-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RyaFYVXm+GaPqBz17LTkJ747SKcWuBrhu9gnNUbgR8Wltmp9cJFLbJ+C0mt8drKm 9Ffpjj0Pz6Ag8Qh1fJ1Uww== 0000215419-98-000012.txt : 19980813 0000215419-98-000012.hdr.sgml : 19980813 ACCESSION NUMBER: 0000215419-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980628 FILED AS OF DATE: 19980812 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHECKPOINT SYSTEMS INC CENTRAL INDEX KEY: 0000215419 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 221895850 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11257 FILM NUMBER: 98683730 BUSINESS ADDRESS: STREET 1: 101 WOLF DR STREET 2: P O 188 CITY: THOROFARE STATE: NJ ZIP: 08086 BUSINESS PHONE: 6096481800 10-Q 1 SECOND QUARTER 1998 FORM 10-Q LIVE DOCUMENT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 For the quarter ended June 28, 1998 ----------------------------------------------------------------------- QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-11257 ----------------------------------------------- Checkpoint Systems, Inc. --------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 22-1895850 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 Wolf Drive P.O. Box 188 Thorofare, New Jersey 08086 --------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (609) 848-1800 --------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of August 05, 1998, there were 32,415,684 shares of the Common Stock outstanding. 2 CHECKPOINT SYSTEMS, INC. FORM 10-Q INDEX Page No. -------- Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets . . . . . . . . . . . . . . 3 Consolidated Statements of Operations . . . . . . . . . 4 Consolidated Statement of Shareholders' Equity. . . . . 5 Consolidated Statement of Comprehensive Income. . . . . 5 Consolidated Statements of Cash Flows . . . . . . . . . 6 Notes to Consolidated Financial Statements. . . . . . . 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . 10-15 Part II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders . . 16 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 16 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . 16 -2- 3 CHECKPOINT SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
June 28, Dec. 28, 1998 1997 --------- -------- ASSETS (Unaudited) ------ (Thousands) CURRENT ASSETS Cash and cash equivalents $ 55,753 $ 64,138 Accounts receivable, net of allowances of $5,470,000 and $5,703,000 122,383 136,748 Inventories, net 85,588 77,631 Other current assets 10,998 13,570 Deferred income taxes 5,569 5,593 ------- ------- Total current assets 280,291 297,680 REVENUE EQUIPMENT ON OPERATING LEASE, net 21,213 24,718 PROPERTY, PLANT AND EQUIPMENT, net 82,015 58,674 EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET 73,877 72,304 INTANGIBLES, NET 12,867 14,003 OTHER ASSETS 57,055 49,055 ------- ------- TOTAL ASSETS $527,318 $516,434 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Short-term borrowings and current portion of long-term debt $ 9,769 $ 6,957 Accounts payable 17,387 13,200 Accrued compensation and related taxes 7,364 7,745 Income taxes 10,029 13,687 Unearned revenues 12,628 11,413 Other current liabilities 24,450 33,108 ------- ------- Total current liabilities 81,627 86,110 LONG-TERM DEBT, LESS CURRENT MATURITIES 45,475 30,855 CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000 DEFERRED INCOME TAXES 870 1,458 MINORITY INTEREST 410 461 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 36,448,084 and 36,338,228 3,645 3,633 Additional capital 233,035 232,079 Retained earnings 91,838 86,873 Common stock in treasury, at cost, 3,188,700 shares (27,986) (27,986) Accumulated other comprehensive income (21,596) (17,049) ------ ------- TOTAL SHAREHOLDERS' EQUITY 278,936 277,550 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $527,318 $516,434 ======= =======
See accompanying notes to Consolidated Financial Statements. -3- 4 CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Quarter (13 Weeks) Ended Six Months (26 Weeks) Ended ------------------------ --------------------------- June 28, June 29, June 28, June 29, 1998 1997 1998 1997 -------- -------- -------- -------- (Thousands, except per share data) Net Revenues $90,578 $81,036 $170,435 $149,214 Cost of Revenues 54,918 46,497 103,220 86,638 ------ ------ ------- ------- Gross Profit 35,660 34,539 67,215 62,576 Selling, General and Administrative Expenses 29,352 27,649 57,991 54,346 Income from operations 6,308 6,890 9,224 8,230 Interest Income 1,031 2,362 2,190 5,193 Interest Expense 2,586 2,304 5,007 4,753 Other Income, net 684 275 873 2,163 ----- ----- ----- ----- Income Before Income Taxes 5,437 7,223 7,280 10,833 Income Taxes 1,767 2,357 2,366 3,532 Minority Interest 22 - 51 - ----- ----- ----- ------ Net Earnings $3,692 $4,866 $4,965 $7,301 ====== ====== ====== ====== Net Earnings Per Share Basic $ .11 $ .14 $ .15 $ .21 ====== ====== ====== ====== Diluted $ .11 $ .14 $ .14 $ .21 ====== ====== ====== ======
