##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

|                               |  |              
|------------------------------ |  | -------------
|For the quarterly period ended |  | June 30, 2001
|                               | 
|                              
|                              
|                              
|                              
|Commission file number         |  | 0-10691      
|                               | 

CHECK TECHNOLOGY CORPORATION

---

(Exact name of registrant as specified in its charter)


|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Minnesota                                                      |  | 41-1392000                       
|                                                               |  |                                  
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                              
|12500 Whitewater Drive                                        
|                                                              
|                                                              
|                                                              
|                                                              
|Minnetonka, Minnesota                                          |  | 55343-9420                       
|                                                               |  |                                  
|(Address of principal executive offices)                       |  | (Zip Code)                       

(952) 939-9000

---

Registrants telephone number, including area code


Not Applicable

---

Former name, former address and former fiscal year, if changed since last report




| |                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 periods 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 practical date.



| |                                                                               
| | ------------------------------------------------------------------------------
| | As of August 3, 2001, there were 6,178,038 shares outstanding of Common
Stock.

1



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TABLE OF CONTENTS



|                              |                                                                                               |                                                                  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|Part I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements (Unaudited)                                                     
|                              |                                                                                               | Condensed Consolidated Balance Sheets                           
|                              |                                                                                               | Condensed Consolidated Statements of Operations                 
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows                 
|                              |                                                                                               | Condensed Notes to Consolidated Financial Statements (Unaudited)
|                              | Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
|                              | Item 3.  Quantitative and Qualitative Disclosure of Market Risk                              
|PART II.  OTHER INFORMATION  
|                              | Item 6.  Exhibits and Reports on Form 8-K                                                    
|SIGNATURES                   



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##### Table of Contents



INDEX

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

|                              |  |                                                                                                             |  |    |  | 
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | -- |  | 
|Part I. FINANCIAL INFORMATION |  |                                                                                                             |  | 3 
|                             
|                             
|                             
|                             
|Item 1.                       |  | Financial Statements (Unaudited)                                                                            |  | 3 
|                             
|                             
|                             
|                             
|                              |  | Condensed consolidated balance sheets  June 30, 2001 and September 30, 2000                                |  | 3 
|                             
|                             
|                             
|                             
|                              |  | Condensed consolidated statements of operations  Three months and nine months ended June 30, 2001 and 2000 |  | 5 
|                             
|                             
|                             
|                             
|                              |  | Condensed consolidated statements of cash flows  Nine months ended June 30, 2001 and 2000                  |  | 6 
|                             
|                             
|                             
|                             
|                              |  | Condensed notes to consolidated financial statements  June 30, 2001                                        |  | 7 
|                             
|                             
|                             
|                             
|Item 2.                       |  | Managements Discussion and Analysis of Results of Operations and Financial Condition                       |  | 10
|                             
|                             
|                             
|                             
|Item 3.                       |  | Quantitative and Qualitative Disclosure of Market Risk                                                      |  | 14
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION    |  |                                                                                                             |  | 14
|                             
|                             
|                             
|                             
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                            |  | 14
|                             
|                             
|                             
|                             
|SIGNATURES                    |  |                                                                                                             |  | 15

2



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##### Table of Contents












Part I. FINANCIAL INFORMATION

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

|                       |                                                                                                                                           |                                   |            |           |           |   |               |           |           | 
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------- | --------- | --------- | - | ------------- | --------- | --------- | 
|                       |                                                                                                                                           |                                   |            | June 30,  |           |   | September 30, |          
|                       |                                                                                                                                           |                                   |            | 2001      |           |   | 2000          |          
|                       |                                                                                                                                           |                                   |            |           |           |   |               |          
|ASSETS                
|                      
|                      
|                      
|                      
|CURRENT ASSETS        
|                      
|                      
|                      
|                      
|                       | Cash and cash equivalents                                                                                                                 |                                   | $          | 1,175,624 |           |   | $             | 3,043,754 |          
|                      
|                      
|                      
|                      
|                       | Short-term investments                                                                                                                    |                                   |            | 70,320    |           |   |               | 108,760   |          
|                      
|                      
|                      
|                      
|                       | Accounts receivable, less allowance for doubtful
accounts of $52,918 and $51,697 as of June 30, 2001
and September 30, 2000, respectively |                                   |            | 8,454,041 |           |   |               | 5,398,986 |          
|                      
|                      
|                      
|                      
|                       | Inventory:                                                                                                                               
|                      
|                      
|                      
|                      
|                       |                                                                                                                                           | Raw materials and component parts |            |           | 7,623,714 |   |               |           | 6,318,199 | 
|                      
|                      
|                      
|                      
|                       |                                                                                                                                           | Work-in-progress                  |            |           | 955,542   |   |               |           | 1,217,165 | 
|                      
|                      
|                      
|                      
|                       |                                                                                                                                           | Finished goods                    |            |           | 3,402,540 |   |               |           | 4,269,391 | 
|                       |                                                                                                                                           |                                   |            |           |           |  
|                       |                                                                                                                                           |                                   | 11,981,796 |           |           |   | 11,804,755    |          
|                       |                                                                                                                                           |                                   |            |           |           |  
|                       | Deferred income taxes                                                                                                                     |                                   |            | 1,027,882 |           |   |               | 1,743,519 |          
|                      
|                      
|                      
|                      
|                       | Other current assets                                                                                                                      |                                   |            | 1,304,723 |           |   |               | 1,379,702 |          
|                       |                                                                                                                                           |                                   |            |           |           |  
|TOTAL CURRENT ASSETS   |                                                                                                                                           |                                   | 24,014,386 |           |           |   | 23,479,476    |          
|                       |                                                                                                                                           |                                   |            |           |           |  
|EQUIPMENT AND FIXTURES
|                      
|                      
|                      
|                      
|                       | Machinery and equipment                                                                                                                   |                                   |            | 2,150,874 |           |   |               | 1,983,899 |          
|                      
|                      
|                      
|                      
|                       | Furniture and fixtures                                                                                                                    |                                   |            | 2,392,632 |           |   |               | 2,169,434 |          
|                      
|                      
|                      
|                      
|                       | Leasehold improvements                                                                                                                    |                                   |            | 323,051   |           |   |               | 315,995   |          
|                       |                                                                                                                                           |                                   |            |           |           |  
|                       |                                                                                                                                           |                                   | 4,866,557  |           |           |   | 4,469,328     |          
|                      
|                      
|                      
|                      
|                       | Less accumulated depreciation and amortization                                                                                            |                                   |            | 3,823,418 |           |   |               | 3,582,931 |          
|                       |                                                                                                                                           |                                   |            |           |           |  
|                       |                                                                                                                                           |                                   | 1,043,139  |           |           |   | 886,397       |          
|                       |                                                                                                                                           |                                   |            |           |           |  
|TOTAL ASSETS           |                                                                                                                                           | $                                 | 25,057,525 |           |           | $ | 24,365,873    |          
|                       |                                                                                                                                           |                                   |            |           |           |  

