North Star Partners Letter to the Board of Checkpoint Systems, Inc.

WESTPORT, Conn., April 8, 2015 /PRNewswire/ --

Mr. William S. Antle, III
Chairman of the Board
Checkpoint Systems, Inc.
101 Wolf Drive
Thorofare, NJ  08086

Dear Mr. Antle:

We are writing again to express our disappointment that you and the Board have decided to ignore our requests to make immediate changes to the Board composition that are critical to restoring the shareholder value that has been lost under your leadership.  Your failure to act in the best interests of shareholders compels us to publically share our concerns with our fellow shareholders.  NS Advisors, LLC ("North Star", "North Star Partners", "we" or "us") currently owns 827,455 common shares of Checkpoint Systems, Inc. ("Checkpoint", "CKP" or the "Company"), and like most shareholders, have suffered significant losses on our investment in Checkpoint.  After watching the company stumble through accounting restatements, earnings misses, guidance bombshells, ill-advised dividends, and significant management turnover, we have come to believe that only by revamping and refreshing the Board with new directors nominated by shareholders, who truly represent their interests, will the Company's dismal financial performance be improved.

Poor Stock Price Performance

As the following tables detail, Checkpoint's share price performance has been pitiful over any reasonable measurement period.  

This consistent, long term under performance reflects the markets opinion of how well our Board and management have performed.  When we look at the operating results that have been produced over the last 10 years, we can see why the market has been so disappointed:

After 10 years of leadership, this Board has failed to deliver any growth in revenue, EBITDA, or normalized EPS for shareholders, and 2015 guidance forecasts continued deterioration on all fronts.                             

Inept Capital Allocation

Proper allocation of the cash flow a business generates is perhaps the most critical decision a management team and Board have to make on behalf of the company's owners.  When the money is used to build per share intrinsic value, the owners will typically see attractive returns on their investment.  Conversely, poor allocation decisions rob shareholders of that opportunity and can actually destroy value by digging holes that will claim even more of the future free cash flow.  Unfortunately for Checkpoint shareholders, management's allocation decisions have failed to deliver any growth in intrinsic value. 

Over the last ten years, the company has spent $151 million on capital expenditures, $188 million on Research and Development and $320 million on acquisitions.  Despite spending $660 million of the shareholders money (an amount that exceeds the current enterprise value by $250 million), the stock price and enterprise value of the company have actually declined 36% and $255 million, respectively.¹

Misguided Taxable Dividend

In spite of multiple shareholder requests to institute a share repurchase program, the Board and its advisors, who claim to have carefully studied the issue,² decided shareholders would be better off receiving a one-time special dividend that would create a tax liability for its taxable investors, while doing nothing to grow per share intrinsic value. 

What is particularly frustrating is that the company repurchased shares in the past, at much higher absolute prices and at higher multiples than where the stock trades today.  In 2008 the company spent over $50 million to repurchase two million shares at average prices of $25-26/share³.  After seven additional years of stewardship by the current Board (six of the nine current Board members have been on the Board for more than ten years and approved the prior repurchase program), they appear to have concluded that they haven't created any growth in intrinsic value and that the stock is meritless despite being marked down over 57%.  What are shareholders and the investment community to think when the Company's Board and management apparently do not believe the Company's stock to be a good investment even at these reduced levels?

The reluctance to purchase shares at the current share price reflects either the Board's core lack of understanding of the potential benefits of share repurchases or its lack of faith in the company's future. We believe the stock is trading at a substantial discount to its intrinsic value and are shocked that you and the Board do not share this view.

Board Entrenching Corporate Governance Practices

Checkpoint's key governance practices are at odds with best practices and are antagonistic to the best interests of the shareholders, including: 

• Classified Board With Staggered Terms. This lack of annual accountability entrenches the Board and has likely contributed to the poor operating record of the company.  We believe you must immediately de-stagger the Board and return the right of shareholders to elect directors annually.
• Special meetings of shareholders can only be called by shareholders holding at least 30% of the voting stock.
• Certain Charter and By-law amendments must be approved by shareholders owning at least 80% of the voting stock.
• Mergers must be approved by shareholders owning at least 80% of the voting stock if not unanimously approved by the currently constituted Board.

Finally, the CEO's employment contract was recently renewed at terms that are not only richer than his previous contract, but also eliminates the share price performance requirement for vesting of stock grants.  In our opinion these changes in contract terms are antithetical to the notion of aligning the interests of management with those of the shareholders.  We believe that all compensation plans should be heavily weighted towards defined performance goals that grow the per share price and intrinsic value of the company. 

Time for Change Is Now

It is clear to us that change is needed to stop the destruction in shareholder value that has occurred over the last 10 years. It must start at the top with an infusion of fresh ideas from new directors chosen by shareholders, who will place the interest of shareholders first.  Management's dismal 2015 outlook was reported on March 5, 2015, one day before the deadline for shareholders to nominate directors for the 2015 annual meeting, making it virtually impossible for shareholders to initiate change through the normal nomination process.  Because of this suspect timing, we now call on the Board to act in the investors'/ shareholders interest and immediately add to the current Board at least two directors selected by shareholders, and include them in the Company's 2015 proxy statement. Concurrently, the Board should immediately initiate steps to declassify the Board, commencing with the term of directors elected at the 2015 annual meeting.  If the Board continues to ignore us and refuses to make these pro-shareholder improvements, we will have no choice but to withhold our votes at this year's annual meeting and request other shareholders to do the same.  It is time for conversations to end and for the Board to take immediate concrete actions that put us on a path of restoring the shareholder value that has been lost under your leadership.

Sincerely,

Andrew R. Jones, CFA 

CONTACT: Andrew Jones, 1-203-227-9898

SOURCE North Star Partners