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 quarter ended June 25, 1995
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Commission file number 1-11257
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Checkpoint Systems, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 22-1895850
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Wolf Drive P.O. Box 188 Thorofare, New Jersey 08086
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(Address of principal executive offices) (Zip Code)
(609) 848-1800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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As of August 1, 1995 there were 13,976,079 of the Common Stock
outstanding.
CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 19-20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 21
Index to Exhibits 22
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 25, December 25,
1995 1994
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ASSETS (Unaudited)
------ (Thousands)
CURRENT ASSETS
Cash $ 29,281 $ 944
Accounts receivable, net of allowances
of $1,877,000 and $1,570,000 44,041 33,290
Inventories 38,623 29,486
Other current assets 6,079 4,385
Deferred income taxes 1,117 1,117
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Total current assets 119,141 69,222
REVENUE EQUIPMENT ON OPERATING LEASE, net 14,191 8,875
PROPERTY, PLANT AND EQUIPMENT, net 30,583 27,924
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED 21,117 10,120
INTANGIBLES 5,782 5,826
OTHER ASSETS 6,797 5,958
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TOTAL ASSETS $197,611 127,925
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 13,161 $ 10,064
Accrued compensation and related taxes 3,841 2,635
Income taxes 2,314 2,223
Unearned revenues 4,410 3,357
Other current liabilities 6,431 4,810
Short-term borrowings and current portion
of long-term debt 4,302 6,706
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Total current liabilities 34,459 29,795
LONG-TERM DEBT, LESS CURRENT MATURITIES 36,695 35,556
DEFERRED INCOME TAXES 1,271 1,271
SHAREHOLDERS' EQUITY
Preferred Stock, no par value, authorized
500,000 shares, none issued
Common Stock, par value $.10 per share,
authorized 100,000,000 shares, issued
14,661,579 and 11,278,511 1,466 1,128
Additional capital 80,483 21,592
Retained earnings 50,362 46,789
Common stock in treasury, at cost,
799,000 shares (5,664) (5,664)
Foreign currency adjustments (1,461) (2,542)
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TOTAL SHAREHOLDERS' EQUITY 125,186 61,303
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $197,611 $127,925
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See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Quarter (13 Weeks) Ended Six Months (26 Weeks) Ended
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June 25, June 26, June 25, June 26,
1995 1994 1995 1994
-------- -------- -------- --------
(Thousands, except per share data)
Net Revenues $49,744 $28,656 $87,104 $54,879
Cost of Revenues 27,800 15,104 49,069 29,064
------ ------ ------ ------
Gross Profit 21,944 13,552 38,035 25,815
Selling, General
and Administrative
Expenses 16,528 11,934 31,155 22,945
------ ------ ------ ------
Operating Income 5,416 1,618 6,880 2,870
Interest Income 325 173 494 284
Interest Expense 993 611 2,049 1,023
Foreign Exchange
Gain(Loss) 66 241 (220) (7)
------ ------ ------ ------
Earnings Before
Income Taxes 4,814 1,421 5,105 2,124
Income Taxes 1,445 354 1,532 530
------ ------ ------ ------
Net Earnings $ 3,369 $ 1,067 $ 3,573 $ 1,594
====== ====== ====== ======
Net Earnings Per
Share
$ .25 $ .10 $ .29 $ .15
====== ====== ====== ======
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
Six Months(26 Weeks) Ended June 25, 1995
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Foreign
Common Additional Retained Treasury Currency
Stock Capital Earnings Stock Adjust. Total
------- ------- ------- ------- ------- ------
(Thousands)
Balance,
December 25, 1994 $ 1,128 $21,592 $46,789 $(5,664) $(2,542) $61,303
Net Earnings 3,573 3,573
Exercise of Stock
Options 9 1,015 1,024
Stock issuance in
connection with
business acquisition 20 3,478 3,498
Stock issuance in
connection with equity
offering 309 54,398 54,707
Foreign Currency
Adjustments 1,081 1,081
------- ------- ------- ------- ------- -------
Balance at
June 25, 1995 $ 1,466 $80,483 $50,362 $(5,664) $(1,461)$125,186
======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months(26 Weeks) Ended
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June 25, June 26,
1995 1994
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(Thousands)
Cash inflow (outflow) from operating activities:
Net earnings $ 3,573 $ 1,594
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of rented equipment sold 447 (1,928)
Long-term customer contracts (349) (890)
Depreciation and amortization 6,794 3,980
Provision for losses on accounts receivable 275 (827)
(Increase) decrease in current assets:
Accounts receivable (6,758) (3,067)
Inventories (9,821) (3,409)
Other current assets (499) 730
Increase (decrease) in current liabilities:
Accounts payable 373 (4,571)
Accrued compensation and related taxes 833 1,125
Income taxes (278) 343
Unearned revenues (70) 288
Other current liabilities 672 (1,466)
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Net cash used by operating activities (4,808) (8,098)
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Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (5,841) (2,389)
Acquisition, net of cash acquired (10,061) -
Other investing activities (2,538) (1,649)
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Net cash used by investing activities (18,440) (4,038)
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Cash inflow (outflow) from financing activities:
Proceeds from stock options 1,024 1,454
Proceeds from sale of common stock 54,707 -
Proceeds of debt 40,000 15,307
Payment of debt (44,146) (3,353)
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Net cash provided by financing activities 51,585 13,408
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Net increase (decrease) in cash and cash
equivalents 28,337 1,272
Cash and cash equivalents:
Beginning of period 944 -
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End of period $ 29,281 $ 1,272
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See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its wholly-owned subsidiaries ("Company"). All material
intercompany transactions are eliminated in consolidation. The
consolidated financial statements and related notes are unaudited and do
not contain all disclosures required by generally accepted accounting
principles. Refer to the Company's Annual Report on Form 10-K for the
fiscal year ended December 25, 1994 for the most recent disclosure of the
Company's accounting policies.
