agreement that the Exhibit 10.10 to Form 10-K for fiscal year
Company has entered into with officers and ended September 30, 1987
directors. Such agreement recites the
provisions of Minnesota Statutes Section
302A.521 and the Company Bylaw provisions
(which are substantially identical to the statute)
10.5 Employment Agreement as of October 1, 1994,
between the Company and Jay A. Herman Exhibit 10.7 to Form 10-K for fiscal year ended
September 30, 1994
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 44
10.9 Executive Loan Program as Amended 54
11 Computation of Per Share Earnings 60
21 List of Subsidiaries 61
23 Consent of Independent Auditors 62
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 18, 1997 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 18, 1997
- --------------------------- ------------------
Robert Reznick
/s/Jay A. Herman President, Director December 18, 1997
- --------------------------- (Principal Executive Officer) ------------------
Jay A. Herman
/s/ Paul Stephenson Vice President, Finance & Administration December 18, 1997
- --------------------------- (Principal Financial & Accounting Officer) ------------------
Paul Stephenson
/s/ Gary Holland Director December 18, 1997
- --------------------------- ------------------
Gary Holland
Director
- --------------------------- ------------------
Thomas H. Garrett III
/s/ Oscar Victor Director December 18, 1997
- -------------------- ------------------
Oscar Victor
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, 1997
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, 1997 and 1996
Consolidated Statements of Operations -- The years ended
September 30, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity -- September 30,
1997, 1996 and 1995
Consolidated Statements of Cash Flows -- The years ended
September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements -- September 30, 1997
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
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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1997. 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, 1997 and
1996 and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/S/ Ernst & Young LLP
- ----------------------------
Ernst & Young LLP
Minneapolis, Minnesota
November 21, 1997
19
CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30,
1997 1996
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $3,165,601 $4,851,283
Short-term investments 5,293,849 4,959,023
Accounts receivable less allowance for
doubtful accounts of $50,000 3,526,551 3,582,350
Inventories:
Raw materials and component parts 5,700,807 5,088,859
Work - in - progress 461,529 127,459
Finished goods 1,887,380 1,383,052
------------- -------------
8,049,716 6,599,370
Deferred income taxes 1,092,259 692,669
Other current assets 673,528 439,548
------------- -------------
TOTAL CURRENT ASSETS 21,801,504 21,124,243
EQUIPMENT AND FIXTURES
Machinery and equipment 2,107,739 1,940,676
Furniture and fixtures 1,737,969 1,643,803
Leasehold improvements 252,685 244,693
------------- -------------
4,098,393 3,829,172
Less accumulated depreciation
And amortization 2,928,404 2,675,559
------------- -------------
1,169,989 1,153,613
------------- -------------
TOTAL ASSETS $ 22,971,493 $ 22,277,856
------------- -------------
------------- -------------
See notes to consolidated financial statements.
20
CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30,
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $2,603,516 $1,963,171
Employee compensation and related taxes 672,492 769,750
Income taxes payable 425,868 489,732
Deferred revenue 469,127 499,036
Current portion of capital lease
obligations 41,925 92,066
------------- -------------
TOTAL CURRENT LIABILITIES 4,212,928 3,813,755
CAPITAL LEASE OBLIGATIONS - less current
portion 78,903 55,615
------------- -------------
TOTAL LIABILITIES 4,291,831 3,869,370
STOCKHOLDERS' EQUITY
Common stock -- par value $.10 per
share --Authorized 25,000,000
shares; issued and Outstanding
1997 -- 6,338,135 shares;
1996 -- 6,237,727 shares 633,814 623,773
Additional paid-in capital 17,151,182 16,395,889
Foreign currency translation adjustment (851,225) (513,963)
Retained earnings 1,745,891 1,902,787
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 18,679,662 18,408,486
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,971,493 $ 22,277,856
------------- -------------
See notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF OPERATIONS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Year Ended September 30,
1997 1996 1995
Sales:
Printing equipment $ 7,885,584 $10,636,518 $10,436,169
Maintenance, spares and supplies 14,981,092 14,082,456 13,924,485
----------- ----------- -----------
NET SALES 22,866,676 24,718,974 24,360,654
Costs and Expenses:
Cost of sales 9,047,708 9,578,116 9,333,299
Selling, general and administrative 11,136,029 10,818,900 10,424,527
Research and development 2,521,073 2,206,444 2,318,736
----------- ----------- -----------
22,704,810 22,603,460 22,076,562
