SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2001 Commission File No. 1-11257
CHECKPOINT SYSTEMS, INC.
(Exact name of Registrant as specified in its Articles of Incorporation)
Pennsylvania 22-1895850
(State of Incorporation) (IRS Employer Identification No.)
101 Wolf Drive, PO Box 188, Thorofare, New Jersey 08086
--------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
856-848-1800
---------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, Par Value $.10 Per Share
Common Share Purchase Rights
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or on any
amendment to this Form 10-K.
X
---
As of March 5, 2002, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $473,285,000.
As of March 5, 2002, there were 31,884,462 shares of the Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Certain portions of the Company's definitive proxy statement for its
Annual Meeting of Shareholders, presently scheduled to be held on May 2, 2002.
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 the forward-looking statements.
PART I
Item 1. BUSINESS
Checkpoint Systems, Inc. (Company) is a multinational manufacturer and marketer
of integrated system solutions for retail security, labeling, and merchandising.
The Company provides technology-driven integrated supply chain solutions to
brand, track, and secure goods for consumer product manufacturers and retailers
worldwide.
Retailers and manufacturers have become increasingly focused on identifying and
protecting assets that are moving through the supply chain. To address this
market opportunity, the Company has built the necessary infrastructure to be a
single source for identification and protection worldwide.
The Company is a leading provider of electronic article surveillance (EAS)
systems and tags using radio frequency (RF) and electromagnetic (EM) technology,
security source tagging, branding tags and labels for apparel, barcode labeling
systems (BCS), retail merchandising systems (RMS), and hand-held labeling
systems (HLS). The Company's labeling systems and services are designed to
consolidate labeling requirements to improve efficiency, reduce costs, and
furnish value-added solutions for customers across many markets and industries.
Applications for labeling systems include brand identification, automatic
identification (auto-ID), retail security, and pricing and promotional labels.
The Company holds or licenses over 1,000 patents and proprietary technologies.
The Company has achieved substantial growth since 1993, primarily through
internal expansion and acquisitions, new product introductions, broadened and
more direct distribution (particularly in international markets), and increased
and more efficient manufacturing capabilities.
The Company's products and services can be categorized into three groups:
Security
The Company's legacy business is retail security. Its diversified security
product lines are designed to help retailers prevent inventory losses caused by
theft (both by customers and employees) and reduce selling costs through lower
staff requirements. The Company's products facilitate the open display of
consumer goods, which allows retailers to maximize sales opportunities with
impulse buying. Offering both its own proprietary RF-EAS and EM-EAS
technologies, the Company holds approximately a 42% share of worldwide EAS
installations. Systems for closed-circuit television (CCTV), fire and intrusion,
and access control, also fall within the security business segment. Checkpoint's
broad and flexible product lines, marketed and serviced by its extensive sales
and service organization, have helped the Company emerge as the preferred
supplier to premier retailers around the world. Retail security represents
approximately 60% of the Company's business.
Labeling Services
Labeling services is another core business for the Company generating 21% of the
Company's revenue in the year 2001. All participants in the retail supply chain
are concerned with maximizing efficiency. Reducing time-to-market requires
refined production and logistics systems to ensure just-in-time delivery, as
well as shorter development, design, and production cycles. Services range from
full color branding labels to tracking labels and, ultimately, fully integrated
labels that include an EAS or radio frequency identification (RFID) circuit.
This integration is based on the critical objective of supporting the rapid
delivery of goods to market while reducing losses, whether through misdirection,
tracking failure, theft or counterfeiting, and to reduce labor costs by tagging
and labeling products at the source. The Company supports these objectives with
its high quality tag and label production, a global service bureau network
(CheckNet(R)) of e-commerce-enabled customization capabilities, high speed
barcode labeling printing systems, and EAS and RFID technology. Increasingly the
market seeks to move toward more sophisticated tag solutions that incorporate
RFID components that will automate many aspects of supply chain tracking and
facilitate many new merchandising enhancements for suppliers and consumers.
Retail Merchandising
Retail merchandising includes hand-held label applicators and tags, promotional
displays, and queuing systems. These traditional products broaden the Company's
reach among retailers and enable the Company to serve a segment of the retail
market that has not converted to the more advanced BCS and EAS technologies.
Many of the products in this business segment represent high-margin items with a
high level of recurring sales of associated consumables such as labels.
BUSINESS STRATEGY
The Company's business strategy focuses on providing comprehensive,
single-source solutions that help manufacturers, distributors, and retailers
identify, track, and protect their assets throughout the entire supply chain.
Innovative new products and greatly expanded product offerings will provide
significant opportunities to enhance the value of legacy products while
expanding the product base in existing customer accounts. The Company will seek
to continue its leadership position in certain key hard goods markets, expand
its market share in the soft goods markets, and maximize its position in new
geographic markets. The Company will also continue to capitalize on its
installed base of large global retailers to aggressively promote source tagging.
Furthermore, the Company will seek to exploit the synergies of its RF technology
with labeling services capabilities within the expanding auto-ID industry.
To achieve these objectives, the Company will work to continually enhance and
expand its technologies and products, provide superior service to its customers
and expand its direct sales activities. The Company is focused on providing its
customers with a wide variety of fully integrated security systems, labeling
services, and retail merchandising solutions characterized by superior quality,
ease of use, good value, and enhanced merchandising opportunities for the
manufacturer, distributor, and retailer.
COMPANY HISTORY
Founded in 1969, the Company was incorporated in Pennsylvania as a wholly-owned
subsidiary of Logistics Industries Corporation (Logistics). In 1977, Logistics,
pursuant to the terms of its merger into Lydall, Inc., distributed the Company's
common stock to Logistics' shareholders as a dividend.
Historically, the Company has expanded its business both domestically and
internationally through acquisitions, internal growth using wholly owned
subsidiaries, and the utilization of independent distributors. In 1993 and 1995,
the Company completed two key acquisitions which gave the Company direct access
into Western Europe. The Company acquired ID Systems International BV and ID
Systems Europe BV in 1993 and Actron Group Limited in 1995. These companies
engaged in the manufacture, distribution, and sale of EAS systems throughout
Europe.
In December 1999, the Company acquired Meto AG, a German multinational
corporation and a leading provider of value-added labeling solutions for article
identification and security. The acquisition doubled the Company's revenues,
increased its breadth of product offerings, and vastly increased its global
reach.
In January 2001, the Company acquired A.W. Printing Inc., a Houston,
Texas-based printer of tags, labels, and packaging material for the apparel
industry.
PRODUCTS AND OFFERINGS
SECURITY
Electronic Article Surveillance
EAS systems have been designed to act as a deterrent and control the increasing
problem of merchandise theft in retail stores and libraries. The Company's
diversified product lines are designed to help reduce both customer and employee
theft, reduce inventory shrinkage, and enable retailers to capitalize on
consumer impulse buying by openly displaying high-margin and high-cost items.
The Company offers a wide variety of RF-EAS and EM-EAS solutions to meet the
varied requirements of retail store configurations for multiple market segments
worldwide. The Company's EAS systems are primarily comprised of sensors and
deactivation units, which respond to or act upon the Company's tags and labels.
The Company's EAS products are designed and built to comply with applicable
Federal Communications Commissions (FCC) regulations governing radio frequencies
(RF), signal strengths and other factors. In addition, the Company's present EAS
products are designed to meet all regulatory specifications for the countries in
which they are sold.
The Company markets its family of RF-EAS and EM-EAS systems under various brand
names including the Strata(R) family of products, the QS series, and the EM
series.
The Strata systems use the latest Digital Signal Processing(TM) (DSP)
technology, along with the Company's newly developed Advanced Digital
Discrimination(TM) (ADD/RF) digital filtering technology. The Strata family can
protect aisle widths of twelve feet using only two sensors.
RF deactivation units disarm the disposable tag to prevent recognition by the
sensors located at the exits. Deactivation usually occurs at the point-of-sale.
The Company's patented integrated scan/deactivation products provide
simultaneous reading of the barcode information, while deactivating the tag in
one single step at the point-of-sale.
Disposable security tags are affixed to merchandise by pressure-sensitive
adhesive or other means. The Company provides tags compatible with a wide
variety of standard price-marking and barcoding printers to combine pricing,
merchandising, protection, and data collection in a single step.
Under the Company's source tagging program, tags can be embedded in products or
packaging at the point-of-manufacture. Approximately 2,800 suppliers worldwide
are participating in this program.
The Company markets a full line of reusable security tags which protect apparel
items, as well as entertainment products such as music CDs, audio and video
cassettes, and video games. The reusable product line consists of plastic hard
tags, fluid ink tags, and SAFER(R) products.
CCTV, Fire and Intrusion Systems
The Company offers a full line of closed-circuit television products along with
its EAS products, providing a total systems solution package for retail
establishments. The Company's video surveillance solutions, including digital
video technology, address shoplifting and internal theft as well as customer and
employee safety and security needs. The product line consists of fixed and
high-speed pan/tilt/zoom camera systems, programmable switcher controls,
time-lapse recording, and remote tele-surveillance.
The Company's custom designed fire and intrusion systems provide protection
against internal and external theft, completing the full line of loss prevention
solutions. The systems can be included in the Company's US-based 24-hour Central
Station Monitoring Service.
Access Control Systems
Electronic access control systems protect restricted areas by granting access
only to authorized personnel at specified times. Continued developments in
processing, networking, and software technology have enhanced the sophistication
of electronic access control systems by integrating these systems into the
infrastructure of the customers' facilities.
The Company's access control products allow limitless coverage - from a single
door to large multi-building complexes. The access control product offerings
support all market segments, from small systems to large multi-user, multi-site
systems. The Company's feature-rich access control products give users the
flexibility to restrict database access, track assets, support LAN/WAN
connectivity, and integrate third party peripherals seamlessly.
LABELING SERVICES
Barcode Labeling Systems
A bar code is a linear or two-dimensional symbol that can be read by a laser
scanner and transmitted to a computer for auto-ID applications. Bar codes can be
printed on hang tags and pressure-sensitive labels using laser or thermal
printers and applied to the product at any of several points in the supply
chain. The Company offers both turnkey in-house barcode printing systems (laser
and thermal printers) and a worldwide service bureau network (CheckNet) that
can supply customers with barcoded labels. Barcoding is widely used in retail
stores, supermarkets, warehouses, manufacturing, libraries, and other
environments where inventory identification and tracking is critical.
The Company offers two thermal printing technologies, thermal direct printing
and thermal transfer printing. The Company also offers high speed laser printers
targeted to manufacturers as well as retail distribution and logistics centers.
Laser printers offer superior print quality and high throughput for such
applications as price marking and product identification, integrated tags and
labels, shelf mark labels, pick tickets, tracking or inventory labeling, and
shipping and compliance labels. The Company's thermal and laser printers
generate a recurring revenue stream from consumables, documents, and service
contracts.
Service Bureau (CheckNet)
The Company has a global service bureau network of 25 locations worldwide
through which it can supply customers with customized retail apparel price tags
and labels at the manufacturing source. A service bureau imprints variable
pricing and article identification data and barcoding information onto price and
apparel branding tags. Limited capital and skilled labor requirements allow the
service bureaus to be located near source manufacturing sites, enabling the
Company to provide timely and flexible service.
The Company's service bureau network is one of the most extensive in the
industry, and its ability to offer integrated branding, barcode and EAS security
tags places it among just a handful of suppliers of this caliber in the world.
In addition to its own label integration and service bureau capabilities, the
Company has strategic working relationships with several other label
integrators.
RFID - Intelligent Tagging
Radio frequency identification is an auto-ID technology. RFID tags, or
"intelligent tags", contain an integrated circuit (IC) powered by a radio
frequency circuit. Tags can be variably coded, and RFID readers can capture data
from multiple tags simultaneously, without line-of-sight requirements. Through
strategic R&D investments, the Company has established a product line of
sophisticated RFID solutions that offer strong feature and price benefits over
competitive offerings. This development puts the benefits of RFID in reach of
the retail and library markets. The Performa(R) family of RFID products of tags
and readers, introduced in 1999, can effectively provide solutions for a variety
of applications in the auto-ID marketplace.
RETAIL MERCHANDISING
Hand-held Labeling Systems
Hand-held labeling systems include a complete line of hand-held price marking
and label application solutions, primarily sold to retailers. Sales of labels,
consumables and service generate a significant source of recurring revenues. As
retail scanning becomes widespread, causing in-store retail price marking
applications to diminish, additional applications are being developed for both
the retail and industrial markets. The Company has a majority market share in
Europe.
Retail Merchandising Systems
Retail merchandising systems include a wide range of products for customers in
certain retail sectors, such as supermarkets and do-it-yourself (DIY), where
in-store price promotion is an important factor. Product categories include
traditional retail promotional systems for in-store communication and electronic
graphics systems, as well as Turn-O-Matic(R), a customer priority system.
Turn-O-Matic has a majority market share worldwide and generates recurring
revenue from ticket sales.
PRINCIPAL MARKETS AND MARKETING STRATEGY
Through its Security business segment, the Company traditionally has marketed
its products primarily to retailers in the hard goods (supermarkets, drug
stores, mass merchandisers and music/electronics), soft goods (apparel) and
library market segments. The Company is a market leader in the supermarket, drug
store and mass merchandiser market segments with customers such as Target
Corporation (Marshall Field Department Stores, Mervyns, and Target Stores),
Albertsons/American Stores, Circuit City Stores, Inc., Eckerd Corporation, H.E.
Butt Stores, Linens `n Things, Rite Aid Corporation, Toys "R" Us, Walgreen Co.,
and Winn Dixie, Inc. in the USA; Canadian Tire and Shoppers Drug Mart/Pharmaprix
in Canada; Gigante in Mexico; B&Q, Sainsbury, and Wickes in the United Kingdom;
Alcampo, Pryca/Carrefour, Continente, and El Corte Ingles in Spain; Intermarche,
FNAC, Casino, and Carrefour in France; El Norte in Argentina; Big W and Coles
Myer Ltd. in Australia; and Big C in Thailand.
Industry sources estimate that "shrinkage" (the value of goods which are not
paid for) is a $25-35 billion annual problem for the North American retail
industry and a $30-45 billion annual problem throughout the rest of the world.
Shrinkage is caused primarily by shoplifting and employee theft. Sophisticated
data collection systems (primarily barcode scanners), available to retailers,
have highlighted the shrinkage problem. As a result, retailers recognize that
implementation of an effective electronic security system can significantly
increase profitability.
With the acquisition of Meto AG in December 1999, the Company now offers supply
chain and value-added labeling solutions to manufacturers and retailers
worldwide. The Company has expanded its reach within the retail supply chain to
provide branding, tracking, and asset protection solutions to retail stores, to
distribution centers, and to consumer product and apparel manufacturers
worldwide.
The Company is focused on providing its customers with a wide variety of fully
integrated loss prevention, labeling services, and retail merchandising
solutions. More specifically, the Company's strategy includes the following:
- open new and expand existing retail accounts with new products that will
increase penetration with fully integrated value-added solutions for
labeling, security, and merchandising
- establish business-to-business web-based capabilities to enable
retailers and manufacturers to design custom tag and label solutions and
initiate and track their orders through the supply chain on a global
basis
- expand supply-side market opportunities to manufacturers and
distributors, including source tagging, value-added labeling, and
authentication solutions
- continue to promote source tagging around the world with extensive
integration and automation capabilities using new EAS, RFID, and auto-ID
technologies
The Company promotes its products primarily through:
- ease of integration into the retail environment
- emphasizing source tagging
- serving as a single point of contact for auto-ID and EAS labeling and
ticketing needs - providing total loss prevention solutions to the
retailer
- superior service and support capabilities - direct sales efforts and
targeted trade show participation
During 2001, nearly one billion disposable tags were provided to approximately
2,800 worldwide manufacturers participating in the Company's source tagging
program. Strategies to increase acceptance of source tagging are as follows:
- increase installation of RF-EAS and EM-EAS equipment on a chainwide
basis with leading retailers around the world
- offer integrated tag solutions, including custom tag conversion that
address the needs of branding, tracking, and loss prevention
- assist retailers in promoting source tagging with vendors
- broaden penetration of existing accounts by promoting the Company's
in-house printing, global service bureau network (CheckNet), and
labeling solution capabilities
- support manufacturers and suppliers to speed implementation
- expand RF tag technologies and products to accommodate the needs of the
packaging industry
In anticipation of the needs of the Company's retail and supply chain customers,
the Company is utilizing the versatility of radio frequency (RF) technology by
combining an integrated circuit with the Company's RF circuit to deliver a RFID
tag capable of storing, processing and communicating product information while
simultaneously protecting merchandise from theft. This product represents a
rational progression of the Company's ongoing focus on RF technology. The
Company believes RFID will revolutionize retail operations, as well as provide
benefits to manufacturers and distributors in the retail supply chain.