The consolidated financial statements include all adjustments necessary to
present fairly the Company's financial position at June 25, 1995 and
December 25, 1994 and its results of operations and changes in cash flows
for the thirteen and twenty-six week periods ended June 25, 1995 and
June 26, 1994.
2. INVENTORIES
June 25, December 25,
1995 1994
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(Thousands)
Raw materials $ 5,894 $ 6,078
Work in process 920 193
Finished goods 31,809 23,215
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$38,623 $29,486
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Inventories are stated at the lower of cost (first-in, first-out method)
or market. Cost includes material, labor and applicable overhead.
3. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated
effective annual tax rate. The Company's net earnings generated by the
operations of its Puerto Rico subsidiary are exempt from Federal income
taxes under Section 936 of the Internal Revenue Code and substantially
exempt from Puerto Rico income taxes. Under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes",
deferred tax liabilities and assets are determined based on the difference
between financial statement and tax basis of assets and liabilities using
enacted statutory tax rates in effect at the balance sheet date.
4. PER SHARE DATA
Per share data is based on the weighted average number of common and
common equivalent shares (stock options) outstanding during the periods.
The number of shares used in the per share computations for the thirteen
and twenty-six week periods ended June 25, 1995 and June 26, 1994 were
13,588,000 and 12,445,000 (1995) and 10,722,000 and 10,613,000 (1994),
respectively.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the thirteen and twenty-six week periods ended June 25,
1995 and June 26, 1994, respectively, included interest payments of
$818,000 and $1,385,000(1995) and $494,000 and $896,000(1994) and income
taxes paid of $300,000 and $1,800,000(1995) and $17,000 and $124,000
(1994).
Excluded from the investing activities in the Consolidated Statements of
Cash Flows are net transfers from inventory to property, plant and
equipment. For the thirteen and twenty-six week periods ended June 25,
1995 and June 26, 1994 net transfers relating to equipment rented to
customers were $3,487,000 and $6,178,000 (1995) and $4,245,000 and
$4,616,000 (1994) respectively.
On February 1, 1995, the Company purchased all of the capital stock of
Alarmex, Inc. together with its related Company Bayport Controls, Inc.
(collectively "Alarmex") for $13,559,000. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired...................$21,656,000
Cash paid and fair value of stock issued for
the capital stock...............................$13,559,000
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Liabilities assumed.............................$ 8,097,000
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In addition, excluded from "Acquisitions, net of cash acquired" in the
1995 Consolidated Statement of Cash Flows is the non-cash portion of the
purchase price of Alarmex relating to 200,717 shares of the Company's
common stock valued at $3,498,000.
6. INTANGIBLES
Intangibles consist of patents, licenses, customer lists, and software
development costs. The costs relating to the acquisition of patents and
licenses are amortized on a straight-line basis over their economic/legal
useful lives, which ranges from five to ten years. Accumulated
amortization approximated $1,647,000 and $1,027,000 at June 25, 1995 and
December 25, 1994, respectively.
The costs of internally developed software are expensed until the
technological feasibility of the software has been established.
Thereafter, all software development costs are capitalized and
subsequently reported at the lower of unamortized cost or net realizable
value. The costs of capitalized software are amortized over the products'
estimated useful lives or five years, whichever is shorter. Capitalized
software development costs, net of accumulated amortization, totaled
$1,131,000 and $992,000 as of June 25, 1995 and December 25, 1994,
respectively.
