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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 28, 2003 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
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(Address of principal executive offices) (Zip Code)
856-848-1800
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(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
Common Stock Purchase Rights New York Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.10 Per Share
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(Title of class)
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
---
Indicate by check mark whether the Registrant is an accelerated filer, (as
defined in Rule 12b-2 of the Act).
Yes X No
--- ---
As of June 29, 2003, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $497,846,000.
As of February 20, 2004, there were 34,940,504 shares of the Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy statement for its Annual
Meeting of Shareholders, presently scheduled to be held in Barcelona, Spain on
April 29, 2004, are incorporated by reference into Part III hereof.
PART I
This report, in "Item 1. Business" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations," may include
information that could constitute forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995 and is including this statement for purposes of
invoking the safe harbor provision. These forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by the use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project," "plan," or
similar expressions. Any such forward-looking statements may involve risk and
uncertainties that could cause actual results to differ materially from
historical results and those anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following risk factors, among other possible factors,
could cause actual results to differ materially from historical or anticipated
results: (1) changes in international business conditions; (2) foreign currency
exchange rate and interest rate fluctuations; (3) lower than anticipated demand
by retailers and other customers for the Company's products, particularly in the
current economic environment; (4) slower commitments of retail customers to
chain-wide installations and/or source tagging adoption or expansion; (5)
possible increases in per unit product manufacturing costs due to less than full
utilization of manufacturing capacity as a result of slowing economic conditions
or other factors; (6) the Company's ability to provide and market innovative and
cost-effective products; (7) the development of new competitive technologies;
(8) the Company's ability to maintain its intellectual property; (9) competitive
pricing pressures causing profit erosion; (10) the availability and pricing of
component parts and raw materials; (11) possible increases in the payment time
for receivables, as a result of economic conditions or other market factors;
(12) changes in regulations or standards applicable to the Company's products;
(13) unanticipated liabilities or expenses; (14) adverse determinations in the
ID Security Systems Canada Inc. litigation and any other pending litigation
affecting the Company; and (15) the impact of adverse determinations in the ID
Security Systems Canada Inc. litigation on liquidity and debt covenant
compliance.
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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 retailers and consumer product manufacturers
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 shrink management solutions 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 display systems (RDS), 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 has achieved substantial international growth, primarily through
acquisitions, and now operates directly in 30 countries. Products are
principally developed and manufactured in-house and sold through direct
distribution.
The Company's products and services can be segmented into three groups:
Security
The Company's largest 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 a greater than 40% share of worldwide EAS
installations. Systems for closed-circuit television (CCTV), fire and intrusion,
and access control, also fall within the security business segment. The
Company'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 64% of the Company's business.
Labeling Services
Labeling services is the Company's second largest business, generating
approximately 22% of the Company's revenues in 2003. 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 a 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
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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 (Check-Net(R)) of e-commerce-
enabled capabilities, high-speed barcode labeling printing systems, and EAS and
RFID technologies. 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. As a
result of retailers introducing scanning, the Company's HLS products are serving
a declining market. Retail merchandising represents approximately 14% of the
Company's business.
BUSINESS STRATEGY
The Company's business strategy focuses on providing comprehensive,
single-source solutions that help retailers, manufacturers, and distributors
identify, track, and protect their assets throughout the entire supply chain.
The Company believes that innovative new products and 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
intends to maintain its leadership position in certain key hard goods markets,
expand its market share in the soft goods markets, and maximize its position in
under-penetrated markets. The Company also intends to continue to capitalize on
its installed base of large global retailers to promote source tagging.
Furthermore, the Company plans to leverage its knowledge of RF and
identification technologies to assist retailers and manufacturers in realizing
the benefits of RFID.
To achieve these objectives, the Company plans to work to continually enhance
and expand its technologies and products, and provide superior service to its
customers. The Company is focused on providing its customers with a wide variety
of integrated shrink management, labeling, and retail merchandising solutions
characterized by superior quality, ease of use, good value, and enhanced
merchandising opportunities for the retailer, manufacturer, and distributor.
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 it direct access into
Western Europe. The Company acquired ID Systems International BV and ID
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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 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 to control the 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 Commission (FCC) and European Community (CE) regulations
governing radio frequencies (RF), signal strengths, and other factors.
The Company markets its family of RF-EAS and EM-EAS systems under various brand
names including Liberty(TM)/3G (3rd Generation), Strata(R), QS series, and EM
series.
The Liberty/3G systems use Digital Signal Processing (DSP) technology, along
with Advanced Digital Discrimination (ADD/RF) filtering technology and newly
integrated wireless communications capabilities. These systems are capable of
communicating vital information on system performance and store activities. The
Liberty/3G, and Strata families can protect entrances of up to twelve feet wide
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 include pressure-sensitive adhesive labels or hang
tickets. 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.
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Under the Company's source tagging program, tags can be embedded in products or
packaging at the point-of-manufacture. The Company has worked with more than
5,000 source tagging partners worldwide.
The Company markets an extensive line of reusable security tags that protect
apparel items, as well as entertainment products. The reusable product line
consists of plastic hard tags, ink tags, and security cases for entertainment
products.
CCTV, Fire and Intrusion Systems
The Company offers a broad line of closed-circuit television products along with
its EAS products, providing a high-value systems solution package for retail
environments. 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 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. These sophisticated
software-driven electronic access control systems offer integrated facility
control for small to large building complexes and include features to protect
people and track assets.
LABELING SERVICES
Barcode Labeling Systems
The Company is one of the largest providers to retailers of global tag and label
printing services. Brand tags and labels are printed and supplied to the apparel
industry worldwide. These products help retailers and manufacturers merchandise
their brand identification along with critical variable data including size,
color, and pricing. Many printing technologies are used to support the apparel
industry including offset, flexographic, and digital printing. Bar codes are
also used extensively with these tags and labels.
The Company sells both turnkey in-house barcode printing systems (laser and
thermal printers) and a worldwide service bureau network (Check-Net) that can
supply customers with integrated custom tags and labels with variable data. In
addition, these tags and labels can be further integrated with RF substrates for
EAS functions. This highly integrated tag incorporating brand identification,
variable data, and RF functionality offers significant value to the apparel
industry. Barcoding data is widely used in retail stores, supermarkets,
warehouses, manufacturing facilities, libraries, and other environments where
inventory identification and tracking are 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
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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.
Check-Net(R) (Service Bureau)
The Company operates a global service bureau network of 29 locations worldwide
which supplies customers with customized retail apparel tags and labels at the
manufacturing location. A service bureau imprints variable pricing and article
identification data and barcoding information onto price and apparel branding
tags.
Check-Net's web-enabled capabilities provide on-time, on-demand printing of
custom labels with variable data. The Company's Check-Net 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 other label integrators.
RFID System Solutions
Radio frequency identification is an auto-ID technology. RFID tags, or
"intelligent tags," contain an integrated circuit (IC) powered by a radio
frequency antenna. 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-based intelligent library solutions that offer strong
features and benefits compared to competitive offerings. The Intelligent Library
System(R) was released in 1999 and is currently installed in more than 100
libraries, primarily in the USA. In 2003, in response to the ongoing efforts of
industry groups to introduce the Electronic Product Code (EPC) RFID tag to the
retail supply chain, the Company made the strategic decision to expand its RFID
development and sales and marketing efforts to this segment.
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, in-store retail price marking applications
have continued to decline. The Company has a majority market share in Europe.
Retail Display Systems
Retail display systems include a wide range of products for customers in certain
retail sectors, such as supermarkets and do-it-yourself (DIY), where
high-quality signage and in-store price promotion are important. Product
categories include traditional retail promotional systems for in-store
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communication and electronic graphics systems, as well as Turn-O-Matic(R), a
customer priority system.
PRINCIPAL MARKETS AND MARKETING STRATEGY
Through its security business segment, the Company markets EAS and CCTV products
primarily to worldwide retailers in the hard goods market (supermarkets, drug
stores, mass merchandisers, and music/electronics), soft goods market (apparel),
libraries, and consumer product manufacturers through its source tagging
program.
The Company enjoys significant market share, particularly in the supermarket,
drug store, hypermarket, and mass merchandiser market segments. Some of its
diverse worldwide customers include: Barnes & Noble, Best Buy, Circuit City
Stores, Esprit, Home Depot, Kohl's Department Stores, Linens `n Things, MarMaxx,
Sears, Target Corporation, Walgreen Co., and Winn Dixie, Inc. in the USA;
Safeway and Shoppers Drug Mart/Pharmaprix in Canada; Gigante in Mexico; Pague
Menos in Brazil; B&Q in the United Kingdom; Alcampo, Carrefour,
El Corte Ingles, and Mercadona in Spain; Carrefour, Casino, FNAC, and
Intermarche in France; Metro Group in Germany; Woolworths in Australia; Don
Quixote in Japan; and Ahold in Europe.
Industry sources estimate that "shrinkage" (the value of goods which is not paid
for) is a $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 have highlighted the shrinkage problem to retailers. As a
result, retailers recognize that the implementation of effective electronic
security solutions can significantly reduce shrinkage and increase
profitability.
In addition to providing retail security solutions, the Company provides a wide
variety of integrated shrink management, labeling services, and retail
merchandising solutions to manufacturers and retailers worldwide. This entails a
broadened focus within the entire retail supply chain by providing branding,
tracking, and shrink management solutions to retail stores, distribution
centers, and consumer product and apparel manufacturers worldwide.
The Company is focused on providing its customers with a wide variety of
integrated shrink management, labeling services, and retail merchandising
solutions. More specifically, the Company's ongoing marketing strategy includes
the following:
- open new and expand existing retail accounts with new products that will
increase penetration with integrated value-added solutions for labeling,
security, and merchandising
- establish business-to-business web-based capabilities to enable retailers
and manufacturers to initiate and track their orders through the supply
chain on a global basis
- expand market opportunities to manufacturers and distributors, including
source tagging and value-added labeling
- continue to promote source tagging around the world with extensive
integration and automation capabilities using new EAS, RFID, and auto-ID
technologies
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- assist retailers in understanding the benefits and implementation of the
new Electronic Product Code (EPC) using RFID technology
- expand our Access Control and Library offerings
The Company promotes its products primarily through:
- ease of integration into the retail environment
- emphasizing source tagging benefits
- serving as a single point of contact for auto-ID and EAS labeling and
ticketing needs
- providing total loss prevention solutions to the retailer
- direct sales efforts and targeted trade show participation
- superior service and support capabilities
More than 5,000 suppliers worldwide have participated in the Company's source
tagging program. Ongoing strategies to increase acceptance of source tagging are
as follows:
- increase installation of EAS equipment on a chain-wide
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 (Check-Net), 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
- develop evolution and compatibility with EPC/RFID technologies
In response to 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.
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. During 2003, 95% of total US EAS revenues 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
in 18 European countries and in Argentina, Australia, Brazil, Canada, Hong Kong,
Japan, Malaysia, Mexico, and New Zealand.
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Independent distributors accounted for 5% of the Company's EAS revenues outside
the USA during 2003. 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 in selected countries throughout
the world using its own sales staff. These products and services are provided to
the Company's 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 sales personnel of the Company's access control products group market
electronic access control products to approximately 240 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
The Company has approximately 100,000 customers worldwide in the labeling
services and retail merchandising businesses. 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 more than 600 salespeople worldwide. 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 $52.7 million at December 28,
2003 compared to approximately $39.0 million at December 29, 2002. The Company
anticipates that substantially all of the backlog at the end of 2003 will be
delivered during 2004. In the opinion of management, the amount of backlog is
not indicative of trends in the Company's business. The Company's Security
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.
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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 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
revenues 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 1.0% to 1.5% of future
RF-EAS products sold through 2008.
The Company, with its acquisition of Meto AG, has three principal license
agreements covering its EAS products, including Allied Signal, Inc. (now
Honeywell Intellectual Properties, Inc.) as licensor for EM tags, 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 2006, 2014, 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 revenues.
RFID System Solutions
On February 12, 1997, the Company entered into a ten-year joint research and
development agreement with Mitsubishi Metals for RFID applications. The
agreement provides for cross licensing of certain RFID applications during the
term and for five years following the termination of the agreement.
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.
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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. The Company's
manufacturing strategy is to rely primarily on in-house capability and to
vertically integrate manufacturing operations to the extent economically
beneficial. 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 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. The manufacture of some RF sensors sold in
Europe and all EM hardware is outsourced. 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 (disposable tags), 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 2003 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 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
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 CCTV, fire and intrusion components
manufactured by others. In the USA, the Company does manufacture the
pan/tilt/zoom dome camera. 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.
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Labeling Services and Retail Merchandising
The Company manufactures 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 Australia, Hong Kong,
New Zealand, Spain, Sweden, and the United Kingdom. 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
Check-Net service bureau network 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.
Two BCS printer suppliers are considered 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 International Ltd., through its ADT security division. Tyco is a
diversified manufacturing and service company with interests in electronics,
fire and security, healthcare, plastics and adhesives, and enginerred products
and services. Tyco's 2003 revenues were approximately $37 billion. Tyco's ADT
security division (including the former Sensormatic Electronics Corporation)
holds a greater than 40% share of the worldwide EAS installed base. Management
estimates that the Company also holds a greater than 40% market share of
installed systems in the EAS industry.
Within the US market, additional competitors include Sentry Technology
Corporation and Ketec, Inc., principally in the retail market, and 3M 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 products with a variety of disposable and reusable
tags and labels, integrated scan/deactivation capabilities, and RF source
tagging embedded into products or packaging. As a result, the Company 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 cost advantage over its competitors.
CCTV, Fire and Intrusion Systems
The Company's CCTV, fire and intrusion products, which are sold domestically
through its Checkpoint Security Systems Group subsidiary and internationally
through its international sales subsidiaries, compete primarily with similar
products offered by Pelco, Sentry Technology, and Tyco. The Company competes
based on its superior service and believes that its product offerings provide
its retail customers with distinct system features.
-13-
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, Honeywell, Lenel Systems,
and Tyco.
Labeling Services
The Company estimates that the current worldwide barcode systems market,
including printers and labels, is approximately $7 billion. This does not
include the service bureau market segment which is estimated to be currently
$500 million. The Company considers this a growing segment and believes it is
well positioned with certain competitive advantages. Major competitors are Avery
Dennison and Paxar. The Company also competes with a number of barcode printer
manufacturers, including Intermec Technologies and Zebra Technologies. Several
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. HL Display is its strongest
competitor in the retail display systems market, primarily in Europe. In the HLS
segment, the Company competes with Contact, Garvey, Hallo, Paxar, Prix, and
Sato.
OTHER MATTERS
Research and Development
The Company expended approximately $15.1 million, $9.0 million, and $8.7
million, in research and development activities during 2003, 2002, and 2001,
respectively. The emphasis of these activities is the continued broadening of
the product lines offered by the Company, cost reductions of the current product
lines, and an expansion of the markets and applications for the Company's
products. The Company's future growth in revenues will be dependent, in part, on
the products and technologies resulting from these efforts.
Another important source of new products and technologies has been the
acquisition of companies and products. 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 lines with improvements
in disposable tag performance and selection, disposable tag manufacturing
processes, and wide-aisle RF-EAS detection sensors with integration of remote
and wireless internet connectivity and RFID integration. The rationalization of
the sensor product line has been released and a new process to improve
disposable tag manufacturing performance has been started. Both projects are
part of the ongoing product rationalization process to bring greater efficiency
from our production facilities and global supply chain.
-14-
Employees
As of December 28, 2003, the Company had 4,042 employees, including six
executive officers, 98 employees engaged in research and development activities,
and 706 employees engaged in sales and marketing activities. In the United
States, 11 of the Company's employees are represented by a union. In Europe, the
Company believes that approximately 850 of the Company's employees are
represented by various unions or work councils.
Financial Information About Geographic and Business Segments
The Company operates both domestically and internationally in the three distinct
business segments described above. 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 28,
2003, and total assets as of December 28, 2003, December 29, 2002, and December
30, 2001, is provided in Note 19 to the Consolidated Financial Statements.
Available Information
The Company's internet website is at www.checkpointsystems.com. Investors can
obtain copies of the Company's annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and any amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act as soon as reasonably practicable after the Company has filed such materials
with, or furnished them to, the Securities and Exchange Commission. The Company
will also furnish a paper copy of such filings free of charge upon request.
Investors can also read and copy any materials filed by the Company with the SEC
at the SEC's Public Reference Room which is located at 450 Fifth Street, NW,
Washington, DC 20549. Information about the operation of the Public Reference
Room can be obtained by calling the SEC at 1-800-SEC-0330. The Company's filings
can also be accessed at the SEC's internet website: www.sec.gov.
The Company has posted the Code of Ethics, the Governance Guidelines and each Of
the Committee Charters on its website at www.checkpointsytems.com, and will post
on its website any amendments to, or waivers from, the Code of Ethics applicable
to any of its directors or executive officers. The foregoing information will
also be available in print upon request.
Item 2. PROPERTIES
The Company's principal corporate offices are located at 101 Wolf Drive,
Thorofare, New Jersey. As of December 28, 2003, the Company owned or leased
approximately 2.3 million square feet of space worldwide which is used primarily
for sales, distribution, manufacturing, and general administration. These
facilities include 30 offices located throughout North and South America,
Europe, Asia, Australia, and New Zealand. The Company's principal manufacturing
facilities are located in the Dominican Republic, Germany, Japan, Malaysia, the
Netherlands, Puerto Rico, and the USA. The Company believes its current
manufacturing capacity will support its needs for the foreseeable future.