DISTRIBUTION
Electronic Article Surveillance
The Company sells its EAS systems principally throughout North America, South
America, Europe, and the Asia Pacific region. In North America, the Company
markets its EAS products almost entirely through its own sales personnel and
independent representatives. Of total North American EAS revenues during 2001,
94% was generated by the Company's own sales personnel.
Internationally, the Company markets its EAS products principally through
foreign subsidiaries which sell directly to the end-user and through independent
distributors. The Company's international sales operations are currently located
throughout Europe, and in Argentina, Brazil, Mexico, Australia, Malaysia, Hong
Kong, Japan, and New Zealand.
Independent distributors accounted for 6% of the Company's EAS revenues outside
the USA during 2001. Foreign distributors sell the Company's products to both
the retail and library markets. The Company, pursuant to written distribution
agreements, generally appoints an independent distributor as an exclusive
distributor for a specified term and for a specified territory.
CCTV, Fire and Intrusion Systems
The Company markets CCTV systems and services throughout the world using its own
sales staff. These products and services are provided to both the Company's
existing EAS retail customers as well as non-EAS retailers. Fire and intrusion
systems are marketed exclusively in the USA through a direct salesforce.
Access Control Systems
The Company's Access Control Products Group sales personnel market electronic
access control products to 226 independent dealers, primarily located in the
USA. The Company employs regional salespeople who are compensated by salary plus
commissions. Under the independent dealer program, the dealer takes title to the
Company's products and sells them to the end-user customer. The dealer installs
the systems and provides ongoing service to the end-user customer.
Labeling Services and Retail Merchandising
Through the acquisition of Meto, the Company gained approximately one hundred
thousand customers worldwide across all of the Meto product areas. These
customers are primarily found within the retail sector and retail supply chain.
Major customers include companies within industries such as food retailing, DIY
(Do-It-Yourself), department stores, textile retailing and garden centers.
Large national and international customers are handled centrally by key account
sales specialists supported by appropriate business specialists. Smaller
customers are served by either a general sales force capable of representing all
products, or if the complexity or size of the business demands, a dedicated
business specialist.
Salespeople
The Company presently employs 668 salespeople worldwide. On average, these
salespeople have over five years experience in the industry. The Company invests
heavily in sales training programs and experiences little turnover among its top
performers.
Backlog
The Company's backlog of orders was approximately $40.1 million at December 30,
2001 compared to $38.8 million at December 31, 2000. The Company anticipates
that substantially all of the backlog at the end of 2001 will be delivered
during 2002. In the opinion of management, the amount of backlog is not
indicative of trends in the Company's business. The Company's RF-EAS and EM-EAS
business generally follows the retail cycle so that revenues are weighted toward
the last half of the calendar year as retailers prepare for the holiday season.
TECHNOLOGY
The Company believes that its patented and proprietary technologies are
important to its business and future growth opportunities, and provide it with
distinct competitive advantages. The Company holds or licenses over 1,000
patents and proprietary technologies relating to its products and their
manufacture. The Company continually evaluates its domestic and international
patent portfolio, and where the cost of maintaining the patent exceeds its
value, such patent may not be renewed. The majority of the Company's revenue is
derived from products or technologies which are patented or licensed. There can
be no assurance, however, that a competitor could not develop products
comparable to those of the Company. The Company's competitive position is also
supported by its extensive manufacturing experience and know-how.
Electronic Article Surveillance
On October 1, 1995, the Company acquired certain patents and improvements
thereon related to EAS products and manufacturing processes from Arthur D.
Little, Inc. (ADL) for $1.9 million plus a royalty of 1% to 1.5% of future
RF-EAS products sold through 2008.
The Company, with its acquisition of Meto, has three principal license
agreements covering its EAS products, including Allied Signal, Inc. (now
Honeywell Intellectual Properties, Inc.) as licensor for EM markers, Miyake as
licensor for RF tags, and a group of former owners of Intermodulation and Safety
System AB as licensors of EM systems. These licenses expire in 2004, 2005, and
2004, respectively.
The Company also licenses technologies relating to certain sensors, magnetic
labels and fluid tags. These license arrangements have various expiration dates
and royalty terms, but are not considered by the Company to be material.
Access Control Systems
The Company pays royalties relative to the feature set embedded within certain
software products. These agreements are renewed annually and average
approximately between 1% and 2% of access control systems revenue.
Labeling Services and Retail Merchandising
The Company focuses its in-house Meto brand product development efforts on
product areas where the Company believes it can achieve and sustain a
competitive cost and positioning advantage, and where delivery service is
critical. The Company also develops and maintains technological expertise in
areas that it believes to be important for new product development in its
principal business areas. Through its acquisition of the Meto brand, the Company
has a base of technology expertise in the label conversion, printing,
electronics, and software areas and is particularly focused on EAS and BCS
technology to support the development of higher value-added labels.
Manufacturing, Raw Materials, And Inventory
Electronic Article Surveillance
The Company manufactures its EAS products in facilities located in Puerto Rico,
Japan, Germany, the Dominican Republic, and the Netherlands and has a highly
integrated manufacturing capability. The Company's manufacturing strategy is to
rely primarily on in-house capability and to vertically integrate manufacturing
operations to the extent economically practical. This integration and in-house
capability provides significant control over costs, quality, and responsiveness
to market demand which the Company believes results in a distinct competitive
advantage.
As part of its total quality management program, the Company practices
concurrent engineering techniques in the design and development of its products
involving its customers, engineering, manufacturing, and marketing.
For the RF sensor production, the Company purchases raw materials from outside
suppliers and assembles electronic components at its facilities in Puerto Rico
for the majority of its sensor product lines. Certain components of sensors are
manufactured at the Company's facilities in the Dominican Republic and shipped
to Puerto Rico for final assembly. For its EAS tag production, the Company
purchases raw materials and components from suppliers and completes the
manufacturing process at its facilities in Puerto Rico, Japan (disposable tags),
Germany (disposable tags), the Dominican Republic (reusable tags) and the
Netherlands (disposable tags). The Company sold approximately 3.4 billion
disposable tags in 2001 and has the capacity to produce approximately 7 billion
disposable tags per year. The principal raw materials and components used by the
Company in the manufacture of its products are electronic components and circuit
boards for its systems; and aluminum foil, resins, paper, and ferric chloride
solutions for the Company's disposable tags. While most of these materials are
purchased from several suppliers, there are numerous alternative sources for all
such materials. The products that are not manufactured by the Company are
sub-contracted to manufacturers selected for their manufacturing and assembly
skills, quality, and price. Three EAS systems suppliers are considered as
strategic partners. The Company's general practice is to maintain a level of
inventory sufficient to meet anticipated demand for its products.
CCTV, Fire and Intrusion Systems
The Company is primarily an integrator of off-the-shelf CCTV, fire and intrusion
components manufactured by others. In the USA, the Company does manufacture the
pan/tilt/zoom dome camera. Limited inventory levels are maintained since the
Company places orders with distributors as customer orders are received. The
software component of the system is added during product assembly at the
Company's operational facilities.
Access Control Systems
The Company purchases raw materials from outside suppliers and assembles the
electronic components for controllers and proximity readers at its facilities in
the Dominican Republic and Puerto Rico. For non-proximity electronic access
control components, the Company subcontracts manufacturing activities. All
electronic access control final system assembly and testing is performed at the
Company's facilities in Thorofare, New Jersey.
Labeling Services and Retail Merchandising
The Company's principal manufacturing focus is on the production of labels,
tags, and hand-held tools. The Company's main production facilities are located
in Germany, the Netherlands, the USA, and Malaysia. Local production facilities
are also situated in the UK, Spain, Sweden, Finland, Australia, and New Zealand.
Manufacturing in Germany is focused on print heads for HLS tools and labels for
the HLS and BCS product areas. The Company's facilities in the Netherlands and
in the USA manufacture labels and tags for laser overprinting, thermal labels,
and support the service bureau network (CheckNet) worldwide. HLS labels are also
manufactured in the USA. The Malaysian facility produces standard bodies for HLS
tools for Europe, complete hand-held tools for the rest of the world, and labels
for the local market.
Three BCS printer suppliers are considered as strategic partners. Supplies from
other smaller suppliers are being combined where possible.
Competition
Electronic Article Surveillance
Currently, EAS systems are sold to two principal markets: retail establishments
and libraries. The Company's principal global competitor in the EAS industry is
Tyco Inc., who acquired Sensormatic Electronics Corporation in 2001. Tyco is a
diversified manufacturing and service company with interests in electrical and
electronic components, telecommunications systems, fire protection systems and
electronic security services, medical device products, financing and leasing
capital, plastics and adhesives. Tyco's 2001 revenues were approximately $38
billion. Tyco's ADT security division (including the former Sensormatic
Corporation) holds approximately a 44% share of the worldwide EAS installation
base. Management estimates that the Company's market share of installed systems
in the EAS industry is approximately 42%.
Within the US market, additional competitors include Sentry Technology
Corporation and Ketec, Inc., principally in the retail market, and Minnesota
Mining and Manufacturing Company, principally in the library market. Within the
Company's international markets, mainly Europe, NEDAP and Tyco are the Company's
most significant competitors.
The Company believes that its product line offers more diversity than its
competition in protecting different kinds of merchandise with disposable tags,
hard reusable tags, and flexible reusable tags. As a result, the Company
believes it appeals to a wider segment of the retail market than does its
competition and competes in marketing its products primarily on the basis of
their versatility, reliability, affordability, accuracy, and integration into
operations. This combination provides many system solutions and allows for
protection against a variety of retail merchandise theft. Furthermore, the
Company believes that its manufacturing know-how and efficiencies relating to
disposable and reusable tags give it a significant cost advantage over its
competitors.
CCTV, Fire and Intrusion Systems
The Company's CCTV, fire and intrusion products, which are sold domestically
through its Security Systems Group subsidiary and internationally through its
international sales subsidiaries, compete primarily with similar products
offered by Tyco, Ultrak, Pelco, and Sentry Technology. The Company competes
based on its superior service and believes that its product offerings provide
its retail customers with distinct system features.
Access Control Systems
The Company's electronic access control products compete with other
manufacturers of electronic access control systems as well as with conventional
security systems. Major competitors are Casi Rusco, Tyco, Honeywell, and Lenel
Systems.
Labeling Services
The worldwide barcode systems product market, including printers and labels, is
estimated to be approximately $7 billion, and Checkpoint's targeted retail and
retail-related markets account for about 40% of the total. Major competitors are
Paxar and Avery Dennison. The Company also competes with a number of barcode
printer manufacturers, including Zebra Technologies and Intermec Technologies.
Many competitive labeling service companies are also customers as they purchase
EAS circuits from the Company to integrate into their label offerings.
Retail Merchandising
The Company faces no single competitor across its entire retail merchandising
product range or across all international markets. However, HL Display is its
strongest competitor in the in-store promotional display market. In the
Hand-held Labeling Systems segment, the Company competes with Paxar, Garvey,
Sato, Hallo, Contact, and Prix.
Other Matters
Research and Development
The Company expended approximately $8.7 million, $9.5 million, and $7.3 million,
in research and development activities during 2001, 2000, and 1999,
respectively. The emphasis of these activities is the continued broadening of
the product lines offered by the Company and an expansion of the markets and
applications for the Company's products. The Company's continued growth in
revenue can be attributed, in part, to the products and technologies resulting
from these efforts.
Another important source of new products and technologies has been the
acquisition of companies and products during the last few years. The Company
continues to assess acquisitions of related businesses or products consistent
with its overall product and marketing strategies.
The Company continues to develop and expand its product line with improvements
in disposable tag performance and selection, disposable tag manufacturing
processes, and wide-aisle RF-EAS detection sensors with integration of remote
internet connectivity and RFID integration. A process of product rationalization
on all product lines is ongoing to bring maximum efficiency from our high volume
production facilities.
In 2001, the Company became actively involved with the Massachusetts Institute
of Technology (MIT) Auto-ID Center project as a technological partner. The
Company believes its involvement with the MIT Auto-ID Center will further
encourage the rapid development of the RFID retail marketplace.
The Company entered into a joint research and development agreement in February
1997, with Mitsubishi Materials Corporation, a Japanese company based in Tokyo,
to develop RFID technology. Under this multi-year agreement, which created a
joint product research and development project, the parties developed radio
frequency intelligent tagging solutions for retail, library, commercial, and
industrial applications. These solutions are currently being sold worldwide.
Employees
As of December 30, 2001, the Company had 4,108 employees, including five
executive officers, 90 employees engaged in research and development activities
and 731 employees engaged in sales and marketing activities. In the United
States, 12 of the Company's employees are represented by a union. In Europe,
approximately 750 of the Company's employees are represented by various unions
or work councils.
Financial Information About Geographic and Business Segment
The Company operates both domestically and internationally in three distinct
business segments. The financial information regarding the Company's geographic
and business segments, which includes net revenues and gross profit for each of
the years in the three-year period ended December 30, 2001, and total assets as
of December 30, 2001, December 31, 2000, and December 26, 1999, is provided in
Note 19 to the consolidated financial statements.
Item 2. PROPERTIES
The Company's principal corporate offices are located at 101 Wolf Drive,
Thorofare, New Jersey. As of December 30, 2001, the Company owned or leased a
total of approximately 2.5 million square feet of space worldwide which is used
primarily for sales, distribution, manufacturing, and general administration.
These facilities include 30 sales/distribution offices located throughout North
and South America, Europe, Asia, Australia, and New Zealand. Additionally, the
Company's principal manufacturing facilities are located in the United States,
Puerto Rico, the Dominican Republic, Germany, the Netherlands, Japan, and
Malaysia. The Company believes its current manufacturing capacity will support
its needs for the foreseeable future.
Item 3. LEGAL PROCEEDINGS
The Company is involved in certain legal and regulatory actions, all of which
have arisen in the ordinary course of business, except for the matter described
in the following paragraph. Management does not believe that the ultimate
resolution of such matters will have a material adverse effect on its
consolidated results of operations or financial condition.
The Company is a defendant in a Civil Action No. 99-CV-577, served February 10,
1999, in the United States District Court for the Eastern District of
Pennsylvania filed by Plaintiff, ID Security Systems Canada Inc. The suit
alleges a variety of antitrust claims; claims related to unfair competition,
interference with a contract, and related matters. Plaintiff seeks damages of up
to $90 million, before trebling, if an antitrust violation were to be
determined. This matter is scheduled for a jury trial commencing April 22, 2002.
Management is of the opinion that the claims are baseless both in fact and in
law, and intends to vigorously defend the suit. If, however, the final outcome
of this litigation results in certain of the Plaintiff's claims being upheld,
the potential damages could be material to the Company's consolidated results of
operations or financial condition.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
No matter was submitted during 2001 to a vote of shareholders.
Item A. EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain current information concerning the
executive officers of the Company, including their ages, position and tenure as
of the date hereof:
Officer Positions with the
Name Age Since Company
- ----------------------------- --- ------- --------------------
Michael E. Smith 46 1990 President and Chief
Executive Officer
William J. Reilly, Jr. 53 1989 Chief Operating Officer
W. Craig Burns 42 1997 Executive Vice President,
Chief Financial
Officer and Treasurer
Officer Positions with the
Name Age Since Company
- ----------------------------- --- ------- --------------------
John E. Davies Jr. 44 2002 Executive Vice President,
Worldwide Operations
Neil D. Austin 55 1989 Vice President, General
Counsel and Secretary
Arthur W. Todd 36 2000 Vice President,
Corporate Controller
and Chief Accounting
Officer
Mr. Smith was appointed President and Chief Executive Officer of the
Company on March 20, 2001. Mr. Smith was Executive Vice President from April
1997 to March 2001. Mr. Smith was Senior Vice President from August 1993 to
April 1997. He was Vice President, Marketing from August 1990 to August 1993.
Mr. Smith was Director of Marketing from April 1989 to August 1990 and Program
Manager, National/Major Accounts from December 1988 to April 1989.
Mr. Reilly was appointed Chief Operating Officer on March 20, 2001. Mr.
Reilly was Executive Vice President from April 1997 to March 2001. Mr. Reilly
was Senior Vice President from August 1993 to April 1997. He was Vice President,
Sales of the Company from April 1989 to August 1993. Mr. Reilly was Eastern
Regional Sales Manager from March 1989 to April 1989.
