FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
For the quarter ended June 29, 1997
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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 July 28, 1997 there were 33,949,964 shares of the Common Stock
outstanding.
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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 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
June 29, Dec. 29,
1997 1996
--------- --------
ASSETS (Unaudited)
------ (Thousands)
CURRENT ASSETS
Cash and cash equivalents $132,791 $185,836
Accounts receivable, net of allowances
of $5,301,000 and $4,282,000 117,309 96,891
Inventories 60,682 53,073
Other current assets 15,635 9,608
Deferred income taxes 2,633 2,736
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Total current assets 329,050 348,144
REVENUE EQUIPMENT ON OPERATING LEASE, net 21,732 18,033
PROPERTY, PLANT AND EQUIPMENT, net 49,318 41,178
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED 71,500 71,622
INTANGIBLES 14,736 15,572
LONG TERM CUSTOMER CONTRACTS 22,317 20,593
OTHER ASSETS 10,518 6,511
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TOTAL ASSETS $519,171 $521,653
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 16,390 $ 12,677
Accrued compensation and related taxes 7,721 8,667
Income taxes 8,561 7,920
Unearned revenues 12,115 10,264
Other current liabilities 16,585 14,702
Short-term borrowings and current portion
of long-term debt 8,372 8,161
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Total current liabilities 69,744 62,391
LONG-TERM DEBT, LESS CURRENT MATURITIES 32,676 33,356
5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES
WITH A SCHEDULED MATURITY IN 2005 120,000 120,000
DEFERRED INCOME TAXES 5,166 5,112
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
36,240,528 and 36,134,622 3,624 3,613
Additional capital 231,356 230,580
Retained earnings 85,946 78,645
Common stock in treasury, at cost,
2,297,500 and 1,598,000 (14,074) (5,664)
Foreign currency adjustments (15,267) (6,380)
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TOTAL SHAREHOLDERS' EQUITY 291,585 300,794
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $519,171 $521,653
======= =======
See accompanying notes to Consolidated Financial Statements.
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 Weeks) Ended Six Months (26 Weeks) Ended
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June 29, June 30, June 29, June 30,
1997 1996 1997 1996
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(Thousands, except per share data)
Net Revenues $81,036 $74,792 $149,214 $141,786
Cost of Revenues 46,497 42,459 86,638 82,015
------ ------ -------- --------
Gross Profit 34,539 32,333 62,576 59,771
Selling, General
and Administrative
Expenses 27,649 22,699 54,346 44,958
------ ------ -------- --------
Operating Income 6,890 9,634 8,230 14,813
Interest Income 2,362 1,744 5,193 2,763
Interest Expense 2,304 2,402 4,753 4,745
Other Income, Net 275 956 2,163 634
----- ------ -------- --------
Earnings Before
Income Taxes 7,223 9,132 10,833 13,465
Income Taxes 2,357 2,922 3,532 4,309
------ ------ -------- --------
Net Earnings $ 4,866 $ 6,210 $ 7,301 $ 9,156
====== ====== ======== ========
Net Earnings Per
Share $ .14 $ .19 $ .21 $ .29
====== ====== ======== ========
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Six Months(26 Weeks) Ended June 29, 1997
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Foreign
Common Additional Retained Treasury Currency
Stock Capital Earnings Stock Adjust. Total
------- ---------- -------- -------- -------- -----
(Thousands)
Balance,
December 29,
1996 $ 3,613 $230,580 $78,645 $(5,664) $(6,380) $300,794
Net Earnings 7,301 7,301
Exercise of Stock
Options 11 776 787
Purchase of
Treasury Stock (8,410) (8,410)
Foreign Currency
Adjustments (8,887) (8,887)
------ ------- ------ ------- ------- --------
Balance at
June 29, 1997 $ 3,624 $231,356 $85,946 $(14,074) $(15,267) $291,585
====== ======= ====== ====== ======= ========
See accompanying notes to Consolidated Financial Statements.