----------- ----------- -----------
INCOME FROM SYSTEM SALES AND SERVICE 161,866 2,115,514 2,284,092
Interest expense 22,813 26,110 27,229
Interest (income) (411,531) (402,539) (283,378)
Unrealized exchange loss (gain) 71,605 (50,770) (29,745)
----------- ----------- -----------
INCOME BEFORE TAXES 478,979 2,542,713 2,569,986
Income taxes 153,000 297,000 517,000
----------- ----------- -----------
NET INCOME $325,979 $ 2,245,713 $ 2,052,986
----------- ----------- -----------
----------- ----------- -----------
Earnings per share $ 0.05 $ 0.35 $ 0.33
Weighted average number of common
shares and common share equivalents
outstanding during the period 6,416,081 6,355,401 6,270,504
See notes to consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Common Stock
Shares Amount
---------- ----------
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
Net income --- ---
Exercise of stock options, including tax
benefit of $345,000 105,448 10,545
Issuance of restricted stock 20,000 2,000
Vesting of restricted stock --- ---
Payment - note receivable --- ---
Foreign currency translation --- ---
---------- ----------
Balance September 30, 1996 6,237,727 623,773
Net income --- ---
Exercise of stock options, including tax
benefit of $17,000 20,408 2,041
Issuance of restricted stock 80,000 8,000
Vesting of restricted stock --- ---
Payment - note receivable --- ---
Foreign currency translation --- ---
---------- ----------
Balance September 30, 1997 6,338,135 $ 633,814
---------- ----------
---------- ----------
See notes to consolidated financial statements.
23
Foreign
Series A & B Convertible Additional Currency Retained
Preferred Stock Paid-In Translation Earnings
Shares Amount Capital Adjustment (Deficit)
-------- -------- ------------ ----------- -----------
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)
--- --- --- --- 2,245,713
--- --- 417,540 --- ---
--- --- 228,000 --- (230,000)
--- --- --- --- 96,500
--- --- 6,646 --- ---
--- --- --- (60,688) ---
-------- -------- ------------ ----------- -----------
0 0 16,395,889 (513,963) 1,902,787
--- --- --- --- 325,979
--- --- (12,320) --- ---
--- --- 762,000 --- (770,000)
--- --- --- --- 287,125
--- --- 5,613 --- ---
--- --- --- (337,262) ---
-------- -------- ------------ ----------- -----------
0 $ 0 $ 17,151,182 $ (851,225) $ 1,745,891
-------- -------- ------------ ----------- -----------
-------- -------- ------------ ----------- -----------
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Year Ended September 30,
1997 1996 1995
---------- ---------- ------------
OPERATING ACTIVITIES
Net income $ 325,979 $ 2,245,713 $ 2,052,986
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 402,272 438,275 433,997
Other 81,746 (111,001) (209,513)
Changes in operating assets and
liabilities:
Accounts receivable (128,305) 1,282,909 (1,679,087)
Inventories (1,705,446) (745,111) 624,730
Other current assets (658,170) (402,574) (353,962)
Accounts payable and accrued
expenses 734,802 (520,939) 308,020
Deferred revenue (15,866) (29,216) 31,175
---------- ---------- ------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (962,988) 2,158,056 1,208,346
INVESTING ACTIVITIES
Purchase of equipment and fixtures (505,626) (442,118) (338,989)
Proceeds from sale of equipment 67,802 82,092 116,273
Purchase of short-term investments (25,269,275) (10,651,726) (4,926,101)
Proceeds from sale of short-term
investments 25,079,552 9,931,000 5,492,840
---------- ---------- ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (627,547) (1,080,752) 344,023
FINANCING ACTIVITIES
Issuance of common stock (10,279) 428,085 49,019
Addition of capital leases 85,757 40,101 63,966
Note receivable from stock sale 5,613 6,646 (68,966)
Repayment of capital leases (100,784) (90,070) (95,336)
---------- ---------- ------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (19,693) 384,762 (51,317)
EFFECT OF EXCHANGE RATE CHANGES
ON CASH (75,454) (1,139) 17,990
---------- ---------- ------------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,685,682) 1,460,927 1,519,042
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 4,851,283 3,390,356 1,871,314
---------- ---------- ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 3,165,601 $ 4,851,283 $ 3,390,356
---------- ---------- ------------
---------- ---------- ------------
See notes to consolidated financial statements.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Check Technology Corporation's business is the design,
manufacture, sale and service of computerized financial document production
systems. The systems can collate, personalize and encode documents into
packages tailored to the customers' requirements. The systems are sold through
the Company and its international subsidiaries. In excess of 50% of the total
revenues of the Company are related to service and support provided after the
sale. The Company has had a significant presence in the international check
production marketplace. These personal check production markets outside of the
United States include Australia, Latin America, Europe and Asia.