See condensed notes to consolidated financial statements.

3



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##### Table of Contents



CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

|                                           |                                                                                                 |                                                                                  |            |            |         |   |               |            |         | 
|------------------------------------------ | ----------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ---------- | ---------- | ------- | - | ------------- | ---------- | ------- | 
|                                           |                                                                                                 |                                                                                  |            | June 30,   |         |   | September 30, |           
|                                           |                                                                                                 |                                                                                  |            | 2001       |         |   | 2000          |           
|                                           |                                                                                                 |                                                                                  |            |            |         |   |               |           
|LIABILITIES AND SHAREHOLDERS EQUITY      
|                                          
|                                          
|                                          
|                                          
|CURRENT LIABILITIES                       
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts payable                                                                                |                                                                                  | $          | 4,562,755  |         |   | $             | 4,242,943  |        
|                                          
|                                          
|                                          
|                                          
|                                           | Employee compensation and related taxes                                                         |                                                                                  |            | 1,377,728  |         |   |               | 868,362    |        
|                                          
|                                          
|                                          
|                                          
|                                           | Income taxes payable                                                                            |                                                                                  |            | 34,866     |         |   |               | 15,247     |        
|                                          
|                                          
|                                          
|                                          
|                                           | Bank line of credit                                                                             |                                                                                  |            | 1,895,000  |         |   |               |           |        
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred revenue                                                                                |                                                                                  |            | 271,709    |         |   |               | 3,316,085  |        
|                                           |                                                                                                 |                                                                                  |            |            |         |  
|TOTAL CURRENT LIABILITIES                  |                                                                                                 |                                                                                  | 8,142,058  |            |         |   | 8,442,637     |           
|                                           |                                                                                                 |                                                                                  |            |            |         |  
|TOTAL LIABILITIES                          |                                                                                                 |                                                                                  | 8,142,058  |            |         |   | 8,442,637     |           
|                                           |                                                                                                 |                                                                                  |            |            |         |  
|SHAREHOLDERS EQUITY                      
|                                          
|                                          
|                                          
|                                          
|                                           | Common stock  par value $.10 per share  authorized
25,000,000 shares; issued and outstanding:
|                                          
|                                          
|                                          
|                                          
|                                           |                                                                                                 | 6,178,038 and 6,190,978 as of June 30, 2001
and September 30, 2000, respectively |            |            | 617,804 |   |               |            | 619,098 | 
|                                          
|                                          
|                                          
|                                          
|                                           | Additional paid-in capital                                                                      |                                                                                  |            | 17,169,682 |         |   |               | 17,063,384 |        
|                                          
|                                          
|                                          
|                                          
|                                           | Accumulated other comprehensive loss                                                            |                                                                                  |            | (2,257,266 | )       |   |               | (1,968,736 | )      
|                                          
|                                          
|                                          
|                                          
|                                           | Retained earnings                                                                               |                                                                                  |            | 1,385,247  |         |   |               | 209,490    |        
|                                           |                                                                                                 |                                                                                  |            |            |         |  
|TOTAL SHAREHOLDERS EQUITY                 |                                                                                                 |                                                                                  | 16,915,467 |            |         |   | 15,923,236    |           
|                                           |                                                                                                 |                                                                                  |            |            |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                 | $                                                                                | 25,057,525 |            |         | $ | 24,365,873    |           
|                                           |                                                                                                 |                                                                                  |            |            |         |  

See condensed notes to consolidated financial statements.

