FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
For the quarter ended September 28, 1997
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11257
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Checkpoint Systems, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 22-1895850
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Wolf Drive P.O. Box 188 Thorofare, New Jersey 08086
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(Address of principal executive offices) (Zip Code)
(609) 848-1800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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As of November 3, 1997, there were 33,817,928 shares of the Common Stock
outstanding.
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CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
Sept. 28, Dec. 29,
1997 1996
--------- --------
ASSETS (Unaudited)
------ (Thousands)
CURRENT ASSETS
Cash and cash equivalents $105,470 $185,836
Accounts receivable, net of allowances
of $5,032,000 and $4,282,000 132,568 96,891
Inventories 72,149 53,073
Other current assets 15,365 9,608
Deferred income taxes 2,617 2,736
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Total current assets 328,169 348,144
REVENUE EQUIPMENT ON OPERATING LEASE, net 23,043 18,033
PROPERTY, PLANT AND EQUIPMENT, net 53,912 41,178
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED 71,391 71,622
INTANGIBLES 14,604 15,572
LONG TERM CUSTOMER CONTRACTS 20,619 20,593
OTHER ASSETS 12,128 6,511
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TOTAL ASSETS $523,866 $521,653
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 13,298 $ 12,677
Accrued compensation and related taxes 7,879 8,667
Income taxes 10,086 7,920
Unearned revenues 11,768 10,264
Other current liabilities 21,653 14,702
Short-term borrowings and current portion
of long-term debt 7,302 8,161
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Total current liabilities 71,986 62,391
LONG-TERM DEBT, LESS CURRENT MATURITIES 31,707 33,356
5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES
WITH A SCHEDULED MATURITY IN 2005 120,000 120,000
DEFERRED INCOME TAXES 5,162 5,112
MINORITY INTEREST 499 -
SHAREHOLDERS' EQUITY
Preferred Stock, no par value, authorized
500,000 shares, none issued - -
Common Stock, par value $.10 per share,
authorized 100,000,000 shares, issued
36,283,528 and 36,134,622 3,628 3,613
Additional capital 231,714 230,580
Retained earnings 91,996 78,645
Common stock in treasury, at cost,
2,373,700 and 1,598,000 (15,013) (5,664)
Foreign currency adjustments (17,813) (6,380)
------ -------
TOTAL SHAREHOLDERS' EQUITY 294,512 300,794
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $523,866 $521,653
======= =======
See accompanying notes to Consolidated Financial Statements.
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 Weeks) Ended Nine Months (39 Weeks)Ended
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Sept. 28, Sept. 29, Sept. 28, Sept. 29,
1997 1996 1997 1996
----------- ----------- --------- ---------
(Thousands, except per share data)
Net Revenues $87,959 $73,765 $237,173 $215,551
Cost of Revenues 50,373 43,701 137,011 125,716
------ ------ -------- --------
Gross Profit 37,586 30,064 100,162 89,835
Selling, General
and Administrative
Expenses 28,551 22,952 82,897 67,910
------ ------ -------- --------
Operating Income 9,035 7,112 17,265 21,925
Interest Income 1,899 2,807 7,092 5,570
Interest Expense 2,302 2,368 7,055 7,113
Other Income, Net 226 302 2,389 936
----- ------ -------- --------
Earnings Before
Income Taxes 8,858 7,853 19,691 21,318
Income Taxes 2,879 2,495 6,411 6,804
Minority Interest 71 -- 71 --
------ ------ -------- -------
Net Earnings $ 6,050 $ 5,358 $ 13,351 $ 14,514
====== ====== ======== ========
Net Earnings Per
Share $ .17 $ .15 $ .38 $ .43
====== ====== ======== ========
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Nine Months(39 Weeks) Ended Sept. 28,1997
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Foreign
Common Additional Retained Treasury Currency
Stock Capital Earnings Stock Adjust. Total
------- ---------- -------- -------- -------- -----
(Thousands)
Balance,
December 29,
1996 $ 3,613 $230,580 $78,645 $(5,664) $(6,380) $300,794
Net Earnings 13,351 13,351
Exercise of Stock
Options 15 1,134 1,149
Purchase of
Treasury Stock (9,349) (9,349)
Foreign Currency
Adjustments (11,433) (11,433)
------ ------- ------ ------- ------- --------
Balance at
Sept.28,1997 $ 3,628 $231,714 $91,996 $(15,013) (17,813) $294,512
====== ======= ====== ====== ======= ========
See accompanying notes to Consolidated Financial Statements.