7. ACQUISITION
On February 1, 1995, the Company purchased Alarmex for approximately $13.5
million ($10 million in cash and 200,717 shares of Common Stock of the
Company). The Company financed the cash portion of the Alarmex
acquisition with a private placement of the Company's long-term notes.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. ACQUISITION (continued)
Alarmex designs and provides CCTV, POS monitoring, burglar and fire alarm
systems and also provides related central station monitoring services to
over 9,000 retail sites in the United States.
The following table represents unaudited combined results of operations
for the first six months of 1995 and 1994, as if the acquisition of
Alarmex had occurred at the beginning of those respective periods. The
following results are not necessarily indicative of what would have
occurred had the acquisition been consummated as of that date or of future
results:
Six Months (26 weeks) Ended
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June 25, June 26,
1995 1994
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(Thousands, except per share data)
Net revenues.................................$87,999 $64,792
Net earnings.................................$ 3,488 $ 1,142
Earnings per common share....................$ .28 $ .11
8. ACCOUNTING FOR FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company's balance sheet accounts of foreign subsidiaries are
translated into U.S. dollars at the rate of exchange in effect at the
balance sheet dates. Revenues, costs and expenses of the Company's
foreign subsidiaries are translated into U.S. dollars at the average rate
of exchange in effect during each reporting period. The resulting
translation adjustment is recorded as a separate component of
stockholders' equity. In addition, gains or losses on long-term
intercompany transactions are excluded from the results of operations and
accumulated in the aforementioned separate component of consolidated
stockholders' equity. All other foreign transaction gains and losses are
included in the results of operations.
The Company has purchased certain foreign currency forward contracts in
order to hedge anticipated rate fluctuations in Europe. Transaction gains
or losses resulting from these contracts are recognized over the contract
period.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. LONG-TERM DEBT
On January 26, 1995, the Company issued and sold in a private placement
$15,000,000 aggregate principal amount of 9.35% series B Notes (the
"Notes") pursuant to a Note Agreement dated as of January 15, 1995, among
the Company and Principal Mutual Life Insurance Company. The Notes are
due January 30, 2003 and bear interest from the issue date(computed on the
basis of a 360 day year) payable semi-annually on January 30 and July 30
of each year commencing July 30, 1995. Notes of $3,000,000 are due on
each January 30 commencing January 30, 1999 through January 30, 2003. The
Notes are uncollaterized and rank equally with the Company's other funded
debt. The notes contain certain covenants which the Company considers to
be normal in transactions of this type.
On February 15, 1995, the Company entered into a new $25,000,000 revolving
Credit Agreement which replaces the Company's Revolving Credit Agreements
that were in existence at year end. Proceeds of $14,880,000 were used to
pay off borrowings under an existing Revolving Credit Agreement with the
Company's principal lending bank. At June 25, 1995, no borrowings
under this credit agreement were outstanding. This agreement would have
expired on May 1, 1996 and contained certain restrictive covenants which,
among other things, required maintenance of specified minimum financial
ratios including debt to capitalization, interest coverage and tangible
net worth.
On June 29, 1995, the Company entered into an amended and restated $60
million revolving Credit Agreement which replaces the agreement discussed
above. As of June 25, 1995, there were no borrowings outstanding. This
Credit Agreement will expire on June 1, 1998 and contains certain
restrictive covenants which, among other things, requires maintenance of
specified minimum financial ratios including debt to capitalization,
interest coverage and current ratio. In addition, this Credit Agreement
limits the Company's ability to pay cash dividends.
10. CONTINGENCIES
The Company, together with two of its senior officers, are defendants in
an action entitled ADT, Inc. and Actron AG v. Checkpoint Systems, Inc. and
Albert E. Wolf and Kevin P. Dowd (D.C.N.J.#95-730) which was filed on
February 9, 1995.