Mr. Burns was appointed Executive Vice President, Chief Financial Officer
and Treasurer on March 20, 2001. Mr. Burns was Vice President, Finance, Chief
Financial Officer and Treasurer from April 2000 to March 2001. Mr. Burns was
Vice President, Corporate Controller and Chief Accounting Officer from December
1997 until April 2000. He was Director of Tax from February 1996 to December
1997. Prior to joining the Company, Mr. Burns was a Senior Tax Manager with
Coopers & Lybrand, LLP from June 1989 to February 1996. Mr. Burns is a Certified
Public Accountant.
Mr. Davies was appointed Executive Vice President, Worldwide Operations on
March 4, 2002. Mr. Davies was Senior Vice President, Worldwide Operations from
March 2001 to March 2002. He was Vice President, Research and Development from
August 1998 to March 2001 and Senior Director, Worldwide Systems Engineering
from October 1996 to August 1998. Since joining the Company in October 1992, Mr.
Davies held various engineering positions until October 1996.
Mr. Austin has been Vice President, General Counsel and Secretary since
joining the Company in 1989.
Mr. Todd has been Vice President, Corporate Controller and Chief Accounting
Officer since August 2000. Mr. Todd was Corporate Controller for Meto AG from
December 1998 until July 2000. From 1986 to November 1998, Mr. Todd held various
financial positions within international subsidiaries of the Meto group. Mr.
Todd is a Fellow of the Chartered Institute of Management Accountants (UK).
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange (NYSE) under
the symbol CKP. The following table sets forth, for the periods indicated, the
high and low sale prices for the Company's common stock as reported on the NYSE
Composite Tape.
Closing Price
High Low
------- -------
2001:
First Quarter.......................... $10.3000 $ 7.6875
Second Quarter......................... 17.6000 8.8100
Third Quarter.......................... 16.8500 10.0000
Fourth Quarter......................... 13.6300 9.4500
2000:
First Quarter.......................... $11.8750 $ 7.5625
Second Quarter......................... 9.7500 7.1250
Third Quarter.......................... 9.1250 7.0000
Fourth Quarter......................... 9.1875 6.1875
As of March 5, 2002, there were 1,103 record holders of the Company's common
stock.
The Company has never paid a cash dividend on the common stock (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. The Company
has retained, and expects to continue to retain, its earnings for reinvestment
in its business. The declaration and payment of dividends in the future, and
their amounts, will be determined by the Board of Directors in light of
conditions then existing, including the Company's earnings, its financial
condition and requirements (including working capital needs), and other factors.
Item 6. SELECTED FINANCIAL DATA
SELECTED ANNUAL FINANCIAL DATA
------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Thousands, except per share data)
FOR THE YEAR ENDED:
Net revenues(1) $658,535 $690,811 $373,062 $364,572 $338,604
Earnings before
income taxes $ 13,716(2) $ 5,447(3) $ 10,207(5) $ 26,184(6) $ 13,565(7)
Income taxes $ 6,857 $ 3,115 $ 2,915 $ 8,509 $ 5,445
Earnings before
extraordinary
loss and
cumulative effect
of change in
accounting
principle $ 6,635 $ 2,254 $ 7,258 $ 17,685 $ 8,228
Earnings before
cumulative effect
of change in
accounting
principle $ 6,635 $ 2,254 $ 6,666 $ 17,685 $ 8,228
Net earnings/
(loss) $ 6,635 $ (2,766)(4) $ 6,666 $ 17,685 $ 8,228
Earnings per
share before
extraordinary
loss and
cumulative
effect of
change in
accounting
principle
Basic $ .21 $ .07 $ .24 $ .55 $ .24
Diluted $ .21 $ .07 $ .24 $ .53 $ .23
Earnings per
share before
cumulative
effect of change
in accounting
principle
Basic $ .21 $ .07 $ .22 $ .55 $ .24
Diluted $ .21 $ .07 $ .22 $ .53 $ .23
Net earnings/
(loss) per
share
Basic $ .21 $ (.09) $ .22 $ .55 $ .24
Diluted $ .21 $ (.09) $ .22 $ .53 $ .23
Depreciation &
amortization $ 43,936 $ 47,883 $ 28,028 $ 25,676 $ 23,762
(1) 1997-1999 amounts have been reclassified to conform with Emerging Issues
Task Force (EITF) 00-10, Accounting for Shipping and Handling Fees and
Costs.
(2) Includes a $11.1 million pre-tax restructuring charge, a $7.5 million pre-
tax asset impairment and a pre-tax restructuring charge reversal of $0.2
million.
(3) Includes a $2.2 million pre-tax restructuring charge, a $10.2 million pre-
tax integration charge, a $7.2 million pre-tax asset impairment, a pre-tax
inventory write-off of $3.7 million and a $5.1 million pre-tax customer-
based receivables write-off.
(4) Includes a non-cash reduction in net earnings of $5.0 million resulting
from the implementation of the SEC Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements.
(5) Includes a $10.9 million pre-tax restructuring charge and a $0.9 pre-tax
integration charge.
(6) Includes a $0.6 million pre-tax reversal of the restructuring charge
recorded in the fourth quarter of 1997.
(7) Includes a $9.0 million pre-tax restructuring charge and non-recurring
pre-tax charges of $8.1 million.
SELECTED ANNUAL FINANCIAL DATA (continued)
-------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Thousands)
AT YEAR END:
Working capital $126,615 $157,089 $ 175,430 $186,261 $211,570
Long-term debt $262,088 $347,011 $ 395,256 $164,934 $150,068
Shareholders'
equity $240,263 $237,679 $ 255,795 $261,936 $277,550
Total assets $752,653 $867,990 $ 944,873 $507,663 $516,434
FOR THE YEAR ENDED:
Capital
expenditures $ 9,572 $ 13,172 $ 8,774 $ 12,301 $ 26,714
Cash provided by/
(used in)
operating
activities $102,736 $ 3,172 $ 87,536 $ 29,157 $(59,559)
Cash used in
investing
activities $(20,792) $(26,365) $(250,891) $(39,460) $(36,548)
Cash (used in)/
provided by
financing
activities $(64,633) $(33,899) $ 216,924 $(18,386) $(24,508)
RATIOS
Return on
net sales(a) 1.01% (.40%) 1.78% 4.85% 2.43%
Return on
average
equity(b) 2.78% (1.12%) 2.57% 6.56% 2.85%
Return on
average
assets(c) .82% (.30%) .92% 3.45% 1.59%
Current
ratio(d) 1.68 1.73 1.74 3.37 3.46
Percent of total
debt to
capital(e) 52.17% 59.35% 60.71% 40.10% 36.13%
(a) "Return on net sales" is calculated by dividing net earnings by net
sales.
(b) "Return on average equity" is calculated by dividing net earnings by
average equity.
(c) "Return on average assets" is calculated by dividing net earnings by
average assets.
(d) "Current ratio" is calculated by dividing current assets by current
liabilities.
(e) "Percent of total debt to capital" is calculated by dividing total long
term debt by total long term debt and equity.
SELECTED ANNUAL FINANCIAL DATA (continued)
------------------------------------------
2001 2000 1999 (1) 1998 1997
------ ------ ------ ------ ------
(Thousands, except employee data)
Other Information
- -----------------
Weighted average
number of
diluted shares
outstanding 31,736 30,624 30,528 33,272 35,184
Number of
employees 4,108 4,984 5,017 3,044 3,605
Backlog $40,100 $38,800 $34,100 $18,800 $24,200
(1) Includes increase in employees and backlog as a result of the Meto
acquisition.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the consolidated
financial statements and the notes to the consolidated financial statements.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles
(GAAP) in the United States of America. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, and bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The critical accounting
policies have been consistently applied throughout the accompanying financial
statements, with the exception of the change in accounting method for revenue
recognition, as noted below.
The Company believes the following accounting policy is critical to the
preparation of its consolidated financial statements:
Revenue Recognition. In accordance with the Securities and Exchange Commission
(SEC) Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements, the Company 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. Equipment leased to customers
under sales-type leases is accounted for as the equivalent of a sale. The
present value of such lease revenues is recorded as net revenues, and the
related cost of the equipment is charged to cost of revenues. The deferred
finance charges applicable to these leases are recognized over the terms of the
leases using the straight-line method which approximates the effective interest
method. Rental revenue from equipment under operating leases is recognized over
the term of the lease. Service revenue is recognized, for service contracts, on
a straight-line basis over the contractual period, and, for non-contract work,
as services are performed. Sales to third party leasing companies are recognized
as the equivalent of a sale.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
Allowance for Doubtful Accounts. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. The adequacy of the reserves for doubtful accounts is
continually assessed. If the financial condition of the Company's customers were
to deteriorate, impairing their ability to make payments, additional allowances
may be required. If economic or political conditions were to change in the
countries where the Company does business, it could have a significant impact on
the results of operations, and the Company's ability to realize the full value
of its accounts receivable. Furthermore, the Company is dependent on customers
in the retail markets. Economic difficulties experienced in those markets could
have a significant impact on the results of operations, and the Company's
ability to realize the full value of its accounts receivables.
Inventory Reserves. The Company writes down its inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of the inventory and the estimated realizable value based upon assumptions of
future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
Valuation of Long-lived Assets. The Company's long-lived assets include
property, plant and equipment, goodwill and identified intangible assets. Long-
lived assets are depreciated or amortized over their estimated useful lives, and
are reviewed for impairment whenever changes in circumstances indicate the
carrying value may not be recoverable. The fair value of the long-lived assets
are based upon the Company's estimates of future cash flows and other factors.
Following the Company's adoption of Statement of Financial Accounting Standards
No. 142 (SFAS 142), Goodwill and Other Intangible Assets on December 31, 2001
(fiscal year 2002), which requires annual testing for the impairment of
goodwill, the fair value of goodwill will be based upon the Company's estimates
of future cash flows and other factors including discount rates. If these assets
or their related assumptions change in the future, the Company may be required
to record impairment charges. An erosion of future business results in any of
the business units could create impairment in goodwill or other long-lived
assets and require a significant write down in future periods.
Deferred Taxes. The Company records a valuation allowance to reduce its deferred
tax assets to the amount that is more likely than not to be realized. While the
Company considers future taxable income and tax planning strategies in assessing
the need for the valuation allowance, if the Company were to determine that it
would be able to realize deferred tax assets in the future in excess of the net
recorded amount, an adjustment to the deferred tax asset would increase income
in the period such determination was made. Likewise, should the Company
determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to the deferred tax asset would decrease
income in the period such determination was made.
Accounting for Loss Contingencies. The Company is involved in certain legal and
regulatory actions which, in accordance with Statement of Financial Accounting
Standards No. 5 (SFAS 5) Accounting for Contingencies, it continually evaluates,
and upon which, it makes various judgements and estimates. (See note 16.) If the
final outcome of these matters differs from the Company's judgements and
estimates, such differences could have a material adverse effect on the
Company's consolidated results of operations or financial condition.
Results of Operations
(All comparisons are with the previous year, unless otherwise stated.)
Management's discussion and analysis of results of operations has been presented
on an as reported basis except for the exclusion in cost of revenues and
selling, general and administrative expense (SG&A), of the restructuring and
integration charges recorded in 2001, 2000, and 1999. The annual savings as a
result of restructuring charges are included in the discussion of the results of
operations. This is a non-GAAP presentation and is not a substitute for GAAP.
Refer to the accompanying financial statements for GAAP presentation.
In 2001, the Company recorded restructuring charges totaling $18.6 million
related to the consolidation of some of its US and Caribbean manufacturing
facilities and the rationalization of certain under-performing sales offices.
Included in the charges are severance costs ($9.7 million), lease termination
costs ($1.4 million), and an asset impairment charge ($7.5 million). The
impairment charge consists of $5.0 million of manufacturing equipment abandoned
due to the rationalization of operations, a further $2.0 million write-down of
the manufacturing facility in Japan, and a $0.4 million goodwill impairment upon
exit of a business segment in Belgium. The restructuring charges were recorded
in cost of revenues ($11.4 million) and other operating expenses ($7.2 million).
An excess accrual of $0.2 million related to the 1999 and 2000 restructuring
provisions was reversed in 2001 to other operating expenses.
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. In 2000, the
Company increased its ownership to 100%. Included in the 2000 results are $19.6
million in restructuring and integration charges related to the completion of
the Meto integration; the subsequent realignment of operations and assets; and
costs related to the consolidation and rationalization of its manufacturing
operations. Included in the 2000 charges are employee severance costs ($1.8
million), facility lease termination costs ($0.4 million), impairments of
manufacturing assets ($7.2 million), and integration costs ($10.2 million), of
which $9.0 million was recorded in cost of revenues and $10.6 million in other
operating expenses.
Included in the 1999 results is $11.8 million of restructuring and integration
charges related to the acquisition of the Meto business. The 1999 charges relate
to employee severance costs ($3.1 million), facility lease termination costs
($3.3 million), certain asset impairments ($4.5 million), and other integration
expenses ($0.9 million) of the Company. Most of the employees affected by the
restructuring were in support services including selling, technical and
administrative staff functions.
The table below reflects the operating income before restructuring and external
integration charges. Integration costs consist primarily of external consulting,
legal and marketing costs incurred in connection with integrating
Meto/Checkpoint operations. Integration costs were charged to expense as
incurred. Accordingly, the discussion that follows speaks to the comparisons in
this table through operating income before restructuring and integration
charges.
2001 2000 1999 (2)
------ ------ ------
(Thousands)
Net revenues (1) $658,535 $690,811 $373,062
Cost of revenues (1) 390,887 408,963 226,289
-------- -------- --------
Gross profit 267,648 281,848 146,773
Selling, general and administrative
expenses 215,709 234,490 118,803
-------- -------- --------
Operating income before
restructuring and integration
charges 51,939 47,358 27,970
Restructuring and integration
charges 18,430 19,551 11,796
-------- -------- --------
Operating income after restruct-
uring and integration charges $ 33,509 $ 27,807 $ 16,174
======== ======== ========
Net revenues by product segment (1)
Security $391,867 $419,696 $362,097
Labeling services 139,654 138,396 5,310
Retail merchandising 127,014 132,719 5,655
-------- -------- --------
$658,535 $690,811 $373,062
======== ======== ========
(1) 1999 amounts have been reclassified to conform with EITF 00-10, Accounting
for Shipping and Handling Fees and Costs.
(2) The 1999 results include the operations of the Meto business from the date
acquired, December 10, 1999.
Net Revenues
The Company's unit volume is driven by product offerings, number of direct sales
personnel, recurring sales and, to some extent, pricing. The Company's
increasing base of installed systems and printers provide a growing source of
recurring revenues from the sale of disposable tags and service revenues. For
fiscal 2001, 2000, and 1999, approximately 48%, 47%, and 34% respectively of the
Company's net revenues were attributable to sales of disposable tags, custom and
stock labels, printer consumables, and service to its installed base of
customers. The increase in 2000 of the recurring revenues as a percentage of
total net revenues is principally due to the acquisition of the Meto business.
The Company's customers are substantially dependent on retail sales, which are
seasonal and subject to significant fluctuations and are difficult to predict.
Such seasonality and fluctuations impact the Company's sales. Historically, the
Company has experienced lower sales in the first and second quarters of each
year, although in 2001, due to the general economic slow down in the middle of
the year, the third quarter produced the lowest revenues.
During 2001, revenues decreased by approximately $32.3 million or 4.7% from
$690.8 million to $658.5 million. Excluding the impact of foreign exchange of
$18.3 million, revenues decreased by 2.0%. This decrease is attributable to a
decline in EAS and CCTV revenues in South America, caused by eroding economic
conditions in the region, as well as a reduction in EAS and RMS revenues in
Europe, partially offset by an increase in HLS revenues as a result of the
conversion to the Euro currency on January 1, 2002.
In 2000, revenues increased by approximately $317.7 million or 85.2% from $373.1
million to $690.8 million. This increase was directly attributable to the Meto
acquisition. On a pro forma basis, which includes Meto as if the acquisition had
occurred at the beginning of 1999, revenues decreased $48.2 million or 6.5%.
This decrease in revenue was a direct result of the negative impact of foreign
exchange. Excluding the impact of foreign exchange, on a pro forma basis,
revenues decreased by less than 1%.
US Domestic net revenues accounted for 35.5%, 33.4%, and 48.0% of the Company's
net revenues in 2001, 2000, and 1999, respectively. US Domestic revenues, as a
percentage of total net revenues, increased in 2001 as a result of a 1% increase
in US Domestic revenues, lower International revenues, and a weakening of most
foreign currencies against the US dollar during the year. The decrease as a
percentage of the total net revenues in 2000 was due to the acquisition of Meto
AG, whose revenues were primarily generated outside the USA. On a pro forma
basis, the year 2000 US Domestic and International revenues were comparable to
prior year.
