FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11257
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Checkpoint Systems, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 22-1895850
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Wolf Drive P.O. Box 188 Thorofare, New Jersey 08086
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(Address of principal executive offices) (Zip Code)
(856) 848-1800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
As of May 5, 2000, there were 30,210,134 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 5
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
March 26, Dec. 26,
2000 1999
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ASSETS (Unaudited)
(Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 75,755 $ 87,718
Accounts receivable, net of allowances
of $11,918,000 and $10,479,000 166,794 184,378
Inventories, net 101,281 99,148
Other current assets 26,373 27,346
Deferred income taxes 21,029 21,210
------- -------
Total current assets 391,232 419,800
REVENUE EQUIPMENT ON OPERATING LEASE, net 18,060 18,665
PROPERTY, PLANT AND EQUIPMENT, net 123,112 128,881
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, net 313,476 316,536
INTANGIBLES, net 14,593 14,211
OTHER ASSETS 45,293 46,780
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TOTAL ASSETS $905,766 $944,873
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and
current portion
of long-term debt $ 40,754 $ 47,680
Accounts payable 42,411 45,892
Accrued compensation and
related taxes 22,747 25,750
Income taxes 26,541 35,370
Unearned revenues 25,202 18,338
Restructuring reserve 22,304 27,047
Other current liabilities 37,805 36,537
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Total current liabilities 217,764 236,614
LONG-TERM DEBT, LESS CURRENT MATURITIES 251,751 263,595
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
OTHER LONG TERM LIABILITIES 64,122 67,893
MINORITY INTEREST 450 976
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized
500,000 shares, none issued
Common stock, par value $.10 per share,
authorized 100,000,000 shares, issued
36,559,634 and 36,522,584 3,655 3,652
Additional capital 233,914 233,617
Retained earnings 104,582 111,224
Common stock in treasury, at cost,
6,359,200 shares (64,410) (64,410)
Other comprehensive loss (26,062) (28,288)
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TOTAL SHAREHOLDERS' EQUITY 251,679 255,795
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $905,766 $944,873
======= =======
See accompanying notes to Consolidated Financial Statements.
3
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 Weeks) Ended
------------------------
March 26, March 28,
2000 1999
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(Thousands, except per share data)
Net Revenues $162,561 $81,754
Cost of Revenues 96,556 50,627
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Gross Profit 66,005 31,127
Selling, general and
administrative expenses 63,853 27,305
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Income from operations 2,152 3,822
Interest income 1,467 1,058
Interest expense 6,105 2,283
Other expense, net (256) (633)
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Income before taxes (2,742) 1,964
Income tax expense (benefit) (1,097) 599
Minority Interest 23 27
------ ------
Earnings before cumulative effect of
change in accounting principle (1,622) 1,392
Cumulative effect of change
in accounting principle (5,020) -
------ ------
Net Earnings (loss) ($6,642) $1,392
====== ======
Earnings (loss) per share before
cumulative effect of change in
accounting principle:
Basic ($0.05) $0.05
====== ======
Diluted ($0.05) $0.05
====== ======
Earnings (loss) per share:
Basic ($0.22) $0.05
====== ======
Diluted ($0.22) $0.05
====== ======
See accompanying notes to Consolidated Financial Statements
4
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Three Months (13 Weeks) Ended March 26,2000
----------------------------------------------------
Other
Compre-
Addit- hensive
Common ional Retained Income Treasury
Stock Capital Earnings (Loss) Stock Total
------ ------- -------- ------ -------- -----
(Thousands)
Balance,
December 26, 1999 $3,652 $233,617 $111,224 $(28,288) $(64,410) $255,795
Net earnings (6,642) (6,642)
Exercise of Stock
Options 3 297 300
Foreign currency
translation adjustment 2,226 2,226
------ -------- -------- --------- --------- --------
Balance
March 26, 2000 $3,655 $233,914 $104,582 $(26,062) $(64,410) $251,679
====== ======== ======== ========= ========= ========
See accompanying notes to Consolidated Financial Statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months (13 Weeks) Ended
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March 26, March 28,
2000 1999
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(Thousands)
Net earnings (loss) $ (6,642) $1,392
Foreign currency translation
adjustment, net of tax 2,226 (11,877)
------ ------
Comprehensive loss $(4,416) $(10,485)
====== ======
See accompanying notes to Consolidated Financial Statements.