-15-
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 matters described
in the following paragraphs. Management believes it is remotely possible that
the ultimate resolution of such matters will have a material adverse effect on
the Company's consolidated results of operations and/or financial condition,
except as described below.
ID Security Systems Canada Inc. versus Checkpoint Systems, Inc.
On May 24, 2002, the jury in the Civil Action No. 99-CV-577 in the United States
District Court for the Eastern District of Pennsylvania, filed by plaintiff ID
Security Systems Canada Inc. against Checkpoint Systems, Inc., held in favor of
the Company on the plaintiff's claim for Monopolization of Commerce, but against
the Company on claims of Attempted Monopolization and Conspiracy to Monopolize.
In addition, the jury held against the Company on two tort claims related to
tortious interference and unfair competition. Judgment was entered on the
verdict in favor of the plaintiff, after trebling, in the amount of $79.2
million plus attorneys' fees and costs to be determined by the Court.
On March 28, 2003, in response to the Company's Motion for Post-Trial Relief,
the Court issued an order which vacated the jury verdict on the antitrust claims
and reduced the damages award related to tortious interference and unfair
competition from $19 million to $13 million. The Company subsequently filed an
additional motion to further reduce the $13 million by $2.1 million based on a
prior agreement between the parties and a previous Order by the Court. The Court
granted the Company's motion, and on May 20, 2003 further reduced the judgment
from $13 million to $10.9 million. On the same date, the Court stayed execution
of the judgment upon the posting of a bond in the amount of $11.3 million by the
Company. The Company promptly posted the requisite bond and execution on the
judgment in the amount of $10.9 million is now stayed.
Both ID Security Systems Canada Inc. and the Company have filed appeals to the
Third Circuit Court of Appeals related to the various decisions of the Court.
Based on input from outside legal counsel, management is of the opinion that the
Judge's Order is consistent with the law as it relates to the antitrust issues,
and is not consistent with the law as it relates to the tortious interference
and unfair competition aspects of the case. Accordingly, no liability has been
recorded for this litigation, as management believes that, at this time, it is
not probable the remaining judgment will be upheld and that the reasonably
possible range of the contingent liability is between zero and $80 million.
Although management believes it is not likely, it is possible that the Court of
Appeals could reverse the decision of the lower Court as it relates to the
antitrust claims and reinstate the original judgment of $79.2 million plus
attorneys' fees and costs. If the final outcome of this litigation, after all
appeals have been exhausted, results in certain of the plaintiff's claims being
upheld, the potential damages could be material to the Company's consolidated
results of operations and/or financial condition and could cause the Company to
be in default of certain bank covenants. Although management expects to be
successful in the appeal process, should the appeal be unsuccessful, management
anticipates that any final judgment would be paid in the second half of 2004 and
is of the opinion that the Company will have sufficient financial resources in
the form of cash and borrowing capacity, due to the cash flow generated during
the intervening period, to satisfy any judgment.
-16-
Matters related to ID Security Systems Canada Inc. versus Checkpoint Systems,
Inc.
A certain number of follow-on purported class action suits have arisen in
connection with the jury decision in the ID Security Systems Canada Inc.
litigation. The purported class action complaints generally allege a claim of
monopolization and are substantially based upon the same allegations as
contained in the ID Security Systems Canada Inc. case (Civil Action No.
99-CV-577) as discussed below.
On August 1, 2002, a civil action was filed in United States District Court for
the Eastern District of Pennsylvania, designated as Civil Action No. 02-6379(ER)
by plaintiff Diane Furs, Inc. t/a Diane Furs against Checkpoint Systems, Inc.
and served on August 21, 2002. On August 21, 2002, a Notice of Substitution of
Plaintiff and Filing of Amended Complaint was filed by the plaintiff, and the
named plaintiff was changed to Medi-Care Pharmacy, Inc.
On August 2, 2002, a civil action was filed in the United States District Court,
District of New Jersey (Camden) designated as Docket No. 02-CV-3730(JEI) by
plaintiff Club Sports International, Inc., d/b/a Soccer CSI against Checkpoint
Systems, Inc. and served on August 26, 2002.
On October 2, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-4777 (JBS)
by plaintiff Baby Mika, Inc. against Checkpoint Systems, Inc. and served on
October 7, 2002.
On October 23, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5001 (JEI)
by plaintiff Washington Square Pharmacy, Inc. against Checkpoint Systems, Inc.
and served on November 1, 2002.
On October 18, 2002, The United States District, District of New Jersey (Camden)
entered an Order staying the proceedings in the Club Sports International, Inc.
and Baby Mika, Inc. cases referred to above. In accordance with the Order, the
Stay will also apply to the Washington Square Pharmacy, Inc. case referred to
above. In addition, the Medi-Care Pharmacy, Inc. case, referred to above, will
be voluntarily dismissed, and it has been re-filed in New Jersey and is included
in the Stay Order. The Stay is expected to remain in place until such time as
the ID Security Systems case, referred to above, is either terminated or any
appeals have been exhausted in the Third Circuit Court of Appeals.
On November 13, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5319 (JEI)
by plaintiff 1700 Pharmacy, Inc. against Checkpoint Systems, Inc. and served on
November 15, 2002.
On December 30, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-6131 (JEI)
by plaintiff Medi-Care Pharmacy, Inc. against Checkpoint Systems, Inc. and
served on January 3, 2003.
Both the 1700 Pharmacy, Inc. case and the Medi-Care Pharmacy, Inc. case were
consolidated with the previously mentioned cases and are included in the October
18, 2002 Stay Order referred to above.
-17-
No liability has been recorded for any of the purported class action suits as
management believes that, based on input from outside legal counsel, it is not
probable that the Court of Appeals will reverse the decision of the lower Court
in the ID Security Systems Canada Inc. litigation as it relates to the antitrust
claims and that the lower end of the reasonably possible range of the contingent
liability is zero at this time. The high end of the range cannot be estimated at
this time.
Franklin Graphics, Inc. versus Checkpoint Systems, Inc. and Christopher Clarke
On February 28, 2003 a civil action was filed in the Superior Court of New
Jersey, Bergen County, by Franklin Graphics, Inc. against Checkpoint Systems,
Inc. and Christopher Clarke, (Docket No. BER-L-1575-03) seeking compensatory
damages in excess of $1 million, treble damages, punitive damages, and
attorneys' fees. The plaintiff alleged tortious interference with a contractual
relationship and prospective economic relations, unfair competition, breach of
contract, and consumer fraud. In December 2003, the Company settled this case
with prejudice.
Other
The Company is a plaintiff in a number of patent infringement suits around the
world against various defendants in an effort to enforce certain of the
Company's intellectual property rights. In each of these proceedings, the
defendants have challenged the validity of the Company's patents. In the event
the relevant patent were to be modified or invalidated, such action could
diminish or eliminate the value to the Company of the relevant patent.
-18-
Item 4. SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
No matter was submitted during the fourth quarter of 2003 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
- ----------------------------- --- ------- -------------------------
George W. Off 57 2002 Chairman of the Board,
President and Chief
Executive Officer
W. Craig Burns 44 1997 Executive Vice President,
Chief Financial Officer and
Treasurer
John E. Davies, Jr. 46 2002 Executive Vice President,
General Manager,
Americas and Asia Pacific
Per H. Levin 46 2002 Executive Vice President,
General Manager, Europe
John R. Van Zile 51 2003 Senior Vice President,
General Counsel and
Secretary
Arthur W. Todd 38 2000 Vice President,
Corporate Controller and
Chief Accounting Officer
Mr. Off was appointed Chairman of the Board of Directors, President and Chief
Executive Officer on August 15, 2002. Mr. Off had been Interim Chief Executive
Officer of the Company since June 2002 and a member of the Board of Directors
since May 2002. Mr. Off is a founder and former Chairman and Chief Executive
Officer of Catalina Marketing Corporation (NYSE: POS) and a 40-year veteran in
the retail marketing industry.
Mr. Burns was elected to the Board of Directors on August 15, 2002 and 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.
-19-
Mr. Davies was appointed Executive Vice President, General Manager, Americas and
Asia Pacific on March 24, 2003. He was elected to the Board of Directors on
November 21, 2002 and was appointed Executive Vice President, Sales and
Marketing USA, Americas, Asia Pacific in August 2002. Mr. Davies was Executive
Vice President, Worldwide Operations from March 2002 to August 2002 and 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. Levin was appointed Executive Vice President, General Manager, Europe on May
22, 2003. He was Vice President, General Manager, Europe since 2001. Mr. Levin
was Regional Director, Southern Europe from 1997 to 2001 and joined the Company
in January 1995 as Managing Director of Spain.
Mr. Van Zile has been Senior Vice President, General Counsel and Secretary since
joining the Company in June 2003. Prior to joining the Company, Mr. Van Zile
served as Executive Vice President, General Counsel and Secretary of Exide
Corporation from September 2000 until October 2002, and was Vice President and
General Counsel from November 1996 until September 2000. Exide Corporation filed
for Chapter 11 protection in April 2002. Prior to Exide Corporation, Mr. Van
Zile held positions of increasing legal responsibility at GM-Hughes Electronics
Corporation and Coltec Industries.
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).
-20-
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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
------- -------
2003:
First Quarter.......................... $11.09 $ 8.66
Second Quarter......................... $14.65 $ 9.84
Third Quarter.......................... $16.32 $14.14
Fourth Quarter......................... $19.65 $15.69
2002:
First Quarter.......................... $16.65 $12.31
Second Quarter......................... $18.25 $10.00
Third Quarter.......................... $11.98 $ 9.82
Fourth Quarter......................... $12.35 $ 9.35
As of February 20, 2004, there were 983 record holders of the Company's common
stock.
The Company has never paid a cash dividend on its 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 prohibited 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.
There have been no stock repurchases of the Company's common stock since 1998.
Furthermore, certain restrictions under the terms of the Company's senior
secured credit facility prohibit the repurchase of the Company's stock.
-21-
Item 6. SELECTED FINANCIAL DATA
2003 2002 2001 2000(7) 1999
------ ------ ------ ------ ------
(Thousands, except per share data)
FOR THE YEAR ENDED:
Net revenues $723,262 $639,486 $658,535 $690,811 $373,062(10)
Earnings before
income taxes $ 44,416(1) $ 37,681(3) $ 13,716(5) $ 5,447(8) $ 9,355(11)
Income taxes $ 14,431 $ 12,020 $ 6,857 $ 3,115 $ 2,655
Earnings before
cumulative effect
of change in
accounting
principle $ 29,882(2) $ 25,579 $ 6,635(6) $ 2,254 $ 6,666(12)
Net earnings/
(loss) $ 29,882 $(47,282)(4)$ 6,635 $ (2,766)(9) $ 6,666
Earnings per
share before
cumulative effect
of change in
accounting
principle
Basic $ .90 $ .79 $ .21 $ .07 $ .22
Diluted $ .84 $ .75 $ .21 $ .07 $ .22
Net earnings/
(loss)
per share
Basic $ .90 $ (1.46) $ .21 $ (.09) $ .22
Diluted $ .84 $ (1.10) $ .21 $ (.09) $ .22
Depreciation and
amortization $ 31,320 $ 30,993 $ 43,936 $ 47,883 $ 28,028
(1) Excludes goodwill amortization. Includes a $7.5 million pre-tax
restructuring charge, a $1.5 million pre-tax asset impairment, and a $0.3
million pre-tax restructuring charge reversal related to fourth quarter
2001 and 2002 restructuring programs.
(2) Includes a $5.0 million restructuring charge (net of tax), a $1.0 million
asset impairment (net of tax), and a $0.2 million restructuring charge
reversal (net of tax) related to fourth quarter 2001 and 2002
restructuring programs.
(3) Excludes goodwill amortization. Includes a $2.3 million pre-tax
restructuring charge, a $0.5 million pre-tax asset impairment, and a $2.6
million pre-tax restructuring charge reversal, as a result of a change in
estimates, related to the fourth quarter 2001 restructuring program.
(4) Includes a non-cash reduction in net earnings of $72.9 million resulting
from the adoption of Statement of Financial Accounting Standards No. 142,
(SFAS 142) "Goodwill and Other Intangible Assets," a $1.5 million
restructuring charge (net of tax), a $0.3 million asset impairment (net
of tax), and a $1.7 million restructuring charge reversal (net of tax), as
a result of changes in estimates.
-22-
(5) Includes a $11.1 million pre-tax restructuring charge, a $7.5 million pre-
tax asset impairment, and a $0.2 million pre-tax restructuring charge
reversal.
(6) 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).
(7) Includes the impact of the acquisition of Meto AG in December 1999.
(8) 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 $3.7
million pre-tax inventory write-off, and a $5.1 million pre-tax
customer-based receivables write-off.
(9) 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."
(10) Amounts have been reclassified to conform with Emerging Issues Task Force
(EITF) 00-10, "Accounting for Shipping and Handling Fees and Costs."
(11) Includes a $10.9 million pre-tax restructuring charge and a $0.9 million
pre-tax integration charge. In accordance with Statement of Financial
Accounting Standards No. 145 (SFAS 145), "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (Issued 4/02)," the $0.9 million pre-tax extraordinary loss has
been reclassified to operating income.
(12) Includes a restructuring charge of $7.7 million (net of tax).
-23-
SELECTED FINANCIAL DATA (continued)
------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Thousands)
AT YEAR END:
Working capital $ 81,161 $112,077 $129,963 $157,089 $ 175,430
Total debt $145,791 $209,325 $293,511 $385,081 $ 441,162
Shareholders'
equity $327,561 $225,246 $240,263 $237,679 $ 255,795
Total assets $773,322 $679,770 $752,653 $867,990 $ 944,873
FOR THE YEAR ENDED:
Capital
expenditures $ 12,714 $ 7,449 $ 9,572 $ 13,172 $ 8,774
Cash provided by
operating
activities $101,790 $110,041 $102,830 $ 3,172 $ 87,536
Cash used in
investing
activities $(11,698) $ (7,018) $(20,886) $(26,365) $(250,891)
Cash (used in)/
provided by
financing
activities $(39,191) $(95,506) $(64,633) $(33,899) $ 216,924
RATIOS
Return on
net sales(a) 4.13% (7.39%) 1.01% (.40%) 1.78%
Return on
average
equity(b) 10.81% (20.31%) 2.78% (1.12%) 2.57%
Return on
average
assets(c) 4.11% (6.60%) .82% (.30%) .92%
Current
ratio(d) 1.28 1.60 1.71 1.73 1.74
Percent of total
debt to
capital(e) 30.80% 48.17% 54.99% 61.83% 63.30%
(a) "Return on net sales" is calculated by dividing net earnings/(loss) after
the cumulative effect of change in accounting principle by net sales.
(b) "Return on average equity" is calculated by dividing net earnings/(loss)
after the cumulative effect of change in accounting principle by average
equity.
(c) "Return on average assets" is calculated by dividing net earnings/(loss)
after the cumulative effect of change in accounting principle 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 debt
by total debt and equity.
-24-
SELECTED ANNUAL FINANCIAL DATA (continued)
------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Thousands, except employee data)
Other Information
- -----------------
Weighted average
number of
diluted shares
outstanding 39,936(1) 39,313(2) 31,736(3) 30,624(3) 30,528(3)
Number of
employees 4,042 3,930 4,108 4,984 5,017
Backlog $52,703 $38,955 $40,100 $38,800 $34,100
(1) Includes 6,189 common shares from the assumed conversion of the
subordinated debentures.
(2) Includes 6,528 common shares from the assumed conversion of the
subordinated debentures.
(3) Excludes 6,528 common shares from the assumed conversion of the
subordinated debentures as it is anti-dilutive.
-25-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following section highlights significant factors impacting the consolidated
operations and financial condition of the Company and its subsidiaries. The
following discussion should be read in conjunction with Item 6. "Selected
Financial Data" and Item 8. "Financial Statements and Supplementary Data."
Overview
The Company's results are heavily dependent upon sales to the retail market. The
Company's customers are dependent upon retail sales which are susceptible to
economic cycles and seasonal fluctuations.
Furthermore, as the majority of the Company's revenues and operations are
located outside the USA, fluctuations in foreign currency exchange rates have a
significant impact on reported results.
Year 2003 results reflected revenue growth on a constant currency basis,
improvement in product margins, reduced interest expense, and increased
investment in research and development. The increase in revenue combined with
the positive impact of foreign currency resulted in an improvement in earnings.
Future financial results will be dependent upon the Company's ability to expand
the functionality of its existing product lines, develop or acquire new products
for sale through its global distribution channels, and reduce the cost of its
products in response to competitive pricing pressures.
Approximately 48% of the Company's revenue is recurring revenue, as defined by
management. This strong base of recurring cash flow and borrowing capacity
should provide the Company with adequate liquidity to execute its business plan.
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. Actual results may differ from these estimates. The
critical accounting policies have been consistently applied throughout the
accompanying financial statements, with the exception of the change in
accounting method for goodwill, as noted below.