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months(39 Weeks) Ended
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Sept. 28, Sept. 29,
1997 1996
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(Thousands)
Cash inflow (outflow) from operating activities:
Net earnings $ 13,351 $ 14,514
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of rented equipment sold 776 3,316
Revenue Equipment placed under Operating Lease (12,270) (11,174)
Long-term customer contracts (5,772) (9,931)
Depreciation and amortization 16,731 13,104
Provision for losses on accounts receivable 1,089 1,010
(Increase) decrease in current assets:
Accounts receivable (41,143) (15,555)
Inventories (21,029) 6,662
Other current assets (6,917) (959)
Increase (decrease) in current liabilities:
Accounts payable 1,090 (2,856)
Accrued compensation and related taxes (492) (22)
Income taxes 1,859 830
Unearned revenues 1,802 2,452
Other current liabilities 6,905 (11,999)
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Net cash used by operating activities (44,020) (10,608)
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Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (19,118) (7,191)
Acquisition, net of cash acquired (3,903) (1,370)
Other investing activities (3,114) (4,640)
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Net cash used by investing activities (26,135) (13,201)
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Cash inflow (outflow) from financing activities:
Proceeds from stock options 1,149 6,900
Proceeds from sale of common stock - 135,930
Proceeds from debt 2,948 -
Payment of debt (4,959) (1,076)
Purchase of Treasury Stock (9,349) -
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Net cash provided (used) by
financing activities (10,211) 141,754
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Net increase (decrease) in cash and cash
equivalents (80,366) 117,945
Cash and cash equivalents:
Beginning of period 185,836 77,456
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End of period $105,470 $195,401
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See accompanying notes to consolidated financial statements.
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its wholly-owned subsidiaries ("Company"). All material
intercompany transactions are eliminated in consolidation. The
consolidated financial statements and related notes are unaudited and do
not contain all disclosures required by generally accepted accounting
principles. Refer to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 1996 for the most recent disclosure of the
Company's accounting policies.
The consolidated financial statements include all adjustments, consisting
only of normal recurring accruals, necessary to present fairly the Company's
financial position at September 28, 1997 and December 29, 1996 and its results
of operations and changes in cash flows for the thirty-nine week periods ended
September 28, 1997 and September 29, 1996.
2. INVENTORIES
September 28, December 29,
1997 1996
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(Thousands)
Raw materials $11,967 $10,912
Work in process 3,672 1,106
Finished goods 56,510 41,055
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$72,149 $53,073
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Inventories are stated at the lower of cost (first-in, first-out method)
or market. Cost includes material, labor and applicable overhead.
3. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated
effective annual tax rate. The Company's net earnings generated by the
operations of its Puerto Rico subsidiary are exempt from Federal income
taxes under Section 936 of the Internal Revenue Code (as amended under the
Small Business Job Protection Act of 1996) and substantially exempt from
Puerto Rico income taxes. Under current law, this exemption from Federal
income tax will remain in effect through 2001, will be subject to certain
limits during the years 2002 through 2005, and will be eliminated
thereafter. Under Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes", deferred tax liabilities and assets
are determined based on the difference between financial statement and tax
basis of assets and liabilities using enacted statutory tax rates in effect
at the balance sheet date.
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 28, 1997 and September 29,1996
were 34,953,000 and 35,328,000 (1997) and 36,123,000 and 33,440,000 (1996),
respectively.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the thirteen and thirty-nine week period ended
September, 1997 and September 29, 1996, respectively, included interest
payments of 895,000 and 5,731,000 (1997) and 880,000 and 5,618,000 (1996),
and income taxes paid of 1,184,000 and 5,060,000 (1997) and 173,000 and
5,506,000 (1996).
6. LONG TERM CUSTOMER CONTRACTS
Long term customer contracts include unbilled receivables generated primarily
from the leasing of the Company's EAS equipment to retailers under long-term
sales-type leasing arrangements (referred to by management as Comprehensive
Tag Program TM). The duration of these programs typically range from three
to five years.
7. MERGERS AND ACQUISITIONS
On March 11, 1997 the Company had announced that it had entered into a
definitive merger agreement with Ultrak, Inc. On April 3, 1997 the Company
announced that the merger agreement with Ultrak had been terminated by mutual
consent. Costs of $1.5 million associated with this transaction were recorded
in the first quarter of 1997 in Selling, General and Administrative expenses.
