FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
For the quarter ended June 27, 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)
(856) 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 3, 1999, there were 30,161,884 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 . . . . . 10-19
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . 20
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 20
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . 21
-2-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 27, Dec. 27,
1999 1998
--------- --------
ASSETS (Unaudited)
------ (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 70,964 $ 35,934
Accounts receivable, net of allowances
of $5,209,000 and $5,556,000 116,979 135,078
Inventories, net 66,518 78,625
Other current assets 12,527 10,748
Deferred income taxes 4,165 4,464
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Total current assets 271,153 264,849
REVENUE EQUIPMENT ON OPERATING LEASE, net 21,657 24,188
PROPERTY, PLANT AND EQUIPMENT, net 82,183 85,762
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET 70,301 72,388
INTANGIBLES, NET 10,429 10,917
OTHER ASSETS 43,416 49,559
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TOTAL ASSETS $499,139 $507,663
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Short-term borrowings and current portion
of long-term debt $13,502 $ 10,453
Accounts payable 19,592 17,346
Accrued compensation and related taxes 8,363 8,295
Income taxes 11,508 11,784
Unearned revenues 14,632 11,288
Other current liabilities 19,384 19,422
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Total current liabilities 86,981 78,588
LONG-TERM DEBT, LESS CURRENT MATURITIES 38,017 45,976
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
DEFERRED INCOME TAXES 812 712
MINORITY INTEREST 437 451
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
36,491,084 and 36,471,584 3,649 3,647
Additional capital 233,323 233,180
Retained earnings 110,096 104,558
Common stock in treasury, at cost,
6,359,200 shares (64,410) (64,410)
Foreign currency translation adjustment (29,766) (15,039)
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TOTAL SHAREHOLDERS' EQUITY 252,892 261,936
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $499,139 $507,663
======= =======
See accompanying notes to Consolidated Financial Statements.
-3-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 Weeks) Ended Six Months (26 Weeks) Ended
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June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- -------- --------
(Thousands, except per share data)
Net Revenues $87,305 $90,578 $169,059 $170,435
Cost of Revenues 51,615 54,918 102,242 103,220
------ ------ ------- -------
Gross Profit 35,690 35,660 66,817 67,215
Selling, General
and Administrative
Expenses 28,006 29,352 55,311 57,991
------ ------ ------ ------
Income from operations 7,684 6,308 11,506 9,224
Interest Income 1,145 1,031 2,203 2,190
Interest Expense 2,228 2,586 4,511 5,007
Other Income/(Loss), net (616) 684 (1,249) 873
------ ------ ------ -----
Income Before
Income Taxes 5,985 5,437 7,949 7,280
Income Taxes 1,825 1,767 2,424 2,366
Minority Interest (14) 22 13 51
------ ------ ------ -----
Net Earnings $4,146 $3,692 $5,538 $4,965
====== ====== ====== ======
Net Earnings Per Share
Basic $ .14 $ .11 $ .18 $ .15
====== ====== ====== ======
Diluted $ .14 $ .11 $ .18 $ .14
====== ====== ====== ======
See accompanying notes to Consolidated Financial Statements.
-4-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Six Months(26 Weeks) Ended June 27,1999
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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 - - 5,538 - - 5,538
Exercise of Stock
Options 2 143 - - - 145
Foreign Currency
Translation
Adjustment - - - (14,727) - (14,727)
------ ------- ------- ------- ------- -------
Balance
June 27,1999 $ 3,649 $233,323 $110,096 $(29,766) $(64,410) $252,892
====== ======= ======= ======= ======= =======
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Quarter Six Months
(13 Weeks) Ended (26 Weeks) Ended
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June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- ------- -------
(Thousands)
Net Earnings $ 4,146 $ 3,692 $ 5,538 $4,965
Foreign Currency Translation
Adjustment, net of tax (2,850) (4,995) (14,727) (4,547)
------- ------- -------- -------
Comprehensive Income/(Loss) $ 1,296 $(1,303) $ (9,189) $ 418
======= ======= ======== =======
See accompanying notes to Consolidated Financial Statements.