The Company believes the following accounting policy is critical to the
preparation of its consolidated financial statements:
Revenue Recognition. The Company recognizes 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.
-26-
The deferred finance charges applicable to these leases are recognized over the
terms of the leases. 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, 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 judgments and estimates have a significant
effect on 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. These allowances are based on specific facts and
circumstances surrounding individual customers as well as the Company's
historical experience. 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 result 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 Valuation. The Company writes down its inventory for estimated
obsolescence or unmarketable items equal to the difference between the cost of
the inventory and the estimated net 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. With
the exception of goodwill, 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 other than goodwill is based upon the Company's
estimates of future undiscounted cash flows and other factors. The fair value of
goodwill is based upon the Company's estimates of future discounted cash flows
and other factors. If the use of these assets or the projections of future cash
flows 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. The expected future decline in retail
merchandising revenues will lead to future impairments of the goodwill
associated with this segment. (See Notes 1 and 4 of the Consolidated Financial
Statements.)
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. In
assessing the realizability of deferred tax assets, the Company considers future
taxable income in the various tax jurisdictions in which it operates 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
-27-
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. (See Note 11 of the Consolidated Financial Statements.)
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 judgments and estimates. (See Note
16 of the Consolidated Financial Statements.) If the final outcome of these
matters differs from the Company's judgments 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.)
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 base of
installed systems and printers provides a source of recurring revenues from the
sale of disposable tags and service revenues. For fiscal 2003, 2002, and 2001,
approximately 48%, 50%, and 48%, 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 Company's customers are substantially dependent on retail sales, which are
seasonal, subject to significant fluctuations, and difficult to predict.
Such seasonality and fluctuations impact the Company's sales. Historically, the
Company has experienced lower sales in the first half of each year.
-28-
The following table sets forth the net revenues for each business segment and
geographic region prepared on a "country of domicile" basis, meaning that net
revenues are included in the geographic area where the selling entity is located
(see Note 19 of the Consolidated Financial Statements):
2003 2002 2001
------ ------ ------
(Thousands)
Security
USA $174,686 $166,835 $169,977
Europe 213,019 175,131 163,729
International Americas 22,104 17,283 26,404
Asia Pacific 55,235 35,784 31,757
-------- -------- --------
Total $465,044 $395,033 $391,867
-------- -------- --------
Labeling Services
USA $ 62,844 $ 60,119 $ 53,378
Europe 81,156 71,719 73,920
International Americas 1,283 1,116 1,450
Asia Pacific 12,500 11,117 10,906
-------- -------- --------
Total $157,783 $144,071 $139,654
-------- -------- --------
Retail Merchandising
USA $ 7,869 $ 8,977 $ 10,158
Europe 79,951 80,254 104,500
International Americas 2,988 3,076 3,466
Asia Pacific 9,627 8,075 8,890
-------- -------- --------
Total $100,435 $100,382 $127,014
-------- -------- --------
Total
USA $245,399 $235,931 $233,513
Europe 374,126 327,104 342,149
International Americas 26,375 21,475 31,320
Asia Pacific 77,362 54,976 51,553
-------- -------- --------
Total $723,262 $639,486 $658,535
======== ======== ========
Fiscal 2003 compared to Fiscal 2002
- -----------------------------------
Net Revenues
During 2003, revenues increased by $83.8 million or 13.1% from $639.5 million to
$723.3 million. Foreign currency translation had a positive impact on revenues
of $65.9 million for the full year 2003.
Security revenues increased by $70.0 million or 17.7% in 2003 compared to 2002.
The positive impact of foreign currency translation was $38.1 million. The
remaining increase was primarily due to growth in the US CCTV market as well as
in the Asia Pacific and European EAS and CCTV markets, partially offset by a
decline in US EAS sales. The growth in the US CCTV revenues can be primarily
attributed to enhanced products and applications, as well as a focus on customer
service. Labeling services revenues increased by $13.7 million or
-29-
9.5%. The positive impact of foreign currency translation was approximately
$13.9 million. The remaining decrease was primarily due to lower barcode
labeling systems revenues in Europe ($6.3 million) and Asia Pacific
($0.7 million), partially offset by a $3.1 million increase in RFID library
system revenues in the USA and a $3.6 million increase in Check-Net revenues in
Europe. Retail merchandising revenues increased by $0.1 million. The positive
impact of foreign currency translation of $13.9 million was offset by lower
revenues, which primarily resulted from the decline of HLS in Europe, due to the
continuing transition from hand-held price labeling to automated barcoding and
scanning by retailers, combined with a decrease in RDS revenues caused by weaker
economic conditions in Europe. The Company experienced an unusual increase in
European HLS revenues in first quarter of 2002 as a result of the conversion to
the Euro currency.
Gross Profit
The principal elements comprising cost of revenues are product cost, research
and development cost, and field service and installation cost. In 2003, as a
percentage of net revenues, the three elements represent 48.0%, 2.1%, and 9.0%,
respectively. The components of product cost are approximately: 56% material,
20% labor, and 24% 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.
During 2003, gross profit increased $33.4 million from $262.6 million to $296.0
million. The benefit of foreign currency translation on gross profit was
approximately $27.2 million. The gross profit percentage decreased from 41.1% to
40.9%. Research and development costs represented 2.1% of revenues in 2003 and
1.4% in 2002. The increased focus is to expand the functionality of our RF-EAS
products and develop the compatibility of RF-EAS and RFID. Gross profit in 2003
included a net restructuring charge of $1.8 million and an asset impairment
charge of $1.5 million. In 2002, gross profit included a net restructuring
charge of $0.1 million and an asset impairment charge of $0.5 million.
Security gross profit, as a percentage of net revenues, increased from 43.8% in
2002 to 44.0% in 2003. Improvements in manufacturing efficiencies and the
benefits of the weakening US dollar on products sourced in US dollars but sold
in a different currency were partially offset by the restructuring and asset
impairment charges and an increase in technology expenditure. Gross profit, as a
percentage of net revenues, for labeling services decreased from 29.1% in 2002
to 28.5% in 2003. The decrease in gross profit percentage was principally due to
competitive pricing pressure in 2003. The retail merchandising gross profit
percentage decreased 1.4% (from 47.4% to 46.0%) in 2003. The decrease was
principally due to the restructuring charges which were partially offset by an
improvement in RDS gross profit in Europe.
For fiscal years 2003 and 2002, field service and installation costs were 9.0%
and 8.4% of net revenues, respectively. The increase in field service costs was
primarily attributable to large EAS and CCTV roll-outs.
-30-
Selling, General, and Administrative Expenses
During 2003, SG&A expenses increased $25.0 million. Foreign currency translation
increased SG&A expenses by approximately $21.4 million. SG&A expenses, as a
percentage of revenues, decreased from 33.3% to 32.9%. Sales, marketing and
bonus expenses increased in 2003 compared to 2002, which included $5.5 million
of compensation costs associated with executive management changes and legal
fees for the ID Security Systems Canada Inc. litigation.
Other Operating Expense/(Income)
In 2003, the Company recorded $5.3 million of severance charges related to the
shared services initiative being implemented in Europe, net of a $0.3 million
reversal.
In 2002, the Company recorded a net reversal of $0.4 million of restructuring
costs related to the rationalization of an under-performing sales office.
See Notes 14 and 15 of the Consolidated Financial Statements for further detail
on the restructuring charges.
Interest Income and Interest Expense
Interest expense decreased $4.1 million due to debt repayment. Interest income
decreased by $0.4 million as a result of lower interest rates on cash
investments.
Other Gain/(Loss), net
Other gain/(loss), net resulted from net foreign currency transaction gains of
$1.3 million and $0.9 million for 2003 and 2002, respectively.
Income Taxes
The Company's effective tax rate for 2003 was 32.5% compared to 31.9% for 2002.
The higher tax rate results primarily from the establishment of valuation
allowances for certain deferred tax assets and withholding taxes accrued on
unremitted earnings.
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 until December 31, 2005 and are substantially exempt from
Puerto Rico's income taxes.
Net Earnings/(Loss)
The Company's net earnings for 2003 were $29.9 million, or $0.84 per diluted
share, compared to a net loss of $47.3 million, or $1.10 per diluted share, in
2002. Included in the net loss for 2002 is the cumulative effect of the change
in accounting principle of $72.9 million, which resulted from the Company's
adoption of Statement of Financial Accounting Standards No. 142 (SFAS 142),
"Goodwill and Other Intangible Assets." The earnings before cumulative effect of
change in accounting principle for 2002 was $25.6 million, or $0.75 per diluted
share. The weighted average number of shares used in the diluted earnings per
share computation were 39.9 million and 39.3 million for fiscal years 2003 and
2002, respectively.
-31-
Fiscal 2002 compared to Fiscal 2001
- -----------------------------------
Net Revenues
During 2002, revenues decreased by $19.0 million or 2.9% from $658.5 million to
$639.5 million. Foreign currency translation had a positive impact on revenues
of $13.3 million for the full year 2002.
Security revenues increased by $3.2 million or 0.8% in 2002 compared to 2001.
The positive impact of foreign currency translation was $4.1 million. The
decline in International Americas' security revenues was due to the further
erosion in economic conditions in South America. This decline was offset by
better penetration in EAS markets in Europe and particularly in Asia Pacific.
Labeling services revenues increased by $4.4 million, which was the amount of
the foreign currency translation benefit. The increase in US Check-Net and
library system revenues was offset by reduced revenues in the European BCS
business. Retail merchandising revenues, including the positive impact of
foreign currency translation of $4.8 million, decreased by $26.6 million or
21.0%, primarily as a result of the decline in Europe in HLS and RDS revenues of
$17.8 million and $4.2 million, respectively. The decline in HLS revenues was
due to an unusual increase in 2001 caused by the conversion to the Euro
currency.
Gross Profit
The principal elements comprising cost of revenues are product cost, research
and development cost, and field service and installation cost. In 2002, as a
percentage of net revenues, the three elements represent 49.1%, 1.4%, and 8.4%,
respectively. The components of product cost are approximately: 60% material,
20% labor, and 20% 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.
During 2002, gross profit increased $6.3 million or 2.5% from $256.3 million to
$262.6 million. The gross profit percentage increased to 41.1% from 38.9%. The
benefit of foreign currency translation on gross profit was approximately $5.5
million. Gross profit in 2002 included a restructuring charge of $1.8 million,
an asset impairment charge of $0.5 million, and a restructuring charge reversal
of $1.7 million. In 2001, gross profit included a restructuring charge of $4.3
million and an asset impairment of $7.1 million.
Security gross profit, as a percentage of sales, increased from 38.6% in 2001 to
43.8% in 2002. This increase was primarily due to higher production volumes and
the impact of cost reduction initiatives in 2002 and restructuring charges in
2001. The Company reduced manufacturing production schedules in 2001 in an
effort to decrease inventory levels. Gross profit, as a percentage of net
revenues, for labeling services increased from 26.5% in 2001 to 29.1% in 2002.
The increase in gross profit percentage was principally the result of
restructuring charges in 2001 and improved profitability in the RFID product
line in 2002 due to reduced product costs. The retail merchandising gross profit
percentage decreased 6.2% (from 53.6% to 47.4%) in 2002. The decrease was
principally due to lower HLS revenues, which have the highest gross profit
percentage in the segment and which resulted in a higher fixed cost per unit due
to lower production volumes.
-32-
For fiscal years 2002 and 2001, field service and installation costs were 8.4%
and 8.8% of net revenues, respectively. The decrease in 2002 was primarily due
to a reduction in the field service workforce of 6%. 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 2002, SG&A expenses decreased $2.8 million or 1.3%. The decrease is
primarily caused by no goodwill amortization in 2002, following the Company's
adoption of SFAS 142, partially offset by increased expenses for compensation
costs associated with executive management changes and legal fees for the ID
Security Systems Canada Inc. litigation. Amortization expense for goodwill and
workforce in place was $11.1 million in 2001. SG&A expenses, as a percentage of
revenues, increased to 33.3% from 32.8%. Foreign currency translation increased
SG&A expenses by approximately $4.0 million.
Other Operating Expense/(Income)
In 2002, the Company recorded $0.5 million of severance costs related to the
rationalization of an under-performing sales office. Due to changes in
management, the Company reviewed and modified the 2001 restructuring plans in
order to reduce the future cash outlays necessary to execute these plans. The
principal modification was to move a manufacturing facility to a location closer
than originally planned. This, and other modifications, resulted in the
retention of certain employees included in the original plan. These changes in
estimates resulted in the reversal of $2.6 million of the restructuring accrual
in 2002. Of this amount, $1.7 million was credited to cost of revenues and $0.9
million to other operating expense/(income).
In 2001, the Company recorded restructuring charges of $6.9 million related to
the rationalization of certain under-performing sales offices and a $0.4 million
goodwill impairment upon exit of a business segment in Belgium. In addition, the
termination of certain contracts related to the 1999 and 2000 restructuring
plans was renegotiated on more favorable terms than expected. These changes in
estimates resulted in the reversal of $1.4 million of restructuring accrual, of
which $1.2 million was recorded as a reduction in goodwill arising from the Meto
acquisition and $0.2 million was credited to other operating expense/(income).
See Notes 14 and 15 of the Consolidated Financial Statements for further detail
on the restructuring and asset impairment charges.
Interest Income and Interest Expense
Interest income for fiscal years 2002 and 2001 was $1.9 million and $2.7
million, respectively. The decrease in 2002 was 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 2002, lower interest rates further reduced interest income. Interest expense
was $15.1 million and $21.8 million for 2002 and 2001, respectively. The
decrease in interest expense in 2002 is directly attributable to debt repayment
and lower Euro-based interest rates.
-33-
Other Gain/(Loss), net
Other gain/(loss), net resulted from net foreign currency transaction
gains/(losses) of $0.9 million, and $(0.7) million for 2002 and 2001,
respectively.
Income Taxes
The Company's effective tax rate before the cumulative effect of change in
accounting principle for fiscal 2002 and 2001 was 31.9% and 50.0%, respectively.
The lower tax rate in 2002 resulted primarily from no goodwill amortization
being recorded due to the Company's adoption of SFAS 142.
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 until December 31, 2005 and are substantially exempt from
Puerto Rico's income taxes.
Cumulative Effect Of Change In Accounting Principle
In June 2001, the Financial Accounting Standards Board (FASB) approved the
issuance of Statements of Financial Accounting Standards No. 142 (SFAS 142),
"Goodwill and Other Intangible Assets". SFAS 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their acquisition
(i.e. the post-acquisition accounting). The most significant changes made by
SFAS 142 are: (1) goodwill and indefinite lived intangible assets will no longer
be amortized, (2) goodwill will be tested for impairment at least annually at
the reporting unit level, (3) intangible assets deemed to have an indefinite
life will be tested for impairment at least annually, and (4) the amortization
period of intangible assets with finite lives will no longer be limited to 40
years. Previously, the Company amortized goodwill over the estimated future
periods to be benefited, ranging from 20 to 30 years. In 2002 and 2003, no
amortization of goodwill was recorded.
Pursuant to SFAS 142, the Company performed an assessment of the carrying value
of goodwill by comparing each individual reporting unit's carrying amount of net
assets, including goodwill, to their fair value. The reporting units' fair value
is based on their expected future discounted cash flows. The completion of the
transitional goodwill impairment test resulted in a goodwill impairment charge
of $72.9 million, which has been accounted for as a change in accounting
principle in fiscal 2002. The impairment of $4.8 million in the security segment
resulted from the economic downturn that occurred in South America. The $27.3
million impairment in the labeling services segment is primarily attributable to
revenues not achieving growth expectations from the date of acquisition of Meto
AG in December 1999. The impairment of $40.8 million in the retail merchandising
segment is attributable to declining revenues as hand-held labeling products are
replaced by scanning technology. The expected future decline in retail
merchandising revenues will lead to future impairments of the goodwill
associated with this segment. The Company performs its annual assessment as of
October 31 each fiscal year. The 2002 and 2003 annual assessments did not result
in an additional impairment charge. Future annual assessments could result in
additional impairment charges which would be accounted for as an operating
expense.
-34-
Net Earnings/(Loss)
Net earnings/(loss) was $(47.3) million or $(1.10) per diluted share and $6.6
million or $.21 per diluted share for fiscal years 2002 and 2001, respectively.
The weighted average number of shares used in the diluted earnings per share
computation were 39.3 million and 31.7 million for 2002 and 2001, respectively.
The increase in the weighted average number of shares from 2001 to 2002 was
primarily due to the assumed conversion of the subordinated debentures being
dilutive for fiscal 2002 but anti-dilutive for fiscal 2001.
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 four 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, for the foreseeable future, to service debt, meet its
capital investment and product development requirements, and satisfy any adverse
judgment resulting from litigation in which it is currently a defendant.
The Company's operating activities during fiscal 2003 generated approximately
$101.8 million compared to approximately $110.0 million during 2002. In 2003,
the cash generated from the reduction in accounts receivable and inventories,
partially offset by an increase in accounts payable, was less than the reduction
achieved in 2002.