Cost of Revenues
During 2001, cost of revenues decreased $18.1 million or 4.4% from $409.0
million to $390.9 million. As a percentage of net revenues, cost of revenues
increased 0.2% (from 59.2% to 59.4%). The increase in the Company's cost of
revenues as a percentage of sales is attributable to an increase in negative
overhead absorption variances of approximately $5.2 million following the
Company's effort to decrease inventory levels by reducing manufacturing
production schedules. This was partially offset by increased sales of high
margin HLS products and a reduction in field service and installation costs.
In 2000, the cost of revenues increase was a direct result of the additional
revenue related to the inclusion of the Meto business for a full year. Cost of
revenues, as a percentage of revenues, decreased to 59.2% from 60.7%. This
decrease is primarily attributable to a reduction in field service and
installation costs due to the Meto integration and the full year effect of
Meto's lower cost of revenues. These decreases were partially offset by a $3.7
million inventory write-off.
The principal elements comprising cost of revenues are product cost, research
and development cost, and field service and installation cost. As a percentage
of net revenues, the three elements represent 49.3%, 1.3%, and 8.8%,
respectively. The components of product cost are as follows: 64% material, 10%
labor, and 26% manufacturing overhead. The principal raw materials and
components used by the Company in the manufacture of its products are electronic
components and circuit boards for its systems; and aluminum foil, resins, paper,
and ferric chloride solutions for the Company's disposable tags. The Company's
general practice is to maintain a level of inventory sufficient to meet
anticipated demand for its products.
For fiscal year 2001, 2000, and 1999, field service and installation costs were
8.8%, 9.1% and 10.6% of net revenues, respectively. The decrease in 2001 was due
to restructuring that reduced the field service workforce by 14%. The decrease
in 2000 was the result of a reduction in costs due to the Meto integration and
the lower field service and installation costs for the Meto product range. The
Company believes that it has made, and will continue to make, product design
changes that improve product performance and result in easier installation,
thereby reducing these costs as a percentage of net revenues over time.
Selling, General and Administrative Expenses
During 2001, SG&A expenses decreased $18.8 million or 8.0% from $234.5 million
to $215.7 million. As a percentage of net revenues, SG&A expenses decreased by
1.1% (from 33.9% to 32.8%). The decrease as a percentage of net revenues
resulted from the full year impact of the Meto integration and a further 4%
reduction in headcount during 2001, partially offset by an increase in post
employment benefits of $2.5 million and an increase in the accounts receivable
reserve of $1.2 million related to the Company's operation in Argentina.
Included in SG&A expenses was $10.3 million of goodwill amortization.
In 2000, the increase in SG&A expenses was directly attributable to the
additional expenses resulting from the inclusion of the Meto business for the
full year. SG&A expenses as a percentage of revenues increased to 33.9% from
31.8%. The increase was due to the amortization of goodwill and other
intangibles associated with the Meto acquisition and a customer-based
receivables write-off of $5.1 million.
Interest Income and Interest Expense
Interest income for fiscal year 2001, 2000, and 1999, was $2.7 million, $4.3
million, and $5.5 million, respectively. The decreases in 2001 and 2000 were
directly attributable to a decrease in cash investments primarily resulting from
the payment of interest and principal on the Company's debt along with the cash
paid for restructuring. In 2001, lower interest rates further reduced interest
income. Interest expense was $21.8 million, $24.1 million, and $9.8 million for
2001, 2000, and 1999, respectively. The decrease in interest expense in 2001 is
directly attributable to debt repayment and lower Euro-based interest rates. The
increase in 2000 resulted from the increased borrowings associated with the
acquisition of Meto AG.
Other Loss, net
Other loss, net resulted from net foreign exchange losses of $(0.7) million,
$(2.5) million, and $(1.7) million for 2001, 2000, and 1999, respectively.
Income Taxes
The Company's effective tax rate for fiscal 2001, 2000, and 1999, was 50.0%,
57.2%, and 28.6%, respectively. The tax rate decreased in 2001 due to the
increase in earnings, which reduced the effect of the non-deductible goodwill,
and the utilization of foreign tax losses. This was partially offset by $1.7
million of foreign losses for which valuation allowances were established. The
higher rate in 2000 was a result of the non-deductible goodwill associated with
the acquisition of Meto in December 1999.
The Company's net earnings generated by the operations of its Puerto Rico
subsidiary are substantially exempt from Federal income taxes under Section 936
of the Internal Revenue Code (Section 936) until December 31, 2005 and are
substantially exempt from Puerto Rican income taxes.
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 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 2000, the Company began
recognizing revenue when installation was complete or other post-shipment
obligations have been satisfied. During the first quarter of 2000, the
cumulative effect of the change in accounting principle was a non-cash reduction
in net earnings of $5.0 million, or $0.16 per diluted share.
Net Earnings/(Loss)
Net earnings/(loss) was $6.6 million or $.21 per share, $(2.8) million or $(.09)
per share, and $6.7 million or $.22 per share for fiscal years 2001, 2000, and
1999, respectively. The weighted average number of shares used in the diluted
earnings per share computation were 31.7 million, 30.6 million, and 30.5 million
for fiscal years 2001, 2000, and 1999, respectively. The increase in the
weighted average number of shares from 2000 to 2001 was primarily due to the
exercise of employee stock options.
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 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 to service debt and meet its capital investment requirements.
The Company's operating activities during fiscal 2001 generated approximately
$102.7 million compared to approximately $3.2 million during 2000. This change
from the prior year was primarily the result of a decrease in working capital,
especially in inventories and accounts receivable.
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, included a $275 million
equivalent multi-currency term note and a $150 million equivalent multi-currency
revolving line of credit. Interest on the facility resets monthly and is based
on the Eurocurrency base rate plus an applicable margin. At December 30, 2001,
149.0 million Euro (approximately $132.0 million) and $9.1 million were
outstanding under the term loan. The outstanding borrowings under the revolving
credit facility were 2.23 billion Japanese Yen (approximately $17.0 million). On
March 15, 2001, the $150 million revolving line of credit was reduced to $100
million.
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.
The contractual obligations and commercial commitments of the Company at
December 30, 2001 are summarized below :
Total Due in
amounts less than Due in Due in Due after
due 1 year 1-3 years 4-5 years 5 years
--------- --------- --------- --------- ---------
(Thousands)
Contractual obligations
Long-term debt $261,134 $ 26,821 $ 60,671 $173,642 $ -
Lines of credit 3,584 3,584 - - -
Capital lease
obligations 28,793 1,018 1,961 18,620 7,194
Operating leases 43,234 11,007 14,354 9,860 8,013
Unconditional
purchase
obligations 34,090 27,341 6,749 - -
-------- -------- -------- -------- --------
Total contractual
cash obligations $370,835 $ 69,771 $ 83,735 $202,122 $ 15,207
======== ======== ======== ======== ========
Management believes that its anticipated cash needs for the foreseeable future
can be funded from cash and cash equivalents on hand, the availability under the
$100 million revolving credit facility, and cash generated from future
operations.
Capital Expenditures
The Company's capital expenditures during fiscal 2001 totaled $9.6 million
compared to $13.2 million during fiscal 2000. The reduction in expenditures
occurred in manufacturing equipment, IT hardware, and office equipment. The
Company anticipates its capital expenditures to approximate $15.0 million in
2002.
Stock Repurchase
There have been no stock repurchases since 1998. Furthermore, certain
restrictions exist under the terms of the senior secured facility, which
prohibit the repurchase of the Company's stock.
Exposure to International Operations
The Company manufactures products in the USA, the Caribbean, Europe, and the
Asia Pacific region 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.
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 December 30, 2001, the Company had currency exchange forward contracts
totaling approximately $19.8 million. The contracts are in the various local
currencies covering primarily the Company's Western European operations along
with the Company's Canadian and Australian operations. Historically, the Company
has not purchased currency exchange forward contracts for its operations in
South America and Asia.
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.
Other Matters
New Accounting Pronouncements and Other Standards
The Emerging Issues Task Force (EITF) of the FASB reached consensus in 2000 on
Issue 00-14, Accounting for Certain Sales Incentives. The standard addresses the
income statement classification of certain selling costs. The standard became
effective for the Company on December 31, 2001 (fiscal year 2002). The Company
does not expect the standard to result in a material restatement of prior
periods.
In June 2001, the Financial Accounting Standards Board (FASB) approved the
issuance of Statement of Financial Accounting Standards No. 141 (SFAS 141),
Business Combinations and Statement of Financial Accounting Standards No. 142
(SFAS 142), Goodwill and Other Intangible Assets. For the Company, these
statements became effective December 31, 2001, although business combinations
initiated after July 1, 2001 are subject to the non-amortization and purchase
accounting provisions. The impact on the Company's pre-tax earnings for 2002
from the non-amortization of goodwill will be approximately $10.6 million. In
accordance with SFAS 142, the Company is currently evaluating goodwill for
possible impairment.
The FASB issued Statement of Financial Accounting Standards No. 143 (SFAS 143),
Accounting for Asset Retirement Obligations on August 15, 2001 and Statement of
Financial Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment
or Disposal of Long-Lived Assets on October 3, 2001. For the Company, SFAS 143
becomes effective on December 30, 2002 and SFAS 144 became effective on December
31, 2001. The effects of these pronouncements on the Company's financial
statements are currently being assessed.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Factors
Fluctuations in interest and foreign currency exchange rates affect the
Company's financial position and results of operations. The Company enters into
forward exchange contracts and purchases options denominated in foreign currency
to hedge certain foreign currency exposure and minimize the effect of such
fluctuations on reported earnings and cash flow. (See "Accounting for Foreign
Currency Translation and Transactions" in the Summary of Significant Accounting
Policies, Note 1; and "Financial Instruments and Risk Management", Note 13.)
Sensitivity of the Company's financial instruments to selected changes in market
rates and prices, which are reasonably possible over a one-year period, are
described below. Market values are the present value of projected future cash
flows based on the market rates and prices.
The Company's financial instruments subject to interest rate risk consist of
fixed rate debt instruments. These debt instruments have a net fair value of
$112.3 million and $87.9 million as of December 30, 2001 and December 31, 2000,
respectively. The sensitivity analysis assumes an instantaneous 100-basis point
move in interest rates from their levels, with all other variables held
constant. A 100-basis point increase in interest rates at December 30, 2001
would result in a $1.8 million decrease in the net market value of the
liability. Conversely, a 100-basis point decrease in interest rates at December
30, 2001 would result in a $1.7 million increase in the net market value of the
liability.
The Company's $120 million subordinated debentures are also subject to equity
price risk. The fair value of these debentures was a liability of $112.3 million
and $87.9 million at December 30, 2001 and December 31, 2000, respectively. The
sensitivity analysis assumes an instantaneous 10% change in the year-end closing
price of the Company's common stock, with all other variables held constant. At
December 30, 2001, a 10% strengthening in the Company's common stock would
result in a net increase in the fair value liability of $2.8 million, while a
10% weakening in the Company's common stock would result in a net decrease in
the fair value liability of $2.5 million.
The Company's financial instruments subject to foreign currency exchange risk
include the 244 million Euro term loan, the $100 million multi-currency
revolving credit facility, and the 18.6 million Deutsche Mark and 5.3 million
Deutsche Mark capital leases. At December 30, 2001, 149.0 million Euro
(approximately $132.0 million) was outstanding under the term loan. The amount
outstanding under the revolving credit facility was 2.23 billion Japanese Yen
(approximately $17.0 million). The outstanding amounts under the capital leases
were 17.8 million Deutsche Mark (approximately $8.1 million) and 3.9 million
Deutsche Mark (approximately $1.8 million). The sensitivity analysis assumes an
instantaneous 10% change in foreign currency exchange rates from year-end
levels, with all other variables held constant. At December 30, 2001, a 10%
strengthening of the US dollar versus the Euro would result in a $12.9 million
decrease in the liability of the term loan, revolving credit facility and
capital leases, while a 10% weakening of the US dollar versus the Euro would
result in a $15.8 million increase in the liability of the term loan, revolving
credit facility, and capital leases. At December 30, 2001, a 10% strengthening
of the US dollar versus the Japanese Yen would result in a $1.5 million decrease
in the liability of the revolving credit facility, while a 10% weakening of the
US dollar versus the Japanese Yen would result in a $1.9 million increase in the
liability of the revolving credit facility.
Also subject to foreign currency exchange risk are the Company's foreign
currency forward exchange contracts and options which represent a net asset
position of $0.02 million and $0.8 million at December 30, 2001 and
December 31, 2000, respectively. The sensitivity analysis assumes an
instantaneous 10% change in foreign currency exchange rates
from year-end levels, with all other variables held constant. At December 30,
2001, a 10% strengthening of the US dollar versus other currencies would result
in an increase of $0.3 million in the net asset position, while a 10% weakening
of the dollar versus all other currencies would result in a decrease of $0.3
million.