Principles of Consolidation: The financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Check Technology Ltd., Check
Technology Pty. Ltd., and Check Technology France S.A. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents and Short-Term Investments: The Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents. Short-term investments consist principally of
held-to-maturity debt securities. The Company determines the appropriate
classification of debt securities at the time of purchase. Debt securities are
classified as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost, adjusted for amortization of premiums and accretion of
discounts to maturity. Cash equivalents and short-term investments are carried
at amounts that approximate market value. Interest on securities is included in
interest income.
Inventories: Inventories are carried at the lower of cost or market determined
under the first-in, first-out (FIFO) method.
Equipment and Fixtures: Equipment and fixtures are stated on the basis of cost
and include the cost of assets held under capital lease obligations.
Demonstration equipment not expected to be resold is carried in equipment on a
cost basis.
The Company provides for depreciation and amortization of equipment and fixtures
by charges to operations at rates calculated to amortize the cost of the
property over its estimated useful life using the straight-line method.
Amortization expense of items under capital lease is included in depreciation
expense.
Deferred Revenue: Amounts billed to customers under maintenance contracts are
recognized in income over the term of the maintenance agreement.
Foreign Currency Translation: The Company's wholly-owned foreign subsidiaries'
financial statements are measured in their functional currency before
translating to U.S. dollars. Gains and losses resulting from the translation
are recorded as a component of stockholders' equity.
Foreign Exchange Contracts: From time to time the Company enters into foreign
exchange contracts as a hedge against specific foreign currency receivables.
Market value gains and losses are recognized, and the resulting credit or debit
offsets foreign exchange gains or losses on those receivables.
Income Taxes: The liability method is used to account for income tax expense.
Deferred tax assets and liabilities are recorded based on the differences
between financial statement and tax bases of assets and liabilities and the tax
rates in effect when these differences are expected to reverse. The deferred
tax asset is reduced by a valuation allowance to a net amount which the Company
believes it more likely than not will realize, based on the Company's estimates
of its future earnings and the expected timing of temporary difference
reversals. Investment tax credits are accounted for under the flow-through
method thereby reducing income taxes in the year in which the credits are
realized.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Stock Based Compensation: The Company follows Accounting Principles Board
Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
when the exercise price of employee stock options equal the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No.123, ACCOUNTING FOR STOCK-BASED COMPENSATION (Statement
123).
Long-Lived Assets: In Fiscal 1997, the Company adopted SFAS 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF. This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events of changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of SFAS 121 had no impact on the Company's
consolidated financial statements.
Earnings Per Share: 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. Common stock
equivalents include dilutive stock options, warrants and Series B Convertible
Preferred Stock using the treasury stock method. In February 1997, the
Financial Accounting Standards Board issued Statement No. 128, EARNINGS PER
SHARE. This Statement establishes standards for computing and presenting basic
and diluted earnings per share (EPS) for financial statements issued for periods
ending after December 15, 1997. The adoption of this Statement will not have a
material effect on the Company's reported EPS.
Comprehensive Income: In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, REPORTING COMPREHENSIVE INCOME. SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The new rules
are effective for the Company in fiscal 1999. The adoption of this Statement is
not expected to have a significant impact on the Company.
Segment Reporting: In June 1997, the Financial Accounting Standards Board
issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. This Statement establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements. The Statement requires additional disclosure only,
and will not impact net income or stockholders' equity of the Company. The
Statement is effective for the Company's fiscal year ended September 30, 1999.