In connection with the acquisition of Meto AG, the Company entered into a $425.0
million senior collateralized multi-currency credit facility. The credit
facility, which expires on March 31, 2006, includes a $275.0 million equivalent
multi-currency term note and a $150.0 million equivalent multi-currency
revolving line of credit. On March 15, 2001, the $150.0 million revolving line
of credit was reduced to $100.0 million. Interest on the facility resets monthly
and is based on the Eurocurrency base rate plus an applicable margin. During
2003, unscheduled repayments of EUR 13.5 million (approximately $14.4 million)
were made on the EUR 244 million term loan and unscheduled repayments of $7.0
million were made on the $25.0 million term loan to fully satisfy the
outstanding balance. At December 28, 2003, EUR 36.9 million (approximately $45.9
million) was outstanding under the multi-currency term loan. The outstanding
borrowings under the revolving credit facility were JPY 300 million
(approximately $2.8 million). The availability under the $100.0 million
multi-currency revolving credit facility has been reduced by letters of credit
totaling $12.1 million, primarily related to the surety bond posted in
connection with ID Security Systems Canada Inc. litigation.
On September 23, 2003, the Company called $35.0 million of the convertible
subordinated debentures for redemption on November 8, 2003. The called
debentures were convertible into common shares at any time prior to the close of
business on November 3, 2003. Each $1,000 of debentures is convertible, at the
holder's option, into 54.42 shares of the Company's common stock, which is
equivalent to a conversion price of $18.375 per share. Of the called
-35-
debentures, $30.3 million were converted into 1.648 million shares of the
Company's common stock and $4.7 million were redeemed for cash.
In addition to the $35.0 million convertible subordinated debentures redeemed in
November 2003, certain bondholders elected to convert their bonds into shares of
the Company's common stock during the fourth quarter 2003. The principal amount
of additional bonds converted into common stock was $1.2 million, which reduced
the outstanding balance of the convertible debentures at December 28, 2003 to
$83.8 million.
On February 18, 2004, the Company called an additional $60.0 million of the
convertible subordinated debentures for redemption on April 13, 2004. The called
debentures are convertible at any time prior to the close of business on April
8, 2004.
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 prohibited by existing covenants in the
Company's debt instruments with regard to paying dividends.
Management believes that its anticipated cash needs for the foreseeable future
can be funded from cash and cash equivalents on hand, the availability under the
$100.0 million revolving credit facility, and cash generated from future
operations.
On May 24, 2002, the jury in the Civil Action No. 99-CV-577 in the United States
District Court for the Eastern District of Pennsylvania, filed by plaintiff ID
Security Systems Canada Inc. against Checkpoint Systems, Inc., held in favor of
the Company on the plaintiff's claim for Monopolization of Commerce, but against
the Company on claims of Attempted Monopolization and Conspiracy to Monopolize.
In addition, the jury held against the Company on two tort claims related to
tortious interference and unfair competition. Judgment was entered on the
verdict in favor of the plaintiff, after trebling, in the amount of $79.2
million plus attorneys' fees and costs to be determined by the Court.
On March 28, 2003, the Court issued an order which vacated the jury verdict on
the antitrust claims and reduced the damages award related to tortious
interference and unfair competition from $19 million to $13 million. The Company
subsequently filed an additional motion to further reduce the $13 million by
$2.1 million based on a prior agreement between the parties and a previous Order
by the Court. The Court granted the Company's motion, and on May 20, 2003
further reduced the judgment from $13 million to $10.9 million. On the same
date, the Court: (1) authorized the release to the Company of the $26.4 million
bond and escrowed treasury shares previously posted as security by the Company,
(2) directed the Company to post a replacement bond in the reduced amount of
$11.3 million, which amount was subsequently amended to $11.4 million, and (3)
stayed execution of the judgment upon the posting of said bond by the Company.
The Company promptly posted the requisite bond and execution on the judgment in
the amount of $10.9 million is now stayed. Both ID Security Systems Canada Inc.
and the Company have filed appeals to the Third Circuit Court of Appeals related
to the various decisions of the Court. (See Note 16 of the Consolidated
Financial Statements.)
-36-
Although management expects to be successful upon appeal, should the appeal be
unsuccessful, management anticipates that any final judgment would be paid in
the second half of 2004 and is of the opinion that the Company will have
sufficient financial resources in the form of cash and borrowing capacity, due
to the cash flow generated during the intervening period, to satisfy any
judgment. The recording of a liability or a final judgment could cause the
Company to be in default of certain bank covenants. In this event, management
would pursue various alternatives, which may include, among other things, debt
covenant waivers, debt covenant amendments, or refinancing of debt. While
management believes it would be successful in pursuing these alternatives, there
can be no assurance of success.
Off Balance Sheet Arrangements and Contractual Obligations
The Company does not have any material off-balance sheet arrangements that have,
or are reasonably likely to have, a current or future effect on its financial
condition, changes in financial condition, revenue or expenses, results of
operations, liquidity, capital expenditures or capital resources. The
contractual obligations and commercial commitments of the Company at December
28, 2003 are summarized below:
Total Due in
amounts less than Due in Due in Due after
due 1 year 2-3 years 4-5 years 5 years
------- --------- --------- --------- ---------
(Thousands)
Contractual obligations
Long-term debt $132,407 $ 77,744(1) $ 54,663 $ - $ -
Lines of credit 931 931 - - -
Capital lease
obligations 12,453 761 1,601 1,316 8,775
Operating leases 61,981 17,174 27,754 10,635 6,418
Unconditional
purchase
obligations - - - - -
-------- -------- -------- -------- --------
Total contractual
cash obligations $207,772 $ 96,610 $ 84,018 $ 11,951 $ 15,193
======== ======== ======== ======== ========
(1) Includes $60.0 million of convertible subordinated debentures called for
early redemption in April 2004.
Capital Expenditures
The Company's capital expenditures during fiscal 2003 totaled $12.7 million
compared to $7.5 million during fiscal 2002. The increase in expenditures
occurred in manufacturing equipment, tooling, and dies. The Company anticipates
capital expenditures to primarily upgrade technology and improve its production
capabilities to approximate $14.0 million in 2004.
-37-
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 areas 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 on the inter-company
receivables and payables. Additionally, the sourcing of product in one currency
and the sales of product in a different currency can cause gross margin
fluctuations due to changes in currency exchange rates.
The Company selectively purchases currency forward exchange contracts to reduce
the risks of currency fluctuations on short-term inter-company receivables and
payables. These contracts guarantee a predetermined exchange rate at the time
the contract is purchased. This allows the Company to shift the effect of
positive or negative currency fluctuations to a third party.
As of December 28, 2003, the Company had currency forward exchange contracts
totaling approximately $20.4 million. The contracts are in the various local
currencies covering primarily the Company's Western European, Canadian, and
Australian operations. Historically, the Company has not purchased currency
forward exchange contracts where it is not economically efficient, specifically
for its operations in South America and Asia.
The Company has historically not used financial instruments to minimize its
exposure to currency fluctuations on its net investments in and cash flows
derived from its foreign subsidiaries. The Company has used third party
borrowings in foreign currencies to hedge a portion of its net investments in
and cash flows derived from its foreign subsidiaries. As the Company reduces its
third party foreign currency borrowings, the effect of foreign currency
fluctuations on its net investments in and cash flows derived from its foreign
subsidiaries increases.
-38-
Other Matters
New Accounting Pronouncements and Other Standards
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
The standard provides guidance on how to account for arrangements that involve
the delivery or performance of multiple products, services, and/or rights to use
assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements
entered into by the Company after June 29, 2003. The Company's adoption of EITF
Issue No. 00-21 has not significantly impacted its consolidated financial
statements.
In December 2003, the FASB issued interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
(revised December 2003)," which supercedes FIN 46. FIN 46R requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46R is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN
46R must be applied to the Company's consolidated financial statements for the
first quarter of 2004. The Company does not expect the adoption of FIN 46R to
have a significant impact on its consolidated financial statements.
In December 2003, the FASB updated Statement of Financial Accounting Standards
No. 132 (SFAS 132), "Employers' Disclosures about Pensions and Other
Postretirement Benefits (revised 2003)." The Statement requires additional
disclosures describing the types of plan assets, investment strategy,
measurement dates, plan obligations, cash flows, and components of net periodic
benefit cost recognized during interim periods. As the Company's pension plans
cover certain employees outside the USA, the new disclosures required by SFAS
132 become effective for the Company on June 27, 2004.
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 denominated in foreign currency to reduce the risks
of currency fluctuations on short-term inter-company receivables and payables.
The Company has historically not used financial instruments to minimize its
exposure to currency fluctuations on its net investments in and cash flows
derived from its foreign subsidiaries. The Company has used third party
borrowings in foreign currencies to hedge a portion of its net investments in
and cash flows derived from its foreign subsidiaries. As the Company reduces its
third party foreign currency borrowings, the effect of foreign currency
fluctuations on its net investments in and cash flows derived from its foreign
subsidiaries increases. (See "Accounting for Foreign Currency Translation and
Transactions" in the Summary of Significant Accounting Policies, Note 1 of the
Consolidated Financial Statements; and "Financial Instruments and Risk
Management", of the Consolidated Financial Statements.) Sensitivity of
the Company's financial instruments to selected changes in market rates and
-39-
prices, which are reasonably possible over a one-year period, is 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 the
fixed rate $83.8 million convertible subordinated debentures. These debt
instruments have a net fair value of $88.6 million and $111.6 million as of
December 28, 2003 and December 29, 2002, 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 28, 2003 would result in a $0.8 million decrease in
the net market value of the liability. Conversely, a 100-basis point decrease in
interest rates at December 28, 2003 would result in a $0.8 million increase in
the net market value of the liability.
The Company's $83.8 million convertible subordinated debentures are also subject
to equity price risk. The fair value of these debentures was a liability of
$88.6 million and $111.6 million at December 28, 2003 and December 29, 2002,
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 28, 2003, a 10% increase in the Company's
common stock would result in a net increase in the fair value liability of $8.7
million, while a 10% decrease in the Company's common stock could result in a
net decrease in the fair value liability of $8.7 million.
The Company's financial instruments subject to foreign currency exchange risk
include the EUR 244.0 million term loan, the $100.0 million multi-currency
revolving credit facility, and the EUR 9.5 million and EUR 2.7 million capital
leases. At December 28, 2003, EUR 36.9 million (approximately $45.9 million) was
outstanding under the term loan. The amount outstanding under the revolving
credit facility was JPY 300 million (approximately $2.8 million). The
outstanding amounts under the capital leases were EUR 8.6 million (approximately
$10.7 million) and EUR 1.4 million (approximately $1.7 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 28,
2003, a 10% strengthening of the US dollar versus the Euro would result in a
$5.4 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 $6.6 million increase in the liability of the term loan,
revolving credit facility, and capital leases. At December 28, 2003, a 10%
strengthening of the US dollar versus the Japanese Yen would result in a $0.3
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 $0.3
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 which represent a net asset position of
$(0.3) million and $0.3 million at December 28, 2003 and December 29, 2002,
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 28, 2003, a 10% strengthening of the US dollar versus
other currencies would result in an increase of $1.5 million in the net asset
position, while a 10% weakening of the dollar versus all other currencies would
result in a decrease of $1.5 million.
-40-
Foreign exchange forward 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. There are presently no significant restrictions on the remittance
of funds generated by the Company's operations outside the USA.
-41-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Auditors.........................................43
Consolidated Balance Sheets as of December 28, 2003 and
December 29, 2002...................................................44
Consolidated Statements of Operations for each of the years
in the three-year period ended December 28, 2003....................45
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 28, 2003..............46
Consolidated Statements of Comprehensive Income/ (Loss) for each of the
years in the three-year period ended December 28, 2003..............47
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 28, 2003....................48
Notes to Consolidated Financial Statements..........................49-83
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts.....................91
-42-
REPORT OF INDEPENDENT AUDITORS
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 28, 2003 and December
29, 2002, and the results of their operations and their cash flows for each of
the three years in the period ended December 28, 2003 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 presents 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 4 to the consolidated financial statements, on December 31,
2001 the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 3, 2004
-43-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 28, December 29,
2003 2002
------------ ------------
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $110,376 $ 54,670
Accounts receivable, net of allowances
of $12,003 and $12,736 137,494 132,945
Inventories 80,986 80,152
Other current assets 32,170 22,051
Deferred income taxes 13,076 10,326
-------- --------
Total current assets 374,102 300,144
REVENUE EQUIPMENT ON OPERATING LEASE, net 4,002 4,895
PROPERTY, PLANT, AND EQUIPMENT, net 100,393 100,173
GOODWILL 212,206 185,758
OTHER INTANGIBLES, net 53,446 51,611
DEFERRED INCOME TAXES 4,525 6,194
OTHER ASSETS 24,648 30,995
-------- --------
TOTAL ASSETS $773,322 $679,770
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and current
portion of long-term debt $ 79,437 20,512
Accounts payable 62,833 47,418
Accrued compensation and related taxes 36,911 25,701
Other accrued expenses 31,653 27,969
Income taxes 23,849 17,860
Unearned revenues 27,813 27,603
Restructuring reserve 10,173 5,600
Other current liabilities 20,272 15,404
-------- --------
Total current liabilities 292,941 188,067
LONG-TERM DEBT, LESS CURRENT MATURITIES 42,601 68,813
CONVERTIBLE SUBORDINATED DEBENTURES 23,753 120,000
ACCRUED PENSIONS 65,871 54,006
OTHER LONG-TERM LIABILITIES 9,610 10,608
DEFERRED INCOME TAXES 9,978 12,189
MINORITY INTEREST 1,007 841
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
39,479,407 and 39,039,506 3,948 3,904
Additional capital 282,529 263,386
Retained earnings 97,693 67,811
Common stock in treasury, at cost,
4,640,631 shares and 6,356,190 shares (47,003) (64,379)
Accumulated other comprehensive loss (9,606) (45,476)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 327,561 225,246
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $773,322 $679,770
======== ========
See accompanying Notes to Consolidated Financial Statements.
-44
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
2003 2002 2001
------ ------ ------
(Thousands, except per share data)
Net revenues $723,262 $639,486 $658,535
Cost of revenues 427,269 376,887 402,251
-------- -------- --------
Gross profit 295,993 262,599 256,284
Selling, general, and administrative
expenses 237,976 212,965 215,709
Other operating expense/(income) 5,331 (399) 7,066
-------- -------- --------
Operating income 52,686 50,033 33,509
Interest income 1,487 1,861 2,742
Interest expense 11,076 15,141 21,841
Other gain/(loss), net 1,319 928 (694)
-------- -------- --------
Earnings before income taxes and
minority interest 44,416 37,681 13,716
Income taxes 14,431 12,020 6,857
Minority interest 103 82 224
-------- -------- --------
Earnings before cumulative
effect of change in
accounting principle 29,882 25,579 6,635
Cumulative effect of change in
accounting principle - (72,861)(1) -
-------- -------- --------
Net earnings/(loss) $ 29,882 $(47,282) $ 6,635
======== ======== ========
Earnings per share before
cumulative effect of change in
accounting principle:
Basic $ .90 $ .79 $ .21
======== ======== ========
Diluted $ .84 $ .75 $ .21
======== ======== ========
Net earnings/(loss) per share:
Basic $ .90 $ (1.46) $ .21
======== ======== ========
Diluted $ .84 $ (1.10) $ .21
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
(1) No tax effect as goodwill amortization is non-deductible for tax.
-45-
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 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)
Net loss (47,282) (47,282)
Exercise of stock
options
(855,645 shares) 86 11,044 11,130
Net loss on interest
rate swap (1,064) (1,064)
Treasury stock issued 31 31
Foreign currency
translation
adjustment 22,168 22,168
------ -------- -------- -------- -------- --------
Balance,
December 29, 2002 3,904 263,386 67,811 (45,476) (64,379) 225,246
(Common shares:
issued 39,039,506;
reacquired 6,356,190)
Net earnings 29,882 29,882
Exercise of stock
options
(439,901 shares) 44 19,143 19,187
Net gain on interest
rate swap 238 238
Treasury stock issued 17,376 17,376
Foreign currency
translation
adjustment 35,632 35,632
------ -------- -------- -------- -------- --------
Balance,
December 28, 2003 $3,948 $282,529 $ 97,693 $ (9,606) $(47,003) $327,561
====== ======== ======== ======== ======== ========
(Common shares:
issued 39,479,407;
reacquired 4,640,631)
See accompanying Notes to Consolidated Financial Statements.