4



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##### Table of Contents






CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

|                                                                                                   |                                     |   |                            |           |  |                           |           |           |      |   |            |            |  |   |            |            | 
|-------------------------------------------------------------------------------------------------- | ----------------------------------- | - | -------------------------- | --------- |  | ------------------------- | --------- | --------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                                                                                   |                                     |   | For the Three Months Ended |           |  | For the Nine Months Ended |          
|                                                                                                   |                                     |   | June 30,                   |           |  | June 30,                  |          
|                                                                                                   |                                     |   |                            |           |  |                           |          
|                                                                                                   |                                     |   | 2001                       |           |  | 2000                      |           |           | 2001 |   |            | 2000       | 
|                                                                                                   |                                     |   |                            |           |  |                           |           |           |      |   |            |            | 
|Sales:                                                                                            
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Printing equipment                  |   | $                          | 7,111,323 |  |                           | $         | 3,795,589 |      |   | $          | 21,600,919 |  |   | $          | 10,358,341 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Maintenance, spares and supplies    |   |                            | 3,783,363 |  |                           |           | 3,322,026 |      |   |            | 11,034,134 |  |   |            | 9,969,311  | 
|                                                                                                   |                                     |   |                            |           |  |                           |           |           |      |   |            |           
|NET SALES                                                                                          |                                     |   | 10,894,686                 |           |  |                           | 7,117,615 |           |      |   | 32,635,053 |            |  |   | 20,327,652 |           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Costs and Expenses:                                                                               
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Cost of sales                       |   |                            | 5,636,576 |  |                           |           | 3,523,477 |      |   |            | 16,899,532 |  |   |            | 9,905,381  | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Selling, general and administrative |   |                            | 3,941,524 |  |                           |           | 2,887,843 |      |   |            | 11,795,496 |  |   |            | 8,680,326  | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Research and development            |   |                            | 680,235   |  |                           |           | 685,838   |      |   |            | 2,031,819  |  |   |            | 2,045,765  | 
|                                                                                                   |                                     |   |                            |           |  |                           |           |           |      |   |            |           
|                                                                                                   |                                     |   | 10,258,335                 |           |  |                           | 7,097,158 |           |      |   | 30,726,847 |            |  |   | 20,631,472 |           
|                                                                                                   |                                     |   |                            |           |  |                           |           |           |      |   |            |           
|INCOME (LOSS) FROM SYSTEM SALES AND SERVICE                                                        |                                     |   | 636,351                    |           |  |                           | 20,457    |           |      |   | 1,908,206  |            |  |   | (303,820   | )         
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Net interest expense (income)                                                                      |                                     |   | 15,165                     |           |  |                           | (38,962   | )         |      |   | 3,129      |            |  |   | (91,085    | )         
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Unrealized exchange (gain) loss                                                                    |                                     |   | (119,160                   | )         |  |                           | (6,918    | )         |      |   | 53,793     |            |  |   | 143,278    |           
|                                                                                                   |                                     |   |                            |           |  |                           |           |           |      |   |            |           
|INCOME (LOSS) BEFORE INCOME TAXES                                                                  |                                     |   | 740,346                    |           |  |                           | 66,337    |           |      |   | 1,851,284  |            |  |   | (356,013   | )         
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Income tax expense (benefit)                                                                       |                                     |   | 288,330                    |           |  |                           | (65,134   | )         |      |   | 710,487    |            |  |   | (160,116   | )         
|                                                                                                   |                                     |   |                            |           |  |                           |           |           |      |   |            |           
|NET INCOME (LOSS)                                                                                  |                                     | $ | 452,016                    |           |  | $                         | 131,471   |           |      | $ | 1,140,797  |            |  | $ | (195,897   | )         
|                                                                                                   |                                     |   |                            |           |  |                           |           |           |      |   |            |           
|Basic and diluted earnings (loss) per common share                                                 |                                     | $ | 0.07                       |           |  | $                         | 0.02      |           |      | $ | 0.18       |            |  | $ | (0.03      | )         
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Weighted average number of shares and equivalents
outstanding during the period                    |                                     |   | 6,169,038                  |           |  |                           | 6,151,933 |           |      |   | 6,175,938  |            |  |   | 6,139,291  |           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Weighted average number of shares and equivalents
outstanding during the period, assuming dilution |                                     |   | 6,203,568                  |           |  |                           | 6,349,124 |           |      |   | 6,232,896  |            |  |   | 6,139,291  |           

See condensed notes to consolidated financial statements.