See accompanying notes to Consolidated Financial Statements. -4- 5 CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
Six Months(26 Weeks) Ended June 28,1998 -------------------------------------------------- Foreign Currency Common Additional Retained Adjust- Treasury Stock Capital Earnings ments Stock Total ------- ---------- -------- -------- -------- ----- (Thousands) Balance, December 28, 1997 $ 3,633 $232,079 $86,873 $(17,049) $(27,986) $277,550 Net Earnings - - 4,965 - - 4,965 Exercise of Stock Options 12 956 - - - 968 Other Comprehensive Income - - - (4,547) - (4,547) ------ -------- ------- ------- ------- ------- Balance at June 28,1998 $ 3,645 $233,035 $91,838 $(21,596) $(27,986) $278,936 ======= ======= ====== ====-=== ======== =======
See accompanying notes to Consolidated Financial Statements. CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
Six Months(26 Weeks) Ended June 28,1998 ------------------------------------------ (Thousands) Net Earnings $4,965 Other Comprehensive Income Foreign Currency Translation Adjustments (4,547) ------ Other Comprehensive Income (4,547) ------ Comprehensive Income $ 418 ======
See accompanying notes to Consolidated Financial Statements. -5- 6 CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months(26 Weeks) Ended -------------------------- June 28, June 29, 1998 1997 --------- -------- (Thousands) Cash inflow (outflow) from operating activities: Net earnings $ 4,965 $ 7,301 Adjustments to reconcile net earnings to net cash provided by operating activities: Net book value of rented equipment sold 896 710 Revenue Equipment placed under Operating Lease (2,395) (8,439) Long-term customer contracts (9,188) (5,439) Depreciation and amortization 13,112 9,630 Provision for losses on accounts receivable 978 692 (Increase) decrease in current assets: Accounts receivable 11,990 (24,901) Inventories (7,590) (8,912) Other current assets 2,495 (6,624) Increase (decrease) in current liabilities: Accounts payable 4,480 4,224 Accrued compensation and related taxes (267) (679) Income taxes (3,950) 266 Unearned revenues 852 2,159 Other current liabilities (9,104) 1,626 ------- ------- Net cash provided (used) by Operating activities 7,274 (28,386) ------- ------- Cash inflow (outflow) from investing activities: Acquisition of property, plant and equipment (8,079) (12,039) Acquisition, net of cash acquired (25,981) (1,820) Other investing activities (1,271) (2,706) ------- ------- Net cash used by investing activities (35,331) (16,565) ------- ------- Cash inflow (outflow) from financing activities: Proceeds from stock options 968 787 Proceeds from debt 19,541 2,947 Payment of debt (837) (3,418) Purchase of treasury stock - (8,410) ------- ------- Net cash provided (used) by financing activities 19,672 (8,094) ------- ------- Net decrease in cash and cash equivalents (8,385) (53,045) Cash and cash equivalents: Beginning of period 64,138 185,836 ------- ------- End of period $ 55,753 $132,791 ======= =======
See accompanying notes to Consolidated Financial Statements. -6- 7 CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF ACCOUNTING The consolidated financial statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries ("Company"). All material intercompany transactions are eliminated in consolidation. The consolidated financial statements and related notes are unaudited and do not contain all disclosures required by generally accepted accounting principles. Refer to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1997 for the most recent disclosure of the Company's accounting policies. The consolidated financial statements include all adjustments, necessary to present fairly the Company's financial position at June 28, 1998 and December 28, 1997 and its results of operations and changes in cash flows for the twenty-six week periods ended June 28, 1998 and June 29, 1997. 2. INVENTORIES
June 28, December 28, 1998 1997 -------- ------------ (Thousands) Raw materials $10,757 $10,329 Work in process 2,190 2,312 Finished goods 72,641 64,990 ------- ------- $85,588 $77,631 ======= =======
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 (referred to by management as the Comprehensive Tag Program(tm)). 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- 8 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:
