FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 26, 1995
--------------------------------------------------------------------------
Commission file number 1-11257
-----------------------------------------------------
Checkpoint Systems, Inc.
--------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 22-1895850
------------------------------- -------------------
(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
--------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(609) 848-1800
--------------------------------------------------------------------------
(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, 1995 there were 13,853,279 of the Common Stock
outstanding.
<PAGE>1
CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
-------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16-17
Item 4. Submission of Matters to a Vote of Security - Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
<PAGE>2
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
March 26, December 25,
1995 1994
------------ ------------
(Unaudited)
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 349 $ 944
Accounts receivable, net of allowances
of $1,710,000 and $1,570,000 38,373 33,290
Inventories 35,712 29,486
Other current assets 4,929 4,385
Deferred income taxes 1,117 1,117
------- -------
Total current assets 80,480 69,222
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 40,897 36,799
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED 20,390 10,120
INTANGIBLES 5,807 5,826
OTHER ASSETS 6,911 5,958
------- ------
TOTAL ASSETS $154,485 $127,925
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 9,367 $ 10,064
Accrued compensation and related taxes 3,432 2,635
Income taxes 1,190 2,223
Unearned revenues 4,949 3,357
Other current liabilities 5,558 4,810
Short-term borrowings and current portion
of long-term debt 4,387 6,706
------- -------
Total current liabilities 28,883 29,795
LONG-TERM DEBT, LESS CURRENT MATURITIES 59,758 35,556
DEFERRED INCOME TAXES 1,271 1,271
SHAREHOLDERS' EQUITY
Preferred Stock, no par value, authorized
500,000 shares, none issued
Common Stock, par value $.10 per share,
authorized 100,000,000 shares, issued
11,551,179 and 11,278,511 1,155 1,128
Additional capital 25,857 21,592
Retained earnings 46,993 46,789
Common stock in treasury, at cost,
799,000 shares (5,664) (5,664)
Foreign currency adjustments (3,768) (2,542)
------- -------
TOTAL SHAREHOLDERS' EQUITY 64,573 61,303
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $154,485 $127,925
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>3
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 Weeks) Ended
------------------------
March 26, March 27,
1995 1994
-------- --------
(Thousands, except per share data)
Net Revenues $37,360 $26,223
Cost of Revenues 21,269 13,960
------- -------
Gross Profit 16,091 12,263
Selling, General and Administrative Expenses 14,627 11,175
------- -------
Operating Income 1,464 1,088
Interest Income 169 111
Interest Expense 1,056 412
Foreign Exchange Loss 286 84
------- -------
Earnings Before Income Taxes 291 703
Income Taxes 87 176
------- -------
Net Earnings $ 204 $ 527
======= =======
Net Earnings Per Share $ .02 $ .05
======= =======
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Quarter (13 Weeks) Ended March 26, 1995
---------------------------------------------------
(Thousands)
Foreign
Common Additional Retained Treasury Currency
Stock Capital Earnings Stock Adjust. Total
------- ------- ------- ------- ------- ------
(Thousands)
Balance,
December 25, 1994 $ 1,128 $21,592 $46,789 $(5,664) $(2,542) $61,303
Net Earnings 204 204
Exercise of Stock
Options 7 787 794
Stock issuance in
connection with
business acquisition 20 3,478 3,498
Foreign Currency
Adjustments (1,226) (1,226)
------- ------- ------- ------- ------- -------
Balance at
March 26, 1995 $ 1,155 $25,857 $46,993 $(5,664) $(3,768) $64,573
======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarter (13 Weeks) Ended
------------------------
March 26, March 27,
1995 1994
-------- --------
(Thousands)
Cash inflow (outflow) from operating activities:
Net earnings $ 204 $ 527
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of rented equipment sold 168 116
Long-term customer contracts (196) (1,080)
Depreciation and amortization 2,737 1,661
Provision for losses on accounts receivable 251 171
(Increase) decrease in current assets:
Accounts receivable (1,470) (1,488)
Inventories (4,341) (1,956)
Other current assets 580 888
Increase (decrease) in current liabilities:
Accounts payable (4,140) (4,748)