5



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##### Table of Contents






CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

|                                                                                                   |                                       |   |                           |            |   |      |           |           |  
|-------------------------------------------------------------------------------------------------- | ------------------------------------- | - | ------------------------- | ---------- | - | ---- | --------- | --------- | -
|                                                                                                   |                                       |   | For the Nine Months Ended |           
|                                                                                                   |                                       |   | June 30,                 
|                                                                                                   |                                       |   |                          
|                                                                                                   |                                       |   | 2001                      |            |   | 2000 |          
|                                                                                                   |                                       |   |                           |            |   |      |          
|OPERATING ACTIVITIES                                                                              
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Net income (loss)                                                                                  |                                       | $ | 1,140,797                 |            |   | $    | (195,897  | )        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Depreciation and amortization         |   |                           | 272,400    |   |      |           | 282,591   |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Provision for bad debts               |   |                           | (1,357     | ) |      |           |          |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Forgiveness of executive officer note |   |                           | 135,186    |   |      |           | 33,564    |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Other                                 |   |                           | 61,672     |   |      |           | 41,278    |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Changes in operating assets and liabilities:                                                      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Accounts receivable                   |   |                           | (3,169,192 | ) |      |           | (712,641  | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Inventory                             |   |                           | (319,386   | ) |      |           | (187,852  | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Other current assets                  |   |                           | 727,843    |   |      |           | (857,338  | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Accounts payable and accrued expenses |   |                           | 907,567    |   |      |           | 246,788   |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Deferred revenue                      |   |                           | (3,033,242 | ) |      |           | 1,291,434 |  
|                                                                                                   |                                       |   |                           |            |   |     
|NET CASH (USED IN) OPERATING ACTIVITIES                                                            |                                       |   | (3,277,712                | )          |   |      | (58,073   | )        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|INVESTING ACTIVITIES                                                                              
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Purchase of equipment and fixtures                                                                 |                                       |   | (463,069                  | )          |   |      | (269,822  | )        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Proceeds from sale of equipment                                                                    |                                       |   | 25,212                    |            |   |      | 56,602    |          
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Purchase of short-term investments                                                                 |                                       |   | (133,487                  | )          |   |      | (727,975  | )        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Proceeds from sale of short-term investments                                                       |                                       |   | 176,849                   |            |   |      | 93,275    |          
|                                                                                                   |                                       |   |                           |            |   |     
|NET CASH (USED IN) INVESTING ACTIVITIES                                                            |                                       |   | (394,495                  | )          |   |      | (847,920  | )        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|FINANCING ACTIVITIES                                                                              
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Issuance of common stock                                                                           |                                       |   | 18,191                    |            |   |      | 53,331    |          
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Repurchase of common stock                                                                         |                                       |   | (78,383                   | )          |   |      | 12,252    |          
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Borrowing on bank line of credit                                                                   |                                       |   | 6,850,000                 |            |   |      |          |          
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Repayment of borrowing on bank line of credit                                                      |                                       |   | (4,955,000                | )          |   |      |          |          
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Payment on capital leases                                                                          |                                       |   |                          |            |   |      | (36,833   | )        
|                                                                                                   |                                       |   |                           |            |   |     
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                                          |                                       |   | 1,834,808                 |            |   |      | 28,750    |          
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                            |                                       |   | (30,731                   | )          |   |      | (80,223   | )        
|                                                                                                   |                                       |   |                           |            |   |     
|(DECREASE) IN CASH AND EQUIVALENTS                                                                 |                                       |   | (1,868,130                | )          |   |      | (957,466  | )        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                     |                                       |   | 3,043,754                 |            |   |      | 2,882,618 |          
|                                                                                                   |                                       |   |                           |            |   |     
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                           |                                       | $ | 1,175,624                 |            |   | $    | 1,925,152 |          
|                                                                                                   |                                       |   |                           |            |   |     

See condensed notes to consolidated financial statements.

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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2001

NOTE A  Basis of Presentation

The accompanying unaudited consolidated 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 Article 10 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. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Companys annual report on Form 10-K for the year ended September 30, 2000.

Reclassifications have been made in the prior year to conform to
classifications in the current year.

NOTE B  Earnings per Share

The following table sets forth the computation of basic and diluted earnings or loss per share:

|             |                                                                                                      |  |                            |           |  |                           |   |           |      |  |   |           |  |  |   |           |   |  |  |   | 
|------------ | ---------------------------------------------------------------------------------------------------- |  | -------------------------- | --------- |  | ------------------------- | - | --------- | ---- |  | - | --------- |  |  | - | --------- | - |  |  | - | 
|             |                                                                                                      |  | For the Three Months Ended |           |  | For the Nine Months Ended |  
|             |                                                                                                      |  | June 30,                   |           |  | June 30,                  |  
|             |                                                                                                      |  |                            |           |  |                           |  
|             |                                                                                                      |  | 2001                       |           |  | 2000                      |   |           | 2001 |  |   | 2000      | 
|             |                                                                                                      |  |                            |           |  |                           |   |           |      |  |   |           | 
|Numerator:  
|            
|            
|            
|            
|             | Net income (loss)                                                                                    |  | $                          | 452,016   |  |                           | $ | 131,471   |      |  | $ | 1,140,797 |  |  | $ | (195,897  | )
|             |                                                                                                      |  |                            |           |  |                           |   |           |      |  |   |          
|             | Numerator for basic and diluted earnings
per share  income (loss) applicable to
common shareholders |  | $                          | 452,016   |  |                           | $ | 131,471   |      |  | $ | 1,140,797 |  |  | $ | (195,897  | )
|            
|            
|            
|            
|Denominator:
|            
|            
|            
|            
|             | Denominator for basic earnings per share,
weighted average shares                                    |  |                            | 6,169,038 |  |                           |   | 6,151,933 |      |  |   | 6,175,938 |  |  |   | 6,139,291 |  
|            
|            
|            
|            
|             | Dilutive potential common shares, employee
stock options                                             |  |                            | 34,530    |  |                           |   | 197,191   |      |  |   | 56,958    |  |  |   |          |   |  |  | a | 
|             |                                                                                                      |  |                            |           |  |                           |   |           |      |  |   |          
|             | Denominator for earnings per share, assuming
dilution, adjusted weighted average shares              |  |                            | 6,203,568 |  |                           |   | 6,349,124 |      |  |   | 6,232,896 |  |  |   | 6,139,291 |  
|            
|            
|            
|            
|             | Earnings (loss) per common share                                                                     |  | $                          | 0.07      |  |                           | $ | 0.02      |      |  | $ | 0.18      |  |  | $ | (0.03     | )
|            
|            
|            
|            
|             | Earnings (loss) per common share,
assuming dilution                                                  |  |                            | 0.07      |  |                           |   | 0.02      |      |  |   | 0.18      |  |  |   | (0.03     | )