The Company is currently assessing the impact of the Statement on its segment
disclosure.
Reclassification: Certain items in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997 presentation.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE B - INCOME TAX
At September 30, 1997, the Company has domestic tax loss carryforwards of
approximately $1,100,000, which expire in 2012 and foreign tax loss
carryforwards of approximately $333,000, which expire in 2002. In addition, the
Company has domestic investment tax credits and research and development credit
carryforwards of approximately $439,000, which are available to offset future
income tax. The credits expire in varying amounts through September 2012.
Domestic alternative minimum tax credits of approximately $143,000 are available
to offset future income tax with no expiration date. These tax benefits,
together with future tax deductions from the reversal of temporary differences,
comprise the net deferred tax assets. The deferred tax asset has been offset by
a valuation allowance as deemed necessary based on the Company's estimates of
its future sources of taxable income and the expected timing of temporary
difference reversals.
Significant components of deferred tax assets and liabilities as of September 30
are as follows:
FEDERAL AND STATE NET DEFERRED TAX ASSETS (LIABILITIES):
1997 1996
---- ----
Deferred Tax Assets:
Net operating loss $ 517,000 $ 0
Business credit carryforwards and
alternative minimum tax credits 582,000 667,000
Stock compensation 138,000 275,000
Inventory valuation reserves 102,000 122,000
Other U.S. and foreign differences 262,000 222,000
------------ ------------
Gross Deferred Tax Asset 1,601,000 1,286,000
Less Valuation Allowances (508,000) (593,000)
------------ ------------
Net Deferred Tax Asset $ 1,093,000 $ 693,000
------------ ------------
------------ ------------
The components of income tax expense as recorded by the Company are as follows:
1997 1996 1995
---- ---- ----
Current Tax Expense:
Federal $ (25,000) $ 3,000 $ 53,000
State 6,000 16,000 0
Foreign 555,000 626,000 464,000
---------- ---------- ----------
Total 536,000 645,000 517,000
---------- ---------- ----------
Deferred Tax Expense:
Federal (258,000) (231,000) 0
State (14,000) (18,000) 0
Foreign (111,000) (99,000) 0
---------- ---------- ----------
Total (383,000) (348,000) 0
---------- ---------- ----------
Total Tax Expense $ 153,000 $ 297,000 $ 517,000
---------- ---------- ----------
---------- ---------- ----------
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE B - INCOME TAX - CONTINUED
A reconciliation of tax expense to the statutory rate of 34% is as follows:
1997 1996 1995
---- ---- ----
Statutory rate applied to pre-tax
income $ 163,000 $ 865,000 $ 874,000
Net operating loss and tax credits
utilized 0 (220,000) (354,000)
Change in valuation allowance 0 (348,000) 0
Other (10,000) 0 (3,000)
---------- ---------- ----------
$ 153,000 $ 297,000 $ 517,000
---------- ---------- ----------
---------- ---------- ----------
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $3,128,000 at September 30, 1997. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. Federal
and State income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of
the amount of unrecognized deferred U.S. income tax liability is not practical
because of the complexities of the calculation.
Cash tax payments for the years ended September 30, 1997, 1996, and 1995 were
$671,000, $570,000 and $470,000, respectively.
NOTE C - FINANCIAL INSTRUMENTS
Foreign Currency Instruments and Hedging Activities: From time to time, the
Company may enter into foreign exchange contracts to manage its exposure to
fluctuations in foreign currency exchange rates. These contracts involve the
exchange of foreign currencies for U.S. dollars at 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.
No contracts were outstanding at September 30, 1997 and 1996.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES
The Company operates in one business segment, which is the sale of printing
equipment and related maintenance, spares and supplies. The Company has
developed computer-controlled printing systems to produce a variety of documents
for the financial services industry. Its primary products provide operating
flexibility and efficiency through sophisticated software and paper handling
mechanisms and produce quality alphanumeric and machine-readable print. The
Company is solely dependent on one vendor for the supply of non-impact
alphanumeric printers used in the printing systems sold by the Company. The
vendor has been able to meet the Company's delivery schedules to date and is
considered by Company management to be a reliable supplier.
The Company's manufacturing operations are located in the United States. Sales
and service operations are located in the United Kingdom, France, and Australia.