Accrued compensation and related taxes 145 169
Income taxes (1,402) (212)
Unearned revenues 469 75
Other current liabilities (581) (800)
------- -------
Net cash used by operating activities (7,576) (6,677)
------- -------
Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (2,335) (822)
Acquisition, net of cash acquired (10,061) -
Purchase of customer list - -
Other investing activities (420) (904)
------- -------
Net cash used by investing activities (12,816) (1,726)
------- -------
Cash inflow (outflow) from financing activities:
Proceeds from stock options 795 71
Proceeds of debt 38,000 12,031
Payment of debt (18,998) (2,532)
------- -------
Net cash provided by financing activities 19,797 9,570
------- -------
Net increase (decrease) in cash and cash
equivalents (595) 1,167
Cash and cash equivalents:
Beginning of period 944 -
------- -------
End of period $ 349 $ 1,167
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>5
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its wholly-owned subsidiaries ("Company"). All material
intercompany transactions are eliminated in consolidation. The
consolidated financial statements and related notes are unaudited and do
not contain all disclosures required by generally accepted accounting
principles. Refer to the Company's Annual Report on Form 10-K for the
fiscal year ended December 25, 1994 for the most recent disclosure of the
Company's accounting policies.
The consolidated financial statements include all adjustments necessary to
present fairly the Company's financial position at March 26, 1995 and
December 25, 1994 and its results of operations and changes in cash flows
for the thirteen week periods ended March 26, 1995 and March 27, 1994.
2. INVENTORIES
March 26, December 25,
1995 1994
--------- ------------
(Thousands)
Raw materials $ 6,550 $ 6,078
Work in process 662 193
Finished goods 28,500 23,215
------- -------
$35,712 $29,486
======= =======
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 principally on earnings from the Company's U.S.
operations. The Company's net earnings generated by the operations of its
Puerto Rico subsidiary are exempt from Federal income taxes under Section
936 of the Internal Revenue Code and substantially exempt from Puerto Rico
income taxes. Under Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes", deferred tax liabilities and
assets are determined based on the difference between financial statement
and tax basis of assets and liabilities using enacted statutory tax rates
in effect at the balance sheet date.
4. PER SHARE DATA
Per share data is based on the weighted average number of common and
common equivalent shares (stock options) outstanding during the periods.
The number of shares used in the per share computations for the thirteen
week periods were 11,302,000 (1995) and 10,504,000 (1994).
<PAGE>6
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the thirteen week periods ended March 26, 1995 and March
27, 1994, respectively, included interest payments of $566,000 and
$402,000 and income taxes paid of $1,500,000 and $107,000.
Also excluded from the investing activities in the Consolidated Statements
of Cash Flows are net transfers from inventory to property, plant and
equipment of $2,690,000 and $371,000 for the thirteen week periods ended
March 26, 1995 and March 27, 1994, respectively, relating to equipment
rented to customers.
In February 1995, the Company purchased all of the capital stock of
Alarmex, Inc. together with its related company Bayport Controls, Inc.
(collectively "Alarmex") for $13,498,000. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired...................$21,595,000
Cash paid and fair value of stock issued for
the capital stock...............................$13,498,000
-----------
Liabilities assumed.............................$ 8,097,000
===========
In addition, excluded from acquisitions, net of cash acquired in the 1995
Consolidated Statement of Cash Flows is a non-cash portion of the purchase
price of Alarmex relating to 200,717 shares of the Company's common
stock valued at $3,498,000.
6. INTANGIBLES
Intangibles consist of patents, licenses, customer lists, and software
development costs. The costs relating to the acquisition of patents and
licenses are amortized on a straight-line basis over their economic useful
lives, which is considered to be ten years. Accumulated amortization
approximated $1,336,000 and $1,027,000 at March 26, 1995 and December 25,
1994, respectively.
The costs of internally developed software are expensed until the
technological feasibility of the software has been established.