5
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CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months (13 Weeks) Ended
-----------------------------
March 26, March 28,
2000 1999
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(Thousands)
Cash inflow (outflow) from operating activities:
Net earnings (loss) $(6,642) $ 1,392
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net book value of rented equipment sold 264 256
Revenue Equipment placed under operating lease (1,213) (3,732)
Long-term customer contracts 1,411 3,860
Depreciation and amortization 12,351 6,143
(Increase) decrease in current assets:
Accounts receivable 14,183 4,428
Inventories (5,313) 4,073
Other current assets 797 (1,955)
Increase (decrease) in current liabilities:
Accounts payable (1,680) (420)
Accrued compensation and related taxes (3,003) (518)
Income taxes (8,660) (671)
Unearned revenues 6,864 3,759
Restructuring reserve (4,743) -
Other current liabilities 1,027 744
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Net cash generated by operating activities 5,643 17,359
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Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment (4,029) (1,480)
Other investing activities (5,363) (986)
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Net cash used by investing activities (9,392) (2,466)
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Cash inflow (outflow) from financing activities:
Proceeds from stock options 300 124
Proceeds from debt - -
Payment of debt (7,409) (4,821)
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Net cash generated (used) by
financing activities (7,109) (4,697)
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Effect of Foreign currency rate on cash
and cash equivalents (1,105) (870)
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Net increase (decrease) in cash and cash
equivalents (11,963) 9,326
Cash and cash equivalents:
Beginning of period 87,718 35,934
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End of period $ 75,755 $ 45,260
======= =======
See accompanying notes to Consolidated Financial Statements.
6
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its majority-owned subsidiaries ("Company"). All
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
footnote 10 and the Company's Annual Report on Form 10-K for the fiscal year
ended December 26, 1999 for the most recent disclosure of the Company's
accounting policies.
The consolidated financial statements include all adjustments, consisting only
of normal recurring accruals, necessary to present fairly the Company's
financial position at March 26, 2000 and December 26, 1999 and its results of
operations and changes in cash flows for the thirteen week periods ended March
26, 2000 and March 28, 1999.
Certain reclassifications have been made to the 1999 financial statements and
related footnotes to conform to the 2000 presentation.
2. INVENTORIES
March 26, December 26,
2000 1999
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(Thousands)
Raw materials $17,013 $14,544
Work in process 10,640 10,984
Finished goods 73,628 73,620
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$101,281 $99,148
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Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes material, labor and applicable overhead.
3. LONG TERM CUSTOMER CONTRACTS
Included in Other Assets are unbilled receivables and other assets relating to
long term customer contracts generated primarily from the leasing of the
Company's EAS equipment to retailers under long-term sales-type leasing
arrangements. The duration of these programs typically range from three to five
years.
4. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated effective
annual tax rate. The Company's net earnings generated by the operations of its
Puerto Rico subsidiary are exempt from Federal income taxes under Section 936 of
the Internal Revenue Code (as amended under the Small Business Job Protection
Act of 1996) and substantially exempt from Puerto Rico income taxes. Under
current law, this exemption from Federal income tax will remain in effect
through 2001, will be subject to certain limits during the years 2002 through
2005, and will be eliminated thereafter. Under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", deferred tax
liabilities and assets are determined based on the difference between financial
statement and tax basis of assets and liabilities using enacted statutory tax
rates in effect at the balance sheet date.
