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 SEPTEMBER 30, 1997
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 November 7, 1997
----- -------------------------------
Common Stock, $.01 par value 5,400,188 shares
Page 1 of 14
Index of Exhibits on Page 13
CHECKMATE ELECTRONICS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
Table of Contents
-----------------
Page
PART 1. FINANCIAL INFORMATION Number
------
Item 1 Financial Statements (Unaudited):
Condensed Balance Sheets -- September 30, 1997
and December 31, 1996 3
Condensed Statements of Operations -- Three Months and
Nine Months Ended September 30, 1997 and 1996 4
Condensed Statements of Cash Flows -- Nine
Months Ended September 30, 1997 and 1996 5
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3 Quantitative and Qualitative Disclosure About Market Risk N/A
PART II. OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 11
Item 6 Exhibits and Reports on Form 8-K 11
SIGNATURES 12
INDEX OF EXHIBITS 13
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHECKMATE ELECTRONICS, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
1997 1996
------------- -------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 473,169 $ 2,204,103
Investments 5,066,067 6,970,297
Accounts receivable, net 8,819,954 8,452,736
Inventories 14,081,713 7,869,751
Deferred tax asset 650,514 636,000
Prepaid expenses 114,152 961,296
----------- -----------
Total current assets 29,205,569 27,094,183
Property and equipment 9,020,994 6,850,633
Accumulated depreciation and amortization (3,709,386) (2,718,682)
----------- -----------
5,311,608 4,131,951
Other assets 3,297,719 2,326,089
----------- -----------
Total assets $37,814,896 $33,552,223
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,080,931 $1,158,081
Accrued liabilities 1,724,026 1,368,889
Deferred revenue 1,053,585 1,072,305
Current portion of long-term obligations 146,534 160,687
----------- -----------
Total current liabilities 7,005,076 3,759,962
Long-term obligations, less current portion 100,213 202,704
Deferred income taxes 1,285,000 1,285,000
Shareholders' equity:
Common stock, $.01 par value 54,007 52,318
Additional paid-in capital 24,471,289 23,025,539
Retained earnings 4,899,311 5,226,700
----------- -----------
Total shareholders' equity 29,424,607 28,304,557
----------- -----------
Total liabilities and shareholders' equity $37,814,896 $33,552,223
=========== ===========
Note: The condensed balance sheet at December 31, 1996 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 OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------------- -----------------------------
1997 1996 1997 1996
-------------------------- -----------------------------
Net revenues $8,831,357 $7,020,911 $23,411,447 $25,609,631
Cost of goods sold 5,637,990 4,119,632 14,393,416 15,091,499
---------- ---------- ----------- -----------
Gross profit 3,193,367 2,901,279 9,018,031 10,518,132
Operating expenses:
Selling, general and
administrative 2,542,500 2,471,098 8,338,791 6,927,605
Research and development 302,119 117,360 840,990 423,836
Depreciation and amortization 194,256 153,255 587,666 443,477
---------- ---------- ----------- -----------
3,038,875 2,741,713 9,767,447 7,794,918
---------- ---------- ----------- -----------
Operating income (loss) 154,492 159,566 (749,416) 2,723,214
Interest income, net 77,473 107,068 248,027 273,498
---------- ---------- ----------- -----------
Income (loss) before income taxes 231,965 266,634 (501,389) 2,996,712
Income taxes 81,000 99,000 (174,000) 1,109,000
---------- ---------- ----------- -----------
Net income (loss) $ 150,965 $ 167,634 $ (327,389) $ 1,887,712
========== ========== =========== ===========
Net income (loss) per share $ 0.03 $ 0.03 $ (0.06) $ 0.34
========== ========== =========== ===========
Weighted average number of
shares outstanding 5,408,000 5,656,000 5,336,000 5,609,000
========== ========== =========== ===========
See notes to condensed financial statements.