Thereafter, all software development costs are capitalized and
subsequently reported at the lower of unamortized cost or net realizable
value. The costs of capitalized software are amortized over the products'
estimated useful lives or five years, whichever is shorter. During the
first quarter of 1995, $120,000 of software development costs were
capitalized. Accumulated amortization of these costs approximated
$1,063,000 and $965,000 at March 26, 1995 and December 25, 1994,
respectively.
7. ACQUISITION
On February 1, 1995, the Company purchased Alarmex for approximately
$13.5 million ($10 million in cash and the balance in 200,717 shares of
Common Stock of the Company). The Company financed the cash portion of
the Alarmex acquisition with a private placement of the Company's long-
term notes.
<PAGE>7
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. ACQUISITION (continued)
Alarmex designs and provides CCTV, POS monitoring, burglar and fire alarm
systems and also provides related central station monitoring services to
over 9,000 retail sites in the United States.
The following table represents unaudited combined results of operations
for the first three months of 1995 and 1994, as if the acquisition of
Alarmex had occurred at the beginning of those respective periods.
The following results are not necessarily indicative of what would have
occurred had the acquisition been consummated as of that date or of future
results:
Three Months (13 weeks) Ended
-----------------------------
March 26, March 27,
1995 1994
------------- -------------
(Thousands, except per share data)
Net revenues.................................$38,255 $30,987
Net earnings.................................$ 119 $ 164
Earnings per common share....................$ .01 $ .02
8. ACCOUNTING FOR FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company's balance sheet accounts of foreign subsidiaries are
translated into U.S. dollars at the rate of exchange in effect at the
balance sheet dates. Revenues, costs and expenses of the Company's
foreign subsidiaries are translated into U.S. dollars at the average rate
of exchange in effect during each reporting period. The resulting
translation adjustment is recorded as a separate component of
stockholders' equity. In addition, gains or losses on long-term
intercompany transactions are excluded from the results of operations and
accumulated in the aforementioned separate component of consolidated
stockholders' equity. All other foreign transaction gains and losses are
included in the results of operations.
The Company has purchased certain foreign currency forward contracts in
order to hedge anticipated rate fluctuations in Europe. Transaction gains
or losses resulting from these contracts are recognized over the contract
period.
<PAGE>8
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. LONG-TERM DEBT
On January 26, 1995, the Company issued and sold $15,000,000 aggregate
principal amount of 9.35% series B Notes (the "Notes") pursuant to a Note
Agreement dated as of January 15, 1995, among the Company and Principal
Mutual Life Insurance Company. The Notes are due January 30, 2003 and
bear interest from the issue date(computed on the basis of a 360 day year)
payable semi-annually on January 30 and July 30 of each year commencing
July 30, 1995. Notes of $3,000,000 are due on each January 30 commencing
January 30, 1999 through January 30, 2003. The Notes are uncollaterized
and rank equally to the Company's other funded debt. The notes contain
certain covenants which the Company considers to be normal in transactions
of this type.
On February 15, 1995, the Company entered into a new $25,000,000 revolving
Credit Agreement which replaces the Company's Revolving Credit Agreements
that were in existence at year end. Proceeds of $14,880,000 were used to
pay off borrowings under an existing Revolving Credit Agreement with the
Company's principal lending bank. At March 26, 1995, borrowings of
$23,000,000 under this credit agreement were outstanding with an average
interest rate of 8.31%. This agreement expires on May 1, 1996. This
agreement contains certain restrictive covenants which, among other
things, requires maintenance of specified minimum financial ratios
including debt to capitalization, interest coverage and tangible net
worth. In addition, this agreement limits the Company's ability to pay
dividends.
10. CONTINGENCIES
The Company, together with two of its senior officers, are defendants in
an action entitled ADT, Inc. and Actron AG v. Checkpoint Systems, Inc. and
Albert E. Wolf and Kevin P. Dowd (D.C.N.J.#95-730) which was filed on
February 9, 1995.