In addition, on January 31, 1997 the Company completed the acquisition of 2M
Security ApS (2M) for approximately $2.3 million. 2M had been the Company's
exclusive distributor for retail security products throughout Denmark since
1992.
On July 2, 1997, the Company acquired the assets of Check-Out Security
Systems for approximately $1.2 million. Check-Out Security, located in
Denmark, is a provider of CCTV products, installation and service.
On August 21,1997 the company acquired all of the oustanding shares of D&D
Security for approximately $1.0 million. D&D Security, located in Belgium,
is a provider of CCTV products and fire/burglar alarm systems.
8. MINORITY INTEREST
On July 1, 1997, Checkpoint Systems Japan Co., Ltd., a wholly-owned
subsidiary of the company ("Checkpoint Japan") issued newly authorized
shares to Mitsubishi Materials Corporation ("Mitsubishi") in exchange for
cash. These shares represented 20% of the adjusted outstanding shares of
Checkpoint Japan.
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<PAGE>8
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The Company's Consolidated Balance Sheet includes 100% of the assets and
liabilities of Checkpoint Japan. Mitsubishi's 20% interest in Checkpoint
Japan and the earnings therefrom have been reflected as minority interest on
the Company's Consolidated Balance Sheet and Consolidated Statement of
Operations, respectively.
9. 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 exchange forward and option
contracts in order to hedge anticipated rate fluctuations in Europe, Canada,
Japan and Australia. Transaction gains or losses resulting from these
contracts are recognized over the contract period. The Company uses the fair
value method of accounting, recording realized and unrealized gains and
losses on these contracts quarterly. These gains and losses are included in
Other income, net on the Company's consolidated statements of operations.
10. STOCK REPURCHASE
On April 8, 1997 the Board of Directors approved the purchase of up to 10% or
approximately 3.5 million shares of the Company's outstanding common stock.
The stock will be repurchased in the open market or in other transactions
pursuant to SEC Rule 10b-18. As of the end of the third quarter the Company
had purchased 767,300 shares of its common stock for a total cash outlay of
approximately $9.3 million. The timing of additional repurchases of common
shares will depend on a variety of factors including price. Based on a current
stock price in the range of $15 to $17 per share these additional repurchases
would represent a cash outlay of between $40.9 to $46.3 million.
11. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In March 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounts Standards(SFAS)No.128, Earnings Per Share. This statement
establishes standards for computing and presenting earnings per share(EPS)
and applies to entities with publicly held common stock or potential common
stock. In addition, this statement is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
This statement requires restatement of all prior-period EPS data presented.
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Although the Company is not permitted to adopt this statement in an earlier
period, pro-forma disclosures as if the Company had adopted the requirements
beginning in 1996 are presented below:
Quarter(13 Weeks) Ended Nine Months(26 Weeks) Ended
----------------------- ---------------------------
Sept. 28, Sept. 29 Sept. 28, Sept. 29,
1997 1996 1997 1996
--------- --------- --------- ---------
Basic:
Basic earnings
per share $ .17 $ .15 $ .38 $ .43
Dilutive:
Dilutive earnings
per share $ .17 $ .15 $ .38 $ .43
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, for fiscal years beginning after December 15, 1997. The
provisions of SFAS No. 130 establish standards for reporting and display of
comprehensive income and its components in the financial statements. This
statement requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in the
financial statements and displayed with the same prominence as the other
financial statements. The provisions of SFAS No. 131 establish standards
for the way that enterprises report information about operating segments in
annual financial statements and require that selected information about
operating segments in interim financial statements be reported. It also
establishes standards for related disclosure about products and services,
geographic areas, and major customers. The Company is currently reviewing
these new standards of disclosure for adoption in 1998.
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CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Third Quarter 1997 Compared to Third Quarter 1996
- ------------------------------------------------------------
Overview
During the third quarter of 1997 revenues increased by approximately 14.2
million (or 19.2%) over the third quarter of 1996. The increase in revenues
was due primarily to increased sales of the Company's EAS and CCTV product
lines within the domestic retail markets and to a lesser extent the
international markets. Cost of revenues declined by 1.9% compared to last
year's third quarter as a percentage of sales (from 59.2% to 57.3%). Selling,
general and administrative ("SG&A") expenses increased $5.6 million and
increased as a percentage of revenues by 1.4% (from 31.1% to 32.5%). Income
from operations increased $1.9 million (from $7.1 million to $9.0 million).
