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 September 24, 1995
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Commission file number 1-11257
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Checkpoint Systems, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 22-1895850
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Wolf Drive P.O. Box 188 Thorofare, New Jersey 08086
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(Address of principal executive offices) (Zip Code)
(609) 848-1800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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As of November 2, 1995 there were 14,149,679 of the Common Stock
outstanding.
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CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 21-22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 23
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
September 24, December 25,
1995 1994
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ASSETS (Unaudited)
------ (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 19,861 $ 944
Accounts receivable, net of allowances
of $1,853,000 and $1,570,000 51,787 33,290
Inventories 42,457 29,486
Other current assets 7,322 4,385
Deferred income taxes 1,117 1,117
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Total current assets 122,544 69,222
REVENUE EQUIPMENT ON OPERATING LEASE, net 15,038 8,875
PROPERTY, PLANT AND EQUIPMENT, net 31,169 27,924
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED 20,827 10,120
INTANGIBLES 6,583 5,826
OTHER ASSETS 6,898 5,958
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TOTAL ASSETS $203,059 127,925
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 8,032 $ 10,064
Accrued compensation and related taxes 5,327 2,635
Income taxes 3,604 2,223
Unearned revenues 4,449 3,357
Other current liabilities 6,897 4,810
Short-term borrowings and current portion
of long-term debt 4,078 6,706
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Total current liabilities 32,387 29,795
LONG-TERM DEBT, LESS CURRENT MATURITIES 35,890 35,556
DEFERRED INCOME TAXES 1,271 1,271
SHAREHOLDERS' EQUITY
Preferred Stock, no par value, authorized
500,000 shares, none issued
Common Stock, par value $.10 per share,
authorized 100,000,000 shares, issued
14,913,679 and 11,278,511 1,491 1,128
Additional capital 83,095 21,592
Retained earnings 54,891 46,789
Common stock in treasury, at cost,
799,000 shares (5,664) (5,664)
Foreign currency adjustments (302) (2,542)
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TOTAL SHAREHOLDERS' EQUITY 133,511 61,303
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $203,059 $127,925
======= =======
See accompanying notes to consolidated financial statements.
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Quarter (13 Weeks) Ended Nine Months (39 Weeks) Ended
------------------------ ---------------------------
Sept. 24, Sept. 25, Sept. 24, Sept. 25,
1995 1994 1995 1994
-------- -------- -------- --------
(Thousands, except per share data)
Net Revenues $52,802 $33,928 $139,906 $88,807
Cost of Revenues 28,033 16,905 77,102 45,969
------ ------ ------ ------
Gross Profit 24,769 17,023 62,804 42,838
Selling, General
and Administrative
Expenses 17,773 13,001 48,928 35,946
------ ------ ------ ------
Operating
Income 6,996 4,022 13,876 6,892
Interest Income 523 137 1,017 421
Interest Expense 971 1,040 3,020 2,063
Foreign Exchange
Loss 48 236 268 243
------ ------ ------ ------
Earnings Before
Income Taxes 6,500 2,883 11,605 5,007
Income Taxes 1,971 721 3,503 1,252
------ ------ ------ ------
Net Earnings $ 4,529 $ 2,162 $ 8,102 $ 3,755
====== ====== ====== ======
Net Earnings Per
Share
$ .31 $ .20 $ .61 $ .35
====== ====== ====== ======
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
Nine Months(39 Weeks) Ended September 24, 1995
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Foreign
Common Additional Retained Treasury Currency
Stock Capital Earnings Stock Adjust. Total
------- ------- ------- ------- ------- ------
(Thousands)
Balance,
December 25, 1994 $ 1,128 $21,592 $46,789 $(5,664) $(2,542) $61,303
Net Earnings 8,102 8,102
Exercise of Stock
Options 34 3,668 3,702
Stock issuance in
connection with
business acquisition 20 3,478 3,498
Stock issuance in
connection with equity
offering 309 54,357 54,666
Foreign Currency
Adjustments 2,240 2,240
------- ------- ------- ------- ------- -------
Balance at
September 24, 1995 $ 1,491 $83,095 $54,891 $(5,664) $ (302) 133,511
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See accompanying notes to consolidated financial statements.