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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2001

NOTE C  Comprehensive Income or Loss

The components of comprehensive income or loss, net of related tax, for the
three-month and nine-month periods ended June 30, 2001 and 2000 are as follows:

|                                        |  |                            |          |   |                           |   |          |      |  |   |           |   |  |   |          |  
|--------------------------------------- |  | -------------------------- | -------- | - | ------------------------- | - | -------- | ---- |  | - | --------- | - |  | - | -------- | -
|                                        |  | For the Three Months Ended |          |   | For the Nine Months Ended |  
|                                        |  | June 30,                   |          |   | June 30,                  |  
|                                        |  |                            |          |   |                           |  
|                                        |  | 2001                       |          |   | 2000                      |   |          | 2001 |  |   | 2000      |  
|                                        |  |                            |          |   |                           |   |          |      |  |   |           |  
|Net income (loss)                       |  | $                          | 452,016  |   |                           | $ | 131,471  |      |  | $ | 1,140,797 |   |  | $ | (195,897 | )
|                                       
|                                       
|                                       
|                                       
|Foreign currency translation adjustment |  |                            | (119,591 | ) |                           |   | (217,762 | )    |  |   | (288,530  | ) |  |   | (613,948 | )
|                                        |  |                            |          |   |                           |   |          |      |  |   |           |  
|Comprehensive income (loss)             |  | $                          | 332,425  |   |                           | $ | (86,291  | )    |  | $ | 852,267   |   |  | $ | (809,845 | )
|                                        |  |                            |          |   |                           |   |          |      |  |   |           |  

NOTE D  Executive Loan

During fiscal 1995, the President and Chief Executive Officer exercised 40,000
options to purchase common stock at $2.00 per share, by executing a $148,996,
five-year, full recourse note, bearing interest at a floating rate, under the
Executive Loan Program. The purpose of the loan was to provide cash for the
exercise of the options and to pay the related income taxes. When exercised,
the Companys stock had a market value of $6.375 per share. In 1998, the loan
terms were amended to change the loan from full recourse to non-recourse, and
the floating rate was fixed at 5.25%. Through June 30, 2001, total principal
payments on the loan have been $54,671. In May of fiscal 2000, acknowledging
the President and Chief Executive Officers contribution to the Company, and
the depressed value of the underlying stock securing the loan, the Company
extended the term of the loan to May 2001 and granted forgiveness of the loan
ratably over the extension period. These modifications resulted in the options
being treated as a fixed stock award. The Company recognized the fair market
value of the stock award of $225,000 over the extension period, which concluded
in the third quarter of fiscal 2001. For the three-month and nine-month
periods ended June 30, 2001, $56,250 and $135,186, respectively, were
recognized as compensation expense related to the stock award.

NOTE E  Closure of the Companys Australian Subsidiary

In February 2001, the Company committed to a plan to close its subsidiary in
Australia, developed a formal exit plan to cease operations effective September
30, 2001, and communicated the plan to all 14 full- and part-time employees of
the subsidiary. The Company determined that operations in the market served by
the Australian subsidiary could be more profitably served by alternative means,
including independent distributors and sales agents. Exit costs have been
estimated at $115,000, comprised solely of termination benefits for employees,
which are included with selling, general administrative expenses in the
Condensed Consolidated Statements of Operations and with employee compensation
and related taxes in the Condensed Consolidated Balance Sheets. For the nine
months ended June 30, 2001, $9,000 has been recorded against the estimated
liability, all in second quarter. Ten full- and part-time employees remain as
of June 30, 2001.

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CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2001

NOTE F  Line of Credit

Effective March 31, 2001, the Company has a $2,500,000 revolving line of credit
with a bank, expiring April 30, 2002, secured by the Companys accounts
receivable, inventory, equipment and general intangibles. Advances under the
line of credit bear interest at the banks reference rate; a commitment fee at
the annual rate of 0.2% applies to any unused portion of the line.

The line of credit agreement places certain restrictions on the Company,
including, among others, requirements as to profitability and minimum levels of
tangible net worth. As of June 30, 2001, borrowings under the line of credit
were $1,895,000, and the Company was in compliance with the covenants under the
agreement.