Six Months Quarter (13 weeks) Ended (26 weeks) Ended ------------------------ ------------------- June 28, June 29, June 28, June 29, 1998 1997 1998 1997 -------- -------- -------- -------- (In thousands, except per share amounts) BASIC EARNINGS PER SHARE: Net Income $ 3,692 $ 4,866 $ 4,965 $ 7,301 ======== ======== ======== ======== Average Common Stock Outstanding 33,249 33,951 33,221 34,255 Basic Earnings Per Share $ .11 $ .14 $ .15 $ .21 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE: Net Income Available for Common Stock Dilutive Securities(1) $ 3,692 $ 4,866 $ 4,965 $ 7,301 ======== ======== ======== ======== Average Common Stock Outstanding 33,249 33,951 33,221 34,255 Additional Common Shares Resulting from Stock Options 1,127 972 1,266 1,261 -------- -------- -------- ------- Average Common Stock and Dilutive Stock Outstanding(1) 34,376 34,923 34,487 35,516 ======== ======== ======= ======= Dilutive Earnings Per Share $ .11 $ .14 $ .14 $ .21 ======== ======== ======= =======
(1) Conversion of the subordinated debentures is not included in the above calculation as the conversion price is anti-dilutive. 6. SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest and income taxes for the thirteen and twenty-six week periods ended June 28, 1998, and June 29, 1997 was as follows:
Six Months Quarter (13 weeks) Ended (26 weeks) Ended ------------------------ ---------------- June 28, June 29, June 28, June 29, 1998 1997 1998 1997 -------- -------- -------- -------- (In thousands) Interest $ 3,791 $ 3,960 $ 4,722 $ 4,836 Income Taxes $ 1,388 $ 3,380 $ 4,045 $ 3,876
-8- 9 CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 7. RESTRUCTURING CHARGE In December 1997, the Company recorded a pre-tax restructuring charge of $9,000,000. This charge, relating directly to the Company's international operations, includes (i) the elimination of approximately 60 positions ($5,450,000); (ii) the lease terminations of six of the Company's sales facilities and the consolidation of the Company's European research and development center into the corporate headquarters ($1,500,000); (iii) the costs associated with the termination of two master reseller agreements in Asia and Southern Europe ($1,550,000); and (iv) costs associated with the consolidation of inventory to the European distribution center ($500,000). At June 28, 1998, $5,572,000 of restructuring remains in Other Current Liabilities. The restructuring activity is expected to be substantially complete prior to the end of 1998. 8. ACQUISITIONS On February 2, 1998, the Company acquired the assets of Tokai Electronics Co., Ltd., a Japanese manufacturer of radio frequency tags, for approximately $27 million. The Company had held a one-third interest in Tokai since 1995. 9. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED In June 1997, the FASB issued SFAS No. 131,"Disclosures about Segments of an Enterprise and Related Information". 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 reviewing this standard of disclosure for adoption in its 1998 annual report. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities. The provisions of SFAS No. 133 establishes new procedures accounting for derivatives and hedging activities and amends a number of existing standards. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. Although the Company has not fully completed its evaluation of the impact of this new standard, we do not anticipate the adoption of this standard to have a material effect on the Company's consolidated financial statements. -9- 10 Item 2. CHECKPOINT SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements This report may include information that could constitute forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements may involve risk and uncertainties that could cause actual results to differ materially from any future results encompassed within forward-looking statements. RESULTS OF OPERATIONS - --------------------- Second Quarter 1998 Compared to Second Quarter 1997 - ------------------------------------------------------------ Overview During the second quarter of 1998, revenues increased by approximately $9.5 million (or 11.8%) over the second quarter of 1997. The increase in revenues was due primarily to increased sales of the Company's Electronic Article Surveillance ("EAS") product line in the Company's international retail markets and an increase in sales of the CCTV/Fire and Burglar product lines within the domestic retail markets and to a lesser extent the increased sales of CCTV/Fire and Burglar products in the international markets. Cost of revenues, as a percentage of sales increased by 3.2% (from 57.4% to 60.6%) when compared to last year's quarter. Selling, general and administrative ("SG&A") expenses increased $1.7 million but decreased as a percentage of revenues by 1.7% (from 34.1% to 32.4%). Income from operations decreased $0.6 million (from $6.9 million to $6.3 million). Net earnings for the second quarter of 1998 decreased $1.2 million (from $4.9 million to $3.7 million). Earnings per share were $.11 for the second quarter of 1998 versus $.14 achieved in the second quarter of 1997. Per share amounts for all periods reflect diluted earnings per share, unless otherwise noted. Net Revenues Net revenues for the second quarter of 1998 increased $9.5 million (or 