Net earnings for the third quarter of 1997 increased $.7 million (from $5.4
million to $6.1 million) resulting in earnings per share of $.17 for the third
quarter of 1997 versus $.15 achieved in last year's third quarter.
Net Revenues
Net revenues for the third quarter of 1997 increased $14.2 million (or 19.2%)
over the third quarter of 1996 (from $73.8 million to $88.0 million).
Domestic and international net revenues accounted for approximately 56.4% and
43.6%, respectively, of total net revenues compared to 52.0% and 48.0% for
last year's similar quarter. Domestic retail Electronic Article Surveillance
("EAS") net revenues increased by $8.0 million (or 31.9%). International EAS
net revenues increased $1.7 million (or 4.9%). Sales of the Company's
Security Systems Group products increased $3.4 million or 34.7% (from $9.8
million to 13.2 million) over the prior year's quarter. The Company's Access
Control product line had sales growth of 40.2% (from 2.3 million to 3.2
million) compared to the prior year's third quarter.
Cost of Revenues
Cost of revenues increased approximately $6.7 million (or 15.3%) over the
third quarter of 1996 (from $43.7 million to $50.4 million). As a percentage
of net revenues, cost of revenues decreased 1.9% (from 59.2% to 57.3%). The
decrease in the Company's cost of sales is primarily attributable to a
reduction in field service costs as a percentage of sales. This is the result
of increased efficiency within the worldwide service organization which was
able to support increased sales volumes without a significant increase in
costs. Product cost, research and development activities, and the other
components of the cost of sales, remained relatively flat as a percentage of
sales.
Selling, General and Administrative Expenses
SG&A expenses increased $5.6 million (or 24.4%) over the third quarter of
1996 (from $23.0 million to $28.6 million). As a percentage of net revenues,
SG&A expenses increased by 1.4% (from 31.1% to 32.5%). The higher expenses
(in dollars) were due to: (i)approximately $4.0 million increase in selling,
marketing and customer service costs to support
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<PAGE>11
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Third Quarter 1997 Compared to Third Quarter 1996
- ------------------------------------------------------------
Selling, General and Administrative Expenses (continued)
existing and future anticipated increases in revenues, and (ii) approximately
$1.6 million increase in general and administrative costs.
Other Income and Expenses
Other income and expense includes a foreign exchange gain for the third
quarter of 1997 totaling $.2 million versus a gain of $.3 million in last
year's third quarter.
Interest Expense and Interest Income
Interest expense for the third quarter of 1997 remained constant at
approximately $2.3 million. Interest income for the third quarter 1997
decreased by $.9 million (from $2.8 million to $1.9 million) as a result
of the Company utilizing the proceeds from last year's equity offering.
Income Taxes
The effective tax rate of 32.5% is slightly higher than the effective tax
rate during the third quarter of 1996 of 31.8%. This is primarily due to
higher taxable income attributable to foreign jurisdictions where tax rates
are marginally higher than the U.S. The Company anticipates an effective tax
rate approximating 32.6% for fiscal year 1997.
Net Earnings
Net earnings for the current quarter were $6.1 million or $.17 per share
versus $5.4 million or $.15 per share for the prior year's third quarter.
Exposure to International Operations
Approximately 92% of the Company's international sales during the third
quarter of 1997 were made in local currencies. Sales denominated in
currencies other than U.S. dollars increased the Company's potential exposure
to currency fluctuations which can affect results. Management cannot predict,
with any degree of certainty, changes in currency exchange rates and
therefore, the future impact that it will have on its operations.
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<PAGE>12
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Nine Months of 1997 Compared to First Nine Months of 1996
- ----------------------------------------------------------------
Overview
During the first nine months of 1997, revenues increased by approximately
$21.6 million (or 10.0%) over the first nine months of 1996. This increase
in revenues was due primarily from increased sales of the Company's EAS
product lines primarily within the domestic retail market ($9.6 million),
increased sales of the Company's CCTV product line in both the domestic and
international markets ($7.7 million) combined with increases in the sales of
the Company's Electronic Access Control product line ($2.1 million). Cost of
revenues decreased by under 1% from last year's first nine months as a
percentage of sales (from 58.3% to 57.8%). Selling, general and
administrative ("SG&A") expenses increased $15.0 million and increased as a
percentage of revenues by 3.5% (from 31.5% to 35.0%). Income from operations
decreased $4.7 million (from $21.9 million to $17.2 million). Net earnings
for the first nine months of 1997 decreased $1.2 million (from $14.5 million
to $13.3 million) resulting in earnings per share of $.38 for the first nine
months of 1997 versus $.43 achieved during last year's first nine months.