7
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. PER SHARE DATA
The following data shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock:
Quarter (13 weeks) Ended
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March 26, March 28,
2000 1999
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(In thousands, except per
share amounts)
BASIC EARNINGS PER SHARE:
Earnings(loss) before cumulative effect
of change in accounting principal $ (1,622) $ 1,392
======== ========
Net earnings (loss) (6,642) $ 1,392
======== ========
Average Common Stock Outstanding 30,189 30,126
Basic earnings (loss) per share before
Cumulative effect of change in
accounting principal $ (.05) $ .05
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Basic earnings (loss) per share $ (.22) $ .05
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DILUTED EARNINGS PER SHARE:
Earnings (loss) before cumulative effect
of change in accounting principal
available for Common Stock and
diluted securities $ (1,622) $ 1,392
======== ========
Net earnings (loss) available for Common
Stock and diluted Securities (1) $ (6,642) $ 1,392
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Average Common Stock Outstanding 30,189 30,126
Additional common shares resulting
from Stock Options - (2) 464
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Average Common Stock and dilutive
stock outstanding (1) 30,189 30,590
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Diluted earnings (loss) per share before
cumulative effect of change in
accounting principal $ (.05) $ .05
======== ========
Dilutive earnings (loss) per share $ (.22) $ .05
======== ========
(1) Conversion of the subordinated debentures is not included in the above
calculation as the conversion price is anti-dilutive.
(2) Additional common shares resulting from stock options are not included in
the first quarter 2000 calculation as they are anti-dilutive.
8
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the thirteen week periods ended March 26, 2000, and March 28,
1999, included interest payments of $4,319,000 (2000) and $876,000 (1999) and
income taxes paid of $6,702,000 (2000) and $328,000 (1999).
7. ACQUISTION OF METO AG
On December 10, 1999, the Company consummated its acquisition of 98.57% of the
outstanding shares of Meto AG pursuant to a cash tender offer. Subsequently, the
Company has increased its ownership to approximately 99.2%. The aggregate
purchase price for the shares acquired was $260.5 million, plus transaction
costs of $4,635,000. In connection with the acquisition, the Company entered
into a new $425 million credit facility provided by several lenders. The credit
facility includes a $275 million term note and a $150 million revolving line of
credit. The terms of the new credit facility required the Company to retire all
existing senior debt. In connection with the senior debt restructuring,
Checkpoint incurred $7.2 million in placement fees which have been capitalized
and are being amortized over the term of the new facility. In addition, the
Company incurred a $852,000 pre-tax extraordinary charge consisting of a
$745,000 prepayment penalty and the write-off of $107,000 of unamortized
deferred financing costs related to debt extinguishment.
The following unaudited pro forma information presents the results of operations
of the Company as if the acquisition of Meto had taken place on December 27,
1998.
Quarter (13 weeks) ended
--------------------------
March 26, March 28,
2000 1999
(actual) (pro forma)
-------- -----------
(Thousands, except per share data)
Net revenues $162,561 $180,287
Net earnings (loss) (1) $ (6,642) (1) $ 2,139
Diluted loss per share $ (.22) $ .07
(1) Amount includes an after-tax cumulative effect of change in accounting
principal of $(5,020) and after-tax integration expenses of $952 recorded in
the first quarter of 2000.
9
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The pro forma results of operations are for comparative purposes only and
reflect increased amortization and interest expense resulting from the
acquisition described above, but do not include any potential cost savings from
combining the acquired businesses with the Company's operations. Consequently,
the pro forma results do not reflect the actual results of operations had the
acquisitions occurred on the dates indicated, and are not intended to be a
projection of future results or trends.
8. PROVISION FOR RESTRUCTURING
A restructuring reserve was established in 1999 for costs related to the
integration of Meto AG. A portion of these costs resulted in a before-tax charge
of $11.8 million ($0.27 per-share after tax) largely for severance costs for
approximately 135 employees ($3.1 million), lease termination costs for 15
office/warehouse facilities ($3.3 million), asset impairments ($4.5 million) and
other integration expenses ($0.9 million) of Checkpoint Systems, the acquiring
company. An additional $20.7 million associated with severance costs for
approximately 289 employees of the acquired company, and lease termination costs
of the acquired company was recorded as an increase to goodwill. Most of the 424
employees affected were in the support services, including selling, technical
and administrative staff functions.