Foreign exchange forward and option contracts are used to hedge certain of the
Company's firm foreign currency cash flows. Thus, there is either an asset or
cash flow exposure related to all the financial instruments in the above
sensitivity analysis for which the impact of a movement in exchange rates would
be in the opposite direction and substantially equal to the impact on the
instruments in the analysis. Presently, the only significant restrictions on the
remittance of funds generated by the Company's operations outside the USA are in
Argentina.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Accountants......................................34
Consolidated Balance Sheets as of December 30, 2001 and
December 31, 2000................................................35-36
Consolidated Statements of Operations for each of the years
in the three-year period ended December 30, 2001.................37-38
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 30, 2001..............39
Consolidated Statements of Comprehensive Loss for each of the
years in the three-year period ended December 30, 2001..............40
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 30, 2001.................41-42
Notes to Consolidated Financial Statements..........................43-70
Financial Statement Schedules
Schedule II -Valuation and Qualifying Accounts......................77
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Checkpoint Systems, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Checkpoint Systems, Inc. and its subsidiaries at December 30, 2001 and December
31, 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 30, 2001 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, in 2000 the
Company adopted Staff Accounting Bulletin 101, Revenue Recognition in Financial
Statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 22, 2002
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 30, December 31,
2001 2000
------------ ------------
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 43,698 $ 28,121
Accounts receivable, net of allowances
of $12,182,000 and $12,427,000 145,768 176,479
Inventories 91,510 122,267
Other current assets 23,309 35,620
Deferred income taxes 9,288 8,668
-------- --------
Total current assets 313,573 371,155
REVENUE EQUIPMENT ON OPERATING LEASE, net 9,059 14,230
PROPERTY, PLANT, AND EQUIPMENT, net 102,613 123,417
GOODWILL, net 231,138 245,241
OTHER INTANGIBLES, net 60,104 70,771
OTHER ASSETS 36,166 43,176
-------- --------
TOTAL ASSETS $752,653 $867,990
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and
current portion
of long-term debt $ 31,423 $ 38,070
Accounts payable 43,008 41,996
Accrued compensation and
related taxes 20,199 16,862
Income taxes 12,934 30,793
Unearned revenues 22,964 22,339
Restructuring reserve 14,179 17,707
Other current liabilities 42,251 46,299
-------- --------
Total current liabilities 186,958 214,066
LONG-TERM DEBT, LESS CURRENT MATURITIES 142,088 227,011
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
ACCRUED PENSIONS 44,851 48,142
OTHER LONG-TERM LIABILITIES 9,230 9,811
DEFERRED INCOME TAXES 8,508 10,734
MINORITY INTEREST 755 547
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
38,183,861 and 36,642,740 3,818 3,664
Additional capital 252,342 234,407
Retained earnings 115,093 108,458
Common stock in treasury, at cost,
6,359,200 shares and 6,359,200 shares (64,410) (64,410)
Accumulated other comprehensive loss (66,580) (44,440)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 240,263 237,679
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $752,653 $867,990
======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
2001 2000 1999
------ ------ ------
(Thousands, except per share data)
Net revenues $658,535 $690,811 $373,062
Cost of revenues 402,251 417,963 226,289
-------- -------- --------
Gross profit 256,284 272,848 146,773
Selling, general, and administrative
expenses 215,709 234,490 118,803
Other operating expenses 7,066 10,551 11,796
-------- -------- --------
Operating income 33,509 27,807 16,174
Interest income 2,742 4,257 5,495
Interest expense 21,841 24,093 9,792
Other loss, net (694) (2,524) (1,670)
-------- -------- --------
Earnings before income taxes 13,716 5,447 10,207
Income taxes 6,857 3,115 2,915
Minority interest (224) (78) (34)
-------- -------- --------
Earnings before extraordinary
loss and cumulative
effect of change in
accounting principle 6,635 2,254 7,258
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $260) - - (592)
Cumulative effect of change in
accounting principle (net of
income tax benefit of $2,703) - (5,020) -
-------- -------- --------
Net earnings/(loss) $ 6,635 $ (2,766) $ 6,666
======== ======== ========
Earnings per share before
extraordinary loss and
cumulative effect of change in
accounting principle:
Basic $ .21 $ .07 $ .24
======== ======== ========
Diluted $ .21 $ .07 $ .24
======== ======== ========
Earnings per share before
cumulative effect of change in
accounting principle:
Basic $ .21 $ .07 $ .22
======== ======== ========
Diluted $ .21 $ .07 $ .22
======== ======== ========
Net earnings/(loss) per share:
Basic $ .21 $ (.09) $ .22
======== ======== ========
Diluted $ .21 $ (.09) $ .22
======== ======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumu-
lated
Other
Addi- Compre-
Common tional Retained hensive Treasury
Stock Capital Earnings Loss Stock Total
------ -------- -------- -------- -------- --------
(Thousands)
Balance,
December 27,1998 $3,647 $233,180 $104,558 $(15,039) $(64,410) $261,936
(Common shares:
issued 36,471,584
reacquired, 6,359,200)
Net earnings 6,666 6,666
Exercise of stock
options
(51,000 shares) 5 437 442
Foreign currency
translation
adjustment (13,249) (13,249)
------ -------- -------- -------- -------- --------
Balance,
December 26, 1999 3,652 233,617 111,224 (28,288) (64,410) 255,795
(Common shares:
issued 36,522,584;
reacquired, 6,359,200)
Net loss (2,766) (2,766)
Exercise of stock
options
(120,156 shares) 12 790 802
Foreign currency
translation
adjustment (16,152) (16,152)
------ -------- -------- -------- -------- --------
Balance,
December 31, 2000 3,664 234,407 108,458 (44,440) (64,410) 237,679
(Common shares:
issued 36,642,740;
reacquired, 6,359,200)
Net earnings 6,635 6,635
Exercise of stock
options
(1,541,121 shares) 154 17,935 18,089
Foreign currency
translation
adjustment (22,140) (22,140)
------ -------- -------- -------- -------- --------
Balance,
December 30, 2001 $3,818 $252,342 $115,093 $(66,580) $(64,410) $240,263
(Common shares: ====== ======== ======== ======== ======== ========
issued 38,183,861
reacquired, 6,359,200)
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
2001 2000 1999
------ ------ ------
(Thousands)
Net earnings/(loss) $ 6,635 $ (2,766) $ 6,666
Foreign currency translation
adjustment, net of tax (22,140) (16,152) (13,249)
-------- -------- --------
Comprehensive loss $(15,505) $(18,918) $ (6,583)
======== ======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
2001 2000 1999
------ ------ ------
Cash flows from operating (Thousands)
activities:
Net earnings/(loss) $ 6,635 $(2,766) $ 6,666
Adjustments to reconcile net earnings
to net cash provided by/(used in)
operating activities:
Cumulative effect of change in
accounting principle, net of tax - 5,020 -
Revenue equipment on operating
lease (740) 3,496 (4,781)
Long-term customer contracts 1,202 - 6,547
Depreciation and amortization 43,936 47,883 28,028
Deferred taxes (1,016) 5,204 (3,120)
Provision for losses on accounts
receivable 3,490 7,506 2,180
Impairment of long-lived assets 7,467 7,110 -
Restructuring and extraordinary
charges 11,170 2,205 12,648
(Increase)/decrease in current assets,
net of the effects of acquired
companies:
Accounts receivable 15,983 (6,508) 15,174
Inventories 25,971 (25,914) 16,931
Other current assets 7,985 (17,881) 5,201
Increase/(decrease) in current liabilities,
net of the effects of acquired companies:
Accounts payable 1,155 (3,300) 9,347
Accrued compensation and related
taxes 3,592 (7,453) 2,015
Income taxes (11,059) (12,952) 1,804
Unearned revenues 1,402 3,354 1,541
Restructuring reserve (14,000) (16,925) -
Other current liabilities (437) 15,093 (12,645)
------- ------- -------
Net cash provided by operating
activities 102,736 3,172 87,536
------- ------- -------
Cash flows from investing activities:
Acquisition of property, plant, and
equipment (9,572) (13,172) (8,774)
Acquisitions, net of cash acquired (13,486) (15,774) (239,792)
Other investing activities 2,266 2,581 (2,325)
------- ------- -------
Net cash used in investing
activities (20,792) (26,365) (250,891)
------- ------- -------
Cash flows from financing activities:
Proceeds from stock issuances 12,731 802 442
Proceeds of debt 6,687 5,827 293,722
Payment of debt (84,051) (40,528) (77,240)
------- ------- -------
Net cash (used in)/provided by
financing activities (64,633) (33,899) 216,924
------- ------- -------
Effect of foreign currency rate
fluctuations on cash and cash
equivalents (1,734) (2,505) (1,785)
------- ------- -------
Net increase/(decrease) in cash and
cash equivalents 15,577 (59,597) 51,784
Cash and cash equivalents:
Beginning of year 28,121 87,718 35,934
------- ------- -------
End of year $43,698 $ 28,121 $87,718
======= ======= =======
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
- --------------------
The Company is a multinational manufacturer and marketer of integrated system
solutions for loss prevention, labeling, and merchandising. The Company is a
leading provider of radio frequency (RF) and electromagnetic (EM) electronic
article surveillance (EAS) systems and tags, security source tagging, retail
merchandising system (RMS), hand-held labeling systems (HLS), and barcode
labeling systems (BCS). The Company's labeling systems and services are designed
to improve efficiency, reduce costs, and furnish value-added solutions for
customers across many markets and industries. Applications for barcode labeling
systems include auto-ID, retail security, pricing, and promotional labels. The
Company also markets closed-circuit television (CCTV) systems primarily to help
retailers prevent losses caused by theft of merchandise, as well as electronic
access control systems (EAC) for commercial and industrial applications. The
Company holds or licenses over 1,000 patents and proprietary technologies. The
Company has achieved substantial growth since 1993, primarily through internal
expansion and acquisitions, new product introductions, broadened and more direct
distribution (particularly in international markets), and increased and more
efficient manufacturing capabilities.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its majority owned subsidiaries (Company). All inter-company
transactions are eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fiscal Year
- -----------
The Company's fiscal year is the 52 or 53 week period ending the last Sunday
of December. References to 2001, 2000, and 1999 are for: the 52 weeks ended
December 30, 2001, the 53 weeks ended December 31, 2000, and the 52 weeks ended
December 26, 1999, respectively.
Reclassifications
- -----------------
Certain reclassifications have been made to the 2000 and 1999 financial
statements and related footnotes to conform to the 2001 presentation.
Revenue Recognition
- -------------------
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarized certain of the staffs views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In accordance with SAB 101, the Company 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. During the first quarter of
year 2000, the cumulative effect of the change in accounting method was a
non-cash reduction in net earnings of $5,020,000, net of income tax benefit of
$2,703,000, or $0.16 per diluted share.
Equipment leased to customers under sales-type leases is accounted for as the
equivalent of a sale. The present value of such lease revenues is recorded as
net revenues, and the related cost of the equipment is charged to cost of
revenues. The deferred finance charges applicable to these leases are recognized
over the terms of the leases using the straight-line method which approximates
the effective interest method. Rental revenue from equipment under operating
leases is recognized over the term of the lease. Installation revenue from EAS
equipment is recognized when the systems are installed. Service revenue is
recognized on a straight-line basis over the contractual period or as services
are performed. Sales to third party leasing companies are recognized as the
equivalent of a sale.
Cash and Cash Equivalents
- -------------------------
Cash in excess of operating requirements is invested in short-term, income
producing instruments. Cash equivalents include commercial paper and other
securities with original maturities of 90 days or less at the time of purchase.
Book value approximates fair value because of the short maturity of those
instruments.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Revenue Equipment on Operating Lease
- ------------------------------------
The cost of the equipment leased to customers under operating leases is
depreciated on a straight-line basis over the length of the contract, which is
usually between three and five years.
Property, Plant, and Equipment
- -----------------------------
Property, plant, and equipment is carried at cost less accumulated depreciation.
Maintenance, repairs, and minor renewals are expensed as incurred. Additions,
improvements and major renewals are capitalized. Depreciation generally is
provided on a straight-line basis over the estimated useful lives of the assets;
for certain manufacturing equipment, the units-of-production method is used.
Buildings, equipment rented to customers, leasehold improvements, and leased
equipment on capitalized leases use the following estimated useful lives of 27.5
years, three to five years, seven years, and five years, respectively. Machinery
and equipment estimated useful lives range from five to ten years. The cost and
accumulated depreciation applicable to assets retired are removed from the
accounts and the gain or loss on disposition is included in income.
Goodwill
- --------
Goodwill is amortized over the estimated future periods to be benefited, ranging
from 20 to 30 years. Accumulated amortization approximated $35,364,000 and
$24,262,000 at December 30, 2001 and December 31, 2000, respectively.
Amortization expense was $10,290,000, $9,513,000, and $4,045,000 for 2001, 2000,
and 1999, respectively. Refer to Note 21.
Other Intangibles
- -----------------
Other intangibles at December 30, 2001 and December 31, 2000 consisted of the
following:
Amortizable
Life (years) 2001 2000
------------ ------ ------
(Thousands)
Customer lists 20 $ 23,380 $ 24,392
Trade name 30 21,406 22,762
Capitalized software 3 to 5 7,976 7,558
Workforce 13 10,050 10,686
Patents, license agreements 5 to 14 26,576 26,912
Other 3 to 6 3,675 4,004
-------- --------
93,063 96,314
Less: accumulated amortization (32,959) (25,543)
-------- --------
Total $ 60,104 $ 70,771
======== ========
Amortization expense was $7,638,000, $9,053,000, and $2,251,000 for 2001, 2000,
and 1999, respectively. Other intangibles are amortized on a straight-line basis
over their useful lives (or legal lives if shorter).
Long-Lived Assets
- -----------------
The Company reviews its long-lived assets, including goodwill and intangibles,
for impairment on an exception basis whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
future cash flows. If it is determined that an impairment loss has occurred
based on expected future cash flows (undiscounted), then the loss is recognized
on the consolidated statements of operations. The amount of an impairment loss
is the excess of the carrying amount of the impaired asset over the fair value
of the asset. The fair value represents expected future cash flows from the use
of the assets, discounted at the rate used to evaluate potential investments.
Refer to Note 21.
Deferred Financing Costs
- ------------------------
Financing costs are capitalized and amortized over the life of the debt. The net
deferred financing costs at December 30, 2001 and December 31, 2000 were
$6,692,000 and $8,001,000, respectively. Amortization expense was $1,708,000,
$1,221,000, and $361,000, for 2001, 2000, and 1999, respectively.
Research and Development Costs
- ------------------------------
Research and development costs, which are included in cost of revenues, are
expensed as incurred, and approximated $8,665,000, $9,494,000, and $7,278,000,
in 2001, 2000, and 1999, respectively.
Royalty Expense
- ---------------
Royalty expenses incurred approximated $4,010,000, $4,780,000, and $3,986,000,
in 2001, 2000, and 1999, respectively, and are included in SG&A.
Income Taxes
- ------------
Income taxes are determined in accordance with SFAS No. 109. Under this method,
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. Changes in
enacted tax rates are reflected in the tax provision as they occur. A valuation
allowance is recorded to reduce deferred tax assets when realization of a tax
benefit is less likely than not.
Accounting for Foreign Currency Translation and Transactions
- ------------------------------------------------------------
The Company's balance sheet accounts of foreign subsidiaries are translated into
US dollars at the rate of exchange in effect at the balance sheet dates. The
resulting translation adjustment is recorded as a separate component of
shareholders' equity. Revenues, costs, and expenses of the Company's foreign
subsidiaries are translated into US dollars at the year-to-date average rate of
exchange. In addition, gains or losses on long-term inter-company transactions
are excluded from the net earnings/(loss) and accumulated in the aforementioned
translation adjustment as a separate component of consolidated shareholders'
equity. All other foreign transaction gains and losses are included in net
earnings/(loss).
The Company enters into certain foreign exchange forward and option contracts in
order to hedge anticipated rate fluctuations in Europe, Canada, and Australia.
Transaction gains or losses resulting from these contracts are
recognized at the end of each reporting period. The Company uses the fair value
method of accounting, recording realized and unrealized gains and losses on
these contracts. These gains and losses are included in other loss, net on the
Company's consolidated statements of operations.
Note 2. INVENTORIES
Inventories consist of the following:
2001 2000
------ ------
(Thousands)
Raw materials $ 10,631 $ 10,921
Work-in-process 3,619 6,819
Finished goods 77,260 104,527
-------- --------
Total $ 91,510 $122,267
======== ========
Note 3. REVENUE EQUIPMENT ON OPERATING LEASE AND PROPERTY, PLANT, AND
EQUIPMENT
The major classes are:
2001 2000
------ ------
(Thousands)
Revenue equipment on operating lease
Equipment rented to customers $ 45,677 $ 48,579
Accumulated depreciation (36,618) (34,349)
-------- --------
$ 9,059 $ 14,230
======== ========
Property, plant, and equipment
Land $ 8,706 $ 10,292
Buildings 57,968 64,314
Machinery & equipment 178,588 188,430
Leasehold improvements 9,049 9,123
-------- --------
254,311 272,159
Accumulated depreciation (151,698) (148,742)
-------- --------
$102,613 $123,417
======== ========
Depreciation expense on the Company's revenue equipment on operating lease and
property, plant, and equipment was $26,300,000, $28,096,000, and $19,698,000,
for 2001, 2000, and 1999, respectively.
Note 4. SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG-TERM DEBT
Short-term borrowings and current portion of long-term debt at December 30, 2001
and at December 31, 2000 consisted of the following:
2001 2000
------ ------
(Thousands)
Overdraft facilities and lines of
credit with interest rates ranging
from 1.38% to 5.50% $ 3,584 $ 5,241
Current portion of long-term debt 27,839 32,829
------- -------
Total short-term borrowings and
current portion of long-term debt $31,423 $38,070
======= =======
Note 5. LONG-TERM DEBT
Long-term debt at December 30, 2001 and December 31, 2000 consisted of the
following:
2001 2000
------ ------
(Thousands)
Six and one-half year EUR 244
million variable interest rate
collateralized term loan $132,037 $204,586
Six and one-half year $25 million
variable interest rate
collateralized loan 9,098 19,250
Six and one-half year $100 million
multi-currency variable interest
rate collateralized revolving
credit facility 16,982 25,108
Twenty two and one-half year
DEM 18.6 million capital lease 8,050 8,738
Eight and one-half year
DEM 5.3 million capital lease 1,764 2,158
Other capital leases with maturities
through 2006 1,996 -
-------- --------
Total 169,927 259,840
Less current portion (27,839) (32,829)
-------- --------
Total long-term portion (excluding
convertible subordinated debentures) 142,088 227,011
Convertible subordinated debentures 120,000 120,000
-------- --------
Total long-term portion $262,088 $347,011
======== ========
In connection with the acquisition of Meto AG, 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. On March 15, 2001, the $150 million
revolving line of credit was reduced to $100 million. Interest on the new
facility resets monthly and is based on the Eurocurrency base rate plus an
applicable margin. At December 30, 2001, 149.0 million Euro (approximately
$132.0 million) and $9.1 million were outstanding under the term loan. The
outstanding borrowings under the revolving credit facility were 2.23 billion
Japanese Yen (approximately $17.0 million).
The terms of the new credit facility required the Company to retire all existing
senior debt. In connection with the senior debt restructuring, the Company
incurred an after-tax extraordinary loss of $0.6 million, or $.02 per share, for
the year ended December 26, 1999.
The above loan agreements contain certain restrictive covenants which, among
other things, require maintenance of specified minimum financial ratios
including debt to earnings, interest coverage, fixed charge coverage and
tangible net worth. In addition, these agreements limit the Company's ability to
pay cash dividends.
On February 8, 2002, the Company secured an amendment to one of the financial
covenants included in the credit facility, which allowed the Company to be in
compliance with its covenants for the year ended December 30, 2001. Management
believes that it will fulfill all covenant requirements, as defined in the
amended credit facility, going forward.
In November 1995, the Company completed the private placement of $120,000,000 of
convertible subordinated debentures (debentures) with an annual interest rate of
5.25%. The debentures are uncollateralized and subordinated to all senior
indebtedness. The debentures are convertible into common stock, at a conversion
price of $18.38 per share (equivalent to approximately 54.4 shares of common
stock for each $1,000 principal amount of debentures), at any time prior to
redemption or maturity. The debentures will mature on November 1, 2005, and are
redeemable, in whole or in part, at the option of the Company. The net proceeds
generated to the Company from this transaction approximated $116,000,000.