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months(26 Weeks) Ended
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June 29, June 30,
1997 1996
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(Thousands)
Cash inflow (outflow) from operating activities:
Net earnings $ 7,301 $9,156
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of rented equipment sold 710 706
Revenue Equipment placed under Operating Lease (8,439) (7,412)
Long-term customer contracts (5,439) (2,933)
Depreciation and amortization 9,630 8,124
Provision for losses on accounts receivable 692 963
(Increase) decrease in current assets:
Accounts receivable (24,901) (10,299)
Inventories (8,912) 5,073
Other current assets (6,624) (3,180)
Increase (decrease) in current liabilities:
Accounts payable 4,224 977
Accrued compensation and related taxes (679) 241
Income taxes 266 (831)
Unearned revenues 2,159 900
Other current liabilities 1,626 (9,075)
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Net cash used by operating activities (28,386) (7,590)
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Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (12,039) (5,447)
Acquisition, net of cash acquired (1,820) (1,409)
Other investing activities (2,706) (3,331)
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Net cash used by investing activities (16,565) (10,187)
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Cash inflow (outflow) from financing activities:
Proceeds from stock options 787 6,304
Proceeds from sale of common stock - 136,027
Proceeds from debt 2,947 -
Payment of debt (3,418) (377)
Purchase of Treasury Stock (8,410) -
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Net cash provided (used) by
financing activities (8,094) 141,954
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Net increase (decrease) in cash and cash
equivalents (53,045) 124,177
Cash and cash equivalents:
Beginning of period 185,836 77,456
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End of period $132,791 $201,633
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See accompanying notes to consolidated financial statements.
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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 29, 1996 for the most recent disclosure of the
Company's accounting policies.
The consolidated financial statements include all adjustments, consisting
only of normal recurring accruals, necessary to present fairly the Company's
financial position at June 29, 1997 and December 29, 1996 and its results of
operations and changes in cash flows for the twenty-six week periods ended
June 29, 1997 and June 30, 1996.
2. INVENTORIES
June 29, December 29,
1997 1996
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(Thousands)
Raw materials $12,296 $10,912
Work in process 1,256 1,106
Finished goods 47,130 41,055
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$60,682 $53,073
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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 (as amended under the
Small Business Job Protection Act of 1996) and substantially exempt from
Puerto Rico income taxes. Under current law, this exemption from Federal
income tax will remain in effect through 2001, will be subject to certain
limits during the years 2002 through 2005, and will be eliminated
thereafter. 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.
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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 29, 1997 and June 30, 1996 were
34,923,000 and 35,516,000 (1997) and 33,239,000 and 32,098,000 (1996),
respectively.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the thirteen and twenty-six week period ended June 29,
1997 and June 30, 1996, respectively, included interest payments of
$3,960,000 and $4,836,000 (1997) and $3,900,140 and $4,738,000 (1996), and
income taxes paid of $3,380,000 and $3,876,000 (1997) and $1,767,000 and
$5,333,000 (1996).
6. LONG TERM CUSTOMER CONTRACTS
Long term customer contracts include unbilled receivables generated
primarily from the leasing of the Company s EAS equipment to retailers under
long-term sales-type leasing arrangements(referred to by management as
Comprehensive Tag Program TM). The duration of these programs typically
range from three to five years.
7. MERGERS AND ACQUISITIONS
On March 11, 1997 the Company had announced that it had entered into a
definitive merger agreement with Ultrak, Inc. On April 3, 1997 the Company
announced that the merger agreement with Ultrak had been terminated by
mutual consent. Costs of $1.5 million associated with this transaction were
recorded in the first quarter of 1997 in Selling, General and Administrative
expenses. In addition, on January 31, 1997 the Company completed the
acquisition of 2M Security ApS (2M) for approximately $2.3 million. 2M had
been the Company's exclusive distributor for retail security products
throughout Denmark since 1992.
On July 2, 1997, subsequent to the end of the second quarter, the Company
acquired the assets of Check-Out Security Systems for approximately $1.2
million. Check-Out Security, located in Denmark, is a provider of CCTV
products, installation and service.
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.
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The Company has purchased certain foreign exchange forward and option
contracts in order to hedge anticipated rate fluctuations in Europe, Canada
and Australia. Transaction gains or losses resulting from these contracts
are recognized over the contract period. The Company uses the fair value
method of accounting, recording realized and unrealized gains and losses on
these contracts quarterly. These gains and losses are included in Other
income, net on the Company s consolidated statements of operations.
