FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
For the quarter ended March 28, 1999
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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
-- --
As of May 5, 1999, there were 30,131,884 shares 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 5
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
-2-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
March 28, Dec. 27,
1999 1998
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ASSETS (Unaudited)
(Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 45,260 $ 35,934
Accounts receivable, net of allowances
of $5,222,000 and $5,556,000 125,844 135,078
Inventories, net 71,473 78,625
Other current assets 12,406 10,748
Deferred income taxes 4,235 4,464
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Total current assets 259,218 264,849
REVENUE EQUIPMENT ON OPERATING LEASE, net 24,364 24,188
PROPERTY, PLANT AND EQUIPMENT, net 82,841 85,762
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, net 71,147 72,388
INTANGIBLES, net 11,024 10,917
OTHER ASSETS 44,079 49,559
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TOTAL ASSETS $492,673 $507,663
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and
current portion
of long-term debt $ 13,551 $ 10,453
Accounts payable 16,322 17,346
Accrued compensation and
related taxes 6,863 8,295
Income taxes 11,087 11,784
Unearned revenues 14,735 11,288
Other current liabilities 19,454 19,422
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Total current liabilities 82,012 78,588
LONG-TERM DEBT, LESS CURRENT MATURITIES 37,942 45,976
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
DEFERRED INCOME TAXES 721 712
MINORITY INTEREST 423 451
COMMITMENTS AND CONTINGENCIES - -
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
36,487,084 and 36,471,584 3,649 3,647
Additional capital 233,302 233,180
Retained earnings 105,950 104,558
Common stock in treasury, at cost,
6,359,200 shares (64,410) (64,410)
Foreign currency translation adjustment (26,916) (15,039)
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TOTAL SHAREHOLDERS' EQUITY 251,575 261,936
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $492,673 $507,663
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See accompanying notes to Consolidated Financial Statements.
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 Weeks) Ended
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March 28, March 29,
1999 1998
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(Thousands, except per share data)
Net Revenues $81,754 $79,857
Cost of Revenues 50,627 48,302
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Gross Profit 31,127 31,555
Selling, General
and Administrative
Expenses 27,305 28,639
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Income from operations 3,822 2,916
Interest Income 1,058 1,159
Interest Expense 2,283 2,421
Other Income (loss), net (633) 189
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Income Before
Income Taxes 1,964 1,843
Income Taxes 599 599
Minority Interest 27 29
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Net Earnings $ 1,392 $ 1,273
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Net Earnings Per Share
Basic $ 0.05 $ .04
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Diluted $ 0.05 $ .04
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See accompanying notes to Consolidated Financial Statements
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Three Months(13 Weeks) Ended March 28,1999
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Foreign
Currency
Addit- Translation
Common ional Retained Adjust- Treasury
Stock Capital Earnings ment Stock Total
------ ------- -------- ------ -------- -----
(Thousands)
Balance,
December 27, 1998 3,647 233,180 104,558 (15,039) (64,410) 261,936
Net earnings 1,392 1,392
Exercise of Stock
Options 2 122 124
Foreign currency
translation adjustment (11,877) (11,877)
------ -------- -------- --------- --------- --------
Balance
March 28,1999 $3,649 $233,302 $105,950 $(26,916) $(64,410) $251,575
====== ======== ======== ========= ========= ========
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months(13 Weeks) Ended
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March 28, March 29,
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(Thousands)
Net Earnings $ 1,392 $1,273
Foreign currency translation
adjustment, net of tax (11,877) 448
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Comprehensive (Loss) $(10,485) $1,721
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See accompanying notes to Consolidated Financial Statements.