4
CHECKMATE ELECTRONICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
---------------------------
1997 1996
------------ -------------
Operating activities:
Net income (loss) $ (327,389) $ 1,887,712
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,528,564 1,068,514
Accretion of marketable securities discount (48,551) 18,707
Deferred income taxes (14,514) -
Changes in operating assets and liabilities:
Accounts receivable (367,218) 781,233
Inventories (6,211,962) (3,154,630)
Prepaid expenses 852,327 (30,919)
Accounts payable and accrued liabilities 3,277,987 869,457
Deferred revenue (18,720) 585,933
----------- -----------
Net cash provided by (used in) operating activities (1,329,476) 2,026,007
Investing activities:
Purchases of marketable securities (5,958,703) (15,522,006)
Proceeds from sales of marketable securities 7,911,484 15,333,516
Purchases of property and equipment (2,170,361) (1,260,109)
Capitalized software (1,020,719) (453,001)
Other (493,954) (166,746)
----------- -----------
Net cash used in investing activities (1,732,253) (2,068,346)
Financing activities:
Payments on long-term obligations (116,644) (126,401)
Proceeds from exercise of stock options 1,447,439 1,188,112
----------- -----------
Net cash provided by financing activities 1,330,795 1,061,711
----------- -----------
Net increase (decrease) in cash and cash
equivalents (1,730,934) 1,019,372
Cash and cash equivalents at beginning of period 2,204,103 878,065
----------- -----------
Cash and cash equivalents at end of period $ 473,169 $ 1,897,437
=========== ===========
See notes to condensed financial statements.
5
CHECKMATE ELECTRONICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 1997
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 1996 Annual Report.
Operating results for the three and nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997 or any interim period.
2. INVENTORIES
Inventories are summarized by class as follows:
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- --------------
Finished goods $ 2,825,063 $1,364,740
Work in process 2,179,102 107,275
Raw materials and supplies 9,077,548 6,397,736
--------------- --------------
$14,081,713 $7,869,751
=============== ==============
3. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997 the Financial Accounting Standards Board issued a new
accounting pronouncement, SFAS No. 128, "Earnings per Share", which will change
the current method of computing earnings per share. The new standard requires
presentation of "basic earnings per share" and "diluted earnings per share"
amounts, as defined. SFAS No. 128 will be effective for the Company's quarter
and year ending December 31, 1997, and, upon adoption, all prior-period earnings
per share data presented shall be restated to conform with the provisions of the
new pronouncement. Application earlier than the Company's quarter ending
December 31, 1997 is not permitted.
Pro forma basic and diluted earnings per share for the three and nine months
ended September 30, 1997 and 1996 calculated under the provisions of SFAS No.
128 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ --------------------------------------
1997 1996 1997 1996
---------------- --------------- ---------------- ----------------
Basic earnings (loss) per share $0.03 $0.03 $(0.06) $0.37
Diluted earnings (loss) per share $0.03 $0.03 $(0.06) $0.33
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Results of Operations - Three and Nine Months Ended September 30, 1997 Compared
to Three and Nine Months Ended September 30, 1996
The following table sets forth certain items derived from the Company's
statements of operations:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1997 1996 1997 1996
------------------ ----------------- ------------------ ----------------
Amount % Amount % Amount % Amount %
------------------ ----------------- ------------------ ----------------
Net revenues $8,831 100.0% $7,021 100.0% $23,411 100.0% $25,610 100.0%
Cost of goods sold 5,638 63.8 4,120 58.7 14,393 61.5 15,092 58.9
------ ----- ------ ----- ------- ----- ------- -----
Gross profit 3,193 36.2 2,901 41.3 9,018 38.5 10,518 41.1
Operating expenses:
Selling, general and
administrative 2,542 28.8 2,471 35.2 8,338 35.6 6,928 27.1
Research and
development 302 3.4 118 1.7 841 3.6 424 1.7
Depreciation and
amortization 194 2.2 153 2.2 587 2.5 443 1.7
------ ----- ------ ----- ------- ----- ------- -----
Total operating
expenses 3,038 34.4 2,742 39.1 9,766 41.7 7,795 30.5
------ ----- ------ ----- ------- ----- ------- -----
Operating income
(loss) 155 1.8 159 2.2 (748) (3.2) 2,723 10.6
Interest income, net 77 0.8 108 1.6 247 1.1 274 1.1
------ ----- ------ ----- ------- ----- ------- -----
Income (loss) before
income taxes 232 2.6 267 3.8 (501) (2.1) 2,997 11.7
Provision for income
taxes (benefit) 81 0.9 99 1.4 (174) (0.7) 1,109 4.3
------ ----- ------ ----- ------- ----- ------- -----
Net income (loss) $ 151 1.7% $ 168 2.4% $ (327) (1.4)% $ 1,888 7.4%
====== ===== ====== ===== ======= ===== ======= =====
Net revenues by product:
Check readers $4,043 45.8% $3,496 49.8% $10,153 43.3% $12,861 50.2%
Debit/credit card
terminals 3,348 37.9 2,253 32.1 8,994 38.4 9,476 37.0
Combination units 270 3.1 24 0.3 1,294 5.5 361 1.4
Signature capture
devices 410 4.6 679 9.7 849 3.6 1,290 5.0
Service and other 760 8.6 569 8.1 2,121 9.2 1,622 6.4
------ ----- ------ ----- ------- ----- ------- -----
$8,831 100.0% $7,021 100.0% $23,411 100.0% $25,610 100.0%
====== ===== ====== ===== ======= ===== ======= =====
Any trends that may be derived from the above tables are not necessarily
indicative of the Company's future operations.