In this action, Actron AG, one of the Company's principal European
competitors, alleges that the Company, in violation of certain common laws
and contractual obligations (1) unlawfully employed in Europe three former
employees of Actron who allegedly are in possession of, and have disclosed
to the Company, certain of Actron's confidential information, (2) has
attempted to employ in Europe certain other of Actron's current
employees,(3) has interfered with certain contractual relationships
between Actron, its former employees, and the supplier of Actron's
disposable EAS tags and (4) has, in allegedly engaging in the activities
complained of, committed acts of unfair competition. The Court has set
a date for mid-May 1995 to hear arguments on the Company's motion to
dismiss the complaint and no hearing date has been set by the Court to
hear Actron's motion to enjoin the Company from allegedly using Actron's
confidential information. Discovery by both parties has commenced. The
Company intends to defend itself vigorously. While the outcome of
litigation can never be predicted with certainty and the lawsuit is still
in its very preliminary stages, the Company does not anticipate that its
ultimate outcome will have a material effect on its operations or financial
condition.
<PAGE>9
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
10. CONTINGENCIES (continued)
The Company has been informed that it, along with several officers and a
director, have been named as defendants in an action entitled Cohen v.
Checkpoint Systems, Inc. et. al. (No. 95-1042) which was filed on March 9,
1995 in the United States District Court in New Jersey. This action,
which seeks class certification, alleges generally that the defendants
participated in a course of conduct to conceal adverse material
information about the operating results and future business prospects of
the Company as a result of which the Company's stock price was
artificially inflated during the period October 21, 1994 through March 7,
1995. Plaintiff alleges that the conduct set forth in the preceding
sentence was in violation of certain federal securities laws. The Company
believes that the plaintiffs' allegations are entirely without merit and
intends to defend itself vigorously.
11. SUBSEQUENT EVENT
The Company completed the sale of approximately 3.1 million shares of
Common Stock during the second quarter of this year pursuant to an
underwriters public offering. The net proceeds received by the Company
from this offering approximated $55.5 million. Of these proceeds, $25
million was used to reduce the amount outstanding under the Company's
revolving credit line. The balance of the proceeds are expected to be
used for general corporate purposes including (i) funding strategic
acquisitions or start-up opportunities, and (ii) funding the Company's
leasing programs.
<PAGE>10
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
First Quarter 1995 Compared to First Quarter 1994
--------------------------------------------------
Overview
During the first quarter of 1995 revenues increased by approximately
$11.1 million (or 42.5%) over the prior year's first quarter. Continued
improvement in the cost of revenues as a percentage of net revenues (from
46.8% to 48.4%) in the Company's base operations (excluding the impact of
the Alarmex acquisition and write up in inventory values under purchase
accounting) resulted in a significant increase in incremental gross profit
from that obtained in last year's first quarter. This improvement was
driven primarily by a reduction in service cost as a percentage of sales
by 1.7% within the Company's EAS operations (8.8% compared to 10.5%).
Including the Alarmex operations, cost of revenues increased by 3.7% (from
53.2% to 56.9%). Selling general and administrative ("SG&A") expenses
increased $3.5 million but declined as a percentage of revenues (from
42.6% to 39.2%). Income from operations increased $.4 million (from $1.1
million to $1.5 million). Net earnings however, declined by $.3 million
(from $.5 million to $.2 million) due to higher interest expense and
increased foreign exchange losses (compared to last year's first quarter)
and certain costs and expenses attributable to the Alarmex acquisition.
Net Revenues
Net revenues increased approximately $11.1 million (or 42.5%) over the
first quarter of 1994 (from $26.2 million to $37.4 million). Domestic and
international net revenues accounted for approximately 63.1% and 36.9%,
respectively, of total net revenues compared to 61.2% and 38.8% for last
year's similar quarter. Domestic retail EAS net revenues increased $1.8
million (or 13.8%) primarily as a result of increased unit sales.
International EAS net revenues increased $3.5 million (or 33.9%) primarily
as a result of: higher sales volume generated by the Company's operations
in Europe ($2.7 million) including sales to a major customer in Spain
($1.5 million); and increased sales by the Company's Argentinean and
Mexican subsidiaries ($.5 million and $.2 million, respectively). Sales
contributed by the Company's Alarmex subsidiary which was acquired on
February 1, 1995 also contributed positively to the increase in revenues
by $5.5 million. The Company's Access Control product line had sales
growth of $.4 million or 31.1% (from $1.1 million to $1.5 million)
compared to the prior year's first quarter as a result of increased sales
to two primary customers.