-5-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months(13 Weeks) Ended
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March 28, March 29,
1999 1998
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(Thousands)
Cash inflow (outflow) from operating activities:
Net earnings $ 1,392 $ 1,273
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of rented equipment sold 256 22
Revenue Equipment placed under operating lease (3,732) (1,608)
Long-term customer contracts 3,860 (5,983)
Depreciation and amortization 6,143 6,528
Provision for losses on accounts receivable 443 385
(Increase) decrease in current assets:
Accounts receivable 3,985 13,572
Inventories 4,073 (5,883)
Other current assets (1,955) 925
Increase (decrease) in current liabilities:
Accounts payable (420) 1,399
Accrued compensation and related taxes (518) (1,205)
Income taxes (671) (2,247)
Unearned revenues 3,759 1,001
Other current liabilities 744 (2,689)
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Net cash generated by operating activities 17,359 5,490
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Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (1,480) (5,618)
Acquisition, net of cash acquired - (25,981)
Other investing activities (986) (403)
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Net cash used by investing activities (2,466) (32,002)
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Cash inflow (outflow) from financing activities:
Proceeds from stock options 124 642
Proceeds from debt - 19,541
Payment of debt (4,821) (837)
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Net cash generated (used) by
financing activities (4,697) 19,346
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Effect of Foreign currency rate on cash
and cash equivalents (870) (286)
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Net increase (decrease) in cash and cash
equivalents 9,326 (7,452)
Cash and cash equivalents:
Beginning of period 35,934 64,138
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End of period $ 45,260 $ 56,686
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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 majority-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
27, 1998 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 March 28, 1999 and December 27, 1998 and its results
of operations and changes in cash flows for the thirteen week periods ended
March 28, 1999 and March 29, 1998.
Certain reclassifications have been made to the 1998 financial statements and
related footnotes to conform to the 1999 presentation.
2. INVENTORIES
March 28, December 27,
1999 1998
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(Thousands)
Raw materials $ 8,912 $ 6,661
Work in process 1,036 1,821
Finished goods 61,525 70,143
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$71,473 $78,625
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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. LONG TERM CUSTOMER CONTRACTS
Included in Other Assets are unbilled receivables and other assets relating
to long term customer contracts generated primarily from the leasing of the
Company's EAS equipment to retailers under long-term sales-type leasing
arrangements. The duration of these programs typically range from three to
five years.
4. 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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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. PER SHARE DATA
The following data shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock:
Quarter (13 weeks) Ended
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March 28, March 29,
1999 1998
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(In thousands, except per
share amounts)
BASIC EARNINGS PER SHARE:
Net Income $ 1,392 $ 1,273
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Average Common Stock Outstanding 30,126 33,194
Basic earnings per share $ .05 $ .04
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DILUTED EARNINGS PER SHARE:
Net income available for Common
Stock dilutive securities(1) $ 1,392 $ 1,273
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Average Common Stock Outstanding 30,126 33,194
Additional common shares
resulting from Stock Options 464 1,403
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Average Common Stock and
Dilutive stock outstanding(1) 30,590 34,597
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Dilutive earnings per share $ .05 $ .04
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(1) Conversion of the subordinated debentures is not included in the above
calculation as the conversion price is anti-dilutive.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the thirteen week periods ended March 28, 1999, and March
29, 1998, included interest payments of $876,000 (1999) and $931,000 (1998)
and income taxes paid of $328,000 (1999) and $2,707,000 (1998).
-8-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. BUSINESS SEGMENTS
Effective December 27,1998 the Company adopted provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Statement requires the Company to disclose selected segment information on an
interim basis; this information is set forth below:
Quarter (13 weeks) Ended
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March 28, March 29,
1999 1998
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(In Thousands)
Business segment net revenue:
Electronic Article Surveillance(1) $67,741 $63,834
Domestic CCTV, Fire, Burglary 10,889 12,791
Access Control 3,044 3,232
RFID 80 -
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Total $81,754 $79,857
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Business segment operating income (loss):
Electronic Article Surveillance(1) $ 3,155 $ 2,263
Domestic CCTV, Fire, Burglary 399 521
Access Control 771 687
RFID (503) (555)
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Total $ 3,822 $ 2,916
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(1) Electronic Article Surveillance (EAS) segment numbers include the
Company's manufacturing and corporate activity. Additionally, included in
the EAS amounts are the Company's foreign CCTV, Fire and Burglary which
represents approximately 4.6%, and 4.4% of the Company's total consolidated
revenue for the thirteen week periods ended March 28, 1999 and March 29,
1998, respectively.
8. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Provisions of SFAS No. 133
established new procedures for accounting for derivatives and hedging
activities and amends a number of existing standards. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. Although the
Company has not fully completed its evaluation of the impact of this new
standard, we do not anticipate the adoption of this standard to have a
material effect on the Company's consolidated financial statements.