-5-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months(26 Weeks) Ended
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June 27, June 28,
1999 1998
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(Thousands)
Cash inflow (outflow) from operating activities:
Net earnings $ 5,538 $ 4,965
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of rented equipment sold 1,429 896
Revenue Equipment placed under Operating Lease (4,676) (2,395)
Long-term customer contracts 4,030 (9,188)
Depreciation and amortization 12,552 13,112
Provision for losses on accounts receivable (347) 978
(Increase) decrease in current assets:
Accounts receivable 12,887 11,880
Inventories 8,706 (7,695)
Other current assets (2,428) 2,495
Increase (decrease) in current liabilities:
Accounts payable 3,032 4,480
Accrued compensation and related taxes 461 (267)
Income taxes (255) (3,950)
Unearned revenues 3,754 852
Other current liabilities 1,242 (9,104)
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Net cash provided by
operating activities 45,925 7,059
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Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (3,840) (8,079)
Acquisition, net of cash acquired - (25,981)
Other investing activities (1,269) (1,271)
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Net cash used by investing activities (5,109) (35,331)
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Cash inflow (outflow) from financing activities:
Proceeds from stock options 143 968
Proceeds from debt - 19,541
Payment of debt (4,821) (837)
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Net cash provided (used) by
financing activities (4,678) 19,672
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Effect of foreign currency rate (1,108) 215
fluctuations on cash and cash equivalents ------- -------
Net increase (decrease) in cash and cash
equivalents 35,030 (8,385)
Cash and cash equivalents:
Beginning of period 35,934 64,138
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End of period $ 70,964 $ 55,753
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See accompanying notes to Consolidated Financial Statements.
-6-
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, necessary to
present fairly the Company's financial position at June 27, 1999 and
December 27, 1998 and its results of operations and changes in cash flows for
the twenty-six week periods ended June 27, 1999 and June 28, 1998.
Certain reclassifications have been made to the 1998 financial statements and
related footnotes to conform to the 1999 presentation.
2. INVENTORIES
June 27, December 27,
1999 1998
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(Thousands)
Raw materials $ 8,760 $6,661
Work in process 1,638 1,821
Finished goods 56,120 70,143
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$66,518 $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.
-7-
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 Six Months
(13 weeks) Ended (26 weeks) Ended
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June 27, June 28, June 27, June 28,
1999 1998 1999 1998
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(In thousands, except per share amounts)
BASIC EARNINGS PER SHARE:
Net Income $ 4,146 $ 3,692 $ 5,538 $ 4,965
======== ======== ======== =======
Average Common Stock
Outstanding 30,132 33,249 30,129 33,221
Basic Earnings Per Share $ .14 $ .11 $ .18 $ .15
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DILUTED EARNINGS PER SHARE:
Net Income Available for
Common Stock Dilutive
Securities(1) $ 4,146 $ 3,692 $ 5,538 $ 4,965
======== ======== ======== ========
Average Common Stock
Outstanding 30,132 33,249 30,129 33,221
Additional Common Shares
Resulting from Stock
Options 372 1,127 418 1,266
-------- -------- -------- --------
Average Common Stock and
Dilutive Stock
Outstanding(1) 30,504 34,376 30,547 34,487
======== ======== ======== ========
Dilutive Earnings Per Share $ .14 $ .11 $ .18 $ .14
======== ======== ======== ========
(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 interest and income taxes for the thirteen and twenty-six
week periods ended June 27, 1999, and June 28, 1998 were as follows:
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
---------------------- ---------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands)
Interest $ 3,767 $ 3,791 $ 4,643 $ 4,722
Income Taxes $ 550 $ 1,388 $ 879 $ 4,045
-8-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. BUSINESS SEGMENTS
Effective December 27, 1998 the Company adopted the 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 Six Months
(13 weeks) Ended (26 weeks) Ended
--------------------- ---------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- -------- ---------
(In thousands)
Business segment net revenue:
Electronic Article
Surveillance(1) $ 72,186 $ 72,896 $140,007 $136,730
Domestic CCTV, Fire,
Burglary 11,620 14,730 22,509 27,521
Access Control 3,499 2,952 6,543 6,184
-------- -------- -------- --------
Total $ 87,305 $ 90,578 $169,059 $170,435
======== ======== ======== ========
Business segment operating
income (loss):
Electronic Article
Surveillance(1) $ 6,578 $ 4,638 $ 9,732 $ 6,901
Domestic CCTV, Fire,
Burglary 875 1,671 1,274 2,192
Access Control 887 602 1,658 1,289
RFID - Development (656) (603) (1,158) (1,158)
-------- -------- -------- --------
Total $ 7,684 $ 6,308 $ 11,506 $ 9,224
======== ======== ======== ========
(1) Electronic Article Surveillance (EAS) segment numbers include the
Company's manufacturing and corporate activity. Additionally, included in the
EAS amounts are (i) the Company's foreign CCTV, Fire and Burglary which
represents approximately 5.1% and 3.4%, and 4.8% and 3.8% of the Company's
total consolidated revenue for the thirteen week and twenty-six week periods
ended June 27, 1999 and June 28, 1998, respectively and (ii) the Company's
initial RFID sales activity which approximated $0.1 million for the six months
ended June 27, 1999.