<PAGE>11
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
---------------------
First Quarter 1995 Compared to First Quarter 1994
--------------------------------------------------
Cost of Revenues
Cost of revenues increased approximately $7.3 million (or 52.4%) over the
first quarter of 1994 (from $14.0 million to $21.3 million). As a
percentage of net revenues, cost of revenues increased 3.7% (from 53.2% to
56.9%) compared to the prior year's first quarter. This increase was
primarily due to (i) lower gross margins generally associated with the
Alarmex products, and (ii) a $760,000 charge to cost of revenues as a
result of a step up in the inventory values associated with the Alarmex
acquisition. Cost of revenues related to the Company's traditional EAS
product lines decreased by 1.6% (from 53.2% to 51.6%) primarily resulting
from reduced service costs as a percentage of revenues (from 10.5% to
8.8%) due to increased revenues combined with quality improvements in the
Company's deactivation product line.
Selling, General and Administrative Expenses
SG&A expenses increased $3.5 million (or 30.1%) over the first
quarter of 1994 (from $11.1 million to $14.6 million). As a
percentage of net revenues, however, SG&A expenses decreased by 3.4%
(from 42.6% to 39.2%). The higher expenses (in dollars) were due to
(i) an increase in the Company's EAS business (an increase of
approximately $2.5 million compared to the first quarter of 1994)
including $.5 million relating to increased commissions and royalties
on higher revenues and (ii) selling, general and administrative
expenses related to the Alarmex operations including amortization of
goodwill(approximately $1.0 million).
Interest Expense
Interest expense increased by $.7 million over the first quarter of
1994 (from $.4 million to $1.1 million). This increase is the result
of interest on (i) increased debt levels from a year ago in order to
fund working capital and acquisitions of property, plant and
equipment ($.5 million) and (ii) the issuance of a $15 million note
in connection with the Alarmex acquisition ($.2 million).
Income Taxes
The effective tax rate of 29.9% is higher than the effective tax rate
used in last year's first quarter of 25.0%. This is primarily due to
(i) higher taxable income attributable to foreign jurisdictions where
tax rates are marginally higher than the U.S. and (i) a marginally
higher tax rate on the earnings generated by the Company's Alarmex
subsidiary.
<PAGE>12
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
---------------------
First Quarter 1995 Compared to First Quarter 1994
--------------------------------------------------
Net Earnings
Net earnings were $.2 million or $.02 per share versus $.5 million or
$.05 per share for the first quarter of 1994. The results for the first
quarter of 1995, however, included the impact of a $.8 million ($.5
million after tax) step up of the Alarmex inventory which is included in
cost of revenues as this inventory is sold.
Exposure To International Operations
Approximately 74% of the Company's international sales during the first
quarter of 1995 were made in local currencies. These sales denominated in
currencies other than U.S. dollars increased the Company's potential
exposure to currency fluctuations which can adversely affect results. For
the first quarter of 1995, currency exchange losses amounted to $.3
million compared to losses of $.1 million for the comparable period in the
prior year. The primary increase in the currency exchange losses was the
result of the continued devaluation of the Mexican peso. As a result of
the peso devaluation and continued economic difficulties in Mexico, the
Company's operations in Mexico could be negatively impacted during the
remainder of 1995, however any such impact is not expected to materially
affect the Company's consolidated results.
<PAGE>13
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.
The Company believes that cash provided from operating activities and
funding available under its current credit agreements, together with the
net proceeds generated from the sale of shares of the Company's Common
Stock (discussed below), will be adequate for its presently foreseeable
working capital and capital investment requirements.
The Company's net cash used by operating activities of $7.6 million during
the first quarter of 1995 compares to a use of cash totaling $6.7 million
in the prior year's first quarter. This use of cash was primarily the
result of (i) an increase in finished goods inventories in order to place
equipment at customer's locations under operating lease agreements and to
meet anticipated product demand and (ii) reduction of accounts payable
from seasonally high year end levels due to the procurement of raw
materials to meet anticipated first quarter product demand.