The aggregate maturities on all long-term debt (including current portion) are:
(Thousands)
2002 $ 27,839
2003 27,854
2004 34,778
2005 161,117
2006 31,145
Thereafter 7,194
--------
Total $289,927
========
Note 6. STOCK OPTIONS
The Company's 1992 Stock Option Plan (1992 Plan) allows the Company to grant
either Incentive Stock Options (ISOs) or Non-Incentive Stock Options (NSOs) to
purchase up to 12,000,000 shares of common stock after giving effect to the
February 1996 stock split. Under the 1992 Plan, only employees are eligible to
receive ISOs and both employees and non-employee directors of the Company are
eligible to receive NSOs. NSOs and ISOs issued under the 1992 Plan through
December 30, 2001 total 10,805,859. At December 30, 2001, December 31, 2000, and
December 26, 1999, a total of 1,194,141, 1,464,179, and 1,296,090 shares,
respectively, were available for grant after giving effect to the February 1996
stock split.
All ISOs under the 1992 Plan expire not more than 10 years (plus six months in
the case of NSOs) from the date of grant. Both ISOs and NSOs require a purchase
price of not less than 100% of the fair market value of the stock at the date of
grant.
The 1992 Plan is administered by the Compensation and Stock Option Committee of
the Company's Board of Directors. All of the options outstanding at December 30,
2001 were issued pursuant to the 1992 Plan. Stock options granted prior to July
1, 1997 were vested upon grant. In July 1997, the Compensation and Stock Option
Committee modified the vesting provisions contained in the 1992 Plan so that all
options issued on or after July 23, 1997, to persons other than non-employee
directors under the Plan, shall vest as set forth below:
Incentive Stock Options and Non-Incentive Stock Options issued to all
employees whose title is less than Vice President shall vest as follows:
(i) 34% on or after the first anniversary date of option grant; (ii) an
additional 33% on or after 18 months of the date of option grant; and (iii)
the remaining 33% on or after the second anniversary date of the option
grant.
Incentive Stock Options and Non-Incentive Stock Options issued to all
employees whose title is Vice President and above shall vest as follows:
(i) 34% on or after the first anniversary date of option grant; (ii) an
additional 33% on or after the second anniversary date of option grant; and
(iii) the remaining 33% on or after the third anniversary date of option
grant.
Options that were fully vested and exercisable totaled 2,510,877 as of December
30, 2001. Options that were outstanding but not yet vested or exercisable
totaled 1,179,825 as of December 30, 2001.
The estimated weighted average fair value of options granted during 2001, 2000,
and 1999 were $5,275,000, $1,133,000, and $3,546,000, respectively, on the date
of the grant using the option pricing model and assumptions referred to below.
The weighted average fair value per share of options granted during 2001, 2000,
and 1999 was $5.40, $4.19, and $3.92, respectively.
The following schedules summarize stock option activity and status:
NUMBER OF SHARES
----------------------------------
2001 2000 1999
----------------------------------
Outstanding at beginning of year 4,940,038 5,228,284 4,782,765
Granted 977,000 270,500 905,500
Exercised (1,541,121) (120,156) (51,000)
Canceled (685,215) (438,590) (408,981)
--------- --------- ---------
Outstanding at end of year 3,690,702 4,940,038 5,228,284
========= ========= =========
Exercisable at end of year 2,510,877 4,025,132 3,631,112
========= ========= =========
WEIGHTED-AVERAGE PRICE
---------------------------
2001 2000 1999
---------------------------
Outstanding at beginning of year $13.01 $13.24 $14.27
Granted $ 9.72 $ 8.29 $ 7.77
Exercised $ 8.27 $ 6.67 $ 8.65
Canceled $13.97 $14.59 $17.67
------ ------ ------
Outstanding at end of year $13.94 $13.01 $13.24
====== ====== ======
Exercisable at end of year $16.10 $14.09 $14.68
====== ====== ======
Following is a summary of stock options outstanding as of December 30, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of As of Contractual Exercise As of Exercise
Exercise Price 12/30/01 Life Price 12/30/01 Price
- ----------------------------------------------------------------------------
$ 4.06 - $ 9.68 1,588,291 8.59 $ 8.80 433,466 $ 7.58
$ 9.78 - $15.50 1,187,211 5.72 $12.93 1,165,211 $12.95
$15.78 - $24.75 455,700 5.46 $19.91 452,700 $19.94
$28.38 - $28.38 459,500 4.85 $28.38 459,500 $28.38
- ----------------------------------------------------------------------------
$ 4.06 - $28.38 3,690,702 6.81 $13.94 2,510,877 $16.10
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company continues to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's common stock at the date of grant over the amount an employee must
pay to acquire the stock. Since all options were granted at market value, there
is no compensation cost to be recognized.
Had compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date using the Black Scholes option pricing
model prescribed under SFAS No. 123, the Company's net income and earnings per
share would approximate the pro forma amounts as follows:
2001 2000 1999
------ ------ ------
(Thousands)
Net earnings/(loss)
As reported $ 6,635 $(2,766) $6,666
Pro forma $ 4,121 $(5,272) $3,595
Diluted earnings/(loss) per share
As reported $ .21 $ (.09) $ .22
Pro forma $ .13 $ (.17) $ .12
The following assumptions were used in estimating fair value of stock options:
2001 2000 1999
------ ------ ------
Dividend yields None None None
Expected volatility .562 .508 .487
Risk-free interest rates 4.5% 6.1% 6.1%
Expected life (in years) 3.8 3.2 3.1
Note 7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in 2001, 2000, and 1999, respectively, included payments for
interest of $20,603,000, $24,184,000, and $9,674,000, and income taxes
of $17,841,000, $15,057,000, and $2,950,000.
Note 8. SHAREHOLDERS' EQUITY
In March 1997, the Company's Board of Directors adopted a new Shareholder's
Rights Plan (1997 Plan) which replaced a prior plan which had been adopted in
1988. The Rights under the 1997 Plan attached to the common shares of the
Company as of March 24, 1997. No separate certificate representing the Rights
will be distributed until the occurrence of certain triggering events as defined
in the 1997 Plan. The Rights are designed to ensure all Company shareholders
fair and equal treatment in the event of a proposed takeover of the Company, and
to guard against partial tender offers and other abusive tactics to gain control
of the Company without paying all shareholders a fair price.
The Rights are exercisable only as a result of certain actions (defined by the
Plan) of an Acquiring Person, as defined. Initially, upon payment of the
exercise price (currently $100.00), each Right will be exercisable for one share
of common stock. Upon the occurrence of certain events as specified in the plan,
each Right will entitle its holder (other than the Acquiring Person) to purchase
a number of the Company's or Acquiring Person's common shares having a market
value of twice the Right's exercise price. The Rights expire on March 10, 2007.
Note 9. STOCK REPURCHASE
There have been no stock repurchases since 1998. Furthermore, certain
restrictions exist under the terms of the senior secured facility, which
prohibit the repurchase of the Company's stock.
Note 10. EARNINGS PER SHARE
Earnings per share are calculated under the provisions of Statements of
Financial Accounting Standards (SFAS) No. 128, Earnings per share, adopted in
the fourth quarter of 1997.
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:
-------------------------------------
2001 2000 1999
-------------------------------------
(Thousands, except per share data)
Basic earnings/(loss) per share:
Earnings before extraordinary loss
and cumulative effect of
change in accounting principle $ 6,635 $ 2,254 $ 7,258
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $260) - - (592)
------- ------- -------
Earnings before cumulative effect of
change in accounting principle 6,635 (2,254) 6,666
Cumulative effect of change in
accounting principle (net of
income tax benefit of $2,703) - (5,020) -
------- ------- -------
Net earnings/(loss) $ 6,635 $(2,766) $ 6,666
======= ======= =======
Weighted average common stock
outstanding 31,230 30,219 30,146
======= ======= =======
Basic earnings per share before
extraordinary loss and
cumulative effect of change in
accounting principle .21 .07 .24
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $260) - - (.02)
------- ------- -------
Basic earnings per share before
cumulative effect of change in
accounting principle $ .21 $ .07 $ .22
Cumulative effect of change in
accounting principle (net of
income tax benefit of $2,703) - (.16) -
------- ------- -------
Basic earnings/(loss) per share $ .21 $ (.09) $ .22
======= ======= =======
Diluted earnings/(loss) per share:
Earnings before extraordinary loss
and cumulative effect of change
in accounting principle $ 6,635 $ 2,254 $ 7,258
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $260) - - (592)
------- ------- -------
Earnings before extraordinary loss 6,635 2,254 6,666
Cumulative effect of change in
accounting principle (net of
income tax benefit of $2,703) - (5,020) -
------- ------- -------
Net earnings/(loss) $ 6,635 $(2,766) $ 6,666
======= ======= =======
Weighted average common stock
outstanding 31,230 30,219 30,146
Additional common shares resulting
from stock options 506 405 382
------- ------- -------
Weighted average common stock
and dilutive stock
outstanding (1) 31,736 30,624 30,528
======= ======= =======
Diluted earnings per share before
extraordinary loss and cumulative
effect of change in
accounting principle $ .21 $ .07 $ .24
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $260) - - (.02)
------- ------- -------
Diluted earnings per share before
cumulative effect of change in
accounting principle .21 .07 .24
Cumulative effect of change in
accounting principle (net of
income tax benefit of $2,703) - (.16) -
------- ------- -------
Diluted earnings/(loss) per share $ .21 $ (.09) $ .22
======= ======= =======
(1) Conversion of the subordinated debentures for 2001, 2000, and 1999 are not
included in the above calculation as they are anti-dilutive.
Note 11. INCOME TAXES
The domestic and foreign components of earnings/(losses) before income taxes
are:
2001 2000 1999
------ ------ ------
(Thousands)
Domestic $ (4,874) $ 2,680 $ 19,009
Foreign 18,590 2,767 (8,802)
------- ------- -------
Total $ 13,716 $ 5,447 $ 10,207
======= ======= =======
The domestic component includes the earnings of the Company's operations in
Puerto Rico.
The related provisions/(benefits) for income taxes consist of:
2001 2000 1999
------ ------ ------
Currently Payable (Thousands)
Federal $ (505) $ 155 $ 3,531
State 248 721 300
Puerto Rico 156 273 554
Foreign 7,974 604 1,650
Deferred
Federal (1,031) (2,311) 927
State - (263) -
Puerto Rico - 87 137
Foreign 15 3,849 (4,184)
------- ------- ------
Total Provision $ 6,857 $ 3,115 $ 2,915
======= ======= =======
Deferred tax assets/liabilities at December 30, 2001 and December 31, 2000
consist of:
2001 2000
------ ------
(Thousands)
Inventory $ 2,540 $ 2,775
Accounts receivable 2,436 2,855
Net operating loss carryforwards 30,652 39,129
Restructuring 3,081 2,361
Pension 3,523 4,700
Warranty 434 480
Other 488 197
Valuation allowance (16,258) (24,887)
------- -------
Deferred tax assets 26,896 27,610
------- -------
Depreciation 1,383 1,183
Intangibles 24,456 26,080
Deferred revenue 91 (418)
Other 184 2,831
------- -------
Deferred tax liabilities 26,114 29,676
------- -------
Net deferred tax asset/
(liability) $ 782 $( 2,066)
======= =======
The Company's net earnings generated by the operations of its Puerto Rico
subsidiary are exempt from Federal income taxes under Section 936 of the
Internal Revenue Code and substantially exempt from Puerto Rico income taxes.
Repatriation of the Puerto Rico subsidiary's unremitted earnings could result in
the assessment of Puerto Rico "tollgate" taxes at a maximum rate of 3.5% of
the amount repatriated. During 2001, 2000, and 1999, a full provision was made
for tollgate taxes. The Company has not provided for tollgate taxes on
approximately $37,000,000 of its subsidiary's unremitted earnings since they are
expected to be reinvested indefinitely.
The net operating loss carryforwards as of December 30, 2001 in the amount of
$95,526,000 include $21,875,000 of loss carryforwards that were acquired in
connection with the acquisition of the ID Systems Group, Actron Group Limited,
and Meto AG. If the benefit of the pre-acquisition loss carryforwards is
realized, the Company will apply such benefit to goodwill in connection with
the acquisition. In 2001, foreign tax losses decreased $23,545,000 due to loss
expiration and revaluations. A valuation allowance had been recorded against
$22,647,000 of these losses. In 2001, a valuation allowance was recorded due
to certain foreign losses where it is more than likely that tax loss
carryforwards will not be utilized.
Of the total foreign net operating loss carryforwards available, $16,188,000
expire beginning January 2002 through December 2010, and the remaining portion
may be carried forward indefinitely.
A reconciliation of the tax provision at the statutory US Federal income tax
rate with the tax provision at the effective income tax rate follows:
2001 2000 1999
------ ------ ------
(Thousands)
Tax Provision at the statutory federal
income tax rate $4,801 $1,907 $3,572
Tax exempt earnings of subsidiary in
Puerto Rico (683) (1,740) (2,746)
Non-deductible goodwill 3,602 3,842 1,306
Non-deductible meals and entertainment 226 265 200
State and local income taxes, net
of federal benefit 296 245 612
Benefit of foreign sales corporation (170) (571) (414)
Foreign losses with no benefit 1,720 391 1,629
Foreign loss carryforwards utilized (2,691) - (1,741)
Foreign rate differentials 479 (749) 497
Other (723) (475) -
------ ------ ------
Tax provision at the effective tax rate $ 6,857 $3,115 $2,915
====== ====== ======
The effective tax rate related to the cumulative effect of the change in
accounting principle approximates the statutory rate.
Note 12. EMPLOYEE BENEFIT PLANS
Under the Company's defined contribution savings plans, eligible employees (see
below) may make basic (up to 6% of an employee's earnings) and supplemental
contributions to a trust. The Company matches in cash 50% of the participant's
basic contributions. Company contributions vest to participants in increasing
percentages over one to five years of service. The Company's contributions under
the plans approximated $1,160,000, $999,000, and $672,000, in 2001, 2000, and
1999, respectively.
Generally, any full-time, non-union employee of the Company who has completed
one month of service, and any part-time non-union employee of the Company who
has completed one year of service, other than employees of the Company's foreign
subsidiaries, may participate in the Company's United States Savings Plan. All
full-time employees of the Puerto Rico subsidiary who have completed three
months of service may participate in the Company's Puerto Rico Savings Plan.
Part-time employees are not entitled to participate in the Company's Puerto Rico
Savings Plan.
Under the Company's non-qualified Employee Stock Purchase Plan, employees in
Canada, Puerto Rico, and the USA, may contribute up to $80 per week to a trust
for the purchase of the Company's common stock at fair market value. The Company
matches employee contributions up to a maximum of $20.75 per week. The Company's
contributions under this plan approximated $193,000, $179,000, and $176,000, in
2001, 2000, and 1999, respectively.
Under the Company's 2001 Corporate Bonus Plan, as approved by the Board of
Directors, employees of the Company have a targeted bonus percentage based on
earnings per share. In 2001, 2000, and 1999, net earnings did not exceed the
required criteria and, accordingly, no bonuses were provided under the Corporate
Bonus Plan.
The Company maintains several defined benefit pension plans, principally in
Europe. The plans covered approximately 20% of the total workforce at December
30, 2001. The benefits accrue according to the length of service, age, and
remuneration of the employee. The table below sets forth the funded status of
the Company's plans and amounts recognized in the accompanying balance sheets.
December 30, December 31,
2001 2000
----------- -----------
(Thousands)
Change in benefit obligation
Net benefit obligation at the beginning of year $47,495 $49,380
Service cost 1,121 1,325
Interest cost 2,648 2,701
Net amortization and deferrals 1,027 (14)
Actuarial (gain) (991) (538)
Gross benefits paid (2,441) (1,885)
Foreign currency exchange rate changes (2,841) (3,474)
------- -------
Net benefit obligation at end of year 46,018 47,495
------- -------
Change in plan assets
Fair value of plan assets at beginning of year 69 71
Employer contributions 2,441 1,885
Gross benefits paid (2,441) (1,885)
Foreign currency exchange rate changes (1) (2)
------- -------
Fair value of plan assets at end of year 68 69
------- -------
Funded status at end of year 45,950 47,426
Unrecognized net actuarial (loss)/gain (1,099) 716
------- -------
Accrued pensions $44,851 $48,142
======= =======
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $46,018,000, $39,438,000, and $68,000, respectively,
as of December 30, 2001, and $47,495,000, $42,499,000, and $69,000, respectively
as of December 31, 2000.