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
establishes 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, 2000. 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-
Item 2. CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This report includes forward-looking statements made pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include information, for example, about
possible future results of operations, the impact of Year 2000 compliance
issues, and risks associated with international operations. While the
Company believes that these statements are reasonable as of the date made,
investors should not place undue reliance on forward-looking statements since
they involve risks and uncertainties that could cause actual results to differ
materially from any anticipated future results encompassed within the
forward-looking statements. Factors that might cause results to differ
significantly from those expressed in the forward-looking statements include,
but are not limited to: technological changes which may impact both existing
and new products; conditions in international markets which may result in
higher costs or adverse currency exchange rate fluctuations; Year 2000
compliance which is dependent on the technical skills and expertise of
Company employees, and third party vendors including materials and product
suppliers, banks, and utility providers; and general economic and business
conditions which may be less favorable than anticipated.
RESULTS OF OPERATIONS
- ---------------------
Second Quarter 1999 Compared to Second Quarter 1998
- ---------------------------------------------------
Overview
During the second quarter of 1999, revenues decreased by approximately $3.3
million (or 3.6%) when compared to the second quarter of 1998. Cost of
revenues, as a percentage of sales decreased by 1.5% (from 60.6% to 59.1%).
Selling, general and administrative ("SG&A") expenses decreased $1.3 million
and decreased as a percentage of revenues by 0.3% (from 32.4% to 32.1%).
Income from operations increased $1.4 million (from $6.3 million to $7.7
million). Net earnings for the second quarter of 1999 increased $0.4 million
(from $3.7 million to $4.1 million). Diluted Earnings per share were $.14
for the second quarter of 1999 versus $.11 achieved in the second quarter of
1998.
Net Revenues
Net revenues for the second quarter of 1999 decreased $3.3 million (or 3.6%)
when compared to the second quarter of 1998 (from $90.6 million to $87.3
million). Electronic Article Surveillance (EAS) revenues decreased
$0.7 million or 1% (from $72.9 million to $72.2 million). This decrease in
EAS revenues was primarily a result of reduced sales in the North American
market partially offset by an increase in EAS revenues in the Company's
International markets. Sales of the Company's Domestic CCTV/Fire and Burglar
products decreased $3.1 million or 21.1% (from $14.7 million to $11.6 million)
when compared to the second quarter of 1998. The Company's Access Control
product line had a sales increase of 16.7% (from $3.0 million to $3.5 million)
compared to the prior year's second quarter.
Cost of Revenues
Cost of revenues decreased $3.3 million (or 6.0%) when compared to the second
quarter of 1998 (from $54.9 million to $51.6 million). As a percentage of net
revenues, cost of revenues decreased 1.5% (from 60.6% to 59.1%). The decrease
in the Company's cost of sales (as a percentage of revenue) is primarily
attributable to: (i) the effects of the recent cost reductions implemented
within the Company's manufacturing operations and (ii) a reduction in field
service costs which are included in cost of revenues.
-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 4.4%) when compared to the second
quarter of 1998 (from $29.3 million to $28.0 million). As a percentage of net
revenues, SG&A expenses decreased by 0.3% (from 32.4% to 32.1%). The lower
expenses (in dollars) were directly attributable to 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.
Interest Expense and Interest Income
Interest expense for the second quarter of 1999 decreased by $0.4 million from
the comparable quarter in 1998 (from $2.6 million to $2.2 million). Interest
income for the second quarter of 1999 increased by $0.1 million from the
comparable quarter in 1998 (from $1.0 million to $1.1 million).