During the first quarter of 1995 the Company also completed a private
placement debt funding of $15 million. In addition, the Company entered
into a new $25 million revolving credit agreement with a group of banks to
replace the existing $15 million in revolving credit indebtedness
outstanding at year end. A significant portion of the private placement
funding proceeds, approximately $13 million, was used for the acquisition
of Alarmex and the repayment of existing debt owed by Alarmex at the time
of acquisition. The balance of the private placement funding of
approximately $2 million was used for general corporate purposes.
The Company completed the sale of approximately 3.1 million shares of
Common Stock during the second quarter of this year pursuant to an
underwriters public offering. The net proceeds received by the Company
from this offering approximated $55.5 million. Of these proceeds, $25
million was used to reduce the amount outstanding under the Company's
revolving credit line. The balance of the proceeds are expected to be
used for general corporate purposes including (i) funding strategic
acquisitions or start-up opportunities, and (ii) funding the Company's
leasing programs.
<PAGE>14
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
-------------------------------------------
The Company's capital expenditures during the first quarter totaled $2.3
million compared to $.8 million during the first three months of 1994.
The Company expects that for the full year investments in property, plant
and equipment will approximate $9 million. These capital expenditures will
generally be used for expanding, improving and maintaining plant
efficiency at the Company's various production facilities located in the
Caribbean. As part of its continuing strategy, the Company is exploring
strategic acquisitions in the following areas: international direct
distribution, a second source of manufacturing capacity and product line
diversification within the Company's core businesses. In order to
consummate any one or more particular acquisitions, the Company may
require additional debt or equity financing.
The Company sells products for international sales to its international
subsidiaries. The subsidiaries, in turn, sell these products to customers
in their respective geographic areas of operation in local currencies.
This method of sales and resale give rise to the risk of gains or losses
as a result of currency exchange rate fluctuations.
In order to reduce the Company's exposure resulting from currency
fluctuations the Company has been purchasing currency exchange forward
contracts on a regular basis. These contracts guarantee a predetermined
exchange rate at the time the contract is purchased. This allows the
Company to shift the risk, whether positive or negative, of currency
fluctuations from the date of the contract to a third party. As of March
26, 1995 the Company had currency exchange forward contracts totaling
approximately $10.5 million. The contracts are in the various local
currencies covering primarily the Company's six Western European
operations along with the Company's Canadian operations. The Company's
operations in Argentina, Mexico and Australia were not covered by currency
exchange forward contracts at March 26, 1995.
The Company is evaluating the use of currency options in order to reduce
the impact that exchange rate fluctuations have on the Company's gross
margins for sales made by the Company's international operations. The
combination of forward exchange contracts and currency options should
result in reducing the Company's risks associated with significant
exchange rate fluctuations.
The Company has never paid a cash dividend and has no plans to do so in
the foreseeable future. Certain covenants in the Company's debt
instruments limit the amounts available for dividends.
<PAGE>15
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On March 10, 1993, the United States International Trade Commission
("Commission") instituted an investigation of a complaint filed by the
Company under Section 337 of the Tariff Act of 1930. The complaint, as
amended, alleged that six respondents imported, sold for importation, or
sold in the United States after importation certain anti-theft
deactivatable resonant tags and components thereof that infringed certain
U.S. Letters Patents of which the Company is exclusive licensee. The
Commission's notice of investigation named six respondents, each of whom
was alleged to have committed one or more unfair acts in the importation
or sale of components or finished tags that infringe the asserted patent
claims. Those respondents are: Actron AG; Tokai Denshi Co. Ltd.; ADT,
Limited; All Tag Security AG; Toyo Aluminum Ltd.; and Custom Security
Industries, Inc.