-46-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
2003 2002 2001
------ ------ ------
(Thousands)
Net earnings/(loss) $ 29,882 $(47,282) $ 6,635
Net gain/(loss) on interest
rate swap, net of tax 238 (1,064) -
Foreign currency translation
adjustment 35,632 22,168 (22,140)
-------- -------- --------
Comprehensive income/(loss) $ 65,752 $(26,178) $(15,505)
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
-47-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
2003 2002 2001
------ ------ ------
(Thousands)
Cash flows from operating activities:
Net earnings/(loss) $ 29,882 $(47,282) $ 6,635
Adjustments to reconcile net earnings/
(loss) to net cash provided by
operating activities:
Cumulative effect of change in
accounting principle, net of tax - 72,861 -
Depreciation and amortization 31,320 30,993 43,936
Deferred taxes (3,907) 395 (1,016)
Provision for losses on accounts
receivable 3,121 3,394 3,490
(Gain)/loss on disposal of fixed assets (4) 692 2,956
Impairment of long-lived assets 1,465 466 7,467
Restructuring charges, net 7,124 (312) 10,963
(Increase)/decrease in current assets,
net of the effects of acquired
companies:
Accounts receivable 12,655 32,864 17,185
Inventories 7,271 17,546 22,369
Other current assets (8,460) (4,963) 7,985
Increase/(decrease) in current
liabilities, net of the effects of
acquired companies:
Accounts payable 11,054 1,607 1,155
Income taxes 4,435 3,513 (11,059)
Unearned revenues (916) 2,874 1,402
Restructuring reserve (3,136) (8,500) (13,793)
Other current and accrued liabilities 9,886 3,893 3,155
-------- -------- --------
Net cash provided by operating activities $101,790 $110,041 $102,830
-------- -------- --------
Cash flows from investing activities:
Acquisition of property, plant, and
equipment $(12,714) $(7,449) $ (9,572)
Acquisitions, net of cash acquired - (681) (13,486)
Other investing activities 1,016 1,112 2,172
-------- ------- --------
Net cash used in investing activities $(11,698) $(7,018) $(20,886)
-------- ------- --------
Cash flows from financing activities:
Proceeds from stock issuances $ 4,572 $ 8,445 $ 12,731
Net change in short-term debt (1,553) (1,908) (919)
Proceeds of long-term debt - - 6,687
Payment of long-term debt (42,210) (102,043) (83,132)
-------- -------- --------
Net cash used in financing activities $(39,191) $(95,506) $(64,633)
-------- -------- --------
Effect of foreign currency rate
fluctuations on cash and cash
equivalents $ 4,805 $ 3,455 $ (1,734)
-------- ------- --------
Net increase in cash and cash
equivalents $ 55,706 $10,972 $ 15,577
Cash and cash equivalents:
Beginning of year 54,670 43,698 28,121
-------- -------- --------
End of year $110,376 $ 54,670 $ 43,698
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
-48-
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 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 display systems (RDS), 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 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
has achieved substantial international growth, primarily through acquisitions,
and now operates directly in 30 countries. Products are principally developed
and manufactured in-house and sold through direct distribution.
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 judgments 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 2003, 2002, and 2001, are for: the 52 weeks ended
December 28, 2003, December 29, 2002, and December 30, 2001, respectively.
Reclassifications
- -----------------
Certain reclassifications have been made to the 2002 and 2001 financial
statements and related footnotes to conform to the 2003 presentation.
-49-
Cash and Cash Equivalents
- -------------------------
Cash in excess of operating requirements is invested in short-term,
income-producing instruments or used to pay down debt. 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 three 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. The Company
reviews its property, plant, and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. If it is determined that an impairment, based on expected future
undiscounted cash flows, exists, then the loss is recognized on the consolidated
statements of operations. The amount of the impairment is the excess of the
carrying amount of the impaired asset over the fair value of the asset.
Goodwill
- --------
Pursuant to Statement of Financial Accounting Standards No. 142 (SFAS 142),
"Goodwill and Other Intangible Assets," effective December 31, 2001 (fiscal year
2002), goodwill is no longer being amortized. The Company performs, at least on
an annual basis, an assessment of the carrying value of goodwill by comparing
each individual reporting unit's carrying amount of net assets, including
goodwill, to their fair value. The adoption of this Standard resulted in a
goodwill impairment charge of $72.9 million in fiscal 2002, which was reported
as a change in accounting principle in fiscal 2002. The Company performs its
annual assessment as of October 31 each fiscal year. The 2003 and 2002 annual
assessments did not result in an impairment charge. Future annual assessments
could result in additional impairment charges, which would be accounted for as
an operating expense. See Note 4.
-50-
Other Intangibles
- -----------------
Other intangibles are amortized on a straight-line basis over their useful lives
(or legal lives if shorter). The Company reviews its other intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. If it is determined that
an impairment, based on expected future undiscounted cash flows, exists, then
the loss is recognized on the consolidated statements of operations. The amount
of the impairment 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. See Note 4.
Other Assets
- ------------
Included in other assets is $13.7 million and $17.2 million of net long-term
customer-based receivables at December 28, 2003 and December 29, 2002,
respectively.
Deferred Financing Costs
- ------------------------
Financing costs are capitalized and amortized over the life of the debt. The net
deferred financing costs at December 28, 2003 and December 29, 2002 were $2.8
million and $4.5 million, respectively. Amortization expense was $2.0 million,
$2.9 million, and $1.7 million, for 2003, 2002, and 2001, respectively.
Revenue Recognition
- -------------------
The Company recognizes 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 lease is recognized over
the term of the lease. Installation revenue from EAS equipment is recognized
when the systems are installed. 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.
Shipping and Handling Fees and Costs
- ------------------------------------
Shipping and handling fees are accounted for in net revenues, shipping and
handling costs in cost of revenues.
Research and Development Costs
- ------------------------------
Research and development costs, which are included as part of cost of revenues,
are expensed as incurred. Research and development costs, which consist
primarily of employee-related costs, approximated $15.1 million, $9.0 million,
and $8.7 million, in 2003, 2002, and 2001, respectively.
-51-
Royalty Expense
- ---------------
Royalty expenses related to security products approximated $4.8 million, $4.2
million, and $4.0 million, in 2003, 2002, and 2001, respectively, and are
included in SG&A.
Stock Options
- -------------
At December 28, 2003, the Company has one stock-based employee compensation
plan, which is described more fully in Note 7. Statement of Financial Accounting
Standards No. 123 (SFAS 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 (APB 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 123, the Company's net earnings/(loss) and net
earnings/(loss) per share would approximate the pro-forma amounts as follows:
2003 2002 2001
------ ------ ------
(Thousands, except per share data)
Net earnings/(loss), as reported $ 29,882 $(47,282) $ 6,635
Total stock-based employee
compensation expense determined
under fair value based method,
net of tax (2,732) (2,223) (2,514)
-------- -------- --------
Pro-forma net earnings/(loss) $ 27,150 $(49,505) $ 4,121
======== ======== ========
Net earnings/(loss) per share:
Basic, as reported $ .90 $ (1.46) $ .21
======== ======== ========
Basic, pro-forma $ .82 $ (1.53) $ .13
======== ======== ========
Diluted, as reported $ .84 $ (1.10) $ .21
======== ======== ========
Diluted, pro-forma $ .77 $ (1.16) $ .13
======== ======== ========
The following assumptions were used in estimating the fair value of the stock
options:
2003 2002 2001
------ ------ ------
Dividend yields None None None
Expected volatility .270 .412 .562
Risk-free interest rates 3.3% 3.6% 4.5%
Expected life (in years) 3.2 3.2 3.8
-52-
Income Taxes
- ------------
Deferred tax liabilities and assets are determined based on the difference
between the financial statement basis and the 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 it
is more likely than not that a tax benefit will not be realized.
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.
Revenues, costs, and expenses of the Company's foreign subsidiaries are
translated into US dollars at the year-to-date average rate of exchange. The
resulting translation adjustments are recorded as a separate component of
shareholders' equity. 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 currency transaction gains and losses
are included in net earnings/(loss).
The Company enters into certain foreign exchange forward contracts in order to
hedge anticipated rate fluctuations in Western 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 gain/(loss), net on the
Company's Consolidated Statements of Operations.
The Company enters, on occasion, into interest rate swaps to reduce the risk of
significant interest rate increases in connection with floating rate debt. This
cash flow hedging instrument is marked to market and the changes are recorded in
other comprehensive income. Any hedge ineffectiveness is charged to interest
expense. No ineffectiveness occurred during fiscal years 2001 to 2003.
-53-
Note 2. INVENTORIES
Inventories consist of the following:
2003 2002
------ ------
(Thousands)
Raw materials $ 8,285 $ 8,184
Work-in-process 3,547 3,387
Finished goods 69,154 68,581
------- -------
Total $80,986 $80,152
======= =======
Note 3. REVENUE EQUIPMENT ON OPERATING LEASE AND PROPERTY, PLANT, AND
EQUIPMENT
The major classes are:
2003 2002
------ ------
(Thousands)
Revenue equipment on operating lease
Equipment rented to customers $ 43,951 $ 41,942
Accumulated depreciation (39,949) (37,047)
--------- ---------
$ 4,002 $ 4,895
========= =========
Property, plant, and equipment
Land $ 10,652 $ 9,484
Buildings 72,635 64,105
Machinery and equipment 203,150 184,713
Leasehold improvements 12,476 9,958
--------- ---------
298,913 268,260
Accumulated depreciation $(198,520) $(168,087)
--------- ---------
$ 100,393 $ 100,173
========= =========
Property, plant, and equipment under capital lease had gross values of $16.3
million and $17.4 million and accumulated depreciation of $4.6 million and $4.7
million, as of December 28, 2003 and December 29, 2002, respectively.
Depreciation expense on the Company's revenue equipment on operating lease and
property, plant, and equipment was $23.9 million, $22.2 million, and $26.3
million, for 2003, 2002, and 2001, respectively.
-54-
Note 4. GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board (FASB) approved the
issuance of Statements of Financial Accounting Standards No. 141 (SFAS 141),
"Business Combinations," and No. 142 (SFAS 142), "Goodwill and Other Intangible
Assets."
SFAS 141 supercedes Accounting Principles Board Opinion No. 16 (APB 16),
"Business Combinations." The most significant changes made by SFAS 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) establishing specific criteria
for the recognition of intangible assets separately from goodwill, and (3)
requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized).
SFAS 142 supercedes APB 17, "Intangible Assets." SFAS 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their
acquisition. The most significant changes made by SFAS 142 are: (1) goodwill and
indefinite-lived intangible assets will no longer be amortized, (2) goodwill
will be tested for impairment at least annually at the reporting unit level, (3)
intangible assets deemed to have an indefinite life will be tested for
impairment at least annually, and (4) the amortization period of intangible
assets with finite lives will no longer be limited to 40 years. Previously, the
Company amortized goodwill over the estimated future periods to be benefited,
ranging from 20 to 30 years.
Pursuant to SFAS 142, which was effective for the Company for fiscal 2002,
goodwill is no longer being amortized. The total amount of goodwill amortization
recorded by the Company in 2001 was $10.3 million.
The Company had intangible assets with a net book value of $53.4 million, and
$51.6 million as of December 28, 2003 and December 29, 2002, respectively.
The following table reflects the components of intangible assets as of
December 28, 2003 and December 29, 2002:
2003 2002
---------------------- ---------------------
Amortizable Gross Gross
Life Carrying Accumulated Carrying Accumulated
(years) Amount Amortization Amount Amortization
----------- -------- ------------ -------- ------------
(Thousands)
Customer lists 20 $31,020 $14,584 $26,363 $10,544
Trade name 30 28,226 3,763 24,405 2,440
Patents, license
agreements 5 to 14 37,362 25,439 32,364 19,095
Other 3 to 6 952 328 778 220
------- ------- ------- -------
Total $97,560 $44,114 $83,910 $32,299
======= ======= ======= =======
The Company recorded $6.2 million, $5.4 million, and $6.0 million of
amortization expense for 2003, 2002, and 2001, respectively.
-55-
Estimated amortization expense for each of the five succeeding years is
anticipated to be:
(Thousands)
2004 $4,560
2005 $4,075
2006 $3,386
2007 $3,334
2008 $3,330
The changes in the carrying amount of goodwill for the 24 months ended December
28, 2003, are as follows:
Labeling Retail
Security Services Merchandising Total
-------- -------- ------------- -------
(Thousands)
Balance as of
December 30, 2001 $ 83,488 $64,531 $91,623 $239,642
Goodwill acquired
during year 441 - - 441
Cumulative effect of
change in accounting
principle (4,828) (27,274) (40,759) (72,861)
Other - (1,578) (612) (2,190)
Exchange rate changes 11,971 1,216 7,539 20,726
-------- ------- ------- --------
Balance as of
December 29, 2002 91,072 36,895 57,791 185,758
Exchange rate changes 15,023 1,538 9,887 26,448
-------- ------- ------- --------
Balance as of
December 28, 2003 $106,095 $38,433 $67,678 $212,206
======== ======= ======= ========
Pursuant to SFAS 142, the Company performed an assessment of the carrying value
of goodwill by comparing each individual reporting unit's carrying amount of net
assets, including goodwill, to their fair value. The reporting units' fair value
is based on their expected future discounted cash flows. The completion of the
transitional goodwill impairment test resulted in a goodwill impairment charge
of $72.9 million in fiscal 2002, which was accounted for as a change in
accounting principle. The impairment in the security segment resulted from the
economic downturn that occurred in South America. The impairment in the labeling
services segment is primarily attributable to revenues not achieving growth
expectations from the date of acquisition of Meto AG in December 1999. The
impairment in the retail merchandising segment is attributable to declining
revenues as hand-held labeling products are replaced by scanning technology. The
expected future decline in retail merchandising revenues will lead to future
impairments of the goodwill associated with this segment. The Company performs
its annual assessment as of October 31 each fiscal year. The 2003 and 2002
annual assessments did not result in an additional impairment charge. Future
annual assessments could result in additional impairment charges, which would be
accounted for as an operating expense.
-56-
Net income and earnings per share for the period ended December 30, 2001
excluding amortization for goodwill and "workforce in place," is presented below
along with the adjusted net income and earnings per share as required under the
transition provisions of SFAS 142:
Dec. 28, Dec. 29, Dec. 30,
2003 2002 2001
-------- -------- --------
(Thousands, except per share data)
Basic earnings/(loss) per share:
Earnings before cumulative effect of
change in accounting principle $ 29,882 $ 25,579 $ 6,635
Add back:
Goodwill/workforce in place
amortization, net of tax - - 10,760
-------- -------- --------
Adjusted basic earnings before cumulative
effect of change in accounting principle 29,882 25,579 17,395
Cumulative effect of change in accounting
principle - (72,861)(2) -
-------- -------- --------
Adjusted basic earnings/(loss) $ 29,882 $(47,282) $ 17,395
======== ======== ========
Earnings before cumulative effect of
change in accounting principle $ .90 $ .79 $ .21
Add back:
Goodwill/workforce in place
amortization, net of tax - - .35
-------- -------- --------
Adjusted basic earnings before cumulative
effect of change in accounting principle .90 .79 .56
Cumulative effect of change in accounting
principle - (2.25) -
-------- -------- --------
Adjusted basic earnings/(loss) per
share $ .90 $ (1.46) $ .56
======== ======== ========
Diluted earnings/(loss) per share:
Earnings before cumulative effect of
change in accounting principle $ 33,521(1) $ 29,422(1) $ 6,635(3)
Add back:
Goodwill/workforce in place
amortization, net of tax - - 10,760
-------- -------- --------
Adjusted diluted earnings before cumulative
effect of change in accounting principle 33,521 29,422 17,395
Cumulative effect of change in accounting
principle - (72,861)(2) -
-------- -------- --------
Adjusted diluted earnings/(loss) $ 33,521 $(43,439) $ 17,395
======== ======== ========
Earnings before cumulative effect of
change in accounting principle $ .84 $ .75 $ .21
Add back:
Goodwill/workforce in place
amortization, net of tax - - .34
-------- -------- --------
Adjusted diluted earnings before cumulative
effect of change in accounting principle .84 .75 .55
Cumulative effect of change in
accounting principle - (1.85) -
-------- -------- --------
Adjusted diluted earnings/(loss) per share $ .84 $ (1.10) $ .55
======== ======== ========
-57-
(1) Assumed conversion of the subordinated debentures is included in the 2003
and 2002 calculations as it is dilutive.
(2) No tax effect as goodwill amortization is non-deductible for tax.
(3) Assumed conversion of the subordinated debentures is not included in the
2001 calculation as it is anti-dilutive.
Note 5. SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG-TERM DEBT
Short-term borrowings and current portion of long-term debt at December 28, 2003
and at December 29, 2002 consisted of the following:
2003 2002
------ ------
(Thousands)
Overdraft facilities and lines of
credit with interest rates ranging
from 1.38% to 1.50%(1) $ 931 $ 2,085
Current portion of long-term debt 18,506 18,427
Called portion of convertible
subordinated debentures 60,000 -
------- -------
Total short-term borrowings and
current portion of long-term debt $79,437 $20,512
======= =======
(1) The weighted average interest rates for 2003 and 2002 were 1.44% and 1.48%,
respectively.
-58-
Note 6. LONG-TERM DEBT
Long-term debt at December 28, 2003 and December 29, 2002 consisted of the
following:
2003 2002
------ ------
(Thousands)
Senior collaterized credit facility:
EUR 244 million variable interest rate
term loan maturing in 2006 $ 45,863 $ 64,447
$25 million variable interest rate
loan maturing in 2006 - 7,882
$100 million multi-currency variable
interest rate revolving credit facility
maturing in 2006 2,791 2,502
EUR 9.5 million capital lease
maturing in 2021 10,733 9,267
EUR 2.7 million capital lease
maturing in 2007 1,693 1,757
Other capital leases with maturities
through 2006 27 1,385
-------- --------
Total (1) 61,107 87,240
Less current portion 18,506 18,427
-------- --------
Total long-term portion (excluding
convertible subordinated debentures) 42,601 68,813
Convertible subordinated debentures 83,753 120,000
Less called portion of convertible
subordinated debentures 60,000 -
-------- --------
Total long-term portion $ 66,354 $188,813
======== ========
(1) The weighted average interest rates for 2003 and 2002 were 5.24% and 5.86%,
respectively.