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months(39 Weeks) Ended
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September 24, September 25,
1995 1994
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(Thousands)
Cash inflow (outflow) from operating activities:
Net earnings $ 8,102 $ 3,755
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of rented equipment sold 690 437
Long-term customer contracts (837) (942)
Depreciation and amortization 9,029 5,926
Provision for losses on accounts receivable 261 341
(Increase) decrease in current assets:
Accounts receivable (14,084) (6,060)
Inventories (17,206) (8,805)
Other current assets (1,695) 182
Increase (decrease) in current liabilities:
Accounts payable (4,527) (4,387)
Accrued compensation and related taxes 2,236 1,337
Income taxes 1,012 942
Unearned revenues (31) 724
Other current liabilities 1,412 (2,059)
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Net cash used by operating activities (15,638) (8,609)
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Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (6,186) (3,686)
Acquisition, net of cash acquired (10,061) -
Other investing activities (2,391) 2,644)
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Net cash used by investing activities (18,638) (6,330)
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Cash inflow (outflow) from financing activities:
Proceeds from stock options 3,702 2,538
Proceeds from sale of common stock 54,666 -
Proceeds of debt 40,000 16,307
Payment of debt (45,175) (3,626)
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Net cash provided by financing activities 53,193 15,219
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Net increase (decrease) in cash and cash
equivalents 18,917 280
Cash and cash equivalents:
Beginning of period 944 -
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End of period $ 19,861 $ 280
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See accompanying notes to consolidated financial statements.
<PAGE>
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 September 24, 1995 and
December 25, 1994 and its results of operations and changes in cash flows
for the thirteen and thirty-nine week periods ended September 24, 1995 and
September 25, 1994.
2. INVENTORIES
September 24, December 25,
1995 1994
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(Thousands)
Raw materials $ 8,924 $ 6,078
Work in process 845 193
Finished goods 32,688 23,215
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$42,457 $29,486
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Inventories are stated at the lower of cost (first-in, first-out method)
or market. Cost includes material, labor and applicable overhead.
3. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated
effective annual tax rate. The Company's net earnings generated by the
operations of its Puerto Rico subsidiary are exempt from Federal income
taxes under Section 936 of the Internal Revenue Code and substantially
exempt from Puerto Rico income taxes. Under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes",
deferred tax liabilities and assets are determined based on the difference
between financial statement and tax basis of assets and liabilities using
enacted statutory tax rates in effect at the balance sheet date.
4. PER SHARE DATA
Per share data is based on the weighted average number of common and
common equivalent shares (stock options) outstanding during the periods.
The number of shares used in the per share computations for the thirteen
and thirty-nine week periods ended September 24, 1995 and September 25,
1994 were 14,791,000 and 13,227,000 (1995) and 10,937,000 and 10,721,000
(1994), respectively.
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the thirteen and thirty-nine week periods ended
September 24, 1995 and September 25, 1994, respectively, included interest
payments of $879,000 and $2,264,000(1995) and $492,000 and
$1,388,000(1994) and income taxes paid of $6,000 and $1,806,000(1995) and
$1,000 and $125,000 (1994).
Excluded from the investing activities in the Consolidated Statements of
Cash Flows are net transfers from inventory to property, plant and
equipment. For the thirteen and thirty-nine week periods ended September
24, 1995 and September 25, 1994 net transfers relating to equipment rented
to customers were $2,392,000 and $8,569,000 (1995) and $1,208,000 and
$5,824,000 (1994) respectively.
On February 1, 1995, the Company purchased all of the capital stock of
Alarmex, Inc. together with its related Company Bayport Controls, Inc.
(collectively "Alarmex") for $13,559,000. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired...................$21,656,000
Cash paid and fair value of stock issued for
the capital stock...............................$13,559,000
-----------
Liabilities assumed.............................$ 8,097,000
===========
In addition, excluded from "Acquisitions, net of cash acquired" in the
1995 Consolidated Statement of Cash Flows is the non-cash portion of the
purchase price of Alarmex relating to 200,717 shares of the Company's
common stock valued at $3,498,000.
6. INTANGIBLES
Intangibles consist of patents, licenses, customer lists, and software
development costs. The costs relating to the acquisition of patents and
licenses are amortized on a straight-line basis over their economic/legal
useful lives, which ranges from five to ten years. Accumulated
amortization approximated $1,940,000 and $1,027,000 at September 24, 1995
and December 25, 1994, respectively.
The costs of internally developed software are expensed until the
technological feasibility of the software has been established.
Thereafter, all software development costs are capitalized and
subsequently reported at the lower of unamortized cost or net realizable
value. The costs of capitalized software are amortized over the products'
estimated useful lives or five years, whichever is shorter. Capitalized
software development costs, net of accumulated amortization, totaled
$1,265,000 and $992,000 as of September 24, 1995 and December 25, 1994,
respectively.
<PAGE>
7. ACQUISITION
On February 1, 1995, the Company purchased Alarmex for approximately $13.5
million ($10 million in cash and 200,717 shares of Common Stock of the
Company). The Company financed the cash portion of the Alarmex
acquisition with a private placement of the Company's long-term notes.
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 nine 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:
Nine Months (39 weeks) Ended
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September 24, September 25,
1995 1994
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(Thousands, except per share data)
Net revenues................................$140,801 $104,986
Net earnings................................$ 8,017 $ 3,380
Earnings per common share...................$ .61 $ .31
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.