9. STOCK REPURCHASE
On April 8, 1997 the Board of Directors approved the purchase of up to 10%
or approximately 3.5 million shares of the Company's outstanding common
stock. The stock will be repurchased in the open market or in other
transactions pursuant to SEC Rule 10b-18. As of the end of the second
quarter the Company had purchased 699,500 shares of its common stock for a
total cash outlay of approximately $8.4 million. The timing of additional
repurchases of common shares will depend on a variety of factors including
price. Based on a current stock price in the range of $14 to $16 per share
these additional repurchases would represent a cash outlay of between $39.2
to $44.8 million.
10. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In March 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounts Standards(SFAS)No.128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per
share(EPS) and applies to entities with publicly held common stock or
potential common stock. In addition, this statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. This statement requires restatement of all
prior-period EPS data presented.
Although the Company is not permitted to adopt this statement in an earlier
period, pro-forma disclosures as if the Company had adopted the requirements
beginning in 1996 are presented below:
Quarter(13 Weeks) Ended Six Months(26 Weeks) Ended
----------------------- --------------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
--------- --------- --------- ---------
Basic:
Basic earnings
per share $ .14 $ .20 $ .21 $ .31
Dilutive:
Dilutive earnings
per share $ .14 $ .18 $ .21 $ .29
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, for fiscal years beginning after December 15, 1997. The
provisions of SFAS No. 130 establish standards for reporting and display of
comprehensive income and its components in the financial statements. This
statement requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
the financial statements and displayed with the same prominence as the other
financial statements. The provisions of SFAS No. 131 establish standards
for the way that enterprises report information about operating segments in
annual financial statements and require that selected information about
operating segments in interim financial statements be reported. It also
establishes standards for related disclosure about products and services,
geographic areas, and major customers. The Company is currently reviewing
these new standards of disclosure for adoption in 1998.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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Second Quarter 1997 Compared to Second Quarter 1996
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Overview
During the second quarter of 1997 revenues increased by approximately
$6.2 million (or 8.4%) over the second quarter of 1996. The increase
in revenues was due primarily from increased sales of the Company's EAS
product lines within both the domestic retail and international markets
combined with an increase in CCTV products internationally. Cost of
revenues increased by less than 1% from last year s second quarter as a
percentage of sales (from 56.8% to 57.4%). Selling, general and
administrative (SG&A) expenses increased $5.0 million and increased as a
percentage of revenues by 3.8% (from 30.3% to 34.1%). Income from
operations decreased $2.7 million (from $9.6 million to $6.9 million). Net
earnings for the second quarter of 1997 decreased $1.3 million (from $6.2
million to $4.9 million) resulting in earnings per share of $.14 for the
second quarter of 1997 versus $.19 achieved in last year s second quarter.
Net Revenues
Net revenues for the second quarter of 1997 increased $6.2 million
million (or 8.4%) over the second quarter of 1996 (from $74.8 million to
$81.0 million). Domestic and international net revenues accounted for
approximately 52.4% and 47.6%, respectively, of total net revenues compared
to 53.2% and 46.8% for last year's similar quarter. Domestic retail
Electronic Article Surveillance (EAS) net revenues increased by $1.9 million
(or 6.9%). International EAS net revenues increased $2.2 million (or 6.2%).
Unit volume for each of the four EAS product lines grew at between 10 to 50%
which is a faster rate than the EAS revenue dollars as the Company continues
to receive significant new customer orders, albeit at lower selling prices.
Sales of the Company's Security Systems Group products and related CCTV
product lines increased $1.7 million or 15.2% (from $11.3 million to $13.0
million) over the prior year's quarter. The Company's Access Control product
line had sales growth of 16.5% (from $2.3 million to $2.7 million) compared
to the prior year's second quarter.
Cost of Revenues
Cost of revenues increased approximately $4.0 million (or 9.5%) over the
second quarter of 1996 (from $42.5 million to $46.5 million). As a
percentage of net revenues, cost of revenues increased .6% (from 56.8% to
57.4%). The increase in the Company s cost of sales is attributable to
increased sales to large national and international customers (primarily
within the supermarket industry) which enjoy volume discounting combined
with the impact of a strengthening of the U.S. dollar against the basket of
currencies in which the Company conducts its foreign sales resulting in
lower selling prices when converted to U.S. dollars offset partially by
reductions in the Company s unit product cost.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Second Quarter 1997 Compared to Second Quarter 1996
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Selling, General and Administrative Expenses
SG&A expenses increased $5.0 million (or 21.8%) over the second quarter of
1997 (from $22.7 million to $27.7 million). As a percentage of net revenues
SG&A expenses increased by 3.8% (from 30.3% to 34.1%). The higher expenses
(in dollars) were due to: (i) approximately $4.2 million increase in
selling, marketing and customer support costs to support existing and future
anticipated increases in revenues, and (ii) approximately $.8 million
increase in general and administrative costs.