Foreign operations include the activities of the three foreign subsidiaries.
Domestic Foreign
Year Ended September 30, 1997 Operations Operations Eliminations Consolidated
- ------------------------------- ------------ ------------ ------------ ------------
Sales to unaffiliated customers $ 7,426,624 $ 15,440,052 $ --- $ 22,866,676
Sales to foreign subsidiaries 4,239,162 --- (4,239,162) ---
------------ ------------ ------------ ------------
Net sales $ 11,665,786 $ 15,440,052 $ (4,239,162) $ 22,866,676
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
(Loss) income from system sales and service $ (751,599) $ 912,005 $ 1,460 $ 161,866
Less:
Interest (income) (377,960) (97,303) 63,732 (411,531)
Interest expense 5,002 82,358 (64,547) 22,813
Unrealized exchange loss (gain) --- 71,117 488 71,605
------------ ------------ ------------ ------------
(Loss) income before taxes (378,641) 855,833 1,787 478,979
Income taxes (291,000) 444,000 --- 153,000
------------ ------------ ------------ ------------
Net (loss) income $ (87,641) $ 411,833 $ 1,787 $ 325,979
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Identifiable assets $ 20,282,967 $ 12,463,933 $ (9,775,407) $ 22,971,493
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Total liabilities $ 2,342,860 $ 5,610,139 $ (3,661,168) $ 4,291,831
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES--Continued
Domestic Foreign
Year Ended September 30, 1996 Operations Operations Eliminations Consolidated
- ------------------------------- ------------ ------------ ------------ ------------
Sales to unaffiliated customers $ 7,279,398 $ 17,439,576 $ --- $ 24,718,974
Sales to foreign subsidiaries 5,435,350 --- (5,435,350) ---
------------ ------------ ------------ ------------
Net sales $ 12,714,748 $ 17,439,576 $ (5,435,350) $ 24,718,974
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income from system sales and service $ 557,288 $ 1,426,266 $ 131,960 $ 2,115,514
Less:
Interest (income) (401,552) (50,077) 49,090 (402,539)
Interest expense 6,072 69,128 (49,090) 26,110
Unrealized exchange loss (gain) 18,999 (69,769) --- (50,770)
------------ ------------ ------------ ------------
Income before taxes 933,769 1,476,984 131,960 2,542,713
Income taxes (230,464) 527,464 --- 297,000
------------ ------------ ------------ ------------
Net income $ 1,164,233 $ 949,520 $ 131,960 $ 2,245,713
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Identifiable assets $ 19,692,227 $ 10,342,786 $ (7,757,157) $ 22,277,856
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Total liabilities $ 1,798,567 $ 3,916,837 $ (1,846,034) $ 3,869,370
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
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) ---
------------ ------------ ------------ ------------
Net sales $ 12,101,979 $ 16,822,771 $ (4,564,096) $ 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 loss (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 $ 17,863,334 $ 9,852,804 $ (7,612,581) $ 20,103,557
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Total liabilities $ 1,662,913 $ 4,291,905 $ (1,543,491) $ 4,411,327
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
The Company's products are marketed worldwide. Domestic operations include
export sales of $3,920,419, $3,383,495 and $1,917,960 for the periods ended
September 30, 1997, 1996, and 1995, respectively.
There were no sales to a single customer in excess of 10% of total sales in
1997, 1996 or in 1995.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE E--LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
September 30,
1997 1996
---------- ----------
Capital lease obligations on automobiles and
equipment, due in monthly installments
varying from $387 to $712, including
interest at 9.2% to 11.6%; automobile and
equipment financed under the lease serve
as security to the lease obligation $120,828 $147,681
Less current portion of lease obligation 41,925 92,066
---------- ----------
$ 78,903 $ 55,615
---------- ----------
---------- ----------
Cash payments of interest were $22,639 in 1997, $24,304 in 1996, and $28,250 in
1995.