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. LONG-TERM DEBT
On January 26, 1995, the Company issued and sold in a private placement
$15,000,000 aggregate principal amount of 9.35% series B Notes (the
"Notes") pursuant to a Note Agreement dated as of January 15, 1995, among
the Company and Principal Mutual Life Insurance Company. The Notes are
due January 30, 2003 and bear interest from the issue date(computed on the
basis of a 360 day year) payable semi-annually on January 30 and July 30
of each year commencing July 30, 1995. Notes of $3,000,000 are due on
each January 30 commencing January 30, 1999 through January 30, 2003. The
Notes are uncollaterized and rank equally with the Company's other funded
debt. The notes contain certain covenants which the Company considers to
be normal in transactions of this type.
On February 15, 1995, the Company entered into a new $25,000,000 revolving
Credit Agreement which replaced 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. On June 29, 1995, the Company entered
into an amended and restated $60 million revolving Credit Agreement which
replaces the agreement discussed above. As of September 24, 1995, there
were no borrowings outstanding. This Credit Agreement will expire on June
1, 1998 and contains certain restrictive covenants which, among other
things, requires maintenance of specified minimum financial ratios
including debt to capitalization, interest coverage and current ratio. In
addition, this Credit Agreement limits the Company's ability to pay cash
dividends.
10. CONTINGENCIES
The Company, together with two of its senior officers, are defendants in
an action entitled ADT, Inc. and Actron AG v. Checkpoint Systems, Inc. and
Albert E. Wolf and Kevin P. Dowd (D.C.N.J.#95-730) which was filed on
February 9, 1995.
In this action, Actron AG, one of the Company's principal European
competitors, alleges that the Company, in violation of certain common laws
and contractual obligations (1) unlawfully employed in Europe three former
employees of Actron who allegedly are in possession of, and have disclosed
to the Company, certain of Actron's confidential information, (2) has
attempted to employ in Europe certain other of Actron's current
employees,(3) has interfered with certain contractual relationships
between Actron, its former employees, and the supplier of Actron's
disposable EAS tags and (4) has, in allegedly engaging in the activities
complained of, committed acts of unfair competition. A hearing was held
in late July, 1995 on Actron's Motion for a Preliminary Injunction on
certain aspects of the matter. The Court has not yet made a determination
on such motion. The Company intends to defend itself vigorously. While
the outcome of litigation can never be predicted with certainty the
Company does not anticipate that its ultimate outcome will have a material
effect on its operations or financial condition.
The Company anticipates that this litigation will terminate upon
completion of the Company's acquisition of the captal stock of Actron (see
Note 13 of the Notes to Consolidated Financial Statements).
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
10. CONTINGENCIES (continued)
The Company, along with several officers and a director, has been named as
a defendant in two actions entitled Milton Cohen, et al v. Checkpoint
Systems, Inc., et al USDC Case No. 95CV1042 (JHR) filed March 9, 1995 and
Aron and Lisa Derman, et al v. Checkpoint Systems, Inc., et al USDC Case
No. 95CV1046 (JEI) filed March 10, 1995, both of which were filed in the
United States District Court in New Jersey. The complaints, which are
substantially identical, seek class certification and allege generally
that the defendants participated in a course of conduct to conceal adverse
material information about the operating results and future business
prospects of the Company as a result of which the Company's stock price
was artificially inflated during the period October 21, 1994 through March
7, 1995. Plaintiff alleges that the conduct set forth in the preceding
sentence was in violation of certain federal securities laws. The Company
believes that the plaintiffs' allegations are entirely without merit and
intends to defend itself vigorously.
11. EQUITY OFFERING
The Company completed the sale of approximately 3.1 million shares of
Common Stock during the second quarter of this year pursuant to an
underwritten public offering. The net proceeds received by the Company
from this offering were approximately $54.7 million. Of these proceeds,
$25 million was used to reduce the amount outstanding under the Company's
revolving credit line. The balance of the proceeds is expected to be used
for general corporate purposes including (i) funding strategic
acquisitions or start-up opportunities, and (ii) funding the Company's
leasing programs.
12. PATENT DEFENSE COSTS
During the second quarter of 1995 the Company was informed that
the Appeals Court had denied the Company's appeal relating to the
adverse International Trade Commission ("ITC") ruling of March
10, 1994 involving certain domestic patents. The Company has
capitalized approximately $1.8 million in patent defense costs
which have been included in Intangibles since the end of fiscal
1993. The Company is the exclusive licensee of the patents and
related technology which are held by Arthur D. Little ("ADL") for
which the Company has made, and continues to make, royalty
payments. Management believes with the advice of counsel that
certain provisions which are contained in the agreement between
the two companies gives the Company the right to recover these
legal defense costs and management intends to pursue the
Company's rights under the licensing agreement. Accordingly,
these costs remain deferred on the Company's balance sheet as of
September 24, 1995.