The pension plans included the following net cost components :
2001 2000
------ ------
(Thousands)
Service cost $1,121 $1,325
Interest cost 2,648 2,701
Net amortization and deferrals 1,027 (14)
------ ------
Total pension expense $4,796 $4,012
====== ======
The weighted average rate assumptions used in determining pension costs and the
projected benefit obligation are as follows:
December 30, December 31,
2001 2000
------------ ------------
Discount rate 6.00% 6.25%
Expected rate of return on plan assets 6.00% 6.25%
Expected rate of increase in future
compensation levels 3.00% 3.25%
Note 13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company's adoption of Statement of Financial Accounting Standards (SFAS) No.
133, Accounting for Derivative Instruments and Hedging Activities, on January 1,
2001, did not materially impact results from operations. The major market risk
exposures to the Company are movements in foreign currency exchange and interest
rates. The Company's policy generally is to hedge major foreign currency
exposures through foreign exchange forward contracts. These contracts are
entered into with major financial institutions thereby minimizing the risk of
credit loss. The Company's policy is to manage interest rates through the use of
interest rate caps. The Company does not hold or issue derivative financial
instruments for speculative or trading purposes. The Company is subject to other
foreign exchange market risk exposure as a result of non-financial instrument
anticipated foreign currency cash flows which are difficult to reasonably
predict, and have therefore not been included in the table below. All listed
items described are non-trading and are stated in US dollars.
Notional Amounts of Derivatives
- -------------------------------
The notional amounts of derivatives are not a complete measure of the Company's
exposure to foreign exchange fluctuation. The amounts exchanged are calculated
on the basis of the notional amounts and the other terms of the derivatives,
which relate to exchange rates.
Foreign Exchange Risk Management
- --------------------------------
The Company enters into currency exchange forward contracts to hedge short-term
receivables denominated in currencies other than the US dollar from its foreign
sales subsidiaries. The term of the currency exchange forward contracts is
rarely more than one year. The Company also entered into a range forward option
in Euros which provides the Company with limited protection against exchange
rate volatility for converting Euros into US dollars. Unrealized and realized
gains and losses on these contracts and options are included in other loss,
net. Notional amounts of currency exchange forward contracts outstanding at
December 30, 2001 were $19,785,000, with various maturity dates ranging
through the end of 2002. At December 31, 2000, the notional amounts of
currency exchange forward contracts outstanding were $49,760,000.
Counterparties to these contracts are major financial institutions,
and credit loss from counterparty non-performance is not anticipated.
Aggregate foreign currency transaction losses in 2001, 2000, and 1999,
were $694,000, $2,524,000, and $1,670,000, respectively, and are included in
other loss, net on the consolidated statements of operations.
Additionally, there were no deferrals of gains or losses on currency exchange
forward contracts or options at December 30, 2001.
Interest Rate Risk Management
- -----------------------------
In connection with the Company's floating rate debt under the senior
collateralized multi-currency credit facility, the Company purchased interest
rate caps to reduce the risk of significant Euro interest rate increases. The
fair value and premiums paid for the instruments were not material.
Fair Values
- -----------
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 30, 2001 and December 31, 2000:
2001 2000
------------------- ------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(Thousands)
Long-term debt (including
current maturities and
excluding capital
leases)(1) $(158,117) $(158,117) $(248,943) $(248,943)
Subordinated debentures (1) (120,000) (112,320) (120,000) (87,888)
Currency exchange
forward contracts
and options (2) 25 25 757 757
(1) The carrying amounts are reported on the balance sheet under the indicated
captions.
(2) The carrying amounts represent the net unrealized gain associated with the
contracts and options at the end of the period. Such amounts are included
in Other Current Liabilities.
Long-term debt is carried at the original offering price, less any payments of
principal. Rates currently available to the Company for long-term borrowings
with similar terms and remaining maturities are used to estimate the fair value
of existing borrowings as the present value of expected cash flows. The
long-term debt agreements have various due dates with none of the agreements
extending beyond the year 2006.
Convertible subordinated debentures are carried at the original offering price,
less any payments of principal. The debentures are unsecured, subordinated to
all senior indebtedness, and convertible at any time into shares of the
Company's common stock. The debentures will mature on November 1, 2005, and are
redeemable, in whole or in part, at the option of the Company on or after
November 1, 1998. In order to estimate the fair value of these debentures, the
Company used currently quoted market prices.
Note 14. PROVISION FOR RESTRUCTURING AND ASSET IMPAIRMENTS
In 2001, the Company recorded restructuring charges totaling $18.6 million
related to the consolidation of some of its US and Caribbean manufacturing
facilities and the rationalization of certain under-performing sales offices.
Included in the charges are severance costs for approximately 347 employees
($9.7 million), lease termination costs for three manufacturing facilities and
two warehouses ($1.4 million), and an asset impairment charge ($7.5 million).
The impairment charge consists of $5.0 million of manufacturing equipment
abandoned due to the rationalization of operations, a further $2.0 million
write-down of the manufacturing facility in Japan, and a $0.4 million goodwill
impairment upon exit of a business segment in Belgium. The book values of the
assets prior to write-down were $5.0 million, $5.7 million, and $0.4 million,
respectively. As of December 30, 2001, 127 of the 347 planned employee
terminations had occurred. The Company expects these actions to be completed by
the end of 2002.
During 2000, the restructuring accrual established in 1999 in connection with
the Company's acquisition of Meto was updated for additional severance costs for
approximately 90 employees ($1.8 million) and lease termination costs for one
office/warehouse facility ($0.4 million). In addition, the Company recorded an
asset impairment charge of $7.2 million relating to the realignment of its
manufacturing processes. This impairment charge is comprised of a $3.7 million
charge relating to the consolidation of the Company's manufacturing facilities
in Japan and a $3.5 million charge related to equipment abandoned in the fourth
quarter 2000 in connection with rationalizing manufacturing operations in the
Caribbean. The book values of the assets prior to write-down were $10.4 million
and $3.8 million respectively. The charge recorded in connection with
consolidating manufacturing facilities in Japan was determined on a "held for
use" basis until manufacturing operations cease (estimated to occur in the first
half of 2003) at which time the facility will be held for disposal. An
additional $5.0 million of severance costs for approximately 72 employees and
$0.4 million of additional lease termination costs relating to the acquired
company were recorded as an increase to goodwill in connection with the
completion of the Meto restructuring plan. As of December 30, 2001, all of the
planned actions had been completed with the exception of Japan, where 14 planned
employee terminations had not taken place and the building was still occupied.
In 1999, a restructuring accrual was established for costs related to the
acquisition of Meto AG. A portion of these costs resulted in a before-tax charge
of $10.9 million largely for severance costs for approximately 135 employees
($3.1 million), lease termination costs for 15 office/warehouse facilities ($3.3
million), and asset impairments ($4.5 million). The charge for asset impairments
relates to leasehold improvements ($1.0 million) on abandoned facilities and
related computer hardware and software ($1.0 million), as well as previously
acquired goodwill ($2.5 million). The book values of the assets prior to
write-down were $1.0 million, $1.0 million, and $2.5 million, respectively. An
additional $20.7 million associated with severance (for approximately 289
employees) 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. As of
December 30, 2001, all of the planned actions had been completed.
In the fourth quarter of 2001, the Company released $1.4 million of
restructuring accrual related to the 1999 and 2000 provisions, of which $1.2
million was recorded as a reduction in goodwill arising from the Meto
acquisition and $0.2 million was credited to earnings.
Termination benefits are being paid out over a period of one to 24 months after
termination.
Restructuring accrual activity was as follows:
Cash
Accrual Payments
at Charge Increase/ (and Accrual
Begin- Charged reversed (Decrease) Exchange at
ning of to to in Rate End of
Year Earnings Earnings Goodwill Changes) Year
-------- -------- -------- -------- ------- -------
(Thousands)
1999
Severance and
other employee
related charges $ - $ 3,097 $ - $17,642 $ - $20,739
Lease termination
costs - 3,248 - 3,060 - 6,308
------- ------- ------- ------- ------- -------
$ - $ 6,345 $ - $20,702 $ - $27,047
======= ======= ======= ======= ======= =======
2000
Severance and
other employee
related charges $20,739 $ 1,766 $ - $ 5,014 $(15,763) $11,756
Lease termination
costs 6,308 439 - 366 (1,162) 5,951
------- ------- ------- ------- ------- -------
$27,047 $ 2,205(1) $ - $ 5,380 $(16,925) $17,707
======= ======= ======= ======= ======= =======
2001
Severance and
other employee
related charges $11,756 $ 9,789 $ (136) $(1,163) $(11,688) $ 8,558
Lease termination
costs 5,951 1,381 (71) - (1,640) 5,621
------- ------- ------- ------- ------- -------
$17,707 $11,170(2) $ (207) $(1,163) $(13,328) $14,179
======= ======= ======= ======= ======= =======
(1) $0.9 million is included in cost of revenues and $1.3 million in other
operating expenses.
(2) $4.3 million is included in cost of revenues and $6.9 million in other
operating expenses.
Note 15. OTHER OPERATING EXPENSES
Other operating expenses is comprised of the following amounts:
2001 2000 1999
---- ---- ----
(Thousands)
Restructuring costs $ 6,868 $ 1,263 $ 6,345
Integration costs - 9,288 904
Asset impairments 405 - 4,547
Restructuring charge reversal (207) - -
------- ------- ------
$ 7,066 $10,551 $11,796
======= ======= ======
Integration costs consist primarily of external consulting, legal, and marketing
costs incurred in connection with integrating Meto/Checkpoint operations.
Integration costs were charged to expense as incurred. Restructuring and asset
impairment costs and the restructuring charge reversal are discussed in Note 14.
In addition to the charges indicated above, cost of revenues in 2001 includes
$4.3 million for restructuring and $7.1 million for asset impairments. In 2000,
cost of revenues includes charges for restructuring, integration, and asset
impairments of $0.9 million, $0.9 million, and $7.2 million, respectively. These
charges were recorded in connection with the consolidation and rationalization
of the Company's manufacturing operations.
Note 16. COMMITMENTS AND CONTINGENCIES
The Company leases certain production facilities, offices, distribution centers,
and equipment. Rental expense for all operating leases approximated $13,201,000,
$13,748,000, and $5,619,000, in 2001, 2000, and 1999, respectively. Future
minimum payments for operating leases having non-cancelable terms in excess of
one year at December 30, 2001 are: $11,007,000 (2002); $8,240,000 (2003);
$6,114,000 (2004); $5,120,000 (2005); $4,740,000 (2006) and $8,013,000
thereafter.
The Company is renting its German laminating facility to Raflatac Produktions
GmbH. In connection with the rental agreement, the Company has agreed to
purchase a certain volume of paper, which equates to approximately 50% of its
current annual worldwide paper consumption. The purchases were approximately
$15.2 million in 2001 and $15.5 million in 2000. The supply agreement, which
remains in place until terminated by either party, provides for a termination
fee of 4.0 million Deutsche Mark (approximately $1.8 million) prior to 2009 and
1.5 million Deutsche Mark (approximately $0.7 million) after 2009 to be paid by
the terminating party.
On October 1, 1995, the Company acquired certain patents and improvements
thereon related to EAS products and manufacturing processes from Arthur D.
Little, Inc. (ADL) for $1.9 million plus a royalty of 1% to 1.5% of future
RF-EAS products sold through 2008.
The Company is involved in certain legal and regulatory actions, all of which
have arisen in the ordinary course of business, except for the matter described
in the following paragraph. Management does not believe that the ultimate
resolution of such matters will have a material adverse effect on its
consolidated results of operations or financial condition.
The Company is a defendant in a Civil Action No. 99-CV-577, served February 10,
1999, in the United States District Court for the Eastern District of
Pennsylvania filed by Plaintiff, ID Security Systems Canada Inc. The suit
alleges a variety of antitrust claims; claims related to unfair competition,
interference with a contract, and related matters. Plaintiff seeks damages of up
to $90 million, before trebling, if an antitrust violation were to be
determined. This matter is scheduled for a jury trial commencing April 22, 2002.
Management is of the opinion that the claims are baseless both in fact and in
law, and intends to vigorously defend the suit. If, however, the final outcome
of this litigation results in certain of the Plaintiff's claims being upheld,
the potential damages could be material to the Company's consolidated results of
operations or financial condition.
Note 17. CONCENTRATION OF CREDIT RISK
The Company's foreign subsidiaries, along with many foreign distributors,
provide diversified international sales thus minimizing credit risk to one or
a few distributors. Domestically, the Company's sales are well diversified among
numerous retailers in the apparel, drug, home entertainment, mass merchandise,
music, shoe, supermarket, and video markets. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers.
Note 18. ACQUISITIONS
All acquisitions have been accounted for under the purchase method. The results
of the operations of the acquired businesses are included in the consolidated
financial statements from the date of acquisition.
On January 9, 2001, the Company acquired A.W. Printing, Inc., a leading
provider of high quality tags, labels and packaging products for the apparel
industry. The acquisition was a cash transaction valued at approximately $13
million. Due to the size and timing of the acquisition, pro forma information is
not provided as it is insignificant.
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. In fiscal year
2000, the Company increased its ownership to 100%. The aggregate purchase price
for the shares acquired was $263.9 million, plus transaction costs of $5.3
million. The financial statements reflect the allocations of the purchase price
based on fair values at the date of acquisition. The allocation resulted in a
step up of fixed assets of $19.9 million, other intangibles of $66.7 million,
which are being amortized on a straight-line basis over periods of 5 to 30
years, and acquired goodwill of $202.0 million, which is being amortized on a
straight-line basis over 30 years.
In conjunction with the acquisition, the aggregate fair value of assets
acquired, cash paid, and direct costs incurred, and liabilities are shown below.
The amounts reflect the acquisition of the remaining outstanding shares and the
final allocation.
Fair value of assets acquired $491,004,000
Cash paid and direct costs incurred
for the capital stock 269,202,000
------------
Liabilities assumed $221,802,000
============
The following unaudited pro forma information presents the results of operations
of the Company as if the acquisition of Meto had taken place at the beginning of
1999.
1999
------
(Thousands, except per share data)
Net revenues (1) $739,043
Net loss $ (7,612)
Diluted loss per share $ (.25)
(1) Amounts have been reclassified to conform with Emerging Issues
Task Force (EITF) 00-10, Accounting for Shipping and Handling Fees
and Costs.
The 1999 pro forma results of operations are for comparative purposes only and
reflect increased amortization, interest expense, and restructuring costs
resulting from the acquisition described above, but do not include any potential
cost savings from combining the acquired businesses with the Company's
operations.
Note 19. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
The Company adopted the provisions of SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Company operates in three
reportable business segments consisting of:
(i) Security - includes electronic article surveillance (EAS) systems,
access control systems and closed-circuit television (CCTV) systems,
and fire and intrusion systems.
(ii) Labeling Services - includes barcoding (BCS) systems, service bureau
(CheckNet), and radio frequency identification (RFID) systems.
(iii) Retail Merchandising - includes hand-held labeling (HLS) systems and
retail merchandising (RMS) systems.
With the recent acquisition of Meto AG, the Company has revised its segments
to reflect the combined company. As a result, the Company has reclassified the
prior period segment information to conform with the current period
presentation. The information set forth below is that viewed by the chief
operating decision maker:
(A) Business Segments
2001 2000 1999
------ ------ ------
(Thousands)
Business segment net revenue:
Security $391,867 $419,696 $362,097
Labeling Services 139,654 138,396 5,310
Retail Merchandising 127,014 132,719 5,655
-------- -------- --------
Total $658,535 $690,811 $373,062(5)
-------- -------- --------
Business segment gross profit:
Security $151,188(1) $165,363(4) $145,443
Labeling Services 37,077(2) 40,377 (359)
Retail Merchandising 68,019(3) 67,108 1,689
-------- -------- --------
Total $256,284 $272,848 $146,773
-------- -------- --------
Business segment total assets:
Security $614,390 $701,710 $792,835
Labeling Services 74,731 82,335 79,227
Retail Merchandising 63,532 83,945 72,811
-------- -------- --------
Total $752,653 $867,990 $944,873
-------- -------- --------
(1) Includes a $7.8 million pre-tax restructuring charge.
(2) Includes a $2.8 million pre-tax restructuring charge.
(3) Includes a $0.8 million pre-tax restructuring charge.
(4) Includes $9.0 million in pre-tax restructuring, integration and impairment
charges and a pre-tax inventory write-off of $3.7 million. See note 15.
(5) Amounts have been reclassified to conform with Emerging Issues Task Force
(EITF) 00-10, Accounting for Shipping and Handling Fees and Costs.