On March 10, 1994 the United States International Trade Commission issued
a Notice of Commission Determination Not to Review an Initial
Determination Finding No Violation of Section 337 of the Tariff Act of
1930. The Company has capitalized approximately $1.9 million in patent
defense costs, which is included in 'Intangibles' as of March 26, 1995 and
December 25, 1994. The ultimate resolution is undetermined at this time
due to the various courses of action available to management. The Company
has appealed this determination to the appropriate United States Court of
Appeals. Although the Company's management ultimately expects a favorable
outcome, should resolution of this matter result in a less than successful
defense of the patents in question the deferred patent costs will be
written off as a charge to earnings at the time of such resolution.
The Company, together with two of its senior officers, are defendants in
an action entitled ADT, Inc. and Actron AG v. Checkpoint Systems, Inc. and
Albert E. Wolf and Kevin P. Dowd (D.C.N.J.#95-730) which was filed on
February 9, 1995.
In this action, Actron AG, one of the Company's principal European
competitors, alleges that the Company, in violation of certain common laws
and contractual obligations (1) unlawfully employed in Europe three former
employees of Actron who allegedly are in possession of, and have disclosed
to the Company, certain of Actron's confidential information, (2) has
attempted to employ in Europe certain other of Actron's current
employees,(3) has interfered with certain contractual relationships
between Actron, its former employees, and the supplier of Actron's
disposable EAS tags and (4) has, in allegedly engaging in the activities
complained of, committed acts of unfair competition. The Court has set
a date for mid-May 1995 to hear arguments on the Company's motion to
dismiss the complaint and no hearing date has been set by the Court to
hear Actron's motion to enjoin the Company from allegedly using Actron's
confidential information. Discovery by both parties has commenced. The
Company intends to defend itself vigorously. While the outcome of
litigation can never be predicted with certainty and the lawsuit is still
in its very preliminary stages, the Company does not anticipate that its
ultimate outcome will have a material effect on its operations or financial
condition.
<PAGE>16
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS (continued)
The Company has been informed that it, along with several officers and a
director, have been named as defendants in an action entitled Cohen v.
Checkpoint Systems, Inc. et. al. (No. 95-1042) which was filed on March 9,
1995 in the United States District Court in New Jersey. This action,
which seeks class certification, alleges generally that the defendants
participated in a course of conduct to conceal adverse material
information about the operating results and future business prospects of
the Company as a result of which the Company's stock price was
artificially inflated during the period October 21, 1994 through March 7,
1995. Plaintiff alleges that the conduct set forth in the preceding
sentence was in violation of certain federal securities laws. The Company
believes that the plaintiffs' allegations are entirely without merit and
intends to defend itself vigorously.
On March 2, 1995, as a result of a private complaint filed in Switzerland
by Actron against three of its former employees who are now employees of
the Company's Swiss subsidiary, Swiss authorities questioned two of these
employees regarding alleged improper possession and/or use of confidential
information and proprietary data allegedly belonging to Actron. In
addition, Swiss authorities took possession of certain files from the
homes of the employees questioned and from the office of the Company's
Swiss subsidiary. The Company has not been advised that it is the subject
of any legal proceeding in Switzerland. The Company believes that
Actron's private complaint (and the resultant actions of the Swiss
authorities) are directly related to the Company's litigation with Actron
as described above.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY - HOLDERS
(a) An annual meeting of shareholders was held on April 27, 1995.
(c) Shareholders voted upon and approved the following three matters:
(1) The election of Roger D. Blackwell, Ph.D., Richard J. Censits and
Jermain B. Porter as the Company's Class I directors to hold office until
the 1998 Annual Shareholders Meeting. Shareholders voted as follows:
For Against
--------- -------
Roger D. Blackwell 8,904,256 280,206
Richard J. Censits 8,904,256 280,206
Jermain B. Porter 8,904,231 280,231
(2) To amend the Company's Stock Option Plan (1992) to increase the
number of shares of common stock issuable thereunder from 3,000,000 to
4,500,000 shares. Shareholders voted as follows:
For Against Abstained Unvoted
---------- --------- ----------- ---------
4,229,163 2,165,434 375,495 2,414,370
(3) To Amend and Restate the Company's Employee Stock Purchase Plan to
extend the duration of the Plan and to make certain other changes to
conform the Plan to the requirements of Rule 16b-3 promulgated under the
Securities and Exchange Act of 1934. Shareholders voted as follows:
For Against Abstained Unvoted
---------- --------- ----------- ---------
6,365,024 116,865 288,203 2,414,370
<PAGE>17
Item 5. OTHER INFORMATION
On February 1, 1995, the Company purchased Alarmex for approximately
$13.5 million ($10 million in cash and the balance in 200,717 shares of
Common Stock of Checkpoint). The Company financed the cash portion of the
Alarmex Acquisition with the private placement of the Company's long-term
notes.