Equipment and fixtures includes the following amounts under the capitalized
lease obligations:
September 30,
1997 1996
---- ----
Office furniture, fixtures and equipment $176,125 $219,387
Less allowance for amortization 45,273 74,734
---------- ----------
$130,852 $144,653
---------- ----------
---------- ----------
Future payments for the capital lease obligations (including interest) as of
September 30, 1997 are:
Capital Lease
Obligations
-------------
Year ending September 30:
1998 $ 52,249
1999 27,644
2000 59,521
----------
Total Payments 139,414
Less amounts representing interest 18,586
----------
Present value of lease payments $120,828
----------
----------
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE F--STOCK OPTIONS AND BENEFIT PLAN
During fiscal year 1997, the Company had three stock option programs, the 1986
Stock Option Plan (the 1986 Plan), the 1991 Stock Plan (the 1991 Plan), and the
1997 Stock Plan (the 1997 Plan), for its key employees and non-employee
directors. The 1986 Plan was adopted in October 1986, the 1991 Plan in March
1991 and the 1997 Plan in June 1997. Stock options under the 1986 Plan are
non-qualified while those under the 1991 Plan and the 1997 Plan can be granted
as either non-qualified or incentive stock options. The 1991 Plan and the 1997
Plan also authorize the granting of awards in the forms of stock appreciation
rights, restricted stock or deferred stock. In all cases, subject to the
provisions of the plans, the board of directors has complete discretion in
establishing the terms and conditions of each option granted to the employees of
the Company. During fiscal year 1995, an officer exercised stock options for a
$148,966 note. The note is interest bearing, collateralized by the underlying
stock.
A summary of outstanding options and shares reserved under each plan for the
last three years is as follows:
The 1986 Plan
- -------------
Shares Weighted
Reserved Average
For Future Options Exercise Price
Grants Outstanding Per Share
---------- ----------- --------------
Balance September 30, 1994 188,660 198,000 $ 2.23
Options exercised --- (41,750) 2.03
---------- -----------
Balance September 30, 1995 188,660 156,250 2.28
Options exercised --- (103,500) 2.11
---------- -----------
Balance September 30, 1996 188,660 52,750 2.63
Options exercised --- (52,750) 2.63
---------- -----------
Balance September 30, 1997 188,660 0 $ 0.00
---------- -----------
---------- -----------
At September 30, 1997, 1996, and 1995 options to purchase 0,52,750, and
156,250 shares were exercisable, respectively.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
1991 Plan
- ---------------
Shares Weighted
Reserved Average
For Future Options Exercise Price
Grants Outstanding Per Share
---------- ----------- --------------
Balance September 30, 1994 230,500 196,160 $ 3.87
Options exercised --- (13,250) 3.35
Options canceled 1,250 (1,250) 1.75
---------- -----------
Balance September 30, 1995 231,750 181,660 3.93
Options granted (63,500) 63,500 8.88
Options exercised --- (28,508) 2.81
Restricted Stock granted (20,000) --- ---
Restricted Stock canceled 4,250 --- ---
Options canceled 5,625 (5,625) 8.08
---------- -----------
Balance September 30, 1996 158,125 211,027 5.45
Options granted (76,000) 76,000 8.72
Options exercised --- (1,333) 2.50
Restricted Stock granted (80,000) --- ---
---------- -----------
Balance September 30, 1997 2,125 285,694 $ 6.34
---------- -----------
---------- -----------
At September 30, 1997, 1996, and 1995 there were 139,152, 98,777, and 84,326
options, respectively, currently exercisable under the 1991 Plan at prices of
$1.75 to $9.63 per share. The Company issued 80,000, 20,000, and 0 shares at
weighted average fair values of $770,000, 230,000 and 0 in 1997, 1996 and 1995,
respectively. Total compensation expense for stock-based compensation was
$287,125, $96,500 and $36,376 in 1997, 1996 and 1995, respectively.
1997 Plan
- ---------
Shares Weighted
Reserved Average
For Future Options Exercise Price
Grants Outstanding Per Share
---------- ----------- --------------
Shares reserved at inception 750,000 ---
Options granted (10,000) 10,000 $ 6.50
---------- -----------
Balance September 30, 1997 740,000 10,000 $ 6.50
---------- -----------
---------- -----------
At September 30, 1997 there were no options currently exercisable under the 1997
Plan.