Other Income and Expense
Other income and expense includes a foreign exchange gain for the second
quarter of 1997 totaling $.3 million versus a gain of $.2 in last year s
second quarter.
Interest Expense and Interest Income
Interest expense for the second quarter of 1997 remained constant at
approximately $2.3 million. Interest income for the second quarter of 1997
increased by $.7 million (from $1.7 million to $2.4 million) as a result of
the cash investment from the Company's equity offering completed during the
second quarter of 1996 which totaled approximately $136 million.
Income Taxes
The effective tax rate of 32.6% is slightly higher than the effective tax
rate during the second quarter of 1996 of 32.0%. This is primarily due to
higher taxable income attributable to foreign jurisdictions where tax rates
are marginally higher than the U.S. The Company anticipates an effective
tax rate approximating 33.0% for fiscal year 1997.
Net Earnings
Net earnings were $4.9 million or $.14 per share versus $6.2 million or $.19
per share for the prior year's second quarter.
Exposure To International Operations
Approximately 93% of the Company's international sales during the second
quarter of 1997 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. Management
cannot predict with any degree of certainty changes in currency exchange
rates and therefore, the future impact that it will have on its operations.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Half 1997 Compared to First Half 1996
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Overview
During the first half of 1997 revenues increased by approximately
$7.4 million (or 5.2%) over the first half of 1996. The increase
in revenues was due primarily from increased sales of the Company's CCTV
product lines within both the domestic retail and international markets,
increased service revenues from the Company s installed base of EAS systems
combined with increases in the sales of the Company s Electronic Access
Control product line. Cost of revenues increased by under 1% from last
year s first half as a percentage of sales (from 57.8% to 58.1%). Selling,
general and administrative (SG&A) expenses increased $9.4 million and
increased as a percentage of revenues by 4.7% (from 31.7% to 36.4%). Income
from operations decreased $6.6 million (from $14.8 million to $8.2 million).
Net earnings for the first half of 1997 decreased $1.9 million (from $9.2
million to $7.3 million) resulting in earnings per share of $.21 for the
first half of 1997 versus $.29 achieved in last year s first half.
Net Revenues
Net revenues for the first half of 1997 increased $7.4 million
million (or 5.2%) over the first half of 1996 (from $141.8 million to
$149.2 million). Domestic and international net revenues accounted for
approximately 50.4% and 49.6%, respectively, of total net revenues compared
to 49.2% and 50.8% for last year's first half. Domestic retail Electronic
Article Surveillance (EAS) net revenues increased by $1.6 million (or 3.5%).
International EAS net revenues were flat. Unit volume for each of the four
EAS product lines grew at between 5 to 31% which is at a faster rate than
the EAS revenue dollars as the Company continues to receive significant new
customer orders, albeit at lower selling prices. Sales of the Company's
Security Systems Group products and related CCTV product lines increased
$4.2 million or 23.1% (from $18.6 million to $22.8 million) over the prior
year's first half. The Company's Access Control product line had sales
growth of 31.3% (from $3.9 million to $5.1 million) compared to the prior
year's first half.
Cost of Revenues
Cost of revenues increased approximately $4.6 million (or 5.6%) over the
first half of 1996 (from $82.0 million to $86.6 million). As a percentage of
net revenues, cost of revenues increased .3% (from 57.8% to 58.1%). The
increase in the Company s cost of sales is attributable to increased sales
to large national and international customers (primarily within the
supermarket industry) which enjoy volume discounting combined with the
impact of a strengthening of the U.S. dollar against the basket of
currencies in which the Company conducts its foreign sales resulting in
lower selling prices when converted to U.S. dollars offset partially by
reductions in the Company s unit product cost.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Half 1997 Compared to First Half 1996
- --------------------------------------------------------------------
Selling, General and Administrative Expenses
SG&A expenses increased $9.4 million (or 20.9%) over the first half of
1997 (from $45.0 million to $54.4 million). As a percentage of net revenues
SG&A expenses increased by 4.7% (from 31.7% to 36.4%). The higher
expenses (in dollars) were due to: (i) approximately $6.1 million increase
in selling, marketing and customer support costs to support existing and
future anticipated increases in revenues, (ii) approximately $1.8 million
increase in general and administrative costs, and (iii) costs totaling $1.5
related to the terminated Ultrak merger (see footnote 8 to the Notes to
Financial Statements).