-9-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This report may include information that could constitute forward-looking
statements made pursuant to the safe harbor provision of the Private
Securities Litigation Reform Act of 1995. Any such forward-looking
statements may involve risk and uncertainties that could cause actual results
to differ materially from any future results encompassed within forward-
looking statements.
RESULTS OF OPERATIONS
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First Quarter 1999 Compared to First Quarter 1998
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Overview
During the first quarter of 1999, revenues increased by approximately $1.9
million (or 2.4%) over the first quarter of 1998. Cost of revenues increased
by 1.4% compared to last year's first quarter as a percentage of sales (from
60.5% to 61.9%). Selling, general and administrative ("SG&A") expenses
decreased $1.3 million and decreased as a percentage of revenues by 2.5%
(from 35.9% to 33.4%). Income from operations increased $0.9 million (from
$2.9 million to $3.8 million). Net earnings for the first quarter of 1999
increased $0.1 million (from $1.3 million to $1.4 million). Earnings per
share were $.05 for the first quarter of 1999 versus $.04 achieved in the
first quarter of 1998.
Net Revenues
Net revenues for the first quarter of 1999 increased $1.9 million (or 2.4%)
over the first quarter of 1998 (from $79.9 million to $81.8 million).
Electronic Article Surveillance (EAS) revenues increased $3.9 million or 6.1%
(from $63.8 million to $67.7 million). This increase in EAS revenues was a
result of increased sales in the International market. Sales of the
Company's domestic CCTV/Fire and Burglar products decreased $1.9 million or
14.8% (from $12.8 million to $10.9 million) over the prior year's quarter.
The Company's Access Control product lines had a sales decline of 6.3% (from
$3.2 million to $3.0 million) compared to the prior year's first quarter.
RFID - Intelligent Tagging (RFID) generated its initial revenues of $0.1
million in the first quarter of 1999.
Cost of Revenues
Cost of revenues increased approximately $2.3 million (or 4.8%) over the
first quarter of 1998 (from $48.3 million to $50.6 million). As a percentage
of net revenues, cost of revenues increased 1.4% (from 60.5% to 61.9%). The
increase in the Company's cost of revenues is primarily attributable to: (i)
the cost associated with the excess capacity in the Puerto Rico manufacturing
facilities; (ii) an increase in field service costs; and (iii) increased
sales of the higher cost disposable tags manufactured in Japan.
-10-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Selling, General and Administrative Expenses
SG&A expenses decreased $1.3 million (or 4.5%) over the first quarter of
1998 (from $28.6 million to $27.3 million). As a percentage of net revenues,
SG&A expenses decreased by 2.5% (from 35.9% to 33.4%). The lower expenses
(in dollars) are directly related to:(i) the savings associated with the
restructuring of the company's foreign subsidiaries which began in the first
quarter of 1998 and resulted in headcount reductions in sales, marketing and
customer service; and (ii) the domestic cost reduction program implemented in
the third quarter of 1998 which resulted in headcount reductions in marketing
and customer service as well as cost reductions in general and administrative
expenses. These savings were partially offset by an increase in information
technology expenses.
Other Income(loss), net
Other income(loss), net for the first quarter of 1999 represented a net
foreign exchange loss of $0.6 and for the first quarter of 1998 represented a
net foreign exchange gain of $0.2 million.
Interest Expense and Interest Income
Interest expense for the first quarter of 1999 decreased $0.1 million from
the comparable quarter in 1998 (from $2.4 million to $2.3 million). Interest
income for the first quarter 1999 decreased by $0.1 million from the
comparable quarter in 1998 (from $1.2 million to $1.1 million).
Income Taxes
The effective tax rate for the first quarter of 1999 was 30.5%. The
effective tax rate during the first quarter of 1998 was 32.5%. The lower tax
rate resulted from the reduction of foreign losses for which no tax benefit
was recorded.
Net Earnings
Net earnings for the current quarter were $1.4 million or $.05 per share
versus $1.3 million or $.04 per share for the prior year's first quarter.
Exposure to International Operations
Approximately 96% of the Company's international sales during the first
quarter of 1999 were made in local currencies. Sales denominated in
currencies other than U.S. dollars increases 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 such changes may have on its operations.
-11-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
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Financial Condition
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, through a
secondary issuance of common stock in a underwritten public offering, and
more recently through cash generated from operations. The Company believes
that cash provided from operating activities and funding available under its
current credit agreements, should be adequate for its presently foreseeable
working capital and capital investment requirements.