Total shares reserved for options and restricted stock are 1,394,229 shares.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
Pro forma information regarding net income and earnings per share is required by
Statement 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 for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1997
and 1996:
1997 1996
---------------- ----------------
Expected dividend yield 0% 0%
Expected stock price volatility 40% 40%
Risk - free interest rate 6.11% 6.60%
Expected life of options 7 years 7 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net earnings and earnings per share were as follows:
1997 1996
---------------- ----------------
Net earnings - pro forma $ 193,475 $ 2,195,045
Earnings per share - pro forma 0.03 0.34
Weighted average fair value of
options granted during the year 4.68 4.44
The pro forma effect on net income and earnings per share is not representative
of the pro forma net earnings in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1996.
The following table summarizes information concerning currently outstanding and
exercisable options:
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Weighted Avg. Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------------
$ 1.750 - 4.500 88,694 3.38 $ 3.30 86,194 $ 3.26
5.375 - 7.750 108,500 6.80 6.27 37,500 5.38
8.125 - 9.625 98,500 6.77 9.17 15,458 8.92
$ 1.750 - 9.625 295,694 5.76 $ 6.34 139,152 $ 4.46
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
The Company has a defined contribution salary deferral plan covering
substantially all U.S. employees under Section 401(k) of the Internal Revenue
Code. The Plan allows eligible employees to make contributions up to the
maximum amount provided under the Code. The Company makes an annual minimum
contribution equal to 50% of the participants' before-tax contributions up
to 6% of base salary. The cost of the plan was $82,766, $78,326, and $32,950
for the years ended September 30, 1997, 1996, and 1995, respectively.
NOTE G--RENTAL COMMITMENTS
Building, equipment and automobile rentals under operating leases were
$1,184,701, $1,039,439, and $846,098 for the years ended September 30, 1997,
1996 and 1995, respectively.
The Company leases its corporate offices under a fifteen-year agreement expiring
on September 15, 2010. Annual rental under the lease is $387,000 increasing to
$481,000 in the eleventh year and thereafter. The Company is obligated to pay
operating expenses and real estate taxes incurred by the landlord. The Company
has the right to terminate such lease at the end of the 10th lease year, subject
to a termination fee.
The Company's subsidiary in the United Kingdom leases office space under a lease
expiring in 2013. Annual rental under the lease is $192,000, 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 $12,397,412 and are due as follows:
fiscal year ending September 30, 1998--$1,176,059; 1999--$1,109,355;
2000--$887,715; 2001--$834,729; 2002--$842,229; thereafter--$7,547,325.
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, 1997, 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, 1997. The line of credit expires March 31, 1998.
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.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTE J-- SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1997 Quarter Ended December 31 March 31 June 30 September 30
- ------------------- ------------ ------------ ------------ ------------
Net Sales $ 5,487,892 $ 6,201,197 $ 6,507,436 $ 4,670,151
Gross Profit 3,416,637 3,720,231 3,821,358 2,860,742
Net Income 100,000 241,703 271,870 (287,594)
Earnings Per Share $ 0.02 $ 0.04 $ 0.04 $ (0.04)
1996 Quarter Ended December 31 March 31 June 30 September 30
- ------------------- ------------ ------------ ------------ ------------
Net Sales $ 6,273,281 $ 6,670,541 $ 6,293,601 $ 5,481,551
Gross Profit 3,807,387 4,099,711 3,847,621 3,386,139
Net Income (1) 552,462 708,245 521,978 463,028
Earnings Per Share $ 0.09 $ 0.11 $ 0.08 $ 0.07
(1) The income tax rate for the fourth quarter of 1996 was impacted by the
adjustment to the effective annual rate and the recognition of certain deferred
tax assets.
38
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES
Charged to
Balance at Charged to Other Balance at
Beginning Cost and Accounts (Deductions) End
Description Of Period Expenses Describe Describe Of Period
1. Allowance for doubtful
accounts
Year ended September
30, 1997 $ 50,000 0 0 0 $ 50,000
Year ended September
30, 1996 $ 50,000 0 0 0 $ 50,000
Year ended September
30, 1995 $ 50,000 0 0 0 $ 50,000
II. Reserve for obsolete
And slow moving
Inventories
Year ended September
30, 1997 $ 334,000 30,000 0 (4,000) $ 360,000
Year ended September
30, 1996 $ 303,000 95,000 0 (64,000) $ 334,000
Year ended September
30, 1995 $ 267,000 60000 0 (24,000) $ 303,000
39