13. SUBSEQUENT EVENTS
AGREEMENT TO PURCHASE ACTRON
On October 11, 1995, the Company and ADT (UK) Limited ("ADT")
entered into a Purchase Agreement whereby the Company would
purchase all of the capital stock of Actron Group Limited, a
wholly-owned subsidiary of ADT ("Actron") from ADT. The purchase
price of the capital stock is $54 million, subject to certain
possible downward adjustments.
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
13. SUBSEQUENT EVENTS (continued)
At the time of execution of the Purchase Agreement, the Company
deposited $1 million into an escrow account. The $1 million is
to be (1) credited against the purchase price if the purchase of
the Actron capital stock is completed; (2) released to the
Company if the closing does not occur as a result of a breach of
the Purchase Agreement by ADT or (3) paid to ADT (to compensate
it for its expenses, but not as liquidated damages) if the
purchase of Actron capital stock has not been completed on or
before December 31, 1995, unless such failure to complete is due
to a breach by ADT of the Purchase Agreement.
Actron manufactures, sells and distributes radio frequency
electronic security systems to the retail industry throughout
Western Europe. For the year ended December 31, 1994, Actron had
revenues of approximately $50 million.
There can be no assurances that the acquisition of the capital
stock of Actron will be completed, or if completed that the
proposed transaction will be profitable or enhance the Company's
competitive position now or in the future. Completion of the
purchase of the Action capital stock is subject to normal and
customary closing conditions and is expected to occur not later
than December 31, 1995.
The Purchase Agreement provides that ADT will not sell or
entertain other offers for the purchase of the capital stock or
assets of Actron, or negotiate with anyone with respect thereto,
until the earlier of December 31, 1995 or such time as the
Company and ADT agree.
PRIVATE PLACEMENT OF DEBT SECURITIES
On October 17, 1995 the Company completed the private placement
of $120,000,000 of Convertible Subordinated Debentures with an
annual interest rate of 5.25%. The debentures are unsecured,
subordinated to all senior indebtedness and convertible at any
time into shares of the Company's common stock at a conversion
price of $36.75 per share (equivalent to approximately 27.2
shares of Common Stock for each $1,000 principal amount of
Debentures). The debentures will mature on November 1, 2005 and
are redeemable, in whole or in part, at the option of the Company
on or after November 1, 1998. The net proceeds generated to the
Company from this transaction approximated $116,000,000.
<PAGE>
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
Third Quarter 1995 Compared to Third Quarter 1994
---------------------------------------------------
Overview
During the third quarter of 1995 revenues increased by
approximately $18.9 million (or 55.6%) over the prior year's
third quarter. During the third quarter cost of revenues in the
Company's base operations (excluding Alarmex) were slightly
higher than in 1994 as a percentage of sales (from 49.8% to
51.1%). Including the Alarmex operations, cost of revenues
increased by 3.3% (from 49.8% to 53.1%). Selling, general and
administrative ("SG&A") expenses increased $4.8 million but
declined as a percentage of revenues by 4.6% (from 38.3% to
33.7%). Income from operations increased $3.0 million (from $4.0
million to $7.0 million). Net earnings for the quarter increased
by $2.3 million (from $2.2 million to $4.5 million) resulting in
earnings per share of $.31 for the quarter versus $.20 achieved
in the prior year's third quarter.
Net Revenues
Net revenues increased approximately $18.9 million (or 55.6%)
over the third quarter of 1994 (from $33.9 million to $52.8
million). Domestic and international net revenues accounted for
approximately 66.6% and 33.4%, respectively, of total net
revenues compared to 62.7% and 37.3% for last year's comparable
quarter. Domestic retail EAS net revenues increased $4.7 million
(or 26.0%) primarily as a result of increased unit sales
resulting from several chain wide installations. International
EAS net revenues increased $5.0 million (or 39.4%) primarily as a
result of: higher unit sales volume generated by the Company's
operations in Europe ($4.6 million) including sales to a major
customer in Spain ($1.3 million). Sales contributed by the
Company's Alarmex subsidiary which was acquired during the first
quarter of 1995 also contributed positively to the increase in
revenues by $9.6 million. The Company's Access Control product
line had sales growth of 8% (from $1.5 million to $1.7 million)
compared to the prior year's third quarter.
<PAGE>
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
---------------------
Third Quarter 1995 Compared to Third Quarter 1994
---------------------------------------------------
Cost of Revenues
Cost of revenues increased approximately $11.1 million (or 65.8%)
over the third quarter of 1994 (from $16.9 million to $28.0
million). As a percentage of net revenues, cost of revenues
increased 3.3% (from 49.8% to 53.1%) compared to the prior year's
third quarter. This increase was primarily due to lower gross
margins generally associated with the Alarmex operations. Cost of
revenues related to the Company's traditional EAS product lines
increased by 1.3% (from 49.8% to 51.1%) primarily resulting from
volume pricing to significant customers which are implementing
EAS systems chain wide and pricing pressure on the Company's
Western European operations offset partially by lower production
costs due to increased volumes and efficiencies.