During the quarter ending March 26, 2000 approximately $4.7 million (primarily
cash paid for severance) was charged against the restructuring reserve recorded
in 1999, leaving a restructuring reserve balance of approximately $22.3 million
as a liability on the balance sheet. In connection with the restructuring
program, 234 employees have been terminated as of March 26, 2000.
Additional charges for restructuring are expected during the remainder of year
2000 as the Company continues to evaluate and align its business portfolio with
its stated goal.
The restructuring activity is expected to be substantially complete by the end
of year 2000.
10
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. BUSINESS SEGMENTS
(1) Effective December 27,1998 the Company adopted provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Statement requires the Company to disclose selected segment information on
an interim basis. With the recent acquisition of Meto AG, the Company has
revised its segments to conform with the combined company. As a result,
the Company has restated the prior period segment information to conform
with the current period presentation; this information is set forth below:
Quarter (13 weeks) Ended
----------------------------
March 26, March 28,
2000 1999 (1)
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(In Thousands)
Business segment net revenue:
Loss Prevention $ 93,984 $ 81,664
Auto ID 36,854 90
Retail Merchandising 31,723 -
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Total $162,561 $ 81,754
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Business segment gross margin:
Loss Prevention $ 37,283 $ 31,171
Auto ID 11,451 (44)
Retail Merchandising 17,271 -
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Total $ 66,005 $ 31,127
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10. CHANGE IN ACCOUNTING PRINCIPLE
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements.
In accordance with SEC Staff Accounting Bulletin No. 101, the Company has
changed its accounting method for recognizing revenue on the sale of equipment
where post-shipment obligations exist. Previously, the Company recognized
revenue for equipment when title transferred, generally upon shipment. Beginning
with the first quarter of year 2000, the Company began recognizing revenue when
installation is complete or other post-shipment obligations have been satisfied.
The cumulative effect of the change in accounting method is a non-cash reduction
in net earnings of $5,020,000, or $0.17 per diluted share.
11
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CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
11. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes a new model for the accounting and
reporting of derivative and hedging transactions. The statement amends a number
of existing standards and, as amended by SFAS No. 137, is scheduled to be
effective for fiscal years beginning after June 15, 2000. The Company expects to
adopt this standard as required in fiscal year 2001 and, because of continual
business-driven changes to its derivatives and hedging programs, has not fully
assessed its potential impact on its financial position or results of
operations.
12
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This report includes forward-looking statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include information, for example, about possible
future results of operations, and risks associated with international
operations. While the Company believes that these statements are reasonable as
of the date made, investors should not place undue reliance on forward-looking
statements since they involve risks and uncertainties that could cause actual
results to differ materially from any anticipated future results encompassed
within the forward-looking statements. Factors that might cause results to
differ significantly from those expressed in the forward-looking statements
include, but are not limited to: technological changes which may impact both
existing and new products; conditions in international markets which may result
in higher costs or adverse currency exchange rate fluctuations; and general
economic and business conditions which may be less favorable than anticipated.
RESULTS OF OPERATIONS
- ---------------------
First Quarter 2000 Compared to First Quarter 1999
- -------------------------------------------------
The table below reflects sales and income from operations for the quarter ended
March 28, 1999 on a pro forma basis, and earnings from operations for the
quarter ended March 26, 2000 excluding integration costs. The acquisition of
Meto AG in 1999, which was accounted for using the purchase method,
significantly impacted the comparability of results for the first quarter of
2000. Accordingly, pro forma revenues and income from operations for the quarter
ended March 28, 1999 are provided to facilitate comparisons. The pro forma
results include Meto AG as if the acquisition had occurred on December 28, 1998.
Pro forma adjustments have been made primarily to reflect an increase in
goodwill amortization related to the Meto acquisition. Cost savings from
combining operations with the Company have not been reflected. Consequently, the
pro forma results do not reflect the actual results of operations had the
acquisition occurred on the date indicated, and are not intended to be a
projection of future results or trends.