Net Revenues
Net revenues for the first nine months of 1997 increased $21.6 million (or
10.0%) over the first nine months of 1996 (from $215.6 million to $237.2
million). Domestic and international net revenues accounted for approximately
52.6% and 47.4%, respectively, of total net revenues compared to 50.2% and
49.8% for last year's first nine months. Domestic retail Electronic Article
Surveillance ("EAS") net revenues increased by $9.6 million (or 13.5%).
International EAS net revenues were flat when compared to prior year partially
resulting from the impact of the stronger U.S. dollar during most of this
year, primarily in Europe. Sales of the Company's Security Systems Group
products and related CCTV product lines increased $7.7 million or 27.1% (from
$28.3 million to $36.0 million) over the prior year's first nine months. The
Company's Access Control product line had sales growth of 35.0% (from $6.0
million to $8.1 million) compared to the prior year's first nine months.
Cost of Revenues
Cost of revenues increased approximately $11.3 million (or 9.0%) over the
first nine months of 1996 (from $125.7 million to $137.0 million). As a
percentage of net revenues, cost of revenues decreased .5% (from 58.3% to
57.8%). The decrease in the Company's cost of sales is mainly attributable
to a reduction in field service costs as a percentage of sales. This is the
result of increased efficiency within the worldwide service organization
which was able to support increased sales volumes without a significant
increase in costs. In addition, the impact of a strengthening in the U.S.
dollar against the basket of currencies in which the Company's foreign sales
entities operate resulted in lower selling prices when converted to U.S.
dollars but have been offset by reductions in the Company's unit product cost.
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<PAGE>13
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Nine Months of 1997 Compared to First Nine Months of 1996
- ----------------------------------------------------------------
Selling, General and Administrative Expenses
SG&A expenses increased $15.0 million (or 22.1%) over the first nine months
of 1996 (from $67.9 million to $82.9 million). As a percentage of net
revenues SG&A expenses increased by 3.5% (from 31.5% to 35.0%). The higher
expenses (in dollars) were due to: (i)approximately $9.8 million increase in
selling, marketing and customer service costs to support existing and future
anticipated increases in revenues, (ii)approximately $3.7 million increase
in general and administrative costs, and (iii)costs totaling $1.5 related
to the terminated Ultrak merger (see below).
Other Income and Expense
Other income and expense totaling $2.4 million includes: a payment of
$1.3 million received from Mitsubishi Materials Corporation in connection
with the establishment of a joint product research and development project
dedicated to developing radio frequency intelligent tagging solutions for
retail, library and industrial applications, a $1.0 million payment received
relating to the loss of business income caused by a fire at the Company's
warehouse facility in France and a foreign exchange gain for the first nine
months of 1997 totaling $.1 million.
Interest Expense and Interest Income
Interest expense for the first nine months of 1997 remained constant at
approximately $7.1 million compared to the same period last year. Interest
income for the first nine months of 1997 increased by $1.5 million (from $5.6
million to $7.1 million) as a result of the cash investment from the Company's
equity offering completed during the second quarter 1996 which totaled
approximately $136 million.
Income Taxes
The effective tax rate of 32.6% is slightly higher than the effective tax rate
during the first nine months of 1996 of 31.9%. This is primarily due to
higher taxable income attributable to foreign jurisdictions where tax rates
are marginally higher than the U.S. The Company anticipates an effective tax
rate approximating 32.6% for fiscal year 1997.
Net Earnings
Net earnings for the first nine months were $13.4 million or $.38 per share
versus $14.5 million or $.43 per share for the prior year's first nine months.
Exposure to International Operations
Approximately 91% of the Company's international sales during the first nine
months of 1997 were made in local currencies. Sales denominated in
currencies other than U.S. dollars increased the Company's potential exposure
to currency fluctuations which can affect results. Management cannot predict
with any degree of certainty changes in currency exchange rates and
therefore, the future impact that it will have on its operations.