In this action, Actron AG, one of the Company's principal European
competitors, alleges that the Company, in violation of certain common laws
and contractual obligations (1) unlawfully employed in Europe three former
employees of Actron who allegedly are in possession of, and have disclosed
to the Company, certain of Actron's confidential information, (2) has
attempted to employ in Europe certain other of Actron's current
employees,(3) has interfered with certain contractual relationships
between Actron, its former employees, and the supplier of Actron's
disposable EAS tags and (4) has, in allegedly engaging in the activities
complained of, committed acts of unfair competition. A hearing was held
in late July, 1995 on Actron's Motion for a Preliminary Injunction on
certain aspects of the matter. The Court has not yet made a determination
on such motion. The Company intends to defend itself vigorously. While
the outcome of litigation can never be predicted with certainty the
Company does not anticipate that its ultimate outcome will have a material
effect on its operations or financial condition.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
10. CONTINGENCIES (continued)
The Company, along with several officers and a director, has been named as
a defendant in two actions entitled Milton Cohen, et al v. Checkpoint
Systems, Inc., et al USDC Case No. 95CV1042 (JHR) filed March 9, 1995 and
Aron and Lisa Derman, et al v. Checkpoint Systems, Inc., et al USDC Case
No. 95CV1046 (JEI) filed March 10, 1995, both of which were filed in the
United States District Court in New Jersey. The complaints, which are
substantially identical, seek class certification and allege generally
that the defendants participated in a course of conduct to conceal adverse
material information about the operating results and future business
prospects of the Company as a result of which the Company's stock price
was artificially inflated during the period October 21, 1994 through March
7, 1995. Plaintiff alleges that the conduct set forth in the preceding
sentence was in violation of certain federal securities laws. The Company
believes that the plaintiffs' allegations are entirely without merit and
intends to defend itself vigorously.
11. EQUITY OFFERING
The Company completed the sale of approximately 3.1 million shares of
Common Stock during the second quarter of this year pursuant to an
underwritten public offering. The net proceeds received by the Company
from this offering were approximately $54.7 million. Of these proceeds,
$25 million was used to reduce the amount outstanding under the Company's
revolving credit line. The balance of the proceeds is expected to be used
for general corporate purposes including (i) funding strategic
acquisitions or start-up opportunities, and (ii) funding the Company's
leasing programs.
12. PATENT DEFENSE COSTS
During the second quarter of 1995 the Company was informed that
the Appeals Court had denied the Company's appeal relating to the
adverse International Trade Commission ("ITC") ruling of March
10, 1994 involving certain domestic patents. The Company has
capitalized approximately $1.9 million in patent defense costs
which have been included in Intangibles since the end of fiscal
1993. The Company is the exclusive licensee of the patents and
related technology which are held by Arthur D. Little ("ADL") for
which the Company has made, and continues to make, royalty
payments. Management believes with the advice of counsel that
certain provisions which are contained in the agreement between
the two companies gives the Company the right to recover these
legal defense costs and management intends to pursue the
Company's rights under the licensing agreement. Accordingly,
these costs remain deferred on the Company's balance sheet as of
June 25, 1995.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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Second Quarter 1995 Compared to Second Quarter 1994
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Overview
During the second quarter of 1995 revenues increased by
approximately $21.0 million (or 73.6%) over the prior year's
second quarter. During the second quarter gross margins in the
Company's base operations (excluding Alarmex) approximated those
obtained in 1994 as a percentage of sales. When combined with
the increase in revenues this resulted in a significant increase
in gross profit dollars from that obtained in last year's second
quarter. Including the Alarmex operations, cost of revenues
increased by 3.2% (from 52.7% to 55.9%). Selling, general and
administrative ("SG&A") expenses increased $4.6 million but
declined as a percentage of revenues by 8.5% (from 41.7% to
33.2%). Income from operations increased $3.8 million (from $1.6
million to $5.4 million). Net earnings for the quarter increased
by $2.3 million (from $1.1 million to $3.4 million) resulting in
earnings per share of $.25 for the quarter versus $.10 achieved
in the prior year's second quarter.
Net Revenues
Net revenues increased approximately $21.0 million (or 73.6%)
over the second quarter of 1994 (from $28.7 million to $49.7
million). Domestic and international net revenues accounted for
approximately 62.3% and 37.7%, respectively, of total net
revenues compared to 58.3% and 41.7% for last year's comparable
quarter. Domestic retail EAS net revenues increased $5.2 million
(or 37.8%) primarily as a result of increased unit sales
resulting from several chain wide installations. International
EAS net revenues increased $6.8 million (or 57.0%) primarily as a
result of: higher unit sales volume generated by the Company's
operations in Europe ($5.2 million) including sales to a major
customer in Spain ($2.6 million); and increased sales by the
Company's subsidiaries in Canada, Mexico, Argentina and Australia
($1.3 million). Sales contributed by the Company's Alarmex
subsidiary which was acquired during the first quarter of 1995
also contributed positively to the increase in revenues by $8.7
million. The Company's Access Control product line had sales
growth of $.4 million or 27.6% (from $1.5 million to $1.9
million) compared to the prior year's second quarter as a result
of increased sales to two primary customers.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
---------------------
Second Quarter 1995 Compared to Second Quarter 1994
---------------------------------------------------
Cost of Revenues
Cost of revenues increased approximately $12.7 million (or 84.1%)
over the second quarter of 1994 (from $15.1 million to $27.8
million). As a percentage of net revenues, cost of revenues
increased 3.2% (from 52.7% to 55.9%) compared to the prior year's
second quarter. This increase was primarily due to lower gross
margins generally associated with the Alarmex products. Cost of
revenues related to the Company's traditional EAS product lines
increased by .8% (from 52.7% to 53.5%) primarily resulting from
volume pricing to significant customers which are implementing
EAS systems chain wide.