Selling, General and Administrative Expenses
SG&A expenses increased $4.8 million (or 36.7%) over the third
quarter of 1994 (from $13.0 million to $17.8 million). As a
percentage of net revenues, however, SG&A expenses decreased by
4.6% (from 38.3% to 33.7%). The higher expenses (in dollars) were
due to an approximately $3.2 million increase in expenditures
supporting the Company's EAS business and approximately $1.6
million of SG&A expenses related to the Alarmex operations
including amortization of goodwill.
Interest Expense
Interest expense for the third quarter of 1995 remained flat at
$1.0 million, primarily as a result of interest on the issuance
of a $15 million note in connection with the Alarmex acquisition
completed during the first quarter of 1995 offset almost entirely
by significantly lower outstanding revolving credit balances
which were paid down during the second quarter of 1995.
Income Taxes
The effective tax rate of 30.3% is higher than the effective tax
rate used in last year's third 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 (ii) a marginally higher tax rate on the earnings
generated by the Company's Alarmex subsidiary versus the
Company's domestic EAS operations.
<PAGE>
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
---------------------
Third Quarter 1995 Compared to Third Quarter 1994
--------------------------------------------------
Net Earnings
Net earnings were $4.5 million or $.31 per share versus $2.2
million or $.20 per share for the third quarter of 1994. The
number of weighted average number of common and common equivalent
shares used in the earnings per share computation for the current
quarter has increased substantially compared to the prior year
(from 10.9 million to 14.8 million) primarily from: Company
shares issued as part of the Alarmex acquisition (200,717); and
shares issued during the second quarter in connection with the
Company's recent equity offering (3,086,600) which is further
discussed in "Liquidity and Capital Resources".
Exposure To International Operations
Approximately 76% of the Company's international sales during the
third quarter of 1995 were made in local currencies. Sales
denominated in currencies other than U.S. dollars increased the
Company's potential exposure to currency fluctuations which can
affect results. For the third quarter of 1995, currency exchange
losses amounted to less than $.1 million compared to losses of
$.2 million for the comparable period in the prior year.
United States International Trade Commission Ruling
During the second quarter of 1995 the Company was informed that
the Appeals Court had denied the Company's appeal relating to the
adverse International Trade Commission ("ITC") ruling of March
10, 1994 involving certain domestic patents. The Company has
capitalized approximately $1.8 million in patent defense costs
which have been included in Intangibles since the end of fiscal
1993. The Company is the exclusive licensee of the patents and
related technology which are held by Arthur D. Little ("ADL") for
which the Company has made, and continues to make, royalty
payments. Management believes with the advice of counsel that
certain provisions which are contained in the agreement between
the two companies gives the Company the right to recover these
legal defense costs and management intends to pursue the
Company's rights under the licensing agreement. Accordingly,
these costs remain deferred on the Company's balance sheet as of
September 24, 1995.
<PAGE>
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
---------------------
First Nine Months of 1995 Compared to First Nine Months of 1994
---------------------------------------------------------------
Overview
During the first nine months of 1995 revenues increased by
approximately $51.1 million (or 57.5%) over the prior year's
first nine months. During the first nine months cost of revenues
in the Company's base operations (excluding the Alarmex
acquisition) were slightly higher as a percentage of sales (from
51.8% to 52.1%) but combined with the increase in revenues
resulted in a significant increase in gross profit from that
obtained in last year's first nine months. Including the Alarmex
operations, cost of revenues increased by 3.3% (from 51.8% to
55.1%). SG&A expenses increased $13.0 million but declined as a
percentage of revenues by 5.5% (from 40.5% to 35.0%). Income
from operations increased $7.0 million (from $6.9 million to
$13.9 million). Net earnings for the first nine months increased
by $4.3 million (from $3.8 million to $8.1 million) resulting in
earnings per share of $.61 for the first nine months versus $.35
achieved in the prior year's first nine months.
Net Revenues
Net revenues increased approximately $51.1 million (or 57.5%)
over the first nine months of 1994 (from $88.8 million to $139.9
million). Domestic and international net revenues accounted for
approximately 64.1% and 35.9%, respectively, of total net
revenues compared to 60.8% and 39.2% for last year's first nine
months. Domestic retail EAS net revenues increased $11.5 million
(or 25.4%) primarily as a result of increased unit sales
resulting from several chain wide installations. International
EAS net revenues increased $15.4 million (or 44.4%) primarily as
a result of: higher unit sales volume generated by the Company's
operations in Europe ($14.7 million) including sales to a major
customer in Spain ($5.5 million); and increased sales by the
Company's subsidiaries in Canada, Argentina and Australia offset
partially by reduced sales in Mexico ($1.8 million). Sales
contributed by the Company's Alarmex subsidiary which was
acquired on February 1, 1995 also contributed positively to the
increase in revenues by $23.8 million. The Company's Access
Control product line had sales growth of $.9 million or 21.4%
(from $4.2 million to $5.1 million) compared to the prior year's
first nine months as a result of increased sales to two primary
customers.