NOTE G  Accounting for Derivative Instruments and Hedging Activities

Effective October 1, 2000, the Company adopted Statement of Financial
Accounting Standards Number 133, Accounting for Derivative Instruments and
Hedging Activities(SFAS 133). SFAS 133 establishes standards for recognition
and measurement of derivatives and hedging activities. The Statement requires
all derivatives to be recorded on the balance sheet at fair value. As a result
of the adoption, the Company did not incur any transition adjustment to
earnings. The adoption of this Statement is not expected to have a significant
impact on the Company.

NOTE H  Revenue Recognition in Financial Statements

On December 3, 1999, the Securities and Exchange Commission issued SEC Staff
Accounting Bulletin Number 101, Revenue Recognition in Financial Statements
(SAB 101). SAB 101 summarizes certain of the staffs views on applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB 101 will be effective for the Company in the fourth quarter of
fiscal 2001 and will have no material impact on the Companys operations or
financial position.

NOTE I  Repurchase of Common Stock

In September 1998, the Company announced a stock repurchase program of up to
500,000 shares of Common Stock. At September 30, 2000, the Company had
repurchased 170,500 shares at a cost of $434,000. In the current fiscal year,
through June 30, 2001, the Company repurchased an additional 10,350 shares at a
cost of $31,000.

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Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition

Results of Operations

The Companys revenue consists of (i) sales of document production systems and
related equipment, and (ii) maintenance contracts, spare parts, supplies and
consumable items. For the three-month period ended June 30, 2001 (third
quarter of fiscal 2001), net revenue was $10.9 million, up 53% from $7.1
million for the same period a year ago. Revenue from the sale of document
production equipment was $7.1 million, up 87% from $3.8 million for the same
period in fiscal 2000. For the nine months ended June 30, 2001, net revenue
was $32.6 million, up 61% from $20.3 million for the same period a year ago.
Revenue from the sale of document production equipment was $21.6 million, up
109% from $10.4 million for the same period in fiscal 2000. The Companys
document production systems primarily consist of the Imaggiaproduct line, the
PS MICRsystems product line (manufactured by Océ Printing Systems GmbH and
sold on a private label basis as the PS75 MICRand PS155 MICR) and the
Checktronicproduct line. The increased revenue from document production
equipment was primarily due to increased North American sales of the Imaggia
and PS MICRsystems product lines. Document production equipment revenue for
the three and nine months ended June 30, 2001 included (i) $5.6 million and
$17.5 million, respectively, from the sale of the Companys Imaggiaproduct
line, increases of 92% and 162% over the $2.9 million and $6.7 million for the
comparable year-ago periods, and (ii) $377,000 and $1.7 million from the sale
of the Companys PS MICRsystems product line, an improvement over comparable
prior-year-to-date sales of $157,000 recognized in the first quarter of fiscal
2000.

For some time, the Company has held a dominant position in many of the
international markets in which its Checktronicequipment is sold. Demand for
the Checktronicproduct line has softened in these international markets, and
revenue from this product line is now largely dependent on sales to emerging
markets such as Latin America, Asia and Africa. The uncertain economic
environment in many of these emerging markets has limited the Companys current
opportunities to sell high-end capital equipment into those regions.

For the third quarter of fiscal 2001, revenue from maintenance contracts, spare
parts, supplies and consumable items increased 14%, compared with the same
period a year ago, from $3.3 million to $3.8 million. Maintenance contracts,
spare parts, supplies and consumable items revenue for the nine-month periods
ended June 30, 2001 and 2000, were $11.0 million and $10.0 million,
respectively, an 11% increase. The increases between quarters and
year-to-date periods were due primarily to increases in domestic revenues from
maintenance contracts, spare parts, supplies and consumable items, on a
substantially higher installed base of Imaggiasystems. The Company expects
domestic revenue from maintenance contracts, spare parts, supplies and
consumable items to increase further in fiscal 2001 with the projected growth
of the Imaggiaproduct line.

The Companys gross margin percentage for the third quarter and first nine
months of fiscal 2001 was 48%, compared with 50% and 51%, respectively, for the
same periods a year ago. The decrease in gross margin percentages for the
comparative quarter and year-to-date periods was primarily due to improved
productivity, offset by the shift in the product mix from the Checktronic
product line to the Imaggiaand PS MICRsystems product lines, which have lower
gross margins, lower margins on maintenance contracts, and increases in
inventory valuation reserves. The Company anticipates that its gross margin
percentage for fiscal 2001 will continue to be somewhat lower than for fiscal
2000 as revenue from the Imaggiaand PS MICRsystems product lines constitutes
a larger portion of the Companys total revenue.

Selling, general and administrative expenses increased 36%, from $2.9 million
for third quarter of fiscal 2000, to $3.9 million for third quarter of fiscal
2001, but decreased as a percentage of net sales, from 41% to 36% for the
current fiscal quarter. For the nine-month periods ended June 30, 2001 and
2000, respectively, selling, general and administrative expenses similarly
increased, from $8.7 million to $11.8 million, or 36%, and similarly decreased
as a percentage of net sales, from 43% to 36%. The increased expense was
primarily due to the increase in personnel and associated expenses required to
support the increase in total revenue. The Company anticipates that its
selling, general and administrative expenses through the remainder of fiscal
2001 will continue to increase to support the projected growth in total
revenue, but at a rate less than the projected total revenue rate of growth.
Research and development expenses for the three and nine months ended June 30,
2001, were $680,000 and $2.0 million, respectively, flat compared with the same
periods a year ago.