Selling, General and Administrative Expenses
SG&A expenses increased $4.6 million (or 38.5%) over the second
quarter of 1994 (from $11.9 million to $16.5 million). As a
percentage of net revenues, however, SG&A expenses decreased by
8.5% (from 41.7% to 33.2%). The higher expenses (in dollars) were
due to an approximately $3.1 million increase in expenditures
supporting the Company's EAS business and approximately $1.5
million of SG&A expenses related to the Alarmex operations
including amortization of goodwill.
Interest Expense
Interest expense increased by $.4 million over the second quarter
of 1994 (from $.6 million to $1.0 million). This increase is
primarily the result of interest on the issuance of a $15 million
note in connection with the Alarmex acquisition completed during
the first quarter of 1995.
Income Taxes
The effective tax rate of 30.0% is higher than the effective tax
rate used in last year's second quarter of 24.9%. This is
primarily due to (i) higher taxable income attributable to
foreign jurisdictions where tax rates are marginally higher than
the U.S. and (ii) a marginally higher tax rate on the earnings
generated by the Company's Alarmex subsidiary versus the
Company's domestic EAS operations.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
---------------------
Second Quarter 1995 Compared to Second Quarter 1994
--------------------------------------------------
Net Earnings
Net earnings were $3.4 million or $.25 per share versus $1.1
million or $.10 per share for the second quarter of 1994. The
number of weighted average number of common and common equivalent
shares used in the earnings per share computation for the current
quarter has increased substantially compared to the prior year
(from 10.7 million to 13.6 million) primarily from: Company
shares issued as part of the Alarmex acquisition (200,717); and
shares issued during the quarter in connection with the Company's
recent equity offering (3,086,600) which is further discussed in
"Liquidity and Capital Resources".
Exposure To International Operations
Approximately 71% of the Company's international sales during the
second quarter of 1995 were made in local currencies. Sales
denominated in currencies other than U.S. dollars increased the
Company's potential exposure to currency fluctuations which can
affect results. For the second quarter of 1995, currency
exchange gains amounted to $.1 million compared to gains of $.2
million for the comparable period in the prior year.
United States International Trade Commission Ruling
During the second quarter of 1995 the Company was informed that
the Appeals Court had denied the Company's appeal relating to the
adverse International Trade Commission ("ITC") ruling of March
10, 1994 involving certain domestic patents. The Company has
capitalized approximately $1.9 million in patent defense costs
which have been included in Intangibles since the end of fiscal
1993. The Company is the exclusive licensee of the patents and
related technology which are held by Arthur D. Little ("ADL") for
which the Company has made, and continues to make, royalty
payments. Management believes with the advice of counsel that
certain provisions which are contained in the agreement between
the two companies gives the Company the right to recover these
legal defense costs and management intends to pursue the
Company's rights under the licensing agreement. Accordingly,
these costs remain deferred on the Company's balance sheet as of
June 25, 1995.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
---------------------
First Half 1995 Compared to First Half 1994
--------------------------------------------------
Overview
During the first half of 1995 revenues increased by approximately
$32.2 million (or 58.7%) over the prior year's first half. During
the first half gross margins in the Company's base operations
(excluding the Alarmex acquisition) increased by approximately
.3% which combined with the increase in revenues resulted in a
significant increase in gross profit from that obtained in last
year's first half. Including the Alarmex operations, cost of
revenues increased by 3.3% (from 53.0% to 56.3%). SG&A expenses
increased $8.2 million but declined as a percentage of revenues
by 6.0% (from 41.8% to 35.8%). Income from operations increased
$4.0 million (from $2.9 million to $6.9 million). Net earnings
for the first half increased by $2.0 million (from $1.6 million
to $3.6 million) resulting in earnings per share of $.29 for the
quarter versus $.15 achieved in the prior year's first half.
Net Revenues
Net revenues increased approximately $32.2 million (or 58.7%)
over the first half of 1994 (from $54.9 million to $87.1
million). Domestic and international net revenues accounted for
approximately 62.6% and 37.4%, respectively, of total net
revenues compared to 59.7% and 40.3% for last year's first half.