Quarter (13 weeks) Ended
----------------------------
March 26, March 28,
2000 1999
(actual) (pro forma)
-------- ---------
(Thousands)
Net Revenues $162,561 $180,287
Cost of revenues 96,556 107,938
-------- --------
Gross Profit 66,005 72,349
Selling, general and administrative
expenses 62,267 62,811
-------- --------
Income from operations before
integration expenses $ 3,738 $ 9,538
======== ========
13
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The discussion that follows speaks to the comparisons in the above table through
income from operations before integration expenses. Comparisons of all other
income and expense items refer to the Consolidated Statements of Operations.
Net Revenues
Net revenues for the first quarter of 2000 decreased $17.7 million (or 9.8%)
over the first quarter of 1999 (from $180.3 million to $162.6 million). This
decrease in revenue is attributable to the effects of the change in foreign
currency exchange rates for the quarter ($9.0 million) with the balance
primarily relating to the impact of the integration of the Meto operations.
Cost of Revenues
Cost of revenues decreased approximately $11.3 million (or 10.5%) over the
first quarter of 1999 (from $107.9 million to $96.6 million). As a percentage of
net revenues, cost of revenues decreased 0.5% (from 59.9% to 59.4%). The
decrease in the Company's cost of revenues is attributable to: (i) a favorable
product mix; (ii) a decrease in field service costs; and (iii) utilization
improvements experienced within the Company's manufacturing operations during
the quarter.
Selling, General and Administrative Expenses
SG&A expenses decreased $0.5 million (or 0.1%) over the first quarter of
1999 (from $62.8 million to $62.3 million). As a percentage of net revenues,
SG&A expenses increased by 3.5% (from 34.8% to 38.3%). Included in SG&A is
approximately $2.8 million of goodwill amortization expense related to the
acquisition of Meto AG.
Other Expense, net
Other expense, net for the first quarter of 2000 represented a net foreign
exchange loss of $0.3 million and for the first quarter of 1999 represented a
net foreign exchange loss of $0.6 million.
Interest Expense and Interest Income
Interest expense for the first quarter of 2000 increased $3.8 million from the
comparable quarter in 1999 (from $2.3 million to $6.1 million). The increase in
interest expense is directly attributable to the increased borrowings associated
with the acquisition of Meto AG in December 1999. Interest income for the first
quarter 2000 increased by $0.4 million from the comparable quarter in 1999 (from
$1.1 million to $1.5 million).
Income Taxes
The effective tax rate for the first quarter of 2000 was 40.0%. The effective
tax rate during the first quarter of 1999 was 30.5%. The higher tax rate
reflects the effect of the increase in nondeductible goodwill amortization
related to the acquisition of Meto AG in December 1999.
14
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Cumulative Effect Of Change In Accounting Principle
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. In accordance with SEC Staff Accounting Bulletin No. 101, the
Company has changed its accounting method for recognizing revenue on the sale of
equipment where post-shipment obligations exist. Previously, the Company
recognized revenue for equipment when title transferred, generally upon
shipment. Beginning with the first quarter of year 2000, the Company began
recognizing revenue when installation is complete or other post-shipment
obligations have been satisfied. The cumulative effect of the change in
accounting method is a non-cash reduction in net earnings of $5.0 million, or
$0.17 per diluted share.
Net Earnings (loss)
Net earnings (loss) for the current quarter were ($6.6) million or ($.22) per
share versus $1.4 million or $.05 per share for the prior year's first quarter.
Exposure to International Operations
Approximately 67.5% of the Company's sales are made in currencies other than
U.S. dollars. Sales denominated in currencies other than U.S. dollars increases
the Company's potential exposure to currency fluctuations which can affect
results. Management cannot predict, with any degree of certainty, changes in
currency exchange rates and therefore, the future impact that such changes may
have on its operations.
Liquidity and Capital Resources
- -------------------------------
Financial Condition
Liquidity and Capital Resources
The Company's liquidity needs have related to, and are expected to continue to
relate to, capital investments, acquisitions and working capital requirements.
The Company has met its liquidity needs over the last three years primarily
through funds provided by long-term borrowings, through a secondary issuance of
common stock in an underwritten public offering, and more recently through cash
generated from operations. The Company believes that cash provided from
operating activities and funding available under its current credit agreements,
should be adequate for its presently foreseeable working capital and capital
investment requirements.