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Net interest expense for the three and nine months ended June 30, 2001, was
$15,000 and $3,000, respectively, compared with net interest income of $39,000
and $91,000, respectively, for the same periods a year ago, due to the Company
borrowing against the bank line of credit in fiscal 2001, but not in fiscal
2000.

Unrealized exchange gains or losses are related to the Companys foreign
operations. The Company experiences foreign currency gains and losses, which
are reflected on the Companys statements of operations, 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 of the subsidiaries, which are
denominated in U.S. dollars. Net exchange gains for the three months ended
June 30, 2001 and 2000 were $119,000 and $7,000, respectively, compared with
net exchange losses for the year-to-date periods then ended of $54,000 and
$143,000, respectively. The general trend over the quarter and
fiscal-year-to-date periods has been the weakening of foreign currencies
against the U.S. dollar. This has resulted in cumulative unrealized foreign
exchange losses in the fiscal-year-to-date periods in both years. Over any
particular quarter, fluctuations in currencies may result in anomalies contrary
to the general trend. This was true in both the quarters ended June 30, 2000
and 2001. In the prior year quarter, the resulting unrealized currency gain
was nominal. However, for the current fiscal quarter, the more significant
gain was primarily due to strengthening of the Australian dollar against the
U.S. dollar. The Company anticipates that it will continue to have exchange
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.

Income tax expense for the three-month period ended June 30, 2001 was $288,000,
compared with an income tax benefit of $65,000 for the three months ended June
30, 2000. Income tax expense for the nine-month period ended June 30, 2001 was
$710,000, compared with an income tax benefit of $160,000 for the nine months
ended June 30, 2000. Income tax expense and benefit in all of the current and
prior year periods were the result of income and losses, respectively,
generated by domestic operations. Interim effective tax rates may vary based
on sources of income or loss and best estimates of the annual effective tax
rate for the fiscal year.

For the third quarter of fiscal 2001, the Companys basic and diluted earnings
were $0.07 per share, compared with $0.02, basic and diluted, for the
comparable prior year period. For the first nine months of fiscal 2001, the
Companys earnings per share, basic and diluted, were $0.18, compared with a
net loss per share, basic and diluted, of $0.03 for the first nine months of
fiscal 2000. The improvements in the quarter and year-to-date periods were
primarily attributable to the increase in revenue, partially offset by the
higher cost of sales, and higher selling, general and administrative expenses.
Earnings were also improved by higher third quarter foreign exchange gains in
fiscal 2001 than in fiscal 2000, and lower foreign exchange losses in the
respective fiscal-year-to-date periods.

In February 2001, the Company committed to close its subsidiary in Australia,
developed a formal exit plan to cease operations effective September 30, 2001,
and communicated the plan to all 14 full- and part-time employees of the
subsidiary. The Company determined that operations in the market served by the
Australian subsidiary could be served more profitably by alternative means,
including independent distributors and sales agents, and is in the process of
closing the Australian subsidiary. In connection with the closure, the Company
recorded a one-time charge of $115,000. By taking this action, the Company
anticipates eliminating annual operating expenses of approximately $500,000,
beginning in fiscal 2002, with no further loss of revenue from Pacific Rim
customers as a result of this change.

Market Risk

The Company has foreign subsidiaries, located in England and France (in
addition to the subsidiary in the process of being closed in Australia), does
business in more than 50 countries and generates approximately 32% of its
revenue from outside North America. The Companys ability to sell its products
in these foreign markets may be affected by changes in economic, political or
market conditions in the foreign markets in which it does business.

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The Companys net investment in its foreign subsidiaries was $6,713,000 and
$7,006,000 at June 30, 2001 and September 30, 2000, respectively, translated
into U.S. dollars at the closing exchange rates. The potential loss based on
end-of-period balances and prevailing exchange rates resulting from a
hypothetical 10% strengthening of the dollar against foreign currencies was not
material in the year-to-date period ended June 30, 2001.

From time to time, the Company has entered into foreign exchange contracts as a
hedge against specific foreign currency receivables. In fiscal 2000 and the
first nine months of fiscal 2001, the Company did not enter into any foreign
exchange contracts and does not anticipate entering into any such contracts
through the remainder of fiscal 2001.

Factors Affecting Results of Operations

The Company is continuing development of the Imaggiasystem, including
improving its overall reliability and robustness. The Company is using as the
print engine for the Imaggiasystem the Gemini digital print technology, which
was developed, and is supplied to the Company, by Delphax Systems. Delphax
Systems is wholly owned by Xerox Corporation, which recently has experienced
financial difficulties. The Company believes, but cannot assure, that these
difficulties will not materially impair Delphax Systems performance as a
supplier. Over the course of the development, the Company has experienced
delays due in part to development delays associated with the Gemini print
engine and finalization of the engines toner formulation, which are outside of
the Companys control. No assurance can be given that further delays will not
occur or that product development or warranty expenses will not be higher than
anticipated.