11.8%) over the second quarter of 1997 (from $81.0 million to $90.5 million). North American (the United States and Canada) and International net revenues accounted for approximately 55.6% and 44.4%, respectively, of total net revenues compared to 57.3% and 42.7% for last year's similar quarter. North American EAS net revenues decreased by $0.2 million (or 0.6%). International EAS net revenues increased $4.5 million (or 13.3%). Sales of the Company's Worldwide CCTV/Fire and Burglar products increased $4.8 million or 36.9% (from $13.0 million to $17.8 million) over the prior year's quarter. The Company's Access Control product line had sales growth of 11.1% (from $2.7 million to $3.0 million) compared to the prior year's second quarter. Cost of Revenues Cost of revenues increased $8.4 million (or 18.1%) over the second quarter of 1997 (from $46.5 million to $54.9 million). As a percentage of net revenues, cost of revenues increased 3.2% (from 57.4% to 60.6%). The increase in the Company's cost of sales is primarily attributable to: (i) the increase in sales of CCTV/Fire and Burglar products which result in higher -10 - 11 CHECKPOINT SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) product costs when compared to the Company's EAS products; (ii) the costs associated with excess capacity in the Puerto Rico and Japan manufacturing facilities resulting from the recent expansion; (iii) an increase in field service costs to support existing and future revenues; (iv) higher costs of disposable labels manufactured in Japan; and (v) an increase in Research and Development activities associated with the development of RF-EAS/ID Products. Selling, General and Administrative Expenses SG&A expenses increased $1.7 million (or 6.1%) over the second quarter of 1997 (from $27.7 million to $29.4 million). As a percentage of net revenues, SG&A expenses decreased by 1.7% (from 34.1% to 32.4%). The higher expenses (in dollars) reflect an $0.8 million increase in selling, marketing and customer service costs to support existing and future revenues, and a $0.9 million increase in general and administrative costs. Other Income, net Other income, net for the second quarter of 1998 increased by $0.4 million over the second quarter of 1997. Other income, net for the second quarter of 1998 included $1.3 million of proceeds from the final settlement of an insurance claim relating to the loss of business income caused by a fire at the Company's warehouse facility in France; offset by a net foreign exchange loss of $0.6 million. Other income, net for the second quarter of 1997 was comprised of a foreign exchange gain of $0.3 million. Interest Expense and Interest Income Interest expense for the second quarter of 1998 increased by $0.3 million over the comparable quarter in 1997 from $2.3 million to $2.6 million. Interest income for the second quarter of 1998 decreased by $1.4 million from the comparable quarter in 1997 (from $2.4 million to $1.0 million) resulting from a direct reduction in cash and cash investments primarily related to (i) the net cash used in operations for the remainder of 1997, (ii) the cost of expanding the Company's manufacturing facility in Ponce, Puerto Rico during 1997, (iii) the purchase of Treasury stock in 1997; and (iv) the acquisition of the assets of Tokai Electronics Co., Ltd., in February 1998. Income Taxes The effective tax rate of 32.5% is the same as the effective tax rate during the second quarter of 1997. Net Earnings Net earnings for the current quarter were $3.7 million or $.11 per share versus $4.9 million or $.14 per share for the prior year's second quarter. Exposure to International Operations Approximately 96% of the Company's international sales during the second quarter of 1998 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 such changes may have on its operations. -11- 12 CHECKPOINT SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) First Half 1998 Compared to First Half 1997 - ------------------------------------------- Overview During the first half of 1998, revenues increased by approximately $21.2 million (or 14.2%) over the first half of 1997. The increase in revenues was due primarily to increased sales of the Company's Electronic Article Surveillance ("EAS") product line in both the North American (the United States and Canada) and International retail markets and CCTV/Fire and Burglar product lines within the domestic retail markets and to a lesser extent the increased sales of CCTV/Fire and Burglar products in the international markets. Cost of revenues, as a percentage of sales, increased by 2.5% (from 58.1% to 60.6%) when compared to last year's first half. Selling, general and administrative ("SG&A") expenses increased $3.6 million but decreased as a percentage of revenues by 2.4% (from 36.4% to 34.0%). Income from operations increased $1.0 million (from $8.2 