Other Income/(Loss), net
Other income/(loss), net for the second quarter of 1999 represented a foreign
exchange loss of $0.6 million. Other income/(loss), net for the second quarter
of 1998 included income of $1.3 million representing the proceeds from the
final settlement of an insurance claim relating to the loss of business income
caused by a fire at the Company's warehouse facility in France; offset by a
net foreign exchange loss of $0.6 million.
Income Taxes
The effective tax rate for the second quarter of 1999 was 30.5%. The effective
tax rate during the second 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 $4.1 million or $.14 per diluted
share versus $3.7 million or $.11 per diluted share for the prior year's
second quarter.
Exposure to International Operations
Approximately 95% of the Company's international sales during the second
quarter of 1999 were made in local currencies. Sales denominated in
currencies other than U.S. dollars increase 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 results of
operations.
-11-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Half 1999 Compared to First Half 1998
- -------------------------------------------
Overview
During the first half of 1999, revenues decreased by approximately $1.4
million (or 0.8%) when compared to the first half of 1998. Cost of revenues,
as a percentage of sales, decreased by 0.1% (from 60.6% to 60.5%) when
compared to last year's first half. Selling, general and administrative
("SG&A") expenses decreased $2.7 million and decreased as a percentage of
revenues by 1.3% (from 34.0% to 32.7%). Income from operations increased
$2.3 million (from $9.2 million to $11.5 million). Net earnings for the first
half of 1999 increased $0.5 million (from $5.0 million to $5.5 million).
Diluted earnings per share were $.18 for the first half of 1999 versus $.14
achieved in the first half of 1998.
Net Revenues
Net revenues for the first half of 1999 decreased $1.4 million (or 0.8%) when
compared to the first half of 1998 (from $170.4 million to $169.0 million).
EAS revenues increased $3.3 million or 2.4% (from $136.7 million to $140.0
million). The increase in EAS revenues was a result of increased EAS sales in
the international markets partially offset by a reduction in sales within the
Company's North American markets. Sales of the Company's domestic CCTV/Fire
and Burglar products decreased $5.0 million or 18.2% (from $27.5 million to
$22.5 million) when compared to the first half of 1998. The Company's Access
Control product line had a sales increase of 5.0% (from $6.2 million to
$6.5 million) when compared to the first half of 1998.
Cost of Revenues
Cost of revenues decreased approximately $1.0 million (or 1.0%) when compared
to the first half of 1998 (from $103.2 million to $102.2 million). As a
percentage of net revenues, cost of revenues decreased 0.1% (from 60.6%
to 60.5%).
-12-
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 $2.7 million (or 4.7%) compared to the first half of
1998 (from $58.0 million to $55.3 million). As a percentage of net revenues,
SG&A expenses decreased by 1.3% (from 34.0% to 32.7%). The lower expenses (in
dollars) are directly attributable to (i) 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; and (ii) 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. These savings were partially offset by an increase in
information technology expenses.
Interest Expense and Interest Income
Interest expense for the first half of 1999 decreased $0.5 million when
compared to the first half of 1998 (from $5.0 million to $4.5 million).
Interest income for the first six months of 1999 remained constant with the
first six months of 1998 at $2.2 million.
Other Income/(Loss), net
Other income/(loss), net for the first half of 1999 represented a net foreign
exchange loss of $1.2 million. Other income/(loss), net of $0.8 million for
the first half of 1999 included income of $1.3 million representing the
proceeds from the final settlement of the insurance claim relating to the
loss of business income caused by a fire at the Company's warehouse facility
in France, offset by a net foreign exchange loss of $0.5 million.
Income Taxes
The effective tax rate for the first half of 1999 was 30.5%. The effective tax
rate during the first half 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 six months ended June 27, 1999 were $5.5 million or $0.18
per diluted share versus $5.0 million or $.14 per diluted share for the prior
year's first half.
-13-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Exposure to International Operations
Approximately 95% of the Company's international sales during the first
half of 1999 were made in local currencies. Sales denominated in currencies
other than U.S. dollars increase 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.
Liquidity and Capital Resources
- -------------------------------
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 six months of 1999
generated approximately $45.9 million in cash flow compared to approximately
$7.1 million generated during the first six months 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 ProgramTM (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 chain-wide 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.
-14-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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.