<PAGE>
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
---------------------
First Nine Months of 1995 Compared to First Nine Months of 1994
---------------------------------------------------------------
Cost of Revenues
Cost of revenues increased approximately $31.1 million (or 67.7%)
over the first nine months of 1994 (from $46.0 million to $77.1
million). As a percentage of net revenues, cost of revenues
increased 3.3% (from 51.8% to 55.1%) compared to the prior year's
first nine months. This increase was primarily due to lower
gross margins generally associated with the Alarmex operations.
Cost of revenues related to the Company's traditional EAS product
lines increased by .3% (from 51.8% to 52.1%) primarily resulting
from volume pricing to significant customers which are
implementing EAS systems chain wide and pricing pressure on the
Company's Western European operations offset mainly by lower
production costs due to increased volumes and efficiencies.
Selling, General and Administrative Expenses
SG&A expenses increased $13.0 million (or 36.1%) over the first
nine months of 1994 (from $35.9 million to $48.9 million). As a
percentage of net revenues, however, SG&A expenses decreased by
5.5% (from 40.5% to 35.0%). The higher expenses (in dollars) were
due to an approximately $9.0 million increase in expenditures
supporting the Company's EAS business of which $4.6 million is
directly attributable to higher sales volumes and approximately
$4.0 million of SG&A expenses related to the Alarmex operations
including amortization of goodwill.
Interest Expense
Interest expense increased by $.9 million over the first nine
months of 1994 (from $2.1 million to $3.0 million). This
increase is primarily the result of higher outstanding loan
balances during the first nine months compared to the prior year.
Interest expense for the first nine months of 1995 included
interest on the issuance of a $15 million note in connection with
the Alarmex acquisition (representing $.9 million of interest)
which occurred during the first quarter of 1995.
Income Taxes
The effective tax rate of 30.2% is higher than the effective tax
rate used in last year's first nine months of 25.0%. This is
primarily due to (i) higher taxable income attributable to
foreign jurisdictions where tax rates are marginally higher than
the U.S. and (ii) a marginally higher tax rate on the earnings
generated by the Company's Alarmex subsidiary versus the
Company's domestic EAS operations.
<PAGE>
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
---------------------
First Nine Months of 1995 Compared to First Nine Months of 1994
---------------------------------------------------------------
Net Earnings
Net earnings were $8.1 million or $.61 per share versus $3.8
million or $.35 per share for the first nine months of 1994. The
increase in the number of shares used in the earnings per share
computation was discussed in the third quarter 1995 compared to
third quarter 1994 results.
Exposure To International Operations
Approximately 74% of the Company's international sales (26% of
total revenues) during the first nine months of 1995 were made in
local currencies. Sales denominated in currencies other than
U.S. dollars increased the Company's potential exposure to
currency fluctuations which can affect results. For the first
nine months of 1995, currency exchange losses amounted to $.3
million compared to losses of $.2 million for the comparable
period in the prior year.
<PAGE>
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. Over the past several years, the
significant growth in the Company's business (through
acquisitions and strategies to place equipment in retailer's
locations in order to promote sales of disposable tags) has
required the use of substantially more cash than has been
generated by internal operations. The Company has met these
liquidity needs over the last three years primarily through funds
provided by long-term borrowings and in fiscal 1995, through the
issuance of common stock in an underwritten public offering and
the issuance of convertible subordinated debt. 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 and the net proceeds generated by the issuance of
convertible subordinated debt(see Note 13 of Notes to
Consolidated Financial Statements), will be adequate for its
presently foreseeable working capital and capital investment
requirements.
The Company's operating activities consumed approximately $15.6
million during the first nine months of 1995 compared to $8.6
million in the prior year's first nine months. This use of cash
was primarily the result of (i) an increase in accounts
receivable levels related to greater sales volumes, and (ii) 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.
During the first nine months of 1995 the Company completed a
private placement of debt totaling $15 million. A significant
portion of the proceeds, approximately $13 million, was used for
the acquisition of Alarmex (see Note 7 of the Notes to
Consolidated Financial Statements) and the repayment of existing
debt owed by Alarmex at the time of acquisition. The balance of
the proceeds, approximately $2 million, was used for general
corporate purposes. During the third quarter, the Company
entered into an amended and restated $60 million revolving credit
agreement with a group of banks to replace the existing $25
million in revolving credit indebtedness which had been
established during the first quarter of 1995. This amended and
restated agreement is a three year agreement which expires on
June 1, 1998 (see Note 9 of the Notes to Consolidated Financial
Statements).