million to $9.2 million). Net earnings for the first half of 1998 decreased $2.3 million (from $7.3 million to $5.0 million). Earnings per share were $.14 for the first half of 1998 versus $.21 achieved in the first half of 1997. Net Revenues Net revenues for the first half of 1998 increased $21.2 million (or 14.2%) over the first half of 1997 (from $149.2 million to $170.4 million). North American and International net revenues accounted for approximately 57.2% and 42.8%, respectively, of total net revenues compared to 55.2% and 44.8% for last year's similar half. North American EAS net revenues increased by $5.2 million (or 9.3%). International EAS net revenues increased $3.3 million (or 5%). Sales of the Company's Worldwide CCTV/Fire and Burglar products increased $11.1 million or 48.7% (from $22.8 million to $33.9 million) over the prior year's first half. The Company's Access Control product line had sales growth of 21.6% (from $5.1 million to $6.2 million) compared to the prior year's first half. Cost of Revenues Cost of revenues increased approximately $16.6 million (or 19.2%) over the first half of 1997 (from $86.6 million to $103.2 million). As a percentage of net revenues, cost of revenues increased 2.5% (from 58.1% to 60.6%). The increase in the Company's cost of sales is primarily attributable to: (i) the increase in sales of CCTV/Fire and Burglar products which result in higher product costs when compared to the Company's EAS products; (ii) the costs associated with excess capacity in the Puerto Rico manufacturing facility resulting from the recent expansion; (iii) an increase in field service costs to support existing and future revenues; (iv) higher costs of disposable labels manufactured in Japan; and (v) an increase in Research and Development activities associated with the development of RF-EAS/ID Products. -12- 13 CHECKPOINT SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Selling, General and Administrative Expenses SG&A expenses increased $3.6 million (or 6.6%) over the first half of 1997 (from $54.4 million to $58.0 million). As a percentage of net revenues, SG&A expenses decreased by 2.4% (from 36.4% to 34.0%). The higher expenses (in dollars) reflect a $2.1 million increase in selling, marketing and customer service costs to support existing and future revenues, and a $1.5 million increase in general and administrative costs. Other Income, net Other income, net for the first half of 1998 decreased by $1.3 million compared to the first half of 1997. Other income, net of $0.8 million for the second half of 1998 included $1.3 million of proceeds from the final settlement of the insurance claim relating to the loss of business income caused by a fire at the Company's warehouse facility in France, offset by a net foreign exchange loss of $0.5 million. Other income, net of $2.2 million for the first half of 1997 includes: (i) a payment of $1.3 million from Mitsubishi Materials Corporation in connection with the establishment of a joint product research and development project; (ii) an insurance claim of $1.0 million related to the loss of business income caused by a fire at the Company's warehouse facility in France; and (iii) a net foreign exchange loss of $0.1 million. Interest Expense and Interest Income Interest expense for the first half of 1998 increased $0.2 million over the first half of 1997 (from $4.8 million to $5.0 million). Interest income for the first half of 1998 decreased by $3.0 million from the comparable half in 1997 (from $5.2 million to $2.2 million) resulting from a direct reduction in cash and cash investments primarily related to (i) the net cash used in operations for the remainder of 1997, (ii) the costs relating to the expansion of the Company's manufacturing facility in Ponce, Puerto Rico during the second half of 1997, (iii) the purchase of Treasury stock; and (iv) the acquisition of the assets of Tokai Electronics Co., Ltd., in February 1998. Income Taxes The effective tax rate of 32.5% is the same as the effective tax rate during the first half of 1997. Net Earnings Net earnings for the current half were $5.0 million or $0.14 per share versus $7.3 million or $.21 per share for the prior year's first half. -13- 14 CHECKPOINT SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Exposure to International Operations Approximately 96% of the Company's international sales during the first half of 1998 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 such changes may have on its operations. Year 2000 The Company is reviewing its major financial and manufacturing applications to determine their year 2000 compliance. The Company expects no material impact on its internal information systems from the year 2000 issue. The Company has recently initiated communications with its significant suppliers to determine the extent that the Company may be impacted by