In connection with the acquisition of Meto AG, the Company entered into a $425.0
million senior collateralized multi-currency credit facility. The credit
facility, which expires on March 31, 2006, included a $275.0 million equivalent
multi-currency term note and a $150.0 million equivalent multi-currency
revolving line of credit. On March 15, 2001, the $150.0 million revolving line
of credit was reduced to $100.0 million. Interest on the facility resets monthly
and is based on the Eurocurrency base rate plus an applicable margin. During
2003, unscheduled repayments of EUR 13.5 million (approximately $14.4 million)
were made on the EUR 244.0 million term loan and unscheduled repayments of $7.0
million were made on the $25.0 million term loan to fully satisfy the
outstanding balance. At December 28, 2003, EUR 36.9 million (approximately $45.9
million) was outstanding under the multi-currency term loan. The outstanding
borrowings under the revolving credit facility were JPY 300 million
(approximately $2.8 million). The availability under the $100.0 million
multi-currency revolving credit facility has been reduced by letters of credit
totaling $12.1 million, primarily related to the surety bond posted in
connection with ID Security Systems Canada Inc. litigation.
-59-
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 net
worth. These agreements also prohibit the Company from paying cash dividends,
repurchasing its stock, and redeeming convertible subordinated debentures. In
addition, under the loan agreements, the Company's assets in the USA and Puerto
Rico, including the shares of certain of its overseas subsidiaries, have been
pledged as collateral.
On September 12, 2003, the Company secured an amendment to certain provisions of
the financial covenants included in the credit facility, which allowed the
Company the flexibility to: (i) redeem the convertible subordinated debentures,
(ii) make purchases of the Company's common stock, (iii) create additional
indebtedness not to exceed $20.0 million, and (iv) provide guarantee support to
subsidiaries. The Company was in compliance with its covenants for fiscal 2003.
In November 1995, the Company completed the private placement of $120.0 million
of convertible subordinated debentures (debentures) with an annual interest rate
of 5.25%. The net proceeds generated to the Company from this transaction
approximated $116 million. The debentures are uncollateralized and subordinated
to all senior indebtedness. The debentures are convertible into common stock at
a conversion price of $18.375 per share (equivalent to approximately 54.42
shares of common stock for each $1,000 principal amount of debentures), at any
time prior to redemption or maturity at the option of the bondholder. The
debentures will mature on November 1, 2005, and are redeemable at any time prior
to maturity, in whole or in part, at the option of the Company. At December 28,
2003, the Company has the option to call the debentures at par value.
On September 23, 2003 the Company called $35.0 million of the convertible
subordinated debentures for redemption on November 8, 2003. The called
debentures were convertible into common shares at any time prior to the close of
business on November 3, 2003. Of the called debentures, $30.3 million were
converted into 1.648 million shares of the Company's common stock and $4.7
million were redeemed for cash.
In addition to the $35.0 million convertible subordinated debentures redeemed in
November 2003, certain bondholders elected to convert their bonds into shares of
the Company's common stock during the fourth quarter 2003. The principal amount
of additional bonds converted into common stock was $1.2 million, which reduced
the outstanding balance of the convertible debentures at December 28, 2003, to
$83.8 million.
On February 18, 2004, the Company called an additional $60.0 million of the
convertible subordinated debentures for redemption on April 13, 2004. The called
debentures are convertible at any time prior to the close of business on April
8, 2004.
The aggregate maturities on all long-term debt (including current portion) are:
(Thousands)
2004 $ 78,506
2005 45,572
2006 10,691
2007 861
2008 455
Thereafter 8,775
--------
Total $144,860
========
-60-
Note 7. 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 16,000,000 shares of common stock. 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. On February 17, 2004, the
Plan was amended to allow an independent consultant to receive NSOs. ISOs and
NSOs issued under the 1992 Plan through December 28, 2003 total 11,773,794. At
December 28, 2003, December 29, 2002, and December 30, 2001, a total of
4,226,206, 218,995, and 1,194,141 shares, respectively, were available for
grant.
All ISOs under the 1992 Plan expire not more than ten 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 28,
2003 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 1,944,470 as of December
28, 2003. Options that were outstanding but not yet exercisable totaled
1,403,121 as of December 28, 2003.
The estimated weighted average fair value of options granted during 2003, 2002,
and 2001 were $2.9 million, $6.0 million, and $5.3 million, respectively, on the
date of the grant using the option pricing model and assumptions referred to in
Note 1 to the Consolidated Financial Statements. The weighted average fair value
per share of options granted during 2003, 2002, and 2001 was $3.13, $4.82, and
$5.40, respectively.
-61-
The following schedules summarize stock option activity and status:
NUMBER OF SHARES
2003 2002 2001
--------- --------- ---------
Outstanding at beginning of year 3,810,203 3,690,702 4,940,038
Granted 938,500 1,236,500 977,000
Exercised (439,901) (855,645) (1,541,121)
Cancelled or forfeited (961,211) (261,354) (685,215)
--------- --------- ---------
Outstanding at end of year 3,347,591 3,810,203 3,690,702
========= ========= =========
Exercisable at end of year 1,944,470 2,531,205 2,510,877
========= ========= =========
WEIGHTED-AVERAGE PRICE
2003 2002 2001
------ ------ ------
Outstanding at beginning of year $13.94 $13.94 $13.01
Granted $11.37 $12.34 $ 9.72
Exercised $10.39 $ 9.87 $ 8.27
Cancelled or forfeited $15.45 $19.65 $13.97
------ ------ ------
Outstanding at end of year $13.23 $13.94 $13.94
====== ====== ======
Exercisable at end of year $14.53 $15.25 $16.10
====== ====== ======
Following is a summary of stock options outstanding as of December 28, 2003:
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 12/28/03 Life Price 12/28/03 Price
- --------------- ----------- ----------- -------- ----------- --------
$ 6.34 - $ 9.68 1,072,351 7.70 $ 9.13 548,358 $ 8.89
$ 9.78 - $12.84 1,073,030 7.96 $11.70 571,892 $11.50
$12.87 - $19.88 845,710 7.24 $14.71 467,720 $15.61
$20.97 - $28.38 356,500 2.85 $26.67 356,500 $26.67
- --------------- --------- ---- ------ --------- ------
$ 6.34 - $28.38 3,347,591 7.15 $13.23 1,944,470 $14.53
=============== ========= ==== ====== ========= ======
-62-
Note 8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in 2003, 2002, and 2001, included payments for interest of $11.5
million, $15.0 million, and $20.6 million, and income taxes of $15.5 million,
$10.1 million, and $17.8 million, respectively.
During the fourth quarter 2003, $31.5 million of convertible subordinated
debentures were converted into 1.716 million shares of the Company's common
stock.
Note 9. 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 that 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.
The components of accumulated other comprehensive loss at December 28, 2003 and
at December 29, 2002 are as follows:
2003 2002
------ ------
(Thousands)
Net loss on interest rate swap, net of tax $ 826 $ 1,064
Foreign currency translation adjustment 8,780 44,412
------ -------
Total $9,606 $45,476
====== =======
-63-
Note 10. EARNINGS PER SHARE
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:
2003 2002 2001
------ ------ ------
(Thousands, except per share data)
Basic earnings/(loss) per share:
Earnings before cumulative effect of
change in accounting principle $ 29,882 $ 25,579 $ 6,635
Cumulative effect of change in
accounting principle - (72,861)(3) -
-------- -------- --------
Net earnings/(loss) $ 29,882 $(47,282) $ 6,635
======== ======== ========
Weighted average common stock
outstanding 33,142 32,298 31,230
======== ======== ========
Basic earnings per share before
cumulative effect of change in
accounting principle $ .90 $ .79 $ .21
Cumulative effect of change in
accounting principle - (2.25) -
-------- -------- --------
Basic earnings/(loss) per share $ .90 $ (1.46) $ .21
======== ======== ========
Diluted earnings/(loss) per share:
Earnings before cumulative effect of
change in accounting principle $ 29,882 $ 25,579 $ 6,635
Interest on subordinated debentures,
net of tax (1) 3,639 3,843 -
-------- -------- --------
Net earnings before cumulative
effect of change in accounting
principle available for dilutive
securities 33,521 29,422 6,635
Cumulative effect of change in
accounting principle - (72,861)(3) -
-------- -------- --------
Net earnings/(loss) after cumulative
effect of change in accounting
principle available for dilutive
securities $ 33,521 $(43,439) $ 6,635
======== ======== ========
-64-
Weighted average common stock
outstanding 33,142 32,298 31,230
Additional common shares resulting
from stock options (2) 605 487 506
Additional common shares resulting
from assumed conversion of
subordinated debentures(1) 6,189 6,528 -
-------- -------- --------
Weighted average common stock
and dilutive stock
outstanding (1) 39,936 39,313 31,736
======== ======== ========
Diluted earnings per share before
cumulative effect of change in
accounting principle $ .84 $ .75 $ .21
Cumulative effect of change in
accounting principle - (1.85) -
-------- -------- --------
Diluted earnings/(loss) per share $ .84 $ (1.10) $ .21
======== ======== ========
(1) The assumed conversion of 6,528 common shares from the subordinated
debentures is not included in 2001 as it is anti-dilutive.
(2) Excludes approximately 932, 1,917, and 1,937 anti-dilutive outstanding
stock options for 2003, 2002, and 2001, respectively.
(3) No tax effect as goodwill amortization is non-deductible for tax.
-65-
Note 11. INCOME TAXES
The domestic and foreign components of earnings/(losses) before income taxes
and minority interest are:
2003 2002 2001
------ ------ ------
(Thousands)
Domestic(1) $ 15,921 $ 15,267 $ (4,874)
Foreign 28,495 22,414 18,590
------- ------- -------
Total $ 44,416 $ 37,681 $ 13,716
======= ======= =======
(1) The domestic component includes the earnings of the Company's operations
in Puerto Rico.
The related provisions/(benefits) for income taxes consist of:
2003 2002 2001
------ ------ ------
Currently payable (Thousands)
Federal $ 2,906 $(1,361) $ (505)
State 638 161 248
Puerto Rico 694 1,392 156
Foreign 14,100 11,433 7,974
------- ------- -------
Total currently payable $18,338 $11,625 $ 7,873
------- ------- -------
Deferred
Federal (1,789) (175) (1,031)
State - - -
Puerto Rico 667 - -
Foreign (2,785) 570 15
------- ------- -------
Total deferred $(3,907) $ 395 $(1,016)
------- ------- -------
Total Provision $14,431 $12,020 $ 6,857
======= ======= =======
-66-
Deferred tax assets/liabilities at December 28, 2003 and December 29, 2002
consist of:
2003 2002
------ ------
(Thousands)
Inventory $ 2,131 $ 3,324
Accounts receivable 2,203 2,335
Net operating loss and foreign
tax credit carryforwards 44,430 39,403
Restructuring 2,030 2,027
Deferred revenue 2,446 1,627
Pension 4,916 3,559
Warranty 667 394
Deferred compensation 1,437 470
Other 1,274 1,163
Valuation allowance (32,650) (27,576)
------- -------
Deferred tax assets 28,884 26,726
------- -------
Depreciation (1,391) 1,018
Intangibles 19,136 20,842
Withholding taxes 3,516 535
------- -------
Deferred tax liabilities 21,261 22,395
------- -------
Net deferred tax asset $ 7,623 $ 4,331
======= =======
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 until December 31, 2005 and are substantially exempt from
Puerto Rico's 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 2003, 2002, and 2001, a full provision was made for
tollgate taxes. The Company has not provided for tollgate taxes on approximately
$37.0 million of its subsidiary's unremitted earnings since they are expected to
be reinvested permanently.
Net operating losses are principally foreign. The net operating loss
carryforwards as of December 28, 2003 include $25.0 million 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 loss
carryforwards is realized, the Company will apply such benefit to goodwill in
connection with the acquisition. In 2003, additional valuation allowance was
recorded due to certain foreign losses where it is more than likely that tax
loss carryforwards will not be utilized. In 2003, net operating losses were
written off in jurisdictions where losses expired and valuation allowances were
not previously provided. Of the total foreign net operating loss carryforwards
available, $10.4 million expire beginning January 2004 through December 2010,
and the remaining portion may be carried forward indefinitely.
-67-
US income taxes have not been provided on approximately $32.0 million of
undistributed earnings of non-US subsidiaries. If remitted, tax credits or
planning strategies should substantially offset any resulting US income tax
liability. Foreign withholding taxes of $1.9 million have been provided on
unremitted earnings.
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:
2003 2002 2001
------ ------ ------
(Thousands)
Tax provision at the statutory Federal
income tax rate $15,545 $13,188 $4,801
Tax exempt earnings of subsidiary in
Puerto Rico (3,450) (1,343) (683)
Non-deductible goodwill - - 3,602
Non-deductible meals and entertainment 242 219 226
State and local income taxes, net
of Federal benefit 415 105 296
Benefit from extraterritorial income (490) (501) (170)
Foreign losses for which no tax
benefit recognized 423 2,327 1,720
Foreign rate differentials (2,199) (1,724) 479
Change in valuation allowance 2,205 - (2,691)
Foreign withholding tax 1,850 - -
Other (110) (251) (723)
------- ------- ------
Tax provision at the effective tax rate $14,431 $12,020 $6,857
======= ======= ======
In 2002, there was no income tax benefit associated with the cumulative effect
of the change in accounting principle as the amortization of goodwill is non-tax
deductible.
-68-
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. 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 $1.0 million, $1.0 million, and $1.2 million, in 2003,
2002, and 2001, respectively.
Generally, all employees in the USA may participate in the Company's US 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.
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 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 $0.2 million for each of the years
2003, 2002, and 2001.
For 2003, the Board of Directors approved the 2003 Corporate Bonus Plan. The
2003 Corporate Bonus Plan provides for a Bonus Pool to be formed when earnings
per share (EPS) increases over a defined target. The Bonus Pool is then
apportioned among four groups of employees; corporate officers, vice presidents,
middle management, and front line employees. Each group has a targeted bonus
percentage assigned which is adjusted, depending on the percentage increase or
decrease over the targeted EPS growth. The specified minimum target for EPS was
attained for the fiscal year 2003 and bonuses are payable.
Under the Company's 2002 and 2001 Corporate Bonus Plan, as approved by the Board
of Directors, employees of the Company had a targeted bonus percentage based on
earnings per share. In 2002, and 2001, net earnings did not exceed the required
criteria and, accordingly, no bonuses were provided under the Corporate Bonus
Plan.
-69-
The Company maintains several defined benefit pension plans, principally in
Europe. The plans covered approximately 20% of the total workforce at December
28, 2003. 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 28, December 29,
2003 2002
----------- -----------
(Thousands)
Change in benefit obligation
Net benefit obligation at beginning of year $56,050 $46,018
Service cost 1,893 1,550
Interest cost 3,715 3,168
Net amortization and deferrals 113 95
Actuarial (gain)/loss (1,914) 250
Gross benefits paid (3,273) (3,042)
Foreign currency exchange rate changes 10,270 8,011
------- -------
Net benefit obligation at end of year $66,854 $56,050
------- -------
Change in plan assets
Fair value of plan assets at beginning of year $ 85 $ 68
Employer contributions 3,273 3,042
Gross benefits paid (3,273) (3,042)
Foreign currency exchange rate changes 20 17
------- -------
Fair value of plan assets at end of year $ 105 $ 85
------- -------
Reconciliation of unfunded status
Unfunded status at end of year $66,749 $55,965
Unrecognized net actuarial loss 878 1,959
------- -------
Accrued pensions $65,871 $54,006
======= =======
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 $66.9 million, $61.4 million, and $0.1 million,
respectively, as of December 28, 2003, and $56.1 million, $50.8 million, and
$0.1 million, respectively, as of December 29, 2002.
The pension plans included the following net cost components:
2003 2002 2001
------ ------ ------
(Thousands)
Service cost $1,893 $1,550 $1,121
Interest cost 3,715 3,168 2,648
Net amortization and deferrals 113 95 1,027
------ ------ ------
Total pension expense $5,721 $4,813 $4,796
====== ====== ======
-70-
The weighted average rate assumptions used in determining pension costs and the
projected benefit obligation are as follows:
December 28, December 29,
2003 2002
------------ ------------
Discount rate (1) 5.75% 5.75%
Expected rate of return on plan assets (2) 5.00% 5.75%
Expected rate of increase in future
compensation levels 3.00% 3.00%
(1) Represents the weighted average rate for all pension plans.
(2) The plan assets are only held in the Netherlands, where the discount rate
for 2003 was 5.00%.
Note 13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company's adoption of Statement of Financial Accounting Standards No. 133
(SFAS 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 has historically not used financial instruments
to minimize its exposure to currency fluctuations on its net investments in and
cash flows derived from its foreign subsidiaries. The Company has used third
party borrowings in foreign currencies to hedge a portion of its net investments
in and cash flows derived from its foreign subsidiaries. Aggregate foreign
currency translation (losses)/gains on the third party borrowings in foreign
currencies in 2003, 2002, and 2001, were $(2.7) million, $(17.6) million, and
$14.6 million, respectively, and are included and are included in foreign
currency translation adjustment o the Consolidated Statements of Comprehensive
Income/(Loss). As the Company reduces its third party foreign currency
borrowings, the effect of foreign currency fluctuations on its net investments
in and cash flows derived from its foreign subsidiaries increases. The Company
enters into forward exchange contracts to reduce the risks of currency
fluctuations on short-term inter-company receivables and payables. 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 or swaps. 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 resulting from
anticipated non-financial instrument foreign currency cash flows which are
difficult to reasonably predict, and have therefore not been included in the
table of Fair Values below. All listed items described are non-trading.
