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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, 1997 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)
609-848-1800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, Par Value $.10 Per Share
Common Share Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or on any
amendment to this Form 10-K.
X
---
As of March 2, 1998 the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $586,000,000.
As of March 2, 1998, there were 33,178,844 shares of the Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Certain portions of the Company's definitive proxy statement for
its Annual Meeting of Shareholders, presently scheduled to be held on
April 22, 1998.
This report may include information that could constitute forward-looking
statements made pursuant to the safe harbor provision of the Private
Securities Litigation Reform Act of 1995. Any such forward-looking statements
may involve risk and uncertainties that could cause actual results to differ
materially from any future results encompassed within the forward-looking
statements.
PART I
Item 1. BUSINESS
Checkpoint is a designer, manufacturer and distributor of integrated
electronic security systems - utilizing proprietary radio frequency (RF)
technologies - designed primarily to help retailers prevent losses caused by
theft of merchandise. The Company markets a wide range of these systems,
including electronic article surveillance (EAS)systems, closed circuit
television (CCTV) systems, point-of-sale (POS) monitoring systems and
electronic access control systems(EAC). Over the past five years, the
Company has achieved substantial growth. This was accomplished through
internal expansion and acquisitions, the introduction of new products,
broadened and more direct distribution (particularly in its international
markets) and increased and more efficient manufacturing capability. The
Company holds or licenses over 200 patents and proprietary technologies
relating to its products and their manufacture. Due to recent evaluation,
certain of the Company's patents, both domestic and international, will not
be renewed. It has been determined that the value of such patents does not
warrant the continued costs associated with maintenance of the patents in
various countries.
The Company's key product offerings use a low-cost disposable, paper-thin, RF
tag which triggers an alarm when passed through the Company's sensors at the
point of exit from the retail site. These disposable tags, which are
manufactured using the Company's proprietary technology at its
state-of-the-art facility in Puerto Rico, can be easily applied on products or
within packaging at the retail outlet or at the product manufacturing source.
Disposable tags can be easily deactivated without locating the tag. Sales of
these disposable tags and field service of their associated sensors and
deactivation units provided a significant source of recurring revenues and
accounted for approximately 30% of the Company's net revenues for fiscal year
1997. With the recent expansion of the Company's manufacturing facilities in
Puerto Rico, the Company now has the capacity to produce up to five billion
disposable RF tags per year at a low cost.
The Company's diversified product lines are designed to help retailers prevent
losses caused by theft (both by customers and employees) while at the same
time enabling retailers to capitalize on consumer impulse buying by openly
displaying high volume, high margin merchandise, and to reduce associated
selling costs through lower staff requirements. 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 such retail chains as American Stores Company, Circuit City Stores, Inc.,
Dayton Hudson Corporation, Eckerd Corporation, Kohl's Department Stores,
Mervyns, Rite Aid Corporation, Target Stores, Walgreen Co., and Winn Dixie in
the U.S.; Canadian Tire, Shoppers Drug Mart/Pharmaprix, and Toys "R" Us in
Canada; Gigante in Mexico; Hakon Group in Scandinavia; B&Q, British Shoe,
Dixons, and Harrods in the UK; Continente, El Corte Ingles and Intermarche in
Southern Europe; and Big W in Australia.
The Company's business strategy focuses on capitalizing on retailers'
increasing attention to theft prevention through use of the Company's
proprietary RF technology-based products, and to continue to increase its
sales penetration in existing markets and develop a significant presence in
new geographic markets. To achieve these objectives, the Company will
continually enhance and expand its RF technologies and products, provide
superior service to its customers and expand its direct sales activities
through acquisitions and start-up operations. The Company is focused on
providing its customers with a wide variety of fully integrated electronic
security system solutions characterized by superior quality, ease of use, good
value and merchandising opportunities for the retailer.
2
The Company has its principal executive offices at 101 Wolf Drive, Thorofare,
New Jersey 08086, (609-848-1800). Unless the context requires otherwise, the
"Company" means Checkpoint Systems, Inc. and its subsidiaries on a
consolidated basis.
COMPANY HISTORY
In 1969, the Company was incorporated in Pennsylvania as a wholly-owned
subsidiary of Logistics Industries Corporation. 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.
In February 1986, the Company acquired Sielox Systems, Inc., which developed,
produced and marketed access control systems for use in commercial and
institutional applications. In August 1990, Sielox's operations were combined
with the Company's.
The Company acquired its Canadian Distributor in November of 1992 and its
Argentinean Distributor in March of 1993. In addition, the Company set up
direct operations in Mexico during March of 1993 and in Australia during June
of 1993. All of these subsidiaries market EAS systems for use in retail and
library applications.
