SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from ______ to ________
Commission File Number 0-22370
CHECKMATE ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Georgia 88-0117097
(State of (I.R.S. Employer
Incorporation) Identification No.)
1003 Mansell Road, Roswell, Georgia 30076
(Address of principal executive offices, including zip code)
(770) 594-6000
(Registrant's telephone number, including area code)
______________
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 twelve 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 past 90 days. Yes x No ___
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at July 24, 1996
- - ---------------------------- ----------------------------
Common Stock, $.01 par value 5,151,698 shares
Page 1 of 13
Index of Exhibits on Page 12
1
CHECKMATE ELECTRONICS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
TABLE OF CONTENTS
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PAGE
PART 1. FINANCIAL INFORMATION NUMBER
------
Item 1 Financial Statements (Unaudited):
Condensed Balance Sheets -- June 30, 1996
and December 31, 1995 3
Condensed Statements of Income -- Three Months and
Six Months Ended June 30, 1996 and 1995 4
Condensed Statements of Cash Flows -- Six
Months Ended June 30, 1996 and 1995 5
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 10
SIGNATURES 11
INDEX OF EXHIBITS 12
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHECKMATE ELECTRONICS, INC.
CONDENSED BALANCE SHEETS
June 30, December 31,
1996 1995
(Unaudited) (Note)
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,525,248 $ 878,065
Investments 6,988,888 6,853,696
Accounts receivable, net 10,120,535 7,327,687
Inventories 7,683,324 7,488,203
Deferred tax asset 424,000 424,000
Prepaid expenses 170,797 188,885
----------- ------------
Total current assets 26,912,792 23,160,536
Property and equipment 5,926,145 5,082,483
Accumulated depreciation and amortization (2,245,961) (1,805,830)
----------- ------------
3,680,184 3,276,653
Other assets 2,351,943 2,120,124
----------- ------------
Total assets 32,944,919 $28,557,313
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 2,045,549 $ 1,278,411
Accrued liabilities 2,085,897 1,037,866
Deferred revenue 922,490 572,236
Current portion of long-term obligations 165,485 168,660
----------- ------------
Total current liabilities 5,219,421 3,057,173
Long-term obligations, less current portion 282,930 362,847
Deferred income taxes 1,072,000 1,072,000
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued and outstanding shares - 5,151,698
and 5,084,298 at June 30, 1996 and
December 31, 1995, respectively 51,517 50,843
Additional paid-in capital 21,927,428 21,342,902
Retained earnings 4,391,623 2,671,548
----------- ------------
Total shareholders' equity 26,370,568 24,065,293
----------- ------------
Total liabilities and shareholders' equity 32,944,919 $28,557,313
=========== ===========
Note: The condensed balance sheet at December 31, 1995 has been derived from the
audited financial statements of the Company at that date but does not include
all of the information required by generally accepted accounting principles for
complete financial statements.
See notes to condensed financial statements
3
CHECKMATE ELECTRONICS, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------------- --------------------------------
1996 1995 1996 1995
----------------------------- --------------------------------
Net revenues $ 10,668,855 $ 8,304,200 $ 18,588,720 $ 14,748,551
Cost of goods sold 6,209,375 4,940,523 10,971,867 8,828,827
------------- ------------ -------------- -------------
Gross profit 4,459,480 3,363,677 7,616,853 5,919,724
Operating expenses:
Selling, general and administrative 2,349,892 1,889,722 4,456,507 3,587,820
Research and development 157,562 127,397 306,476 226,872
Depreciation and amortization 150,051 118,115 290,222 220,328
------------- ------------ -------------- -------------
2,657,505 2,135,234 5,053,205 4,035,020
------------- ------------ -------------- -------------
Operating income 1,801,975 1,228,443 2,563,648 1,884,704
Interest income, net 85,997 99,149 166,427 213,609
------------- ------------ -------------- -------------
Income before income taxes 1,887,972 1,327,592 2,730,075 2,098,313
Income taxes 698,000 504,485 1,010,000 797,359
------------- ------------ -------------- -------------
Net income $ 1,189,972 $ 823,107 $ 1,720,075 $ 1,300,954
============= ============ ============== =============
Net income per share $ 0.21 $ 0.16 $ 0.31 $ 0.25
============= ============ ============== =============
Weighted average number of
shares outstanding 5,606,000 5,306,000 5,586,000 5,231,000
============= ============ ============== =============
See notes to condensed financial statements.