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<PAGE>14
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity needs have related to, and are expected to continue
to relate to, capital investments, acquisitions and working capital
requirements. The Company has met its liquidity needs over the last three
years primarily through funds provided by long-term borrowings, and issuance
of convertible subordinated debt, and as through two separate issuances of
Common Stock in underwritten public offerings.
The Company's operating activities during the first nine months of 1997
consumed approximately $44.0 million compared to $10.6 million during the
first nine months of 1996. This use of cash was primarily the result of the
following activities: (i)an increase in accounts receivable resulting from
increased sales during the first nine months, (ii)increases in inventory
levels in order to support the anticipated increase in product demand during
the fourth quarter, and (iii)the Company's Comprehensive Tag Program which
provides equipment financing to retailers utilizing the Company's EAS systems
in exchange for a multi-year agreement to purchase disposable labels.
The Company's Comprehensive Tag Program ("Comp Tag") is a financial
marketing/sales tool designed to remove capital investment costs as an
obstacle to the potential customer's decision to purchase an EAS system.
Through the program, Checkpoint internally finances the leasing of equipment
to retailers under long-term non-cancelable contracts, usually three to five
years. Customers pay a premium price for an agreed-upon minimum number of
tags shipped on a quarterly or other periodic basis. The comprehensive tag
price reflects the cost of hardware, disposable RF labels, installation and
interest (if applicable) amortized over the life of the contract.
Comp Tag agreements which meet all the necessary requirements for sales-type
leasing as defined under FAS 13 are recognized as a sale upon shipment of the
EAS hardware. If the terms and conditions as specified in the Comp Tag
agreement do not meet all the necessary requirements for sales-type lease
accounting, then the accounting requires operating lease treatment. The cash
flow impact is independent of the accounting principle used for the income
statement. In the majority of cases, Checkpoint is able to recover equipment
and installation costs between 18-24 months under the five-year contract and
within a shorter period of time for contracts which run three or four years.
The impact of the Comp Tag agreement is reflected on the statement of cash
flows under two captions: 1)Long-term customer contracts of those meeting
sales- type lease accounting; or 2)Revenue equipment placed under operating
lease. The balance sheet captions, which reflect the two different financial
accounting treatments, are Long-term Customer Contracts for Comp Tag
contracts under the sales-type lease accounting method and Revenue Equipment
on Operating Lease for operating leases (equipment and installation costs).
Previously, the amounts reflected for Long-term Customer Contracts were
included in Other Assets.
-14-
<PAGE>15
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
In summary, Checkpoint management has determined that the risks of the Comp
Tag Program (i.e. cash outlay, credit risk, equipment and tag monitoring
costs) are far outweighed by the acceleration of chain-wide installations,
which drive market share and faster acceptance of source tagging by
manufacturers which, in turn, reduce the retailers' costs of hand applying
labels, thereby further increasing the favorable impact to the retailers'
bottom line.
The Company's capital expenditures during the first nine months of 1997
totaled $19.1 million compared to $7.2 million during the first nine months
of 1996. This increase is primarily due to the current plant expansion at
the Company's main manufacturing facility located in Ponce, Puerto Rico which
is expected to be operational at the end of the fourth quarter 1997. The
Company expects to continue to make investments in property, plant and
equipment at levels higher than the last several years. These capital
expenditures will generally relate to expanding, improving and maintaining
plant efficiency at the Company's various production facilities located in
the Caribbean. For fiscal year 1997 the Company anticipates that its capital
expenditure requirements will approximate $22 million.
Subsequent to the first quarter the Company announced that on April 8, 1997,
the Board of Directors had approved the purchase of up to 10% or approximately
3.5 million shares of the Company's outstanding common stock. The stock will
be repurchased in the open market or in other transactions pursuant to SEC
Rule 10b-18. As of the end of the third quarter the Company had purchased
767,300 shares of its common stock for a total cash outlay of approximately
$9.3 million. The timing of additional repurchases of common shares will
depend on a variety of factors including price. Based on a current stock
price in the range of $15 to $17 per share this would represent an additional
cash outlay of between $40.9 to $46.3 million.
Management believes that its anticipated cash needs for the forseeable
future can be funded from cash and cash equivalents on hand and a currently
available and unused $60 million bank line of credit. Subsequent to the end
of the third quarter, the Company received a commitment letter from a group
of financial institutions for a new $100 million credit facility which would
replace the current bank line of credit. Management expects to have this new
agreement in place before the end of fiscal year 1997.