In July 1993, the Company purchased all the outstanding capital stock of ID
Systems International BV and ID Systems Europe BV, related Dutch Companies (ID
Systems Group), engaged in the manufacture, distribution and sale of EAS
systems. The acquisition gave the Company direct access to six Western
European countries which included The Netherlands, United Kingdom, Sweden,
Germany, France and Belgium.
In February 1995, the Company purchased Alarmex, Inc. which designs and
provides CCTV, POS monitoring, burglar and fire alarm systems and also
provides related central station monitoring services to over 10,000 retail
sites in the United States.
On November 1, 1995, the Company acquired Eagle Security, its distributor in
Oslo, Norway. The acquisition of Eagle increased the Company's EAS penetration
in Scandinavia and broadened its presence in Europe.
On November 30, 1995, the company purchased all of the capital stock of Actron
Group Limited (Actron), from ADT (UK) Limited (ADT), a wholly-owned subsidiary
of ADT. Actron manufactured, sold and distributed radio frequency electronic
security systems to the retail industry throughout Western Europe. During
1996, Actron's operations were combined into the Company's operations in
Western Europe.
On March 21, 1996, the Company purchased all of the capital stock of Mercatec
Sistemas e Comercio de Equipamentos Electronicos Ltds. (Mercatec). Mercatec
is a leading supplier of EAS systems and CCTV systems to retailers in Brazil.
This acquisition along with the Company's Argentinean operations, further
increased the Company's direct presence in South America.
On November 18, 1996, the Company purchased all of the capital stock of Vysion
Systems, Inc. (Vysion) in Ontario, Canada. Vysions is a leading CCTV systems
integrator and solutions provider for the Canadian market. This acquisition
combined with the Company's existing EAS operations further increased the
Company's direct presence and product offerings to the Canadian market.
On December 27, 1996, the Company acquired Checkpoint Systems Japan Co. Ltd.,
its distributor for retail products throughout Japan. This acquisition
provided the Company its first direct presence in the growing Asian market.
3
In 1997, the Company completed the acquisition of three CCTV operations. Check
Out Security Systems in Denmark, D & D Security in Belgium and Evagard PLC in
the United Kingdom. These strategic acquisitions will allow the Company to
provide direct CCTV products, installation, and service to key markets within
Scandinavia, the Benelux countries, and the United Kingdom. Also in 1997, the
Company acquired 2M Security Systems ApS, its distributor of retail security
products throughout Denmark.
On February 2, 1998, the Company acquired the operating assets of Tokai
Electronics Co., Ltd., which is a Japanese manufacturer of radio frequency
labels, for approximately $27 million. The Company has held a one-third
interest in Tokai since 1995.
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 may be exercised by the holders at a
price of $100.00 per share of common stock, subject to adjustment. The terms
of the Rights are set forth in the 1997 Plan, a copy of which was attached as
Exhibit 4.1 to the Company's Form 10-K for the year 1996.
Principal Product Categories
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Electronic Article Surveillance (EAS)
EAS systems have been designed to act as a deterrent, and control the
increasing problem of merchandise theft in establishments such as retail
stores and libraries. EAS systems have been recognized by retail
establishments to be a significant part of the overall total loss prevention
program which includes closed-circuit television, surveillance cameras,
security guards, and more efficient product merchandising. EAS systems, when
combined with other systems, provide retail management with the ability to
monitor consumer activity and impact merchandise shrinkage.
The Company's diversified product lines are designed to help retailers prevent
losses caused by theft (both by customers and employees) while at the same
time enabling retailers to capitalize on consumer impulse buying by openly
displaying high margin and high cost items. This directly improves product
velocity and reduces employee costs. With the advent of more sophisticated
data collection systems at the point-of-sale and more efficient inventory
controls, retailers have become increasingly aware of the item shrinkage
problem and its impact on revenue and profitability. EAS systems have become
the preferred choice to control these losses.
EAS systems are generally comprised of three components: detectable and
deactivatable security circuits (embedded in tags or labels), referred to as
"tags", which are attached to or placed in the articles to be protected;
electronic detection equipment, referred to as sensors, which recognize the
tags when they enter a detection area (usually located at store entrances and
exits); and deactivation equipment that disarms the tag when customers follow
proper check-out procedures.