(B) Geographic Information
Operating results are prepared on a "customer basis", meaning that net revenues
and profit (loss) from operations are included in the geographic area where the
customer is located. Assets are included in the geographic area in which
the producing entities are located. A direct sale from the USA to an
unaffiliated customer in Europe is reported as a European sale. Inter-area sales
between the Company's locations are made at transfer prices that approximate
market price and have been eliminated from consolidated net revenues. Gross
profit for the individual area includes the profitability on a transfer price
basis, generated by sales of the Company's products imported from other
geographic areas.
The following table shows net revenues, gross profit, and other financial
information by geographic area for the years 2001, 2000, and 1999.
United Inter-
States and national Asia
Puerto Rico Europe Americas Pacific Total
----------- ------ -------- ------- -----
(Thousands)
2001
Net revenues from
unaffiliated customers $228,207 $345,380 $ 32,500 $ 52,448 $658,535
Gross profit $ 81,099(1) $148,448(2) $ 10,814 $ 15,923(3)$256,284
Long-lived assets $ 68,170 $309,650 $ 11,802 $ 19,975 $409,597
2000
Net revenues from
unaffiliated customers $230,451 $353,805 $ 49,465 $ 57,090 $690,811
Gross profit $102,985(4) $134,650(5) $ 16,347(6)$ 18,866(7)$272,848
Long-lived assets $ 87,835 $334,159 $ 11,854 $ 34,624 $468,472
1999
Net revenues from
unaffiliated customers(8)$179,057 $125,126 $ 39,931 $ 28,948 $373,062
Gross profit $ 59,214 $ 58,544 $ 20,041 $ 8,974 $146,773
Long-lived assets $ 88,034 $342,701 $ 12,046 $ 42,811 $485,592
(1) Includes a $3.2 million pre-tax restructuring charge.
(2) Includes a $0.5 million pre-tax restructuring charge.
(3) Includes a $7.7 million pre-tax restructuring charge.
(4) Includes $4.1 million in pre-tax restructuring and impairment charges. See
note 15.
(5) Includes a $0.9 million pre-tax integration charge and a $2.6 million pre-
tax inventory write-off. See note 15.
(6) Includes a $1.1 million pre-tax inventory write-off. See note 15.
(7) Includes a $4.0 million pre-tax restructuring charge and impairment
charges. See note 15.
(8) 1999 amounts have been reclassified to conform with EITF 00-10, Accounting
for Shipping and Handling Fees and Costs.
Note 20. MINORITY INTEREST
On July 1, 1997, Checkpoint Systems Japan Co. Ltd. (Checkpoint Japan), a
wholly-owned subsidiary of the Company 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. The
Company's consolidated balance sheets include 100% of the assets and liabilities
of Checkpoint Japan. Mitsubishi's 20% interest in Checkpoint Japan and the
earnings/(losses) therefrom have been reflected as minority interest on the
Company's consolidated balance sheets and consolidated statements of operations,
respectively.
Note 21. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER STANDARDS
The Emerging Issues Task Force (EITF) of the FASB reached consensus in 2000 on
Issue 00-14, Accounting for Certain Sales Incentives. The standard addresses the
income statement classification of certain selling costs. The standard became
effective for the Company on December 31, 2001 (fiscal year 2002). The Company
does not expect the standard to result in a material restatement of prior
periods.
In June 2001, the Financial Accounting Standards Board (FASB) approved the
issuance of Statement of Financial Accounting Standards No. 141 (SFAS 141),
Business Combinations and Statement of Financial Accounting Standards No. 142
(SFAS 142), Goodwill and Other Intangible Assets. For the Company, these
statements became effective December 31, 2001, although business combinations
initiated after July 1, 2001 are subject to the non-amortization and purchase
accounting provisions. The impact on the Company's pre-tax earnings for 2002
from the non-amortization of goodwill will be approximately $10.6 million. In
accordance with SFAS 142, the Company is currently evaluating goodwill for
possible impairment.
The FASB issued Statement of Financial Accounting Standards No. 143 (SFAS 143),
Accounting for Asset Retirement Obligations on August 15, 2001 and Statement of
Financial Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment
or Disposal of Long-Lived Assets on October 3, 2001. For the Company, SFAS 143
becomes effective on December 30, 2002, and SFAS 144 became effective on
December 31, 2001. The effects of these pronouncements on the Company's
financial statements are currently being assessed.
SELECTED QUARTERLY FINANCIAL DATA
QUARTERS (unaudited)
----------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
(Thousands, except per share data)
2001
- ----
Net revenues $163,728 $162,182 $155,322 $177,303 $658,535
Gross profit $ 67,145 $ 66,324 $ 62,762 $ 60,053(1) $256,284
Earnings/(loss)
before cumulative
effect of change
in accounting
principle $ 3,553 $ 6,179 $ 4,361 $ (7,458)(2) $ 6,635
Net earnings/
(loss) $ 3,553 $ 6,179 $ 4,361 $ (7,458) $ 6,635
Earnings/(loss)
per share before
cumulative effect
of change in
accounting
principle (3)
Basic $ .12 $ .20 $ .14 $ (.24) $ .21
Diluted $ .12 $ .19 $ .14 $ (.24) $ .21
Net earnings/(loss)
per share: (3)
Basic $ .12 $ .20 $ .14 $ (.24) $ .21
Diluted $ .12 $ .19 $ .14 $ (.24) $ .21
2000
- ----
Net revenues (4) $163,424 $167,891 $171,225 $188,271 $690,811
Gross profit $ 66,005 $ 69,640 $ 71,583 $ 65,620(5) $272,848
(Loss)/earnings
before cumulative
effect of change
in accounting
principle $( 1,622) (6)$ 1,934(7) $ 5,208(8) $ (3,266)(9) $ 2,254
Net(loss)/
earnings $ (6,642)(10)$ 1,934 $ 5,208 $ (3,266) $ (2,766)
(Loss)/earnings
per share before
cumulative effect
of change in
accounting
principle (3)
Basic $ (.05) $ .06 $ .17 $ (.11) $ .07
Diluted $ (.05) $ .06 $ .17 $ (.11) $ .07
Net (loss)/earnings
per share: (3)
Basic $ (.22) $ .06 $ .17 $ (.11) $ (.09)
Diluted $ (.22) $ .06 $ .17 $ (.11) $ (.09)
(1) Includes a $4.3 million pre-tax restructuring charge, and a $7.1 million
pre-tax asset impairment.
(2) Includes a $8.2 million restructuring charge (net of tax), a $5.3 million
asset impairment (net of tax), and a restructuring charge reversal of
$0.1 million (net of tax).
(3) Quarterly earnings per share are computed independently; therefore the
sum of the quarters may not equal full year earnings per share.
(4) Amounts have been reclassified to conform with EITF 00-10, Accounting for
Shipping and Handling Fees and Costs.
(5) Includes a $0.9 million pre-tax restructuring charge, a $0.9 million pre-
tax integration charge, a $7.2 million pre-tax asset impairment and a
pre-tax inventory write-off of $3.7 million.
(6) Includes a $1.6 million pre-tax integration charge.
(7) Includes a $4.0 million pre-tax integration charge.
(8) Includes a $3.1 million pre-tax integration charge.
(9) Includes a $1.3 million pre-tax restructuring charge, a $0.6 million pre-
tax integration charge, and a $5.1 million pre-tax customer-based
receivables write-off.
(10) Includes a non-cash reduction in net earnings of $5.0 million resulting
from the implementation of the SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements.
Item 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no changes or disagreements to report under this item.
PART III
The information called for by Item 10, Directors and Executive Officers of the
Registrant (except for the information regarding executive officers called for
by Item 401 of Regulation S-K which is included in Part I hereof as Item A in
accordance with General Instruction G(3)); Item 11, Executive Compensation; Item
12, Security Ownership of Certain Beneficial Owners and Management; Item 13,
Certain Relationships and Related Transactions, is hereby incorporated by
reference to the Registrant's Definitive Proxy Statement for its Annual Meeting
of Shareholders presently scheduled to be held on May 2, 2002, which management
expects to file with the Securities and Exchange Commission within 120 days of
the end of the Registrant's fiscal year.
Note that the sections of the Company's Definitive Proxy Statement entitled
"Compensation and Stock Option Committee Report on Executive Compensation" and
"Stock Price Performance Graph", pursuant to Regulation S-K Item 402 (a)(9) are
not deemed "soliciting material" or "filed" as part of this report.
PART IV
Item 14. EXHIBITS, FINANCIAL SCHEDULE, AND REPORTS ON FOR 8-K
All other schedules are omitted either because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto:
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K
Exhibit 3.1 Articles of Incorporation, as amended, are hereby
incorporated by reference to Item 14(a), Exhibit 3(i) of
the Registrant's 1990 Form 10-K, filed with the SEC on
March 14, 1991.
Exhibit 3.2 By-Laws, as Amended and Restated, are hereby
incorporated by Reference to the Registrant's 1992 Form
10-K, filed with the SEC on March 25, 1993.
Exhibit 4.1 Rights Agreement by and between Registrant and
American Stock and Transfer and Trust Company dated as of
March 10, 1997, is hereby incorporated by reference to
Item 14(a), Exhibit 4.1 of the Registrant's 1996 Form
10-K filed with the SEC on March 17, 1997.
Exhibit 4.2 Indenture dated as of October 24, 1995 by and between
Registrant and The Chase Manhattan Bank, as Trustee, is
hereby incorporated herein by reference to Exhibit 4.3 to
Registrant's Form 10-Q/A filed with the SEC on December
13, 1995.
Exhibit 4.3 First Supplemental Indenture dated as of February 27,
1998 (amending Indenture dated as of October 24, 1995) is
hereby incorporated herein by reference to Exhibit 4.4 to
Registrant's Form 10-K for 1997 filed with the SEC on
March 23, 1998.
Exhibit 4.4 Second Supplemental Indenture dated
07/31/01 amending the First Supplemental
Indenture dated as of February 27, 1998
(amending Indenture dated as of October 24,
1995) is hereby incorporated by reference to
Exhibit 4.4 to Registrants From 10-K for 1997
filed with the SEC on March 23, 1998.
Exhibit 10.1 2001 Bonus Plan.
Exhibit 10.2 Amended and Restated Stock Option Plan (1992) is
hereby incorporated by reference to Registrant's Form
10-K for 1997 filed with the SEC on March 23, 1998
Exhibit 10.3 Consulting and Deferred Compensation Agreement With
Albert E. Wolf, are incorporated by reference to Item
(a), Exhibit 10(c) of the Registrant's 1994 Form 10-K.
Exhibit 10.4 Amended and Restated Employee Stock Purchase Plan as
Appendix A to the Company's Definitive Proxy Statement,
filed with the SEC on March 22, 1996, is incorporated by
reference.
Exhibit 10.5 Credit Agreement dated October 27, 1999, by and
among Registrant, First Union National Bank, as
Administrative Agent, and the lenders named therein, is
incorporated herein by reference to Item 7(c), Exhibit 10
of the Registrant's Form 8-K filed on December 27, 1999.
Exhibit 10.6 Employment Agreement with Michael E. Smith is
incorporated by reference to Item 6(a), Exhibit
10(iii)A of the Registrants Form 10-Q filed on
November 14, 2001
Exhibit 10.7 First Amendment to Employment Agreement with
Michael E. Smith is incorporated by reference
to Item 6(a), Exhibit 10(iii)A of the
Registrants Form 10-Q filed on
November 14, 2001
Exhibit 10.8 Second Amendment to Employment Agreement with
Michael E. Smith is incorporated herein by
reference to Item 6(a), Exhibit
10(iii)A of the Registrants Form 10-Q filed on
November 14, 2001
Exhibit 10.9 Third Amendment to Employment Agreement with
Michael E. Smith is incorporated herein by
reference to Item 6(a), Exhibit
10(iii)A of the Registrants Form 10-Q filed on
November 14, 2001
Exhibit 10.10 Employment Agreement with William J. Reilly, Jr.
is incorporated by reference to Item 6(a),
Exhibit 10(iii)A of the Registrants Form 10-Q filed
on November 14, 2001
Exhibit 10.11 First Amendment to Employment Agreement with
William J. Reilly, Jr. is incorporated herein by
reference to Item 6(a), Exhibit
10(iii)A of the Registrants Form 10-Q filed on
November 14, 2001
Exhibit 10.12 Second Amendment to Employment Agreement with
William J. Reilly, Jr. is incorporated herein by
reference to Item 6(a), Exhibit
10(iii)A of the Registrants Form 10-Q filed on
November 14, 2001
Exhibit 10.13 Third Amendment to Employment Agreement with
William J. Reilly, Jr. is incorporated herein by
reference to Item 6(a), Exhibit
10(iii)A of the Registrants Form 10-Q filed on
November 14, 2001
Exhibit 10.14 Employment Agreement with W. Craig Burns is
Incorporated by reference to Item 6(a), Exhibit 10(iii)A
of the Registrants Form 10-Q filed on November 14, 2001
Exhibit 10.15 First Amendment to Employment Agreement with
W. Craig Burns is incorporated herein by
reference to Item 6(a), Exhibit
10(iii)A of the Registrants Form 10-Q filed on
November 14, 2001
Exhibit 10.16 Employment Agreement with Neil D. Austin is
Incorporated by reference to Item 6(a), Exhibit
10(iii)A of the Registrants Form 10-Q filed on
November 14, 2001
Exhibit 10.17 Employment Agreement with Arthur W. Todd is
Incorporated by reference to Item 6(a), Exhibit
10(iii)A of the Registrants Form 10-Q filed on
November 14, 2001
Exhibit 12 Ratio of Earnings to Fixed Charges
Exhibit 21 Subsidiaries of the Registrant.
Exhibit 23 Consent of Independent Accountants.
Exhibit 24 Power of Attorney, contained in signature page.
(b) Reports on Form 8-K
The Registrant filed has not filed any reports on Form 8-K during the fiscal
year ended December 30, 2001.
CHECKPOINT SYSTEMS, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Year Balance Additions Charged Deductions Balance
at through to Costs at End
Beginning Acqui- and of
of Year sition Expenses Year
- ---- --------- --------- -------- ---------- -------
(Thousands)
Allowance For Doubtful Accounts
2001 $12,427 $ - $3,490 $(3,735) $12,182
------- ------ ------ ------ -------
2000 $10,479 $ - $7,506 $(5,558) $12,427
------- ------ ------ ------ -------
1999 $ 5,556 $4,539 $2,180 $(1,796) $10,479
------- ------ ------ ------ -------
Year Balance Additions Allowance Release of Release of Balance
at through Recorded Allowance Allowance at End
Beginning Acqui- on Current on Losses on Losses of
of sition Year Utilized Expired or Year
Year Losses Revalued
- ---- --------- --------- ---------- --------- ---------- -------
(Thousands)
Valuation Allowance
2001 $24,887 $ - $1,720 $(2,691) $(7,658) $16,258
------- ------ ------ ------- ------- -------
2000 $19,717 $5,639 $ 391 $ - $ (860) $24,887
------- ------ ------ ------- ------- -------
1999 $19,090 $2,801 $1,629 $(1,741) $(2,062) $19,717
------- ------ ------ ------- ------- -------
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
EXHIBIT 10.1 . . . . 2001 Bonus Plan
EXHIBIT 12 . . . . . Ratio of Earnings to Fixed Charges
EXHIBIT 21 . . . . . Subsidiaries of Registrant
EXHIBIT 23 . . . . . Consent of Independent Accountants
EXHIBIT 24 . . . . . Power of Attorney, Contained in Signature
EXHIBIT 24
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in Thorofare, New
Jersey, on March 29, 2001.
CHECKPOINT SYSTEMS, INC.
/s/Michael E. Smith
- -------------------
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Michael E. Smith and W. Craig Burns and each of them,
his true and lawful attorneys-in-fact and agents, with full power of
substitution in their place and stead, in any and all capacities, to sign any
and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Michael E. Smith President and Chief March 28, 2002
- ------------------------ Executive Officer, Director
/s/W. Craig Burns Executive Vice President, March 28, 2002
- ------------------------ Chief Financial Officer,
and Treasurer
/s/Arthur W. Todd Vice President, Corporate March 28, 2002
- ------------------------ Controller and Chief
Accounting Officer
/s/Richard J. Censits Director March 28, 2002
- ------------------------
/s/David W. Clark, Jr. Director March 28, 2002
- ------------------------
/s/R. Keith Elliott Director March 28, 2002
- ------------------------
/s/Alan R. Hirsig Director March 28, 2002
- ------------------------
/s/Jack W. Partridge Director March 28, 2002
- ------------------------