4
CHECKMATE ELECTRONICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
-------------------------------
1,996 1,995
-------------- --------------
Net cash provided by (used in) operating activities $ 1,685,177 $ (762,976)
Investing activities:
Purchases of marketable securities (11,481,898) (4,396,090)
Proceeds from sales of marketable securities 11,271,867 10,115,064
Purchases of property and equipment (843,658) (978,178)
Capitalized software (382,582) (357,228)
Other (103,831) (26,970)
-------------- --------------
Net cash provided by (used in) investing activities (1,540,102) 4,356,598
Financing activities:
Payments on long-term obligations (83,092) (94,957)
Proceeds from exercise of stock options 585,200 16,252
-------------- --------------
Net cash provided by (used in) financing activities 502,108 (78,705)
-------------- --------------
Net increase in cash and cash equivalents 647,183 3,514,917
Cash and cash equivalents at beginning of period 878,065 746,428
-------------- --------------
Cash and cash equivalents at end of period 1,525,248 4,261,345
============== ==============
See notes to condensed financial statements.
5
CHECKMATE ELECTRONICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. These statements should be read in conjunction with the Company's
audited financial statements included in the Company's 1995 Annual Report.
Operating results for the three and six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996 or any interim period.
2. INVENTORIES
Inventories are summarized by class as follows:
June 30, December 31,
1996 1996
------------ ------------
Finished goods $ 735,192 $ 657,662
Work in process 734,299 213,033
Raw materials and supplies 6,213,833 6,617,508
------------ ------------
$7,683,324 $7,488,203
============ ============
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - --------------------------------------------------------------------------------
OF OPERATIONS
- - -------------
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 1995
Net revenues increased by 28.5% in the three months ended June 30,
1996 compared to the same period in 1995. Net revenues increased by 26.0% in
the corresponding six month periods. The increase in the three months ended
June 30, 1996 primarily resulted from an increase in sales of ATM/debit card
terminals, which increased by $3,375,000, to 35.8% of net revenues in the three
months ended June 30, 1996, from 5.3% of net revenues in the three months ended
June 30, 1995. The increase in sales of the Company's ATM/debit card terminals
reflects the continued rollout of this product to an existing customer base
which began in the second half of 1995. Sales of the Company's check reader
product also were strong in the second quarter, posting the second highest net
revenues from check readers in the Company's history. However, the highest
quarterly net revenues from check readers were recorded in the second quarter of
1995, so the Company experienced a decline of $1,477,000 in net revenues from
the sales of its check reader product on a quarter to quarter comparison. This
decline is due to the absence of a single significant customer which was present
in the 1995 period, and is not viewed by the Company as a decline in the
strength of customer interest in this product. The Company also experienced a
slight increase in sales of its signature capture product and continued
improvement of sales of the combination check/card terminal, of which the
initial customer shipment was made in the first quarter of 1996. The Company
anticipates that net revenues from its ATM/debit card terminals, signature
capture devices and combination check/card terminals, subject to normal
fluctuations in the timing of sales orders received from customers, will
continue to comprise a greater percentage of net revenues during 1996 compared
to 1995.
Cost of goods sold as a percentage of net revenues was 58.2% in the
three months ended June 30, 1996 and 59.5% in the three months ended June 30,
1995. Cost of goods sold as a percentage of net revenues was 59.0% in the six
months ended June 30, 1996 and 59.9% in the six months ended June 30, 1995. The
improvement between periods was achieved despite a significant change in product
mix, and reflects a higher per unit sales price for check readers combined with
lower costs per unit for both the check reader and the ATM/debit card terminals.
The Company anticipates that cost of goods sold as a percentage of net revenues
will be affected in the future by changes in product mix as well as by selling
price and product cost changes, among other factors.
Selling, general and administrative expenses for the quarter increased
by 24.4%, but declined as a percent of net revenues to 22.0% in the three months
ended June 30, 1996 from 22.8% in the three months ended June 30, 1995.
Selling, general and administrative expenses for the six month period increased
by 24.2%, but declined as a percent of net revenues to 24.0% in the six months
ended June 30, 1996 from 24.3% in the six months ended June 30, 1995. The
increases in the dollar amount of the expense were due primarily to increases in
personnel and related costs required to support the Company's growth in net
revenues. The decreases in the percent of net revenues were the result of the
higher revenue base.
7
Product development expenditures include research and development
expense and capitalized software development costs and consist primarily of
labor costs. A summary of product development efforts is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ----------------------------
1996 1995 1996 1995
------------- -------------- ------------ -------------
Gross product development expenditures $ 338,000 $ 330,000 $ 689,000 $ 583,000
Capitalized software development costs (180,000) (203,000) (383,000) (356,000)
------------- -------------- ------------ -------------
Net research and development expense 158,000 127,000 306,000 227,000
Amortization of previously capitalized costs 71,000 29,000 130,000 58,000
------------- -------------- ------------ -------------
Total expense $ 229,000 $ 156,000 $436,000 $285,000
============= ============== ============ =============
Product development as a percent of net
revenues:
Gross expenditures 3.2% 4.0% 3.7% 4.0%
Net expense 1.5% 1.5% 1.6% 1.5%
Total expense 2.1% 1.9% 2.3% 1.9%
Gross product development expenditures increased by 2.1% and 18.2% in
the three and six months ended June 30, 1996, respectively. The increases
resulted from the Company's continuing efforts to remain at the forefront of
payment automation technology. The decreases in gross product development
expenditures as a percent of net revenues are the result of the larger revenue
base. Checkmate expects to increase research and development expenditures for
the foreseeable future as the Company is dedicated to developing new products
and enhancing its existing products.