In January 2000, the Company accepted a three-year equipment and service
contract from a U.S. customer, valued at approximately $40.0 million, for its
Imaggiasystem. The contract value includes the sales of document production
systems and related equipment for approximately $22.0 million, and maintenance,
spare parts, supplies and consumable items estimated to be worth approximately
$18.0 million over the three-year period. Equipment deliveries under the
contract began in the second quarter of fiscal 2000, and are continuing through
the third quarter of fiscal 2001. Under the contract, the Company records
document production systems and related equipment revenue with the delivery of
each component piece of equipment. The Company records revenue for
maintenance, spare parts, supplies and consumable items based on the monthly
usage of these components. Revenue under the contract for maintenance, spare
parts, supplies and consumable items may fluctuate with changes in the
customers demand for these items. Achievement of the Companys future revenue
plans depends upon continued market acceptance of the Imaggiasystem.

The Companys PS MICRsystems product line is marketed under an agreement with
Océ Printing Systems GmbH for the worldwide exclusive rights to private label,
sell and service the PS75 MICRproduct, and provides for certain non-exclusive
rights to private label, sell and service other Océ high-performance sheet-fed
MICR and non-MICR printing systems. Through the first three quarters of fiscal
2001, sales of the PS MICRsystems product line, totaling $1.7 million,
exceeded sales of $463,000 for all of fiscal 2000, the first year in which the
PS MICRsystems product line was sold. The Company anticipates that sales of
the PS MICRsystems product line will comprise a larger portion of its document
production systems revenue in future periods.

The Companys net sales and operating results may also fluctuate from quarter
to quarter because (i) the Companys sales cycle is relatively long, (ii) the
size of orders may vary significantly, (iii) the availability of financing for
customers in some countries is variable, (iv) customers may postpone or cancel
orders, and (v) economic, political and market conditions in some markets
change with minimal notice and effect 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.

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Euro Conversion

On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Unions common currency (Euro). The transition period for the introduction of
the Euro is from January 1, 1999 to January 1, 2002. The Company has prepared
for the introduction of the Euro and has evaluated methods to address the many
issues involved with the introduction of the Euro, including the conversion of
information technology systems, recalculating currency risk, strategies
concerning continuity of contracts, and ramifications on the processes for
preparing taxation and accounting records. The Company believes the Euro
conversion will not have a material impact on its financial statements.

Liquidity and Capital Resources

Working capital was $15.9 million at June 30, 2001, compared with $15.0 million
at September 30, 2000. The Companys inventory levels increased to $12.0
million at June 30, 2001 from $11.8 million at September 30, 2000, primarily
due to higher levels of Imaggiastock. Accounts receivable increased to $8.5
million at June 30, 2001 from $5.4 million at September 30, 2000, due to
increased sales. Cash and short-term investments amounted to $1.2 million at
June 30, 2001, compared with $3.2 million at September 30, 2000. The $2.0
million decrease in cash and short-term investments was primarily due to
increases in accounts receivable and inventory. Deferred revenue was $272,000
at June 30, 2001, compared with $3.3 million at September 30, 2000. This
decrease was principally due to deliveries under the equipment portion of the
three-year contract (described above), and the earning of the related deferred
revenue.

The Company has undertaken no significant investing activities. No significant
capital investment has been undertaken or is planned, and at June 30, 2001, the
Company had no material commitments for capital expenditures. Short-term
investments are purchased as cash is available and sold as they mature.

The Company has undertaken no significant new financing activities. The
Company maintains a $2.5 million bank line of credit, which expires on April
30, 2002 and is secured by the Companys accounts receivable, inventory,
equipment and general intangibles. Advances under the line of credit bear
interest at the banks reference rate. The line of credit agreement places
certain restrictions on the Company, including, among others, requirements as
to profitability and minimum levels of tangible net worth. At June 30, 2001,
the Company is in compliance with all loan covenants, and the amount owed under
the line was $1,895,000.

Under the Companys stock repurchase program announced in 1998, no shares were
repurchased in fiscal 2000. In the current fiscal year, through June 30, 2001,
the Company repurchased 10,350 shares at a cost of $31,000, bringing the total
repurchased under the program to 180,850 shares at a cost of approximately
$465,000.

The Company believes that its current financial arrangements and anticipated
level of internally generated funds will be sufficient to fund its working
capital requirements through the remainder of fiscal 2001.

Cautionary Statement

Statements included in this Managements Discussion and Analysis of Financial
Condition and Results of Operations, the Companys Annual Report, 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 shareholders, 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.

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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.

Item 3.   Quantitative and Qualitative Disclosure of Market Risk

The information called for by this item is provided under the caption Market
Risk under Item 2.  Managements Discussion and Analysis of Financial
Condition and Results of Operations.




PART II.   OTHER INFORMATION




Item 6.   Exhibits and Reports on Form 8-K

The Company did not file any reports on Form 8-K during the three months ended
June 30, 2001.

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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.

|     |                |  |                                                                                        |  |  |                                       
|---- | -------------- |  | -------------------------------------------------------------------------------------- |  |  | --------------------------------------
|     |                |  |                                                                                        |  |  | CHECK TECHNOLOGY CORPORATIONRegistrant
|    
|Date | August 8, 2001 |  | /s/ Jay A. Herman
Jay A. Herman
President and Chief Executive Officer                 
|    
|Date | August 8, 2001 |  | /s/ Robert M. Barniskis
Robert M. Barniskis
Vice President and Chief Financial Officer

15