<PAGE>
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
-------------------------------------------
The Company also completed the sale of approximately 3.1 million
shares of Common Stock during the second quarter of this year
pursuant to an underwritten public offering. The net proceeds
received by the Company from this offering approximated $54.7
million. Of these proceeds, $25 million was used to reduce in its
entirety the amount outstanding under the Company's revolving
credit line. The balance of the proceeds are expected to be used
for general corporate purposes including (i) funding strategic
acquisitions or start-up opportunities, and (ii) funding the
Company's leasing programs.
The Company's capital expenditures during the first nine months
totaled $6.2 million compared to $3.7 million during the first
nine months of 1994. The Company expects that for the full year
investments in property, plant and equipment will approximate
$9.0 million. These capital expenditures will generally be used
for expanding, improving and maintaining plant efficiency at the
Company's various production facilities located in the Caribbean.
As part of its continuing strategy to expand international direct
distribution the Company has entered into a purchase agreement
whereby the Company would purchase all of the capital stock of
Actron (previously discussed).
Subsequent to the third quarter, the Company generated
approximately $116 million from the issuance of convertible
subordinated debt (see Note 13 of the Notes to Consolidated
Financial Statements). These proceeds are expected to be used by
the Company for the following: (i) approximately $55 million for
the acquisition of Actron and related transaction expenses; (ii)
approximately $25 million for potential strategic acquisitions
and related start-up operations and capital expenditures in the
following areas: various international distribution centers, a
second source of manufacturing capacity and product line
diversification within the Company's core business; and (iii)
approximately $36 million to provide the necessary capital to
enable the Company to lease equipment to retailers under long-
term leases (in order to promote sales of disposable tags) and
for general corporate purposes.
At November 7, 1995 there were no amounts outstanding under the Company's
revolving line of credit. Both the private placement debt instrument and
the revolving credit agreement contain certain financial covenants which
must be met before borrowings under the revolving credit agreement can
occur. As a result of the issuance of $120 million of convertible
subordinated debentures the Company's capacity to borrow under its
revolving credit facility has been reduced due to the borrowing
limitations imposed by the applicable financial covenants in the private
placement debt instrument and revolving credit agreement as amended. As
of November 7, 1995, the Company had approximately $25 million borrowing
capacity under its revolving credit agreement.
<PAGE>
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
-------------------------------------------
The Company exports products for international sales to its
foreign subsidiaries. The subsidiaries, in turn, sell these
products to customers in their respective geographic areas of
operation, generally in local currencies. This method of sale
and resale gives rise to the risk of gains or losses as a result
of currency exchange rate fluctuations.
In order to reduce the Company's exposure resulting from currency
fluctuations the Company has been purchasing currency exchange
forward contracts on a regular basis. These contracts guarantee
a predetermined exchange rate at the time the contract is
purchased. This allows the Company to shift the risk, whether
positive or negative, of currency fluctuations from the date of
the contract to a third party. As of September 24, 1995 the
Company had currency exchange forward contracts totaling
approximately $9.8 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 September
24, 1995. However, management is evaluating a strategy to
minimize the Company's existing foreign exchange exposure in
Mexico and Argentina.
In addition, the Company on an ongoing basis is evaluating the
use of currency options in order to reduce the impact that
exchange rate fluctuations have on the Company's gross margins
for sales made by the Company's international operations. The
combination of forward exchange contracts and currency options
could limit the Company's risks associated with significant
exchange rate fluctuations. The Company had no options
outstanding as of September 24, 1995.
The Company has never paid a cash dividend and has no plans to do
so in the foreseeable future. Certain covenants in the Company's
debt instruments limit the amounts available for cash dividends.
On October 11, 1995 the Company and ADT (UK) Limited ("ADT")
entered into a Purchase Agreement whereby the Company would
purchase all of the capital stock of Actron Group Limited
("Actron"), a wholly owned subsidiary of ADT from ADT. The
purchase price is $54 million, subject to certain possible
downward adjustments. Actron manufactures, sells and distributes
radio frequency electronic security systems to the retail
industry throughout Western Europe. For the year ended December
31, 1994 Actron had revenues of approximately $50 million.
Completion of the purchase of the Actron capital stock is subject
to normal and customary closing conditions and is expected to occur
no later than December 31, 1995 (see Note 13 of Notes to Consolidated
Financial Statements).
<PAGE>
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
ITC Proceedings
---------------
On March 10, 1993, the United States International Trade Commission
("Commission") instituted an investigation of a complaint filed by the
Company under Section 337 of the Tariff Act of 1930. The complaint, as
amended, alleged that six respondents imported, sold for importation, or
sold in the United States after importation certain anti-theft
deactivatable resonant tags and components thereof that infringed certain
U.S. Letters Patents of which the Company is the exclusive licensee. The
Commission's notice of investigation named six respondents, each of whom
was alleged to have committed one or more unfair acts in the importation
or sale of components or finished tags that infringe the asserted patent
claims. Those respondents are: Actron AG; Tokai Denshi Co. Ltd.; ADT,
Limited; All Tag Security AG; Toyo Aluminum Ltd.; and Custom Security
Industries, Inc.