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 June 27, 1999, 2.31 billion Japanese Yen
(approximately $19.0 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.
Capital Expenditures
The Company's capital expenditures during the first six months of 1999 totaled
$3.8 million compared to $8.1 million during the first six months of 1998.
The higher expenditures during the first six months of 1998, were a direct
result of the costs associated with the 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 $8.0 million
in 1999.
-15-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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.
As of June 27, 1999, the Company had currency exchange forward contracts
totaling approximately $36.9 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 June 27, 1999.
During the second quarter of 1999, the Company entered into a foreign exchange
option contract for the conversion of 6.0 million Euros into USD with an
expiration date of May 2000.
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.
-16-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 completed its assessment of year 2000 readiness. 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.
As of June 27, 1999, the Company estimates that the remediation phase is 85%
completed for most of its primary applications. The Company expects the
remainder of the remediation phase to be completed for its primary
applications prior to the end of the third quarter. The Company's
non-mission critical information systems and applications software have been
evaluated and remediation efforts are currently underway for those non-mission
critical systems which are not year 2000 ready.
As a result of an evaluation of the Company's product lines for year 2000
readiness, the Company has determined that its 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. 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 has assessed the internal
year 2000 readiness of its Central Station monitoring service, which has been
determined to be year 2000 ready. However, such systems might be affected by
third party products and/or services upon which the Company's Central Station
fire and burglar monitoring systems rely. The Company is currently obtaining
year 2000 readiness certifications from these third party vendors.
-17-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 has contacted all mission critical business partners to obtain
year 2000 readiness certifications.
Costs
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 and software 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
the costs will not exceed this level. Through June 27, 1999, the Company has
incurred $1.0 million in capitalized hardware and software purchases and
$.6 million in year 2000 consulting services. 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 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.
-18-
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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, contingency
plans have been completed for certain critical areas while other areas are in
various stages of development. These contingency plans include, but are not
limited to, manufacturing, finance, supply chain and customer service. The
various contingency plans in place, or under development, would be utilized in
the event that operations are adversely affected by the year 2000 problem.
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.
-19-
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant's Annual Meeting of Shareholders was held on
May 5, 1999.
(b) The following Class II directors were elected at the meeting:
David W. Clark, Jr. and Elisa Margaona. Voting results for
the election of director nominees were as follows:
David W. Clark, Jr. Elisa Margaona
--------------------- ---------------------
For 24,708,394 For 24,708,944
Withheld 445,938 Withheld 445,388
---------- ----------
Total 25,154,332 Total 25,154,332
========== ==========
The names of the other directors continuing in office after the meeting are:
Roger D. Blackwell, Richard J. Censits, Kevin P. Dowd, Alan R. Hirsig, William
P. Lyons, Jr., Raymond R. Martino and Albert E. Wolf.
Item 5. OTHER INFORMATION
On August 11, 1999, the Company announced that it is launching a
cash tender offer to acquire all of the outstanding shares of Meto AG,
a worldwide provider of value-added labeling solutions. Headquartered in
Heppenheim, Germany, Meto's stock is traded on the Stockholm Stock Exchange.
The transaction is valued at approximately $300 million, which includes
the assumption of all, approximately $35 million, of Meto's net debt.
The Company will utilize cash reserves and proceeds from credit facilities
to be provided by First Union Capital Markets to complete the transaction.
The completion of the offer is conditioned upon the tender of at least
95% of Meto's outstanding shares, U.S. and European regulatory approvals
and other customary conditions. Refer to Exhibit 99, attached.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
------ -----------
27 Financial Data Schedule (Electronic filings only)
99 Press release dated August 11, 1999, announcing
the Registrant's launching of a cash tender offer
to acquire all of the outstanding shares of Meto AG,
headquartered in Heppenheim, Germany.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the second quarter
of 1999.
-20-
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
- ----------------------- August 11, 1999
Senior Vice President - Finance,
Chief Financial Officer and Treasurer
/s/ W. Craig Burns
- ------------------------ August 11, 1999
Vice President, Corporate Controller
and Chief Accounting Officer
-21-
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
27 Financial Data Schedule
99 Press release dated August 11, 1999, announcing
the Registrant's launching of a cash tender offer
to acquire all of the outstanding shares of Meto AG,
headquartered in Heppenheim, Germany.