Domestic retail EAS net revenues increased $7.1 million (or
25.9%) primarily as a result of increased unit sales resulting
from several chain wide installations. International EAS net
revenues increased $10.4 million (or 47.2%) primarily as a result
of: higher unit sales volume generated by the Company's
operations in Europe ($8.0 million) including sales to a major
customer in Spain ($4.1 million); and increased sales by the
Company's subsidiaries in Canada, Mexico, Argentina and Australia
($2.1 million). Sales contributed by the Company's Alarmex
subsidiary which was acquired on February 1, 1995 also
contributed positively to the increase in revenues by $14.2
million. The Company's Access Control product line had sales
growth of $.8 million or 29.1% (from $2.7 million to $3.4
million) compared to the prior year's first half as a result of
increased sales to two primary customers.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
---------------------
First Half 1995 Compared to First Half 1994
-------------------------------------------
Cost of Revenues
Cost of revenues increased approximately $20.0 million (or 68.8%)
over the first half of 1994 (from $29.1 million to $49.1
million). As a percentage of net revenues, cost of revenues
increased 3.3% (from 53.0% to 56.3%) compared to the prior year's
first half. This increase was primarily due to lower gross
margins generally associated with the Alarmex products. Cost of
revenues related to the Company's traditional EAS product lines
decreased by .3% (from 47.0% to 46.7%) primarily resulting from
lower production costs due to higher manufacturing volumes and
increased efficiencies offset partially by volume pricing to
significant customers which are implementing EAS systems chain
wide.
Selling, General and Administrative Expenses
SG&A expenses increased $8.2 million (or 35.8%) over the first
half of 1994 (from $23.0 million to $31.2 million). As a
percentage of net revenues, however, SG&A expenses decreased by
6.0% (from 41.8% to 35.8%). The higher expenses (in dollars) were
due to an approximately $5.9 million increase in expenditures
supporting the Company's EAS business and approximately $2.3
million of SG&A expenses related to the Alarmex operations
including amortization of goodwill.
Interest Expense
Interest expense increased by $1.0 million over the first half of
1994 (from $1.0 million to $2.0 million). This increase is
primarily the result of higher outstanding loan balances during
the first half compared to the prior year including interest on
the issuance of a $15 million note in connection with the Alarmex
acquisition (representing $.6 million of interest) which occurred
during the first quarter of 1995.
Income Taxes
The effective tax rate of 30.0% is higher than the effective tax
rate used in last year's first half of 25.0%. This is primarily
due to (i) higher taxable income attributable to foreign
jurisdictions where tax rates are marginally higher than the U.S.
and (ii) a marginally higher tax rate on the earnings generated
by the Company's Alarmex subsidiary versus the Company's domestic
EAS operations.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
---------------------
First Half 1995 Compared to First Half 1994
-------------------------------------------
Net Earnings
Net earnings were $3.6 million or $.29 per share versus $1.6
million or $.15 per share for the first half of 1994. The
increase in the number of shares used in the earnings per share
computation was discussed in the second quarter 1995 compared to
second quarter 1994 results.
Exposure To International Operations
Approximately 72% of the Company's international sales (27% of
total revenues) during the first half of 1995 were made in local
currencies. Sales denominated in currencies other than U.S.
dollars increased the Company's potential exposure to currency
fluctuations which can affect results. For the first half of
1995, currency exchange losses amounted to $.2 million compared
to a small loss of $7,000 for the comparable period in the prior
year. The primary increase in the currency exchange losses was
the result of the continued devaluation of the Mexican peso
through the first quarter of the current year. As a result of
the peso devaluation and continued economic difficulties in
Mexico, the Company's operations in Mexico could continue to be
negatively impacted during the balance of 1995; however any such
impact is not expected to materially affect the Company's
consolidated results for the remainder of the fiscal year.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's liquidity needs have related to, and are expected
to continue to relate to, capital investments, acquisitions and
working capital requirements. The Company has met its liquidity
needs over the last three years primarily through funds provided
by long-term borrowings and in fiscal 1995, through the issuance
of common stock in an underwritten public offering. The Company
believes that cash provided from operating activities and funding
available under its current credit agreements, together with the
net proceeds generated from the sale of shares of the Company's
Common Stock (discussed below), will be adequate for its
presently foreseeable working capital and capital investment
requirements.
The Company's operating activities consumed approximately $4.8
million during the first half of 1995 compared to $8.1 million in
the prior year's first half. This use of cash was primarily the
result of (i) an increase in finished goods inventories in order
to place equipment at customer's locations under operating lease
agreements and to meet anticipated product demand, and (ii) an
increase in accounts receivable levels related to greater sales
volumes.