On March 10, 1994 the United States International Trade Commission issued
a Notice of Commission Determination Not to Review an Initial
Determination Finding No Violation of Section 337 of the Tariff Act of
1930. During the second quarter of 1995 the Company was informed that the
Appeals Court had denied the Company's appeal relating to the adverse
International Trade Commission ("ITC") ruling of March 10, 1994 involving
certain domestic patents. The Company has capitalized approximately $1.8
million in patent defense costs which have been included in Intangibles
since the end of fiscal 1993. The Company is the exclusive licensee of the
patents and related technology which are held by Arthur D. Little ("ADL")
for which the Company has made, and continues to make, royalty payments.
Management believes that certain provisions contained in the agreement
between the two companies gives the Company the right to recover these
legal defense costs and management intends to pursue the Company's rights
under the licensing agreement. Accordingly, these costs remain deferred
on the Company's balance sheet as of September 24, 1995.
Actron AG Litigation
--------------------
The Company, together with two of its senior officers, are defendants in
an action entitled ADT, Inc. and Actron AG v. Checkpoint Systems, Inc. and
Albert E. Wolf and Kevin P. Dowd (D.C.N.J.#95-730) which was filed on
February 9, 1995.
<PAGE>
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS (continued)
Actron AG Litigation (continued)
--------------------
In this action, Actron AG, one of the Company's principal European
competitors, alleges that the Company, in violation of certain common laws
and contractual obligations (1) unlawfully employed in Europe three former
employees of Actron who allegedly are in possession of, and have disclosed
to the Company, certain of Actron's confidential information, (2) has
attempted to employ in Europe certain other of Actron's current
employees,(3) has interfered with certain contractual relationships
between Actron, its former employees, and the supplier of Actron's
disposable EAS tags and (4) has, in allegedly engaging in the activities
complained of, committed acts of unfair competition. A hearing was held
in late July, 1995 on Actron's Motion for a Preliminary Injunction on
certain aspects of the matter. The Court has not yet made a determination
on such motion. The Company intends to defend itself vigorously. While
the outcome of litigation can never be predicted with certainty the
Company does not anticipate that its ultimate outcome will have a material
effect on its operations or financial condition.
On March 2, 1995, as a result of a private complaint filed in Switzerland
by Actron AG against three of its former employees who are now employees
of the Company's Swiss subsidiary, Swiss authorities questioned two of
these employees regarding alleged improper possession and/or use of
confidential information and proprietary data allegedly belonging to
Actron. In addition, Swiss authorities took possession of certain files
from the homes of the employees questioned and from the office of the
Company's Swiss subsidiary. The Company has not been advised that it is
the subject of any legal proceeding in Switzerland. The Company believes
that Actron's private complaint (and the resultant actions of the Swiss
authorities) are directly related to the Company's litigation with Actron
as described above.
The Company anticipates that this litigation will terminate upon
completion of the Company's acquisition of the capital stock of Actron
(see Note 13 of the Notes to Consoliated Financial Statements).
Cohen Litigation
----------------
The Company, along with several officers and a director, has been named as
a defendant in two actions entitled Milton Cohen, et al v. Checkpoint
Systems, Inc., et al USDC Case No. 95CV1042 (JHR) filed March 9, 1995 and
Aron and Lisa Derman, et al v. Checkpoint Systems, Inc., et al USDC Case
No. 95CV1046 (JEI) filed March 10, 1995, both of which were filed in the
United States District Court in New Jersey. The complaints, which are
substantially identical, seek class certification and allege generally
that the defendants participated in a course of conduct to conceal adverse
material information about the operating results and future business
prospects of the Company as a result of which the Company's stock price
was artificially inflated during the period October 21, 1994 through March
7, 1995. Plaintiff alleges that the conduct set forth in the preceding
sentence was in violation of certain federal securities laws. The Company
believes that the plaintiffs' allegations are entirely without merit and
intends to defend itself vigorously.
<PAGE>
Item 5. OTHER INFORMATION
Refer to Note 13 (Subsequent Events) of the Notes to Consolidated
Financial Statements.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) No reports on Form 8-K have been filed during the third quarter of
1995.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 8, 1995
CHECKPOINT SYSTEMS, INC.
Steven G. Selfridge
Senior Vice President - Operations
and Chief Financial Officer
November 8, 1995
Mitchell T. Codkind
Vice President, Corporate Controller
and Chief Accounting Officer
<PAGE>
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<NAME> CHECKPOINT SYSTEMS, INC.
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