Other Income and Expense
Other income and expense includes: a payment of $1.3 million received from
Mitsubishi Materials Corporation for the establishment of a joint product
research and development project dedicated to developing radio frequency
intelligent tagging solutions for retail and library applications, a $1.0
payment received relating to the loss of business income caused by a fire at
the Company s warehouse facility in France and a foreign exchange loss for
the first half of 1997 totaling $.1 million.
Interest Expense and Interest Income
Interest expense for the first half of 1997 remained constant at
approximately $4.8 million compared to the same period last year. Interest
income for the first half of 1997 increased by $2.4 million (from $2.8
million to $5.2 million) as a result of the cash investment from the
Company's equity offering completed during the second quarter of 1996
which totaled approximately $136 million.
Income Taxes
The effective tax rate of 32.6% is slightly higher than the effective tax
rate during the first half of 1996 of 32.0%. This is primarily due to
higher taxable income attributable to foreign jurisdictions where tax rates
are marginally higher than the U.S. The Company anticipates an effective
tax rate approximating 33.0% for fiscal year 1997.
Net Earnings
Net earnings for the first half were $7.3 million or $.21 per share versus
$9.2 million or $.29 per share for the prior year's first half.
Exposure To International Operations
Approximately 90% of the Company's international sales during the first half
of 1997 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. Management cannot predict
with any degree of certainty changes in currency exchange rates and
therefore, the future impact that it will have on its operations.
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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 issuance
of convertible subordinated debt, as well as through two separate issuances
of Common Stock in underwritten public offerings.
The Company's operating activities during the first half of 1997 consumed
approximately $28.4 million compared to $7.6 million during the first half
of 1996. This use of cash was primarily the result of the following
activities: (i) an increase in accounts receivable resulting, in part, from
increased sales during the quarter, (ii) increases in inventory levels in
order to support the anticipated increase in product demand during the
second half of the year which is supported by the Company s backlog, and
(iii) an expansion of the Company s Comprehensive Tag Program TM which
provides equipment financing to retailers utilizing the Company s EAS
systems in exchange for a multi-year agreement to purchase disposable labels
(see below).
The Company s Comprehensive Tag Program (Comp Tag) is a financial
marketing/sales tool designed to remove capital investment costs as an
obstacle to the potential customer s decision to purchase an EAS system.
Through the program, Checkpoint internally finances the leasing of equipment
to retailers under long-term non-cancelable contracts, usually three to five
years. Customers pay a premium price for an agreed-upon minimum number of
tags shipped on a quarterly or other periodic basis. The comprehensive tag
price reflects the cost of hardware, disposable RF labels, installation and
interest (if applicable) amortized over the life of the contract.
Comp Tag agreements which meet all the necessary requirements for sales-type
leasing as defined under FAS 13 are recognized as a sale upon shipment of
the EAS hardware. If the terms and conditions as specified in the Comp Tag
agreement do not meet all the necessary requirements for sales-type lease
accounting, then the accounting requires operating lease treatment. The
cash flow impact is independent of the accounting principle used for the
income statement. In the majority of cases, Checkpoint is able to recover
equipment and installation costs between 18-24 months under the five-year
contract and within a shorter period of time for contracts which run three
or four years. The impact of the Comp Tag agreement is reflected on the
statement of cash flows under two captions: 1)Long-term customer contracts
of those meeting sales- type lease accounting; or 2)Revenue equipment placed
under operating lease. The balance sheet captions, which reflect the two
different financial accounting treatments, are Long-term Customer Contracts
for Comp Tag contracts under the sales-type lease accounting method and
Revenue Equipment on Operating Lease for operating leases (equipment and
installation costs). Previously, the amounts reflected for Long-term
Customer Contracts were included in Other Assets.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
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In summary, Checkpoint management has determined that the risks of the Comp
Tag Program (i.e. cash outlay, credit risk, equipment and tag monitoring
costs) are far outweighed by the acceleration of chain-wide installations,
which drive market share and faster acceptance of source tagging by
manufactures which, in turn, reduce the retailers costs of hand applying
labels, thereby further increasing the favorable impact to the retailer s
bottom line.