During the first half of 1995 the Company also completed a
private placement of debt totaling $15 million. A significant
portion of the proceeds, approximately $13 million, was used for
the acquisition of Alarmex (see Note 7 of the Notes to
Consolidated Financial Statements) and the repayment of existing
debt owed by Alarmex at the time of acquisition. The balance of
the proceeds, approximately $2 million, was used for general
corporate purposes. Subsequent to the second quarter, the
Company entered into an amended and restated $60 million
revolving credit agreement with a group of banks to replace the
existing $25 million in revolving credit indebtedness which had
been established during the first quarter of 1995. This amended
and restated agreement is a three year agreement which expires on
June 1, 1998 (see Note 9 of the Notes to Consolidated Financial
Statements).
The Company also completed the sale of approximately 3.1 million
shares of Common Stock during the second quarter of this year
pursuant to an underwritten public offering. The net proceeds
received by the Company from this offering approximated $54.7
million. Of these proceeds, $25 million was used to reduce in its
entirety the amount outstanding under the Company's revolving
credit line. The balance of the proceeds are expected to be used
for general corporate purposes including (i) funding strategic
acquisitions or start-up opportunities, and (ii) funding the
Company's leasing programs.
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
-------------------------------------------
The Company's capital expenditures during the first half totaled
$5.8 million compared to $2.4 million during the first half of
1994. The Company expects that for the full year investments in
property, plant and equipment will approximate $9.0 million.
These capital expenditures will generally be used for expanding,
improving and maintaining plant efficiency at the Company's
various production facilities located in the Caribbean. As part
of its continuing strategy, the Company is exploring strategic
acquisitions in the following areas: international direct
distribution, a second source of manufacturing capacity and
product line diversification within the Company's core
businesses. In order to consummate any one or more particular
acquisitions, the Company may require additional debt or equity
financing.
The Company exports products for international sales to its
foreign subsidiaries. The subsidiaries, in turn, sell these
products to customers in their respective geographic areas of
operation, generally in local currencies. This method of sale
and resale gives rise to the risk of gains or losses as a result
of currency exchange rate fluctuations.
In order to reduce the Company's exposure resulting from currency
fluctuations the Company has been purchasing currency exchange
forward contracts on a regular basis. These contracts guarantee
a predetermined exchange rate at the time the contract is
purchased. This allows the Company to shift the risk, whether
positive or negative, of currency fluctuations from the date of
the contract to a third party. As of June 25, 1995 the Company
had currency exchange forward contracts totaling approximately
$12.6 million. The contracts are in the various local currencies
covering primarily the Company's six Western European operations
along with the Company's Canadian operations. The Company's
operations in Argentina, Mexico and Australia were not covered by
currency exchange forward contracts at June 25, 1995. However,
management is evaluating a strategy to minimize the Company's
existing foreign exchange exposure in Mexico and Argentina.
In addition, the Company is evaluating the use of currency
options in order to reduce the impact that exchange rate
fluctuations have on the Company's gross margins for sales made
by the Company's international operations. The combination of
forward exchange contracts and currency options could limit the
Company's risks associated with significant exchange rate
fluctuations.
The Company has never paid a cash dividend and has no plans to do
so in the foreseeable future. Certain covenants in the Company's
debt instruments prohibit the amounts available for cash
dividends.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
ITC Proceedings
---------------
On March 10, 1993, the United States International Trade Commission
("Commission") instituted an investigation of a complaint filed by the
Company under Section 337 of the Tariff Act of 1930. The complaint, as
amended, alleged that six respondents imported, sold for importation, or
sold in the United States after importation certain anti-theft
deactivatable resonant tags and components thereof that infringed certain
U.S. Letters Patents of which the Company is the exclusive licensee. The
Commission's notice of investigation named six respondents, each of whom
was alleged to have committed one or more unfair acts in the importation
or sale of components or finished tags that infringe the asserted patent
claims. Those respondents are: Actron AG; Tokai Denshi Co. Ltd.; ADT,
Limited; All Tag Security AG; Toyo Aluminum Ltd.; and Custom Security
Industries, Inc.
On March 10, 1994 the United States International Trade Commission issued
a Notice of Commission Determination Not to Review an Initial
Determination Finding No Violation of Section 337 of the Tariff Act of
1930. During the second quarter of 1995 the Company was informed that the
Appeals Court had denied the Company's appeal relating to the adverse
International Trade Commission ("ITC") ruling of March 10, 1994 involving
certain domestic patents. The Company has capitalized approximately $1.9
million in patent defense costs which have been included in Intangibles
since the end of fiscal 1993. The Company is the exclusive licensee of the
patents and related technology which are held by Arthur D. Little ("ADL")
for which the Company has made, and continues to make, royalty payments.