Depreciation and amortization expenses increased by 27.0% and 31.7% in
the three and six months ended June 30, 1996, respectively, but remained
constant at 1.4% of net revenues in the three months ended June 30, 1996 and
increased to 1.6% from 1.5% of net revenues in the corresponding six month
periods. The increases in 1996 primarily resulted from capital expenditures
associated with the expansion of the Company's headquarters during 1995.
Interest income, net decreased by 13.3% and 22.1% in the three and six
months ended June 30, 1996 as compared to the same periods in 1995. The
decreases in 1996 are due to lower average investments outstanding.
The Company's effective income tax rate was 37% in the three and six
months ended June 30, 1996 and 38% in the three and six months ended June 30,
1995.
Net income increased by 44.6% and net income per share increased 31.3%
in the three months ended June 30, 1996 as compared to the three months ended
June 30, 1995. Net income increased by 32.2% and net income per share increased
by 24.0% in the six months ended June 30, 1996 as compared to the six months
ended June 30, 1995. The weighted average number of shares outstanding
increased by 5.7% and 6.8% in the three and six months ended June 30, 1996,
respectively, due primarily to an increase in the value of unexercised options,
resulting from additional options issued and an increase in the market value of
the Company's common stock.
8
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $1,685,000 in
the six months ended June 30, 1996 and $(763,000) in the six months ended June
30, 1995. The increase in cash provided by operating activities was due
primarily to higher net income, depreciation and deferred revenue, a smaller
increase in inventories, and a larger increase in accounts payable. The Company
experiences normal fluctuations in its accounts receivable balance, including
days outstanding, due to a variety of factors, including the Company's overall
sales performance when compared to prior periods, the timing of shipments to its
customers and individual customer negotiated terms of sale. The rate of
inventory turnover experienced by the Company also is dependent upon a variety
of factors, including anticipated inventory requirements to fulfill current and
future customer orders in a timely manner, individual customer negotiated
contracts of sale and the availability of key components used in the
manufacturing process. The increase in accounts receivable during 1996 is due
to higher sales volumes. The Company anticipates that fluctuations in accounts
receivable and inventories will continue in the future.
Net cash provided by (used in) investing activities was $(1,540,000)
in the six months ended June 30, 1996 and $4,357,000 in the six months ended
June 30, 1995. Purchases of property and equipment and additions to capitalized
software and other noncurrent assets were $1,330,000 in the six months ended
June 30, 1996 as compared to $1,362,000 in the six months ended June 30, 1995.
Net purchases of marketable securities were $(210,000) in the six months ended
June 30, 1996, as compared to net proceeds from the sale of marketable
securities of $5,719,000 in the six months ended June 30, 1995.
Net cash provided by (used in) financing activities was $502,000 in
the six months ended June 30, 1996 and $(79,000) in the six months ended June
30, 1995. The cash provided by financing activities in the six months ended
June 30, 1996 was due to the proceeds from the exercise of stock options.
The Company's working capital position was $21,693,000 at June 30,
1996. While the Company had no material commitments for capital expenditures as
of June 30, 1996, the Company anticipates that it will spend approximately
$2,000,000 for capital expenditures, including additions to capitalized
software, during the remainder of 1996. The Company believes that its strong
working capital position at June 30, 1996, together with anticipated future cash
flows provided by operating activities and its borrowing available under a
$1,000,000 revolving credit agreement, are sufficient to meet the Company's
operating needs, including possible increases in accounts receivable and
inventories, along with planned capital expenditures for at least the next
twelve to eighteen months.
9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits. The following exhibit is filed as part of this report:
---------
EXHIBIT NO. DESCRIPTION
- - ------------- -----------
11. Statement re Computation of Per Share Earnings
(b) Reports on Form 8-K. The following Current Reports on Form 8-K were filed
--------------------
by the Company during the quarter ended June 30, 1996:
Financial
Date of Form 8-K Statements
Report Item No. Description Filed
- - ------- -------- ----------- ----------
4/18/96 5 Press release dated April 18, 1996 reporting
first quarter 1996 results None
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHECKMATE ELECTRONICS, INC.
(Registrant)
Date: July 24, 1996 /s/Jerry P. Malec
-----------------
Jerry P. Malec
President and
Chief Executive Officer
(Duly Authorized Officer)
Date: July 24, 1996 /s/ John J. Neubert
-------------------
John J. Neubert
Chief Operating Officer,
Chief Financial Officer and
Senior Vice President
11
INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE NO.
- - ----------- ----------- --------
11 Statement re Computation of Per Share Earnings 13
12