Net revenues increased 25.8% in the three months and decreased 8.6% in the
nine months ended September 30, 1997 as compared to the same periods in 1996.
The increase in net revenues in the third quarter of 1997 was experienced
primarily in sales of check readers and debit/credit card terminals. Check
reader revenues increased 15.6% in the third quarter due to shipments to a
greater number of mid-sized accounts, while debit/credit card terminal revenues
increased 48.6% due to large shipments to major retailers, one of which
purchased the new CM 2100 terminal. The decrease in net revenues in the first
nine months of 1997 is attributable to lower net revenues for both of these
products due to delays in purchasing by major retailers in the second quarter of
1997.
7
Cost of goods sold as a percentage of net revenues was 63.8% in the three
months and 61.5% in the nine months ended September 30, 1997, compared to 58.7%
in the three months and 58.9% in the nine months ended September 30, 1996. The
primary factor in the increases of this percentage from the 1996 periods to
the 1997 periods was selling price pressure from major retailers and
inefficiencies associated with start-up production of the new CM 2100 terminal.
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, selling prices and
unit costs among other factors.
Selling, general and administrative expenses increased 2.9% over the third
quarter of 1996 and 20.4% over the 1996 year-to-date period. The increases are
due primarily to higher personnel costs in sales and engineering as a result of
increased hiring, as well as the recording of a one-time severance expense in
the second quarter of 1997.
Product development expenditures include research and development expense
and capitalized software development costs and consist primarily of labor. A
summary of product development efforts is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -----------------------------------
1997 1996 1997 1996
-------------- -------------- ---------------- ---------------
Gross product development expenditures $ 611,000 $188,000 $ 1,862,000 $ 877,000
Capitalized software development costs (309,000) (70,000) (1,021,000) (453,000)
-------------- -------------- ---------------- ---------------
Research and development expense 302,000 118,000 841,000 424,000
Amortization of previously capitalized costs 120,000 71,000 305,000 200,000
-------------- -------------- ---------------- ---------------
Total expense $ 422,000 $189,000 $ 1,146,000 $ 624,000
============== ============== ================ ===============
Product development as a percent of net revenues:
Gross expenditures 6.9% 2.7% 8.0% 3.4%
Research and development expense 3.4% 1.7% 3.6% 1.7%
Total expense 4.8% 2.7% 4.9% 2.4%
Research and development expense increased by $184,000 or 157.4% and
$417,000 or 98.4% in the three and nine months ended September 30, 1997,
respectively. The increase in the dollar amount of product development
expenditures resulted from the Company's continuing efforts to remain at the
forefront of payment automation technology. The Company expects to continue to
increase product 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 26.8% and 32.5% in the
three and nine months ended September 30, 1997, respectively. The increases
resulted from capital expenditures associated with the growth in personnel and
improvements in information systems.
Interest income, net decreased 27.6% and 9.3% in the three and nine months
ended September 30, 1997, respectively, due to lower average investment balances
outstanding.
8
The effective tax rate was 34.9% and 34.7% in three and nine months ended
September 30, 1997 and 37.1% and 37.0% in the three and nine months ended
September 30, 1996. The decrease in the effective tax rate in 1997 was due
primarily to a lower effective state tax rate.
As a result of the above factors, net income decreased by 9.9% and 117.3%
in the three and nine months ended September 30, 1997, respectively. The
weighted average number of shares outstanding for the third quarter decreased
4.4% from 1996 to 1997 due to a lower market price for the Company's common
stock, which resulted in fewer stock options being considered common stock
equivalents in the computation of the weighted average shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $(1,329,000) in the
nine months ended September 30, 1997 and $2,026,000 in the nine months ended
September 30, 1996. The net cash used in operating activities in 1997 was
primarily due to a net loss in the year-to-date period and a large increase in
inventories, partially offset by an increase in accounts payable. The net cash
provided by operating activities in the 1996 period resulted from the net income
reported for the period, increased by depreciation and amortization, a decrease
in accounts receivable, an increase in accounts payable and deferred revenues,
partially offset by an increase in inventories. 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.