Management believes that certain provisions contained in the agreement
between the two companies gives the Company the right to recover these
legal defense costs and management intends to pursue the Company's rights
under the licensing agreement. Accordingly, these costs remain deferred
on the Company's balance sheet as of June 25, 1995.
Actron AG Litigation
--------------------
The Company, together with two of its senior officers, are defendants in
an action entitled ADT, Inc. and Actron AG v. Checkpoint Systems, Inc. and
Albert E. Wolf and Kevin P. Dowd (D.C.N.J.#95-730) which was filed on
February 9, 1995.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS (continued)
Actron AG Litigation (continued)
-------------------------------
In this action, Actron AG, one of the Company's principal European
competitors, alleges that the Company, in violation of certain common laws
and contractual obligations (1) unlawfully employed in Europe three former
employees of Actron who allegedly are in possession of, and have disclosed
to the Company, certain of Actron's confidential information, (2) has
attempted to employ in Europe certain other of Actron's current
employees,(3) has interfered with certain contractual relationships
between Actron, its former employees, and the supplier of Actron's
disposable EAS tags and (4) has, in allegedly engaging in the activities
complained of, committed acts of unfair competition. A hearing was held
in late July, 1995 on Actron's Motion for a Preliminary Injunction on
certain aspects of the matter. The Court has not yet made a determination
on such motion. The Company intends to defend itself vigorously. While
the outcome of litigation can never be predicted with certainty the
Company does not anticipate that its ultimate outcome will have a material
effect on its operations or financial condition.
On March 2, 1995, as a result of a private complaint filed in Switzerland
by Actron AG against three of its former employees who are now employees
of the Company's Swiss subsidiary, Swiss authorities questioned two of
these employees regarding alleged improper possession and/or use of
confidential information and proprietary data allegedly belonging to
Actron. In addition, Swiss authorities took possession of certain files
from the homes of the employees questioned and from the office of the
Company's Swiss subsidiary. The Company has not been advised that it is
the subject of any legal proceeding in Switzerland. The Company believes
that Actron's private complaint (and the resultant actions of the Swiss
authorities) are directly related to the Company's litigation with Actron
as described above.
Cohen Litigation
----------------
The Company, along with several officers and a director, has been named as
a defendant in two actions entitled Milton Cohen, et al v. Checkpoint
Systems, Inc., et al USDC Case No. 95CV1042 (JHR) filed March 9, 1995 and
Aron and Lisa Derman, et al v. Checkpoint Systems, Inc., et al USDC Case
No. 95CV1046 (JEI) filed March 10, 1995, both of which were filed in the
United States District Court in New Jersey. The complaints, which are
substantially identical, seek class certification and allege generally
that the defendants participated in a course of conduct to conceal adverse
material information about the operating results and future business
prospects of the Company as a result of which the Company's stock price
was artificially inflated during the period October 21, 1994 through March
7, 1995. Plaintiff alleges that the conduct set forth in the preceding
sentence was in violation of certain federal securities laws. The Company
believes that the plaintiffs' allegations are entirely without merit and
intends to defend itself vigorously.
Item 5. OTHER INFORMATION
On June 29, 1995, the Company entered into an amended and restated Credit
Agreement which replaces the credit agreement that was entered into on
February 15, 1995. Under the new Credit Agreement, a group of banks have
agreed to provide up to $60 million of credit to the Company on an
unsecured basis at varying rates of interest depending on the Company's
election. As of June 25, 1995 and as of the date of this report there
were no borrowings outstanding under either of these agreements. This new
agreement will expire on June 1, 1998. This Credit Agreement contains
certain restrictive covenants which, among other things, requires
maintenance of specified minimum financial ratios including debt to
capitalization, interest coverage and current ratio. In addition, this
Credit Agreement limits the Company's ability to pay cash dividends.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10 (i) Second Amended and Restated Loan and Agency Agreement dated as of
June 29, 1995
(b) No reports on Form 8-K have been filed during the second quarter of
1995.
SIGNATURE
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.
CHECKPOINT SYSTEMS, INC.
August 8, 1995 Steven G. Selfridge
Senior Vice President - Operations,
Chief Financial Officer
August 8, 1995 Mitchell T. Codkind
Vice President, Corporate Controller
and Chief Accounting Officer
INDEX TO EXHIBITS
EXHIBIT
-------
Exhibit 10(i) Second Amended and Restated Loan and Agency
Agreement