Foreign Exchange Risk Management
- --------------------------------
The Company enters into currency forward exchange contracts to hedge short-term
receivables denominated in currencies other than the US dollar from its foreign
sales subsidiaries. The term of the currency forward exchange contracts is
rarely more than one year. Unrealized and realized gains and losses on these
contracts are included in other gain/(loss), net. Notional amounts of currency
forward exchange contracts outstanding at December 28, 2003 were $20.4 million,
with various maturity dates ranging through the end of the first quarter 2004.
At December 29, 2002, the notional amounts of currency forward exchange
contracts outstanding were $22.5 million.
Aggregate foreign currency transaction gains/(losses) in 2003, 2002, and 2001,
were $1.3 million, $0.9 million, and $(0.7) million, respectively, and are
included in other gain/(loss), net on the Consolidated Statements of Operations.
-71-
Additionally, there were no deferrals of gains or losses on currency forward
exchange contracts at December 28, 2003.
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. The interest
rate caps expired on March 31, 2003.
On March 11, 2002, the Company entered into an interest rate swap to reduce the
risk of significant Euro interest rate increases in connection with the floating
rate debt outstanding under the Euro term loan. The cash flow hedging instrument
initially swapped interest payments on the notional amount of EUR 50 million
from variable to fixed. The contract expires in December 2004. The interest rate
swap is marked to market and the changes are recorded in other comprehensive
income.
Fair Values
- -----------
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 28, 2003 and December 29, 2002:
2003 2002
-------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
(Thousands)
Long-term debt (including
current maturities and
excluding capital
leases)(1) $ 48,654 $ 48,654 $ 74,831 $ 74,831
Convertible subordinated
debentures
(including current
maturities)(1) $ 83,753 $ 88,569 $120,000 $111,600
Currency forward exchange
contracts(2) $ (343) $ (343) $ 309 $ 309
Interest rate swap(3) $ (711) $ (711) $ (1,064) $ (1,064)
(1) The carrying amounts are reported on the balance sheet under the indicated
captions.
(2) The carrying amounts represent the net unrealized (loss)/gain associated
with the contracts at the end of the period. Such amounts are included in
other current liabilities.
(3) The carrying amounts represent the net unrealized loss associated with the
contract at the end of the period. Such amounts are included in other
long-term 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.
-72-
Convertible subordinated debentures are carried at the original offering price,
less any payments of principal. In order to estimate the fair value of these
debentures, the Company used currently quoted market prices.
The carrying value approximates fair value for cash, accounts receivable, and
accounts payable.
Note 14. PROVISION FOR RESTRUCTURING AND ASSET IMPAIRMENTS
Fiscal 2003
- -----------
The Company recorded in cost of revenues restructuring charges of $1.9 million
for severance costs and an asset impairment charge of $1.5 million. The
severance costs relate to cost reductions in hand-held labeling (HLS) and
electronic article surveillance (EAS) manufacturing. The impairment charge
consists of a further $1.1 million write-down of a manufacturing facility in
Japan and a $0.4 million write-down of equipment in Puerto Rico. The book values
of the assets prior to write-down were $2.6 million and $0.4 million,
respectively. Due to changes in product mix, the Company reviewed and modified
the 2001 restructuring plan to reduce costs in EAS manufacturing. The principal
modification was to close a different manufacturing plant than the one
originally planned. This resulted in an increase in severance costs of $0.2
million and the reversal of $0.1 million of lease termination costs.
In addition, the Company recorded $5.6 million of severance charges related to
the shared services initiative being implemented in Europe. Minor modifications
to prior restructuring plans resulted in the retention of certain employees
included in the original plans. These changes in estimates resulted in the
reversal of $0.3 million of the restructuring accrual in 2003.
As of December 28, 2003, 15 of the 512 planned employee terminations had
occurred. The Company expects these terminations and actions to be completed by
the end of 2005.
Fiscal 2002
- -----------
The Company recorded in cost of revenues restructuring charges of $1.8 million
for severance costs and an asset write-off of $0.5 million related to leasehold
improvements abandoned due to leaving a facility. The book values of the assets
prior to write-off were $0.5 million. The charges are related to cost reductions
in hand-held labeling (HLS) and barcode labeling (BCS) manufacturing. In
addition, the Company recorded $0.5 million of severance costs in other
operating expense/(income) related to the rationalization of an under-performing
sales office. As of December 28, 2003, all of the planned actions related to the
2002 restructuring had occurred.
Due to changes in management in 2002, the Company reviewed and modified the 2001
restructuring plans in order to reduce the future cash outlays necessary to
execute these plans. The principal modification was to move a manufacturing
facility to a location closer than originally planned. This, and other
modifications, resulted in the retention of certain employees included in the
original plan. These changes in estimates resulted in the reversal of $2.6
million of the restructuring accrual in 2002. Of this amount, $1.7 million was
credited to cost of revenues and $0.9 million to other operating
expense/(income)
-73-
In 2002, the Company was able to negotiate more favorable terms than originally
estimated regarding the termination of a lease for an office/warehouse facility
and the severance for certain employees. This resulted in a decrease in goodwill
related to the acquisition of Meto AG of $0.9 million.
Fiscal 2001
- -----------
The Company recorded restructuring charges of $11.1 million and asset
impairments of $7.5 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 ($9.8 million), lease termination costs for three
manufacturing facilities and two warehouses ($1.4 million), and an asset
impairment charge ($7.4 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 28, 2003, all of the planned
actions related to the 2001 restructuring, with the exception of EAS
manufacturing, mentioned above, were complete.
In 2001, the termination of certain contracts related to the 1999 and 2000
restructuring plans was renegotiated on more favorable terms than expected.
These changes in estimates resulted in the reversal of $1.4 million of
restructuring accrual, of which $1.2 million was recorded as a reduction in
goodwill arising from the Meto acquisition and $0.2 million was credited to
other operating (income)/expense.
Termination benefits are being paid out over a period of one to 24 months after
termination. Leased facilities will be paid over the remaining life of the
lease.
-74-
Restructuring accrual activity was as follows:
Cash
Accrual Payments
at Charge (and Accrual
Begin- Charged Reversed (Decrease) Exchange at
ning of to to in Rate End of
Year Earnings Earnings Goodwill Changes) Year
------- -------- -------- --------- -------- -------
(Thousands)
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(1) $ (207) $(1,163) $(13,328) $14,179
======= ======= ======= ======= ======== =======
2002
Severance and
other employee
related charges $ 8,558 $ 2,325 $(2,534) $ (219) $ (4,342) $ 3,788
Lease termination
costs 5,621 - (103) (679) (3,027) 1,812
------- ------- ------- ------- -------- -------
$14,179 $ 2,325(2) $(2,637)(4)$ (898) $ (7,369) $ 5,600
======= ======= ======= ======= ======== =======
2003
Severance and
other employee
related charges $ 3,788 $ 7,453 $ (256) $ - $(2,107) $ 8,878
Lease termination
costs 1,812 - (73) - (444) 1,295
------- ------- ------- ------- -------- -------
$ 5,600 $ 7,453(3) $ (329) $ - $(2,551) $10,173
======= ======= ======= ======= ======== =======
(1) $4.3 million is included in cost of revenues and $6.9 million in other
operating expense/(income).
(2) $1.8 million is included in cost of revenues and $0.5 million in other
operating expense/(income).
(3) $1.9 million is included in cost of revenues and $5.6 million in other
operating expense/(income).
(4) $1.7 million is included in cost of revenues and $0.9 million in other
operating expense/(income).
-75-
Note 15. OTHER OPERATING EXPENSE/(INCOME)
Other operating expense/(income) is comprised of the following amounts:
2003 2002 2001
------ ------ ------
(Thousands)
Restructuring costs $5,587 $ 558 $6,868
Asset impairments - - 405
Restructuring charge reversal (256) (957) (207)
------ ------ ------
$5,331 $ (399) $7,066
====== ====== ======
Restructuring costs, asset impairments, and the restructuring charge reversals
are discussed in Note 14.
In addition to the reversal indicated above, cost of revenues for 2003 includes
a $0.1 million restructuring charge reversal offset by a restructuring charge of
$1.9 million for severance costs (see Note 14) and an asset impairment charge of
$1.5 million (see Note 14). In 2002, cost of revenues includes a $1.7 million
restructuring charge reversal offset by a restructuring charge of $1.8 million
for severance costs and an asset impairment charge of $0.5 million for leasehold
improvements abandoned due to leaving a facility. Cost of revenues in 2001
includes $4.3 million for restructuring and $7.1 million for asset impairments.
Note 16. COMMITMENTS AND CONTINGENCIES
The Company leases certain production facilities, offices, distribution centers,
and equipment. Rental expense for all operating leases approximated $21.6
million, $15.4 million, and $13.2 million, in 2003, 2002, and 2001,
respectively.
Future minimum payments for operating leases having non-cancelable terms in
excess of one year at December 28, 2003 are:
(Thousands)
2004 $17,174
2005 15,129
2006 12,625
2007 5,756
2008 4,879
Thereafter 6,418
-------
Total $61,981
=======
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.
-76-
The Company, with its acquisition of Meto AG, has three principal license
agreements covering its EAS products, including Allied Signal, Inc. (now
Honeywell Intellectual Properties, Inc.) as licensor for EM tags, 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 2006, 2014, and
2004, respectively.
The Company is involved in certain legal and regulatory actions, all of which
have arisen in the ordinary course of business, except for the matters described
in the following paragraphs. Management believes it is remotely possible that
the ultimate resolution of such matters will have a material adverse effect on
the Company's consolidated results of operations and/or financial condition,
except as described below.
ID Security Systems Canada Inc. versus Checkpoint Systems, Inc.
On May 24, 2002, the jury in the Civil Action No. 99-CV-577 in the United States
District Court for the Eastern District of Pennsylvania, filed by plaintiff ID
Security Systems Canada Inc. against Checkpoint Systems, Inc., held in favor of
the Company on the plaintiff's claim for Monopolization of Commerce, but against
the Company on claims of Attempted Monopolization and Conspiracy to Monopolize.
In addition, the jury held against the Company on two tort claims related to
tortious interference and unfair competition. Judgment was entered on the
verdict in favor of the plaintiff, after trebling, in the amount of $79.2
million plus attorneys' fees and costs to be determined by the Court.
On March 28, 2003, in response to the Company's Motion for Post-Trial Relief,
the Court issued an order which vacated the jury verdict on the antitrust claims
and reduced the damages award related to tortious interference and unfair
competition from $19 million to $13 million. The Company subsequently filed an
additional motion to further reduce the $13 million by $2.1 million based on a
prior agreement between the parties and a previous Order by the Court. The Court
granted the Company's motion, and on May 20, 2003 further reduced the judgment
from $13 million to $10.9 million. On the same date, the Court stayed execution
of the judgment upon the posting of a bond in the amount of $11.3 million by the
Company. The Company promptly posted the requisite bond and execution on the
judgment in the amount of $10.9 million is now stayed.
Both ID Security Systems Canada Inc. and the Company have filed appeals to the
Third Circuit Court of Appeals related to the various decisions of the Court.
Based on input from outside legal counsel, management is of the opinion that the
Judge's Order is consistent with the law as it relates to the antitrust issues,
and is not consistent with the law as it relates to the tortious interference
and unfair competition aspects of the case. Accordingly, no liability has been
recorded for this litigation, as management believes that, at this time, it is
not probable the remaining judgment will be upheld and that the reasonably
possible range of the contingent liability is between zero and $80 million.
Although management believes it is not likely, it is possible that the Court of
Appeals could reverse the decision of the lower Court as it relates to the
antitrust claims and reinstate the original judgment of $79.2 million plus
attorneys' fees and costs. If the final outcome of this litigation, after all
appeals have been exhausted, results in certain of the plaintiff's claims being
upheld, the potential damages could be material to the Company's consolidated
results of operations and/or financial condition and could cause the Company to
be in default of certain bank covenants. Although management expects to be
successful in the appeal process, should the appeal be unsuccessful, management
-77-
anticipates that any final judgment would be paid in the second half of 2004
and is of the opinion that the Company will have sufficient financial resources
in the form of cash and borrowing capacity, due to the cash flow generated
during the intervening period, to satisfy any judgment.
Matters related to ID Security Systems Canada Inc. versus Checkpoint Systems,
Inc.
A certain number of follow-on purported class action suits have arisen in
connection with the jury decision in the ID Security Systems Canada Inc.
litigation. The purported class action complaints generally allege a claim of
monopolization and are substantially based upon the same allegations as
contained in the ID Security Systems Canada Inc. case (Civil Action No.
99-CV-577) as discussed below.
On August 1, 2002, a civil action was filed in United States District Court for
the Eastern District of Pennsylvania, designated as Civil Action No. 02-6379(ER)
by plaintiff Diane Furs, Inc. t/a Diane Furs against Checkpoint Systems, Inc.
and served on August 21, 2002. On August 21, 2002, a Notice of Substitution of
Plaintiff and Filing of Amended Complaint was filed by the plaintiff, and the
named plaintiff was changed to Medi-Care Pharmacy, Inc.
On August 2, 2002, a civil action was filed in the United States District Court,
District of New Jersey (Camden) designated as Docket No. 02-CV-3730(JEI) by
plaintiff Club Sports International, Inc., d/b/a Soccer CSI against Checkpoint
Systems, Inc. and served on August 26, 2002.
On October 2, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-4777(JBS)
by plaintiff Baby Mika, Inc. against Checkpoint Systems, Inc. and served on
October 7, 2002.
On October 23, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5001(JEI)
by plaintiff Washington Square Pharmacy, Inc. against Checkpoint Systems, Inc.
and served on November 1, 2002.
On October 18, 2002, The United States District, District of New Jersey (Camden)
entered an Order staying the proceedings in the Club Sports International, Inc.
and Baby Mika, Inc. cases referred to above. In accordance with the Order, the
Stay will also apply to the Washington Square Pharmacy, Inc. case referred to
above. In addition, the Medi-Care Pharmacy, Inc. case, referred to above, will
be voluntarily dismissed, and it has been re-filed in New Jersey and is included
in the Stay Order. The Stay is expected to remain in place until such time as
the ID Security Systems case, referred to above, is either terminated or any
appeals have been exhausted in the Third Circuit Court of Appeals.
On November 13, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5319(JEI)
by plaintiff 1700 Pharmacy, Inc. against Checkpoint Systems, Inc. and served on
November 15, 2002.
On December 30, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-6131(JEI)
by plaintiff Medi-Care Pharmacy, Inc. against Checkpoint Systems, Inc. and
served on January 3, 2003.
-78-
Both the 1700 Pharmacy, Inc. case and the Medi-Care Pharmacy, Inc. case were
consolidated with the previously mentioned cases and are included in the October
18, 2002 Stay Order referred to above.
No liability has been recorded for any of the purported class action suits as
management believes that, based on input from outside legal counsel, it is not
probable that the Court of Appeals will reverse the decision of the lower Court
in the ID Security Systems Canada Inc. litigation as it relates to the antitrust
claims and that the lower end of the reasonably possible range of the contingent
liability is zero at this time. The high end of the range cannot be estimated at
this time.
Franklin Graphics, Inc. versus Checkpoint Systems, Inc. and Christopher Clarke
On February 28, 2003 a civil action was filed in the Superior Court of New
Jersey, Bergen County, by Franklin Graphics, Inc. against Checkpoint Systems,
Inc. and Christopher Clarke, (Docket No. BER-L-1575-03) seeking compensatory
damages in excess of $1 million, treble damages, punitive damages, and
attorneys' fees. The plaintiff alleged tortious interference with a contractual
relationship and prospective economic relations, unfair competition, breach of
contract, and consumer fraud. In December 2003, the Company settled this case
with prejudice.
The following table set forth the movement in the warranty reserve:
2003 2002
---- ----
(Thousands)
Balance at the beginning of the period $4,002 $3,303
Accruals for warranties issued $ 934 $1,347
Accruals related to pre-existing warranties,
including changes in estimate (80) (486)
------ ------
Total accruals $ 854 $ 861
Settlement made (743) (628)
Foreign currency translation adjustment 478 466
------ ------
Balance at the end of period $4,591 $4,002
====== ======
-79-
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 1, 2002, the Company acquired various assets of Thomeko OY, its
former distributor of RF-EAS equipment in Finland. The acquisition consists of
an initial cash payment and delayed purchase price payments over two years. The
total transaction is estimated to be approximately EUR 0.8 million ($0.7
million). Due to the size and timing of the acquisition, pro-forma information
is not provided as it is not significant.
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 not significant.
Note 19. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
The Company's reportable business segments are strategic business units that
offer distinctive products and services that are marketed through different
channels. The Company has three reportable business segments:
(i) Security - includes electronic article surveillance (EAS) systems,
access control systems, closed-circuit television (CCTV) systems, and
fire and intrusion systems.