The Company's operating activities during the first quarter of 1999 generated
approximately $17.4 million compared to approximately $5.5 million generated
during the first quarter of 1998. This change from the prior year was
primarily the result of a decreased investment in working capital and long-
term customer contracts.
The Company's Comprehensive Tag Program (Comp Tag) is a financial
marketing/sales program designed to remove capital investment costs as an
obstacle to the potential customer's decision to purchase an EAS system.
This program is offered to large potential customers in strategic vertical
markets who are considering chainwide EAS installations. Through the Comp
Tag program, the Company 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 tags, installation and
interest.
Comp Tag agreements that meet all the necessary requirements for sales-type
leasing as defined under SFAS No. 13, are recognized as a sale upon shipment
of the EAS hardware. If the terms and conditions 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 used for the Consolidated
Earnings Statement. In the majority of cases, the Company 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: (i) long-term customer contracts
for those meeting sales-type lease accounting; or (ii) revenue equipment
placed under operating lease. Comp Tag contracts under the sales-type lease
accounting method are included in Other Assets on the Consolidated Balance
Sheets. Comp Tag contracts under the operating lease accounting method are
included in Revenue Equipment on Operating Lease on the Consolidated Balance
Sheets.
-12-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
The Company's 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 manufacturers.
This in turn, reduces the retailers' costs of hand applying labels, thereby
further increasing the favorable impact to the retailers' bottom line.
The Company has an existing $100 million multi-currency long term unsecured
revolving credit facility. At March 28, 1999, 2.31 billion Japanese Yen
(approximately $19.4 million) was outstanding under this credit agreement.
The Company has never paid a cash dividend (except for a nominal cash
distribution in April 1997, to redeem the rights outstanding under the
Company's 1988 Shareholders' Rights Plan). The Company does not anticipate
paying any cash dividend in the near future and is limited by existing
covenants in the Company's debt instruments with regard to paying dividends.
Management believes that its anticipated cash needs for the foreseeable
future can be funded from cash and cash equivalents on hand and the
availability under the $100 million unsecured revolving credit facility.
Capital Expenditures
The Company's capital expenditures during first quarter of 1999 totaled $1.5
million compared to $5.6 million during the first quarter of 1998. This
decrease when compared to prior year is primarily due to the first quarter
1998 completion of the plant expansion at the Company's main manufacturing
facility located in Ponce, Puerto Rico. The Company anticipates its capital
expenditures to approximate $10.0 million in 1999.
Exposure to International Operations
The Company exports products for international sales to its foreign
subsidiaries. The subsidiaries, in turn, sell these products to customers in
their respective geographic area 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.
Furthermore, approximately 20% of the Company's disposable tags offered for
sale are manufactured in Japan. As the material and production costs are
denominated in Japanese Yen, the related product costs are subject to
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.
-13-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Exposure to International Operations (continued)
As of March 28, 1999, the Company had currency exchange forward contracts
totaling approximately $39.9 million. The contracts are in the various local
currencies covering primarily the Company's Western European operations along
with the Company's Canadian, and Australian operations. The Company's
operations in Japan, Argentina, Mexico and Brazil were not covered by
currency exchange forward contracts at March 28, 1999.
During 1998, the Company also purchased a series of put options denominated
in Canadian dollars which gave the Company the right, but not the obligation,
to convert Canadian dollars at a specified exchange rate into U.S. dollars.
These options expire in 1999.
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 net
earnings from sales made by the Company's international operations. The
combination of forward exchange contracts and currency options should reduce
the Company's risks associated with significant exchange rate fluctuations.
Other Matters
Year 2000
Year 2000 Readiness
The Company's year 2000 readiness plan is primarily directed towards ensuring
business continuity by mitigating any year 2000 computer failures that could
interrupt business processes, damage customer service, and/or cause financial
loss. The plan addresses the year 2000 effect on the following areas: (i)
information systems; (ii) the Company's product offerings; and (iii) internal
and external supply chain readiness which includes the Company's internal
manufacturing processes.
The Company has substantially completed its assessment of year 2000 readiness
and has begun a company-wide program of remediating its computer systems and
applications for the year 2000. The Company's primary applications software
has been procured through third party vendors, and the Company is continuing
its ongoing process to address potential year 2000 deficiencies through
updates provided by the vendors. The Company expects the remediation phase
to be completed for most of its primary applications by the beginning of the
third quarter, with implementations by the end of the third quarter 1999.