The Company exports products for international sales to its foreign
subsidiaries. The subsidiaries, in turn, sell these products to customers
in their respective geographic area of operation, generally in local
currencies. This method of sales and resale gives rise to the risk of gains
or losses as a result of currency exchange rate fluctuations.
In order to reduce the Company's exposure resulting from currency
fluctuations, the Company has been selectively purchasing currency exchange
forward contracts on a regular basis. These contracts guarantee a
predetermined exchange rate at the time the contract is purchased. This
allows the Company to shift the risk, whether positive or negative, of
currency fluctuations from the date of the contract to a third party.
-15-
<PAGE>16
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
As of September 28, 1997, the Company had currency exchange forward contracts
totaling approximately $45.6 million. The contracts are in the various local
currencies covering primarily the Company's Western European operations along
with the Company's Canadian, Japanese and Australian operations. The
Company's operations in Argentina, Mexico and Brazil were not covered by
currency exchange forward contracts at September 28, 1997.
The Company also holds a series of put options denominated in German marks
which gives the Company the right but not the obligation to convert German
marks at a specified exchange rate into U.S. dollars. The Company will
continue to evaluate the use of currency options in order to reduce the
impact that exchange rate fluctuations have on the Company's gross margins
for sales made by the Company's international operations. The combination of
forward exchange contracts and currency options could limit the Company's
risks associated with significant exchange rate fluctuations.
During the quarter the Company made two CCTV acquisitions within the
International markets including acquiring the assets of Check-Out Security
Systems for approximately $1.2 million. Check-Out Security, located in
Denmark, is a provider of CCTV products, installation and service.
In addition, the company acquired the outstanding shares of D&D Security NV,
a company based in Belgium for approximately $1.0 and provides security
alarm installation, CCTV products and service.
The Company has never paid a cash dividend and has no plans to do so in the
foreseeable future. Certain covenants in the Company's debt instruments
limit the amounts available for cash dividends.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On February 14, 1996, the United States Federal Trade Commission (FTC) began
an investigation of the retail security systems industry. The probe was
launched under the premise of anticompetitive practices within the industry
whereby certain retail-trade groups limited the autonomy of smaller retailers
by supporting specific security systems. The Company, along with Sensormatic
Electronics Corporation, Minnesota Mining and Manufacturing Company, and other
industry participants, received subpoenas requesting certain documents and
communications necessary for the investigation. The Company does not believe
that any legal or regulatory infraction will be found on its part.
Item 2. CHANGES IN SECURITIES
As disclosed in the Company's 1996 Annual Report on Form 10-K, filed March 17,
1997, the Board of Directors of the Company, by action taken on March 10,
1997, (i) adopted a new shareholders rights plan pursuant to a written
agreement as of that date (1997 Plan) between the Company and American Stock
Transfer & Trust Company as rights agent, and (ii) terminated its
-16-
<PAGE>17
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
Item 2. Changes in Securities (continued)
existing shareholders rights agreement which was dated as of December 15,
1988, (1988 Plan) and directed the redemption of the outstanding rights under
the 1988 Plan at a price of $.005 per right. The redemption of the rights
under the 1988 Plan was effected on April 8, 1997, by payment of $.005 per
right to all holders of the Company's common stock as of the close of business
on March 24, 1997.
The rights under the 1997 Plan attached to the existing common shares as of
the close of business on March 24, 1997. No separate certificate representing
the new rights under the 1997 Plan are to be distributed until the occurrence
of certain triggering events as defined in the 1997 Plan. The rights may be
exercised by the holders at a price of $100.00 per share of common stock,
subject to adjustment. The terms of the rights are set forth in the 1997
Plan. The 1997 Plan is attached as Exhibit 4.1 to the Company's Annual Report
on Form 10-K for the year ended December 29, 1996.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the third quarter of 1997.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHECKPOINT SYSTEMS, INC.
/s/ Jeffrey A. Reinhold
- ----------------------- November 12, 1997
Vice President - Finance,
Chief Financial Officer and Treasurer
/s/ Mitchell T. Codkind
- ------------------------ November 12, 1997
Vice President, Corporate Controller
and Chief Accounting Officer
-17-
<PAGE>18
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