The Company's capital expenditures during the first half of 1997 totaled
$12.0 million compared to $5.4 million during the first half of 1996.
This increase is primarily due to the current plant expansion at the
Company s main manufacturing facility located in Ponce, Puerto Rico which is
expected to be operational at the end of the third quarter of 1997. The
Company expects to continue to make investments in property, plant and
equipment at levels higher than the last several years. These capital
expenditures will generally relate to expanding, improving and maintaining
plant efficiency at the Company's various production facilities located in
the Caribbean. For fiscal year 1997 the Company anticipates that its
capital expenditure requirements will approximate $20 million.
On April 8, 1997 the Board of Directors approved the purchase of up to 10%
or approximately 3.5 million shares of the Company s outstanding common
stock. The stock will be repurchased in the open market or in other
transactions pursuant to SEC Rule 10b-18. As of the end of the second
quarter the Company had purchased 699,500 shares of its common stock for a
total cash outlay of approximately $8.4 million. The timing of additional
repurchases of common shares will depend on a variety of factors including
price. Based on a current stock price in the range of $14 to $16 per share
this would represent an additional cash outlay of between $39.2 to $44.8
million.
Management believes that its anticipated cash needs for the foreseeable
future can be funded from cash and cash equivalents on hand and a currently
available and unused $60 million bank line of credit.
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 selectively 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 29, 1997 the Company had currency exchange forward contracts totaling
approximately $32.5 million. The contracts are in the various local
currencies covering primarily the Company's Western European operations
along with the Company's Australian and Canadian operations. The Company's
operations in Argentina, Mexico, Brazil and Japan were not covered by
currency exchange forward contracts at June 29, 1997.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
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The Company is considering increasing the amount of currencies covered by
forward exchange contracts during fiscal 1997. The Company also holds a
series of put options denominated in German marks which gives the Company
the right but not the obligation to convert German marks at a specified
exchange rate into U.S. dollars. The Company will continue to evaluate 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.
On July 2, 1997, subsequent to the end of the second quarter, the Company
acquired the assets of Check-Out Security Systems for approximately $1.2
million. Check-Out Security, located in Denmark, is a provider of CCTV
products, installation and service.
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
limit the amounts available for cash dividends.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On February 14, 1996, the United States Federal Trade Commission (FTC) began
an investigation of the retail security systems industry. The probe was
launched under the premise of anticompetitive practices within the industry
whereby certain retail-trade groups limited the autonomy of smaller
retailers by supporting specific security systems. The Company, along with
Sensormatic Electronics Corporations, Minnesota Mining and Manufacturing
Company, and other industry participants, received subpoenas requesting
certain documents and communications necessary for the investigation. The
Company does not believe that any legal or regulatory infraction will be
found on its part.
Item 2. CHANGES IN SECURITIES
As disclosed in the Company s 1996 Annual Report on Form 10-K, filed March
17, 1997, the Board of Directors of the Company, by action taken on March
10, 1997, (i) adopted a new shareholders rights plan pursuant to a written
agreement as of that date (1997 Plan) between the Company and American Stock
Transfer & Trust Company as rights agent, and (ii) terminated its existing
shareholders rights agreement which was dated as of December 15, 1988, (1988
Plan) and directed the redemption of the outstanding rights under the 1988
Plan at a price of $.005 per right. The redemption of the rights under the
1988 Plan was effected on April 8, 1997, by payment of $.005 per right to
all holders of the Company s common stock as of the close of business on
March 24, 1997.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Item 2. Changes in Securities (continued)
The rights under the 1997 Plan attached to the existing common shares as of
the close of business on March 24, 1997. No separate certificate
representing the new rights under the 1997 Plan are to be distributed until
the occurrence of certain triggering events as defined in the 1997 Plan.
The rights may be exercised by the holders at a price of $100.00 per share
of common stock, subject to adjustment. The terms of the rights are set
forth in the 1997 Plan. The 1997 Plan is attached as Exhibit 4.1 to the
Company s Annual Report on Form 10-K for the year ended December 29, 1996.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the second quarter of 1997.
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.
Jeffrey A. Reinhold August 8, 1997
Vice President - Finance,
Chief Financial Officer and Treasurer
Mitchell T. Codkind August 8, 1997
Vice President, Corporate Controller
and Chief Accounting Officer
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