third parties' failure to address the issue. The Company will continue to monitor and evaluate the impact of the year 2000 on its operations. Liquidity and Capital Resources - ------------------------------- The Company's liquidity needs have related to, and are expected to continue to relate to, capital investments, acquisitions and working capital requirements. The Company has met its liquidity needs over the last three years primarily through funds provided by long-term borrowings, the issuance of convertible subordinated debt, and through two separate issuances of Common Stock in underwritten public offerings. The Company's operating activities during the first six months of 1998 generated approximately $7.3 million compared to $28.4 million consumed during the first six months of 1997. This change from the prior year was primarily the result of a decrease in accounts receivable offset primarily by increases in inventory levels and the Company's continued investment in the Comprehensive Tag Program, which provides equipment financing to retail customers utilizing the Company's EAS systems in exchange for a multi-year agreement to purchase disposable labels. The Company's capital expenditures during the first six months of 1998 totaled $8.1 million compared to $12.0 million during the first six months of 1997. For fiscal year 1998 the Company anticipates that its capital expenditure requirements will approximate $13.0 million. -14- 15 CHECKPOINT SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) During 1997, the Board of Directors approved the purchase of up to 10% or approximately 3.5 million shares of the Company's common stock at an average cost not to exceed $14.00 per share. As of July 30, 1998, the Company has purchased 2,434,000 shares of common stock for an average price of $12.86 per share. The timing of additional purchases of common shares will depend on a variety of factors including price. The Company has an existing $100 million multi-currency unsecured revolving credit facility. At June 28, 1998, 2.45 billion Japanese yen (approximately $18.9 million) was outstanding under this credit agreement. These borrowings, along with approximately $8 million from cash on hand, were utilized in February 1998, to acquire the assets of Tokai Electronics Co., Ltd., a Japanese manufacturer of radio frequency tags, for approximately $27 million. Management believes that its anticipated cash needs for the foreseeable future can be funded from cash and cash equivalents on hand and the unused portion of the $100 million bank line of credit. 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 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. As of June 28, 1998, the Company had currency exchange forward contracts totaling approximately $30.7 million. The contracts are in the various local currencies covering primarily the Company's Western European operations along with the Company's Australian operations. The Company's operations in Argentina, Brazil, Canada, Japan, and Mexico were not covered by currency exchange forward contracts at June 28, 1998. 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 to the amount of dividends which may be paid. -15- 16 PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Registrant's Annual Meeting of Shareholders was held on April 22, 1998. (b) The following Class I directors were elected at the meeting: Roger D. Blackwell and Richard J. Censits. Voting results for the election of director nominees were as follows:
Roger D. Blackwell Richard J. Censits ------------------ ------------------ For 32,795,568 For 32,816,590 Withheld 277,082 Withheld 256,060 ---------- ---------- Total 33,072,650 Total 33,072,650 ========== ==========
The names of the other directors continuing in office after the meeting are: Robert O. Aders, David W. Clark, Jr., Kevin P. Dowd, Elisa Margaona, Raymond R. Martino and Albert E. Wolf. The Board of Directors elected a new director, William P. Lyons, Jr., at its meeting held on July 23, 1998. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Number Description - ------ ----------- 27 Financial Data Schedule (Electronic filings only) (b) Reports on Form 8-K No reports on Form 8-K have been filed during the second quarter of 1998. 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 - ----------------------- August 12, 1998 Vice President - Finance, Chief Financial Officer and Treasurer /s/ W. Craig Burns - ------------------------ August 12, 1998 Vice President, Corporate Controller and Chief Accounting Officer -16- 17 EX-27 2
5 0000215419 CHECKPOINT SYSTEMS, INC. 1,000 3-MOS DEC-27-1998 JUN-28-1998 55,753 0 122,383 5,470 85,588 280,291 165,422 62,194 527,318 81,627 0 0 0 3,645 278,936 527,318 90,578 90,578 54,918 29,352 (1,715) 0 2,586 5,437 1,767 3,692 0 0 0 3,692 .11 .11
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