On January 26, 1995, the Company issued and sold $15,000,000 aggregate
principal amount of 9.35% series B Notes (the "Notes") pursuant to a Note
Agreement dated as of January 15, 1995, among the Company and Principal
Mutual Life Insurance Company. The Notes are due January 30, 2003 and
bear interest from the issue date(computed on the basis of a 360 day
year.) Payable semi-annually on January 30 and July 30 of each year
commencing July 30, 1995. Notes of $3,000,000 are due on each January 30
commencing January 30, 1999 and ending January 30, 2002, with the
remaining principal payable on January 30, 2003. The Notes are unsecured
and rank pari passu with the Company's other funded debt. The notes
contain certain covenants which the Company considers to be normal in
transactions of this type.
On February 15, 1995, the Company entered into a new $25,000,000 revolving
Credit Agreement which replaces the Company's Revolving Credit Agreements
that were in existence at year end. Proceeds of $14,880,000 were used to
pay off borrowings under an existing Revolving Credit Agreement with the
Company's principal lending bank. At March 26, 1995, borrowing of
$23,000,000 under this credit agreement were outstanding with an average
interest rate of 8.31%. This agreement expires on May 1, 1996. This loan
agreement contains certain restrictive covenants which, among other
things, requires maintenance of specified minimum financial ratios
including debt to capitalization, interest coverage and tangible net
worth. In addition, this agreement limits the Company's ability to pay
dividends.
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
During the Company's first quarter ended March 26, 1995, the Company filed
the following reports: (i) Form 8-K filed on February 15, 1995 respecting
the Company's acquisition of all of the issued and outstanding capital
stock of Alarmex, Inc. ("Alarmex") and a related company, Bayport
Controls, Inc.; (ii) Form 8-K/A filed on February 17, 1995 amending
further the Company's Report on Form 8-K dated July 22, 1993, and as
amended on Forms 8-K/A on August 19, 1993 and September 20, 1993
respectively; and (iii) Form 8-K/A filed on March 16, 1995, amending the
Company's report on Form 8-K filed February 15, 1995 attaching required
financial statements.
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.
May 10, 1995 /s/ Steven G. Selfridge
------------ --------------------------------------
Senior Vice President - Operations,
Chief Financial Officer and Treasurer
May 10, 1995 /s/ Mitchell T. Codkind
------------- --------------------------------------
Vice President, Corporate Controller
and Chief Accounting Officer
<PAGE>18
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000215419
<NAME> CHECKPOINT SYSTEMS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-26-1995
<CASH> 349
<SECURITIES> 0
<RECEIVABLES> 40,083
<ALLOWANCES> 1,710
<INVENTORY> 35,712
<CURRENT-ASSETS> 80,480
<PP&E> 63,347
<DEPRECIATION> 22,450
<TOTAL-ASSETS> 154,485
<CURRENT-LIABILITIES> 28,883
<BONDS> 0
<COMMON> 1,155
0
0
<OTHER-SE> 63,418
<TOTAL-LIABILITY-AND-EQUITY> 154,485
<SALES> 37,360
<TOTAL-REVENUES> 37,360
<CGS> 21,269
<TOTAL-COSTS> 14,627
<OTHER-EXPENSES> 117
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,056
<INCOME-PRETAX> 291
<INCOME-TAX> 87
<INCOME-CONTINUING> 204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 204
<EPS-PRIMARY> .02
<EPS-DILUTED> 0
</TABLE>