The Company's other non-mission critical information systems and applications
software, some of which are not year 2000 ready, are also in the process of
being evaluated.
As a result of an evaluation of the Company's product lines for year 2000
readiness, the Company's primary products, comprised of EAS products, are not
date dependant and therefore, will not require modifications. The Company's
current Access Control products, which are date dependant, are determined to
be year 2000 ready. Certain of the Company's Access Control Products, which
are no longer offered for sale, were determined as not being year 2000 ready.
-14-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Year 2000 Readiness (continued)
The Company has offered, through it's website at
http://www.checkpointacpg.com/y2kinfo.htm, an upgrade path for such non-
compliant products. The Company's CCTV and Fire and Burglar alarm products
are generally purchased from outside vendors and the Company is working with
such vendors to determine readiness. The Company is currently assessing the
year 2000 readiness of its Central Station monitoring service, which is
expected to be completed by the end of May 1999.
The Company has created a website to communicate the readiness of its
products, services and business processes. The goal is to provide the
Company's customers with up-to-date information about the Year 2000 Readiness
effort. This website, located at
http://www.checkpointsystems.com/www_checkpoint_y2k.html, provides the latest
year 2000-readiness information and status. The information provided by the
outside vendors regarding the Company's CCTV and Fire and Burglar products
are also posted on this website.
The Company is continuing with the assessment of year 2000 issues associated
with its various business partners, including vendors and service providers,
and is working with these third parties to identify and mitigate common
risks. The Company also recognizes the potential for year 2000 issues in
external areas such as telephone and communication systems, utilities, banks
and alarm systems and is contacting all mission critical business partners to
obtain year 2000 readiness certifications. Initial responses have been
received and the Company is in the process of re-contacting some of the third
party vendors for clarification on their responses.
Costs
Costs associated with the year 2000 compliance have not been material to
date, and the total costs to achieve year 2000 compliance are being
evaluated. Currently, management estimates the cost to test and remedy the
Company's information systems to be approximately $3.0 million. This
estimate includes the acceleration of hardware purchases of approximately
$1.6 million and other expenses consisting primarily of outside year 2000
consulting services of $1.4 million. However, there can be no assurance that
costs will not exceed this level. The Company is currently determining the
potential cost associated with the Company's product offerings and supply
chain readiness. The Company does not expect these costs to be material.
Risks
The variety, nature and complexity of year 2000 issues, the dependence on
technical skills and expertise of Company employees and independent
contractors and issues associated with the readiness of third parties are
factors which could result in the Company's efforts toward year 2000
compliance being less than fully effective.
The failure to correct a material year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. As of the date of this filing, the Company has not received any
information from its vendors or suppliers, or developed any information
internally, indicating that a material adverse impact on its business,
results of operations, liquidity, or financial condition is considered likely
-15-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Risks (continued)
due to year 2000 matters. While the Company believes that it is unlikely to
experience a material adverse effect, the Company is unable to provide
assurances at this time that the consequences of year 2000 failures will not
have a material impact on the Company's results of operations, liquidity or
financial condition. The execution of the Company's year 2000 plan is
expected to significantly reduce the Company's level of uncertainty
associated with the year 2000 problem.
Contingency Plans
The Company believes that its program of assessment, correction and testing,
along with selected system upgrades will enable it to successfully meet the
year 2000 challenge. In conjunction with the remediation process, the
Company has begun to formalize its contingency plans to address potential
failures associated with year 2000 readiness.
Forward Looking Statement
The foregoing year 2000 discussion includes forward-looking statements of the
Company's efforts and management's expectations relating to year 2000
readiness. The Company's ability to achieve year 2000 compliance and the
level of incremental costs associated therewith, could be adversely affected
as a result of the numerous factors described in the above discussion.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this report:
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the first quarter of 1999.
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.
CHECKPOINT SYSTEMS, INC.
/s/ Jeffrey A. Reinhold
- ----------------------- May 12, 1999
Senior Vice President,
Chief Financial Officer and Treasurer
/s/ W. Craig Burns
- ---------------------- May 12, 1999
Vice President, Corporate Controller
and Chief Accounting Officer
16