(ii) Labeling Services - includes barcode labeling systems (BCS), service
bureau (Check-Net), and radio frequency identification (RFID) systems.
(iii) Retail Merchandising - includes hand-held labeling systems (HLS) and
retail display systems (RDS).
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
-80-
The business segment information set forth below is that viewed by the chief
operating decision maker:
(A) Business Segments
2003 2002 2001
------ ------ ------
(Thousands)
Business segment net revenue:
Security $465,044 $395,033 $391,867
Labeling Services 157,783 144,071 139,654
Retail Merchandising 100,435 100,382 127,014
-------- -------- --------
Total $723,262 $639,486 $658,535
-------- -------- --------
Business segment gross profit:
Security $204,768(1) $173,107(3) $151,188(6)
Labeling Services 44,989(2) 41,893(4) 37,077(7)
Retail Merchandising 46,236 47,599(5) 68,019(8)
-------- -------- --------
Total gross profit 295,993 262,599 256,284
Operating expenses 243,307 212,566 222,775
Interest expense, net 9,589 13,280 19,099
Other gain/(loss) 1,319 928 (694)
-------- -------- --------
Earnings before income taxes and
minority interest $ 44,416 $ 37,681 $ 13,716
======== ======== ========
Business segment total assets:
Security $428,134 $400,520 $381,808
Labeling Services 176,793 139,749 171,117
Retail Merchandising 168,395 139,501 199,728
-------- -------- --------
Total $773,322 $679,770 $752,653
======== ======== ========
(1) Includes a $0.1 million restructuring charge, a $0.1 million
restructuring charge reversal, and a $1.5 million asset impairment
charge.
(2) Includes a $1.7 million restructuring charge.
(3) Includes a $0.1 million restructuring charge reversal.
(4) Includes a $1.0 million restructuring charge, a $1.3 million
restructuring charge reversal, and a $0.5 million asset impairment
charge.
(5) Includes a $0.8 million restructuring charge and a $0.3 million
restructuring charge reversal.
(6) Includes a $1.1 million restructuring charge and a $6.7 million asset
impairment charge.
(7) Includes a $2.4 million restructuring charge and a $0.4 million asset
impairment charge.
(8) Includes a $0.8 million restructuring charge.
-81-
(B) Geographic Information
Operating results are prepared on a "country of domicile" basis, meaning that
net revenues and gross profit are included in the geographic area where the
selling entity 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 South America is reported as a sale in the USA.
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 2003, 2002, and 2001:
United Inter-
States and national Asia
Puerto Rico Europe Americas Pacific Total
----------- ------ -------- ------- -----
(Thousands)
2003
- ----
Net revenues from
unaffiliated customers $245,399 $374,126 $ 26,375 $ 77,362 $732,262
Gross profit $106,689(1) $153,888(4) $ 8,852 $ 26,564(7)$295,993
Long-lived assets $ 81,193 $247,259 $ 5,412 $ 36,182 $370,046
2002
- ----
Net revenues from
unaffiliated customers $235,931 $327,104 $ 21,475 $ 54,976 $639,486
Gross profit $104,120(2) $131,284(5) $ 6,147 $ 21,048 $262,599
Long-lived assets $ 84,140 $218,737 $ 4,773 $ 34,787 $342,437
2001
- ----
Net revenues from
unaffiliated customers $233,513 $342,149 $ 31,320 $ 51,553 $658,535
Gross profit $ 83,657(3) $146,509(6) $ 10,542 $ 15,576(8)$256,284
Long-lived assets $113,277 $236,914 $ 13,216 $ 37,870 $401,277
(1) Includes a $0.1 million restructuring charge, a $0.1 million restructuring
charge reversal, and a $0.4 million asset impairment charge.
(2) Includes a $1.6 million restructuring charge reversal and an asset
impairment charge of $0.5 million.
(3) Includes a $3.2 million restructuring charge.
(4) Includes a $1.7 million restructuring charge.
(5) Includes a $1.7 million restructuring charge.
(6) Includes a $0.5 million restructuring charge.
(7) Includes a $1.1 million asset impairment charge.
(8) Includes a $7.7 million restructuring charge.
-82-
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 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
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
The standard provides guidance on how to account for arrangements that involve
the delivery or performance of multiple products, services, and/or rights to use
assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements
entered into by the Company after June 29, 2003. The Company's adoption of EITF
Issue No. 00-21 has not significantly impacted its consolidated financial
statements.
In December 2003, the FASB issued interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
(revised December 2003)," which supercedes FIN 46. FIN 46R requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46R is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN
46R must be applied to the Company's consolidated financial statements for the
first quarter of 2004. The Company does not expect the adoption of FIN 46R to
have a significant impact on its consolidated financial statements.
In December 2003, the FASB updated Statement of Financial Accounting Standards
No. 132 (SFAS 132), "Employers' Disclosures about Pensions and Other
Postretirement Benefits (revised 2003)." The Statement requires additional
disclosures describing the types of plan assets, investment strategy,
measurement dates, plan obligations, cash flows, and components of net periodic
benefit cost recognized during interim periods. As the Company's pension plans
cover certain employees outside the USA, the new disclosures required by SFAS
132 become effective for the Company on June 27, 2004.
Note 22. SUBSEQUENT EVENTS
On February 3, 2004, the Company made a $2.5 million minority investment in
Goliath Solutions, a start-up developer of RFID-based technology for point-of-
purchase advertising and display compliance monitoring in the grocery, chain
drug, mass merchandise, and convenience store channels of trade. Management
expects this development stage operation to generate losses in 2004.
On February 18, 2004, the Company called an additional $60.0 million of the
convertible subordinated debentures for redemption on April 13, 2004. The called
debentures are convertible at any time prior to the close of business on
April 8, 2004.
-83-
SELECTED QUARTERLY FINANCIAL DATA
QUARTERS (unaudited)
----------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
(Thousands, except per share data)
2003
- ----
Net revenues $156,417 $175,720 $177,229 $213,896 $723,262
Gross profit $ 63,149 $ 75,611 $ 73,190 $ 84,043(7) $295,993
Earnings before
cumulative effect
of change in
accounting
principle $ 4,201 $ 10,862 $ 10,022 $ 4,797 $ 29,882
Net earnings $ 4,201 $ 10,862 $ 10,022 $ 4,797(8) $ 29,882
Earnings per share
before cumulative
effect of change
in accounting
principle(1)
Basic $ .13 $ .33 $ .31 $ .14 $ .90
Diluted $ .13 $ .30 $ .27 $ .14 $ .84
Net earnings
per share:(1)
Basic $ .13 $ .33 $ .31 $ .14 $ .90
Diluted $ .13 $ .30 $ .27 $ .14 $ .84
2002
- ----
Net revenues $143,454 $160,924 $158,800 $176,308 $639,486
Gross profit $ 59,432 $ 66,082 $ 65,613(5) $ 71,472(9) $262,599
Earnings before
cumulative effect
of change in
accounting
principle $ 4,114 $ 5,967 $ 6,374(6) $ 9,124(10) $ 25,579
Net (loss)/
earnings $(68,747)(2) $ 5,967 $ 6,374(6) $ 9,124(10) $(47,282)
Earnings per share
before cumulative
effect of change
in accounting
principle(1)
Basic $ .13 $ .19 $ .20 $ .28 $ .79
Diluted $ .13 $ .18 $ .19 $ .26 $ .75
Net (loss)/earnings
per share:(1)
Basic $ (2.15)(3) $ .19 $ .20 $ .28 $ (1.46)
Diluted $ (2.10)(4) $ .18 $ .19 $ .26 $ (1.10)
(1) Quarterly earnings per share are computed independently; therefore the sum
of the quarters may not equal full year earnings per share.
-84-
(2) Includes a goodwill impairment charge of $72.9 million for the cumulative
effect of change in accounting principle. The reported net earnings for
the first quarter, 2002, were $4.1 million.
(3) The reported net earnings were $0.13 per basic share.
(4) The reported net earnings were $0.13 per diluted share.
(5) Includes a $1.6 million pre-tax restructuring charge reversal related to
the fourth quarter 2001 restructuring program offset by a pre-tax $0.7
million restructuring charge, and a $0.5 million pre-tax asset impairment.
(6) Includes a $1.7 million restructuring charge reversal (net of tax) related
to the fourth quarter 2001 restructuring program offset by a $0.5
million restructuring charge (net of tax), and a $0.3 million asset
impairment (net of tax).
(7) Includes a $1.9 million pre-tax restructuring charge, a $1.5 million
pre-tax asset impairment, and a $0.1 million pre-tax restructuring charge
reversal related to fourth quarter 2001 and 2002 restructuring programs.
(8) Includes a $5.0 million restructuring charge (net of tax), a $1.0 million
asset impairment (net of tax), and a $0.2 million restructuring charge
reversal (net of tax) related to fourth quarter 2001 and 2002
restructuring programs.
(9) Includes a $0.1 million pre-tax restructuring charge reversal related to
the fourth quarter 2001 restructuring program offset by a $1.1 million
pre-tax restructuring charge.
(10)Includes a $0.1 million restructuring charge reversal (net of tax) related
to the fourth quarter 2001 restructuring program offset by a $1.1 million
restructuring charge (net of tax).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes or disagreements to report under this item.
Item 9A. DISCLOSURE CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's principal executive officer and principal
financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based on this evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective in alerting them, on a timely basis, to
material information required to be included in the Company's periodic SEC
reports. It should be noted that the design of any system of controls is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how remote.
There have been no significant changes in the Company's internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934) during the fourth quarter of 2003 that materially affected, or are
reasonably likely to affect materially, the Company's internal control over
financial reporting.
-85-
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item (except for the information regarding
executive officers called for by Item 401 of Regulation S-K, which is included
in Part I hereof in accordance with General Instruction G(3)) is hereby
incorporated by reference to the Registrant's Definitive Proxy Statement for its
Annual Meeting of Shareholders presently scheduled to be held on April 29, 2004,
which management expects to file with the SEC within 120 days of the end of the
Registrant's fiscal year.
The Company has adopted a code of business conduct and ethics (the "Code of
Ethics") as required by the listing standards of the New York Stock Exchange and
the rules of the SEC. This Code of Ethics applies to all of the Company's
directors, officers and employees. The Company has also adopted corporate
governance guidelines (the "Governance Guidelines") and a charter for each of
its Audit Committee, Compensation Committee and Governance and Nominating
Committee (collectively, the "Committee Charters"). The Company has posted the
Code of Ethics, the Governance Guidelines and each of the Committee Charters on
its website at www.checkpointsystems.com, and will post on its website any
amendments to, or waivers from, the Code of Ethics applicable to any of its
directors or executive officers. The foregoing information will also be
available in print upon request.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is hereby incorporated by reference to the
Registrant's Definitive Proxy Statement for its Annual Meeting of Shareholders
presently scheduled to be held on April 29, 2004, which management expects to
file with the SEC 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.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is hereby incorporated by reference to the
Registrant's Definitive Proxy Statement for its Annual Meeting of Shareholders
presently scheduled to be held on April 29, 2004, which management expects to
file with the SEC within 120 days of the end of the Registrant's fiscal year.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is hereby incorporated by reference to the
Registrant's Definitive Proxy Statement for its Annual Meeting of Shareholders
presently scheduled to be held on April 29, 2004, which management expects to
file with the SEC within 120 days of the end of the Registrant's fiscal year.
-86-
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is hereby incorporated by reference to the
Registrant's Definitive Proxy Statement for its Annual Meeting of Shareholders
presently scheduled to be held on April 29, 2004, which management expects to
file with the SEC within 120 days of the end of the Registrant's fiscal year.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 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) 1. Consolidated Financial Statements
Report of Independent Auditors.........................................43
Consolidated Balance Sheets as of December 28, 2003 and
December 29, 2002...................................................44
Consolidated Statements of Operations for each of the years
in the three-year period ended December 28, 2003....................45
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 28, 2003..............46
Consolidated Statements of Comprehensive Income/ (Loss) for each of the
years in the three-year period ended December 28, 2003..............47
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 28, 2003....................48
Notes to Consolidated Financial Statements..........................49-83
(a) 2. Consolidated Financial Statement Schedule
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts.....................91
(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.
-87-
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 July 31, 2001
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 2003 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 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 10.7 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 10.8 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 10.9 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 10.10 Employment Agreement with George W. Off is
Incorporated by reference to Item 6(a),
Exhibit 10.1 of the Registrants Form 10-Q filed
on November 12, 2002
Exhibit 10.11 Employment Agreement with John E. Davies, Jr., is
Incorporated by reference to Item 6(a),
Exhibit 10.2 of the Registrants Form 10-Q filed
on November 12, 2002
-88-
Exhibit 10.12 First Amendment to Employment Agreement with
John E. Davies, Jr., Incorporated by reference
to Item 6(a), Exhibit 10.3 of the Registrants
Form 10-Q filed on November 12, 2002
Exhibit 10.13 Employment Agreement with Per Harold Levin is
Incorporated by reference to Item 6(a), Exhibit 10.4 of
the Registrants Form 10-Q filed on November 12, 2002
Exhibit 12 Ratio Earnings to Fixed Charges
Exhibit 21 Subsidiaries of Registrant
Exhibit 23 Consent of Independent Auditors
Exhibit 24 Power of Attorney, contained in Signature Page.
Exhibit 31.1 Certification of the Chief Executive Officer
pursuant to Rule 13a-14(a) of the Exchange Act, as
enacted by Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of the Chief Financial Officer
pursuant to Rule 13a-14(a) of the Exchange Act, as
enacted by Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification of the Chief Executive Officer and the
Chief Financial Officer pursuant to 18 United States Code
Section 1350, as enacted by Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
The Registrant filed the following reports during the quarter ended December 28,
2003:
(i) Form 8-K filed October 24, 2003 attaching a press release dated October 23,
2003 announcing the Company's financial results for the third quarter of
2003.
(ii) Form 8-K filed November 6, 2003 attaching a press release dated November 5,
2003 announcing that the holders of $30.3 million of the $35.0 million of
aggregate principal amount of its existing 5-1/4% Convertible Subordinated
Debentures due 2005 ("the Notes") called for redemption on November 8,
2003, elected to convert their Notes into 1,647,697 shares of the Company's
common stock at a conversion price of $18.375 per share.
-89-
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 12, 2004.
CHECKPOINT SYSTEMS, INC.
/s/George W. Off
- ----------------
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints George W. Off and W. Craig Burns and each of them, his
or her 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
or she 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/George W. Off Chairman of the Board March 12, 2004
- -------------------------- of Directors, President
and Chief Executive Officer
/s/W. Craig Burns Executive Vice President, March 12, 2004
- -------------------------- Chief Financial Officer
and Treasurer
/s/Arthur W. Todd Vice President, Corporate March 12, 2004
- -------------------------- Controller and Chief
Accounting Officer
/s/Robert O. Aders Director March 12, 2004
- --------------------------
/s/William S. Antle III Director March 12, 2004
- --------------------------
/s/David W. Clark, Jr. Director March 12, 2004
- --------------------------
/s/John E. Davies, Jr. Executive Vice President, March 12, 2004
- -------------------------- General Manager, Americas
and Asia Pacific, Director
/s/R. Keith Elliott Director March 12, 2004
- --------------------------
/s/Alan R. Hirsig Director March 12, 2004
- --------------------------
/s/Jack W. Partridge Director March 12, 2004
- --------------------------
/s/Sally Pearson Director March 12, 2004
- --------------------------
-90-
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Balance Additions Charged Deductions Balance
at Through to Costs (Write-Offs at End
Beginning Acqui- and and Recover- of
Year of Year sition Expenses ies, net) Year
- ---- --------- --------- -------- ---------- -------
(Thousands)
Allowance For Doubtful Accounts
2003 $12,736 $ - $3,121 $(3,854) $12,003
------- ------ ------ ------ -------
2002 $11,525 $ - $3,394 $(2,183) $12,736
------- ------ ------ ------ -------
2001 $12,176 $ - $3,490 $(4,141) $11,525
------- ------ ------ ------ -------
Allowance Release of
Balance Additions Recorded Release of Allowance Balance
at Through on Current Allowance on Losses at End
Beginning Acqui- Year on Losses Expired or of
Year of Year sition Losses Utilized Revalued Year
- ---- --------- --------- ---------- --------- ---------- -------
(Thousands)
Deferred Tax Valuation Allowance
2003 $27,576 $ - $5,893 $ (819) $ - $32,650
------- ------ ------- ------- ------- -------
2002 $22,448 $ - $ 5,128 $ - $ - $27,576
------- ------ ------- ------- ------- -------
2001 $28,316 $ - $ 4,481 $(2,691) $(7,658) $22,448
------- ------ ------- ------- ------- -------
-91-
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
EXHIBIT 10.1 . . . . 2003 Bonus Plan
EXHIBIT 12 . . . . . Ratio of Earnings to Fixed Charges
EXHIBIT 21 . . . . . Subsidiaries of Registrant
EXHIBIT 23 . . . . . Consent of Independent Auditors
EXHIBIT 31.1 . . . . Certification by the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
EXHIBIT 31.2 . . . . Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
EXHIBIT 32 . . . . . Certification by the Chief Executive Officer
and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-92-