The Company's operating activities during the first quarter of 2000 generated
approximately $12.0 million, before the payment of restructuring and integration
expenses of $6.3 million, compared to approximately $17.4 million during 1999.
This change from the prior year was primarily attributable to the payment of
assumed liabilities, and interest expense.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
In December 1999, the Company completed the acquisition of Meto AG. In
connection with the acquisition, the Company entered into a new $425 million six
and one-half year senior collateralized multi-currency credit facility with a
consortium of twenty-one banks led by the Company's principal lending bank. The
credit facility, which expires on March 31, 2006, includes a $275 million
equivalent multi-currency term note and a $150 million equivalent multi-currency
revolving line of credit. Interest rates on the new facility reset quarterly and
is based on the Eurocurrency base rate plus an applicable margin. At March 26,
2000, 244 million Euro (approximately $236.0 million) and $25 million were
outstanding under the term loan and 2.23 billion Japanese Yen (approximately
$20.8 million) was outstanding under the revolving credit facility.
The Company has never paid a cash dividend (except for a nominal cash
distribution in April 1997, to redeem the rights outstanding under the Company's
1988 Shareholders' Rights Plan). The Company does not anticipate paying any cash
dividend in the near future and is limited by existing covenants in the
Company's debt instruments with regard to paying dividends.
Management believes that its anticipated cash needs for the foreseeable future
can be funded from cash and cash equivalents on hand and the availability under
the $150 million, six and one-half year revolving credit facility.
Capital Expenditures
The Company's capital expenditures during the first quarter of fiscal 2000
totaled $4.0 million compared to $1.4 million during the first quarter of fiscal
1999. The higher expenditures during 2000 were primarily a result of an
increased investment in the Company's global IT infrastructure combined with an
investment in manufacturing equipment located in Puerto Rico. The Company
anticipates its capital expenditures to approximate $15.0 million in 2000.
Exposure to International Operations
The Company manufactures product in the US, the Caribbean, Europe and Asia
Pacific for both the local marketplace as well as for export to its foreign
subsidiaries. The subsidiaries, in turn, sell these products to customers in
their respective geographic area of operation, generally in local currencies.
This method of sale and resale gives rise to the risk of gains or losses as a
result of currency exchange rate fluctuations.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
In order to reduce the Company's exposure resulting from currency fluctuations,
the Company has been selectively purchasing currency exchange forward contracts
on a regular basis. These contracts guarantee a predetermined exchange rate at
the time the contract is purchased. This allows the Company to shift the risk,
whether positive or negative, of currency fluctuations from the date of the
contract to a third party.
As of March 26, 2000, the Company had currency exchange forward contracts
totaling approximately $58.0 million. The contracts are in the various local
currencies covering primarily the Company's operations located within the
European Monetary Union. Historically, the Company has not purchased currency
exchange forward contracts for its operations in South America and Asia Pacific.
During 1999, the Company entered into a foreign exchange option contract for the
conversion of 6.0 million Euros into USD with an expiration date of May 2000.
The Company will continue to evaluate the use of currency options in order to
reduce the impact that exchange rate fluctuations have on the Company's net
earnings from sales made by the Company's international operations. The
combination of forward exchange contracts and currency options should reduce the
Company's risks associated with significant exchange rate fluctuations.
17
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Number Description
-------- -------------------------------
27 Financial Data Schedule
(Electronic filings only)
(b) Reports on Form 8-K
The Registrant filed the following reports:
(i) Form 8-K filed December 27, 1999 reporting that the
Registrant consummated its acquisition of 98.5% of the
outstanding shares of Meto AG; and (ii) Form 8-K/A filed
February 25, 2000 filing the required financial statements and
pro forma financial information relating to the aforementioned
acquisition.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Checkpoint Systems, Inc. May 10, 2000
- ------------------------
/s/ W. Craig Burns
Vice President, Finance,
Chief Financial Officer
and Treasurer
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