Increases in these accounts during 1997 and 1996 have been caused by anticipated
increases in sales volumes and by new product introductions. The Company
anticipates that fluctuations in these accounts will continue in the future.
Net cash used in investing activities was $1,732,000 in the nine months
ended September 30, 1997 and $2,068,000 in the nine months ended September 30,
1996. Purchases of property and equipment and additions to capitalized software
and other noncurrent assets were $3,685,000 and $1,880,000 in the nine months
ended September 30, 1997 and 1996, respectively. These uses of net cash were
offset by net proceeds from the sale of investments of $1,953,000 in 1997, and
were increased by the net purchase of investments of $188,000 in 1996.
Net cash provided by financing activities was $1,331,000 in the nine months
ended September 30, 1997 and $1,062,000 in the nine months ended September 30,
1996. The increase in net cash provided by financing activities in 1997 was due
to the exercise of stock options, primarily by the estate of a former employee.
The Company's working capital position was $22,200,000 at September 30,
1997 and $23,334,000 at December 31, 1996. The Company had no commitments for
material capital expenditures as of September 30, 1997. During the remainder of
1997, the Company anticipates that it will spend approximately $1,000,000 for
capital expenditures, including additions to capitalized software. The Company
believes that its working capital position at September 30, 1997, together with
anticipated future cash flows from operations and the borrowing available under
its 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.
The Company's operating results have fluctuated on a quarterly basis in the
past and may vary significantly in future periods due to a variety of factors.
These factors include, but are not limited to, the timing of orders from and
shipments to major customers, the timing of new product introductions by the
Company and its competitors, variations in the Company's product mix and
9
component costs, and competitive pricing pressures. Due primarily to the above
factors, the results of any particular quarter may not be indicative of the
results for the full year.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The above "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995.
Management cautions that these statements represent projections and estimates of
future performance and involve certain risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors including, without limitation,
the Company's reliance on check readers in its product mix; the Company's
dependence on its limited suppliers and manufacturers of component parts of its
products; rapid and significant technological developments that could delay the
introduction of improvements in existing products or of new products; the
Company's dependence on its proprietary technologies (which may be independently
developed by competitors); the Company's dependence on a small number of large
retail customers; the potential fluctuation in financial results as a result of
the Company's inability to make sales to large customers as well as the volume
and timing of orders received during a quarter and variations in sales mix;
competition from existing companies as well as new market entrants; and, the
Company's dependence on key personnel.
10
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
(b) On October 13, 1997, the Board of Directors of the Company approved a
shareholder rights plan and declared a dividend of one stock purchase
right on each outstanding share of Common Stock. Generally, each stock
purchase right entitles the holder to purchase one share of Common Stock
at an exercise price of $50.00 per share in the event that, under certain
circumstances, a person or group acquires 15% or more of the Company's
Common Stock or announces a tender offer for the Common Stock. To provide
further protection to the shareholders from unsolicited takeover
proposals, the Board of Directors also adopted two amendments to the
Company's By-Laws to incorporate the "fair price" and "business
combination" provisions of the Georgia Business Corporation Code. For
further information, see the Company's press release dated October 13,
1997 which is filed as Exhibit 99 to this report.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits. The following exhibits are filed as part of this report:
---------
EXHIBIT NO. DESCRIPTION
- ---------- -----------
11. Statement re Computation of Per Share Earnings
27. Financial Data Schedule
99. Press release dated October 13, 1997
(b) Reports on Form 8-K. No Current Reports on Form 8-K were filed by the
--------------------
Company during the quarter ended September 30, 1997.
11
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: November 12, 1997 /s/ Gregory A. Lewis
--------------------
Gregory A. Lewis
President and Chief Operating Officer
(Duly Authorized Officer)
Date: November 12, 1997 /s/ John J. Neubert
-------------------
John J. Neubert
Chief Financial Officer and
Senior Vice President
(Principal Financial Officer)
12
INDEX OF EXHIBITS
Exhibit
No. Description
------- -----------
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
99 Press release dated October 13, 1997
13