CCTV Systems and Monitoring Services
A full line of closed-circuit television products is offered by the Company
along with its EAS products, providing a total systems solution package for
retail establishments. The product line consists of basic and high-speed
camera systems, programmable switcher controls, time-lapse recording, remote
tele-surveillance, Point-of-Sale (POS) monitoring. Clarity Concept (R) Video
4
Surveillance Systems are designed for both internal and external applications
to monitor location activity. These full-featured, programmable pan/tilt/zoom
camera systems offer the greatest flexibility and functionality, and when
combined with the Company's remote video tele-surveillance system, and
Viewpoint(R) POS monitoring capability, allow the retailer to manage store
operations efficiently and economically.
The Company's custom designed fire/intrusion alarm systems, such as Secure
PointTM, is a full perimeter intrusion alarm system which completes the line
of products that can be procured through the Company. All systems supplied
can be included in the Company's 24-hour Central Station Monitoring program.
Access Control Systems
Electronic access control systems restrict access to areas requiring
protection from intrusion by unauthorized personnel by granting access only to
selected individuals at specified times. Continued developments in processing
and software technology have enhanced the sophistication of electronic access
control systems while lowering the cost.
Access control systems use an "electronic credential", that incorporates a
unique identification number to be interpreted by a reading device. The most
advanced systems utilize cards with embedded digital circuits as the
credential. Each card possesses a personal identification number (PIN). Once
the cardholder presents the card containing the PIN, an intelligent
controller, which is also a part of the access control system, determines
security clearance/access levels. This data along with the time and location
are recorded by the system computer for later analysis.
RF-EAS/IDTM - Intelligent Tagging
The joint development of a new product undertaken by the Company and
Mitsubishi Materials Corporation (Mitsubishi) for both retail and library
establishments is called RF-EAS/IDTM. This joint project combines the
Company's EAS tag development strength with Mitsubishi's microchip and
materials expertise. The product, in the form of an intelligent tag, will be
capable of carrying information about a consumer product's history from the
initial manufacturing process through distribution, retail sales and
ultimately, consumer record keeping. The focus of the project is to provide a
complimentary means to the retail establishment to take advantage of existing
EAS systems by adding more intelligence to the products being protected.
Products
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Product Descriptions
EAS Systems
The Company offers a wide variety of EAS solutions to meet the requirements of
retail store configurations. The Company's EAS system is primarily comprised
of sensors and deactivation units, which respond to or act upon the Company's
tags.
The Company's EAS products are designed and built to comply with applicable
Federal Communications Commissions (FCC) regulations governing radio
frequencies (RF), signal strengths and other factors. The Company's present
EAS products comply with applicable regulations. In addition, the Company's
present EAS products meet all regulatory specifications for the countries in
which they are sold.
5
Sensors
The Company's sensor product lines are used principally in retail
establishments and libraries. In retail establishments, EAS sensors are
usually positioned at the exits from areas in which protected articles are
displayed. Each unit includes one or multiple vertical sensors placed at
pre-set distances (i.e. three to eight feet apart).
In libraries, sensors are positioned at the exit paths, and gates or
turnstiles which control traffic. Tags are placed inside books and other
materials to be protected. A tag passing through the sensor triggers an
alarm, which locks the gate or turnstile. The tag can easily be deactivated
(detuned) or passed around the sensor by library personnel.
EAS system components include a wide range of sensor styles including chrome,
wood, glass or custom designs. The Company also offers the customer a choice
of patented disposable paper tags, reusable flexible tags and reusable hard
plastic tags. The EAS system's transmitter emits an RF signal and the receiver
measures the change in that signal caused by an active tag, causing the system
to activate the alarm. For fiscal years 1997, 1996, and 1995, the percentage
of the Company's net revenues from sensors was 26%, 27%, and 23%,
respectively.
Introduced in 1990, the QS2000(R) remains the most popular of the Company's
narrow aisle product line, especially in the drug and supermarket stores
because of its rugged, reliable design. Improvements to the QS2000 system
electronics have kept the system current with state-of-the-art digital
technology. The QS2000 has been re-engineered to provide excellent tag
detection with enhanced tag-discrimination capabilities. Using digital
filtering technology, the QS2000 analyzes RF signals in its detection zone and
can discriminate between unique tag signals and environmental interference.
This development greatly enhances system integrity while increasing tag
detection. The QS2000 is also available in a weatherized version for outdoor
use.
Rounding out the narrow aisle product line, the Company also offers
chrome-finished Quicksilver (R) sensors, and solid-oak Signature (R) sensors,
featuring similar technology as offered in the QS2000.
To satisfy the European and Pacific Rim preference for in-lane protection in
supermarkets and hypermarkets, the Company offers several in-lane EAS sensors
that are compatible with the full range of EAS tags and deactivators.
Marketed under the names Corvus (R) and INCA (R), these systems utilize the
same technology used in the QS2000 style products but are typically installed
in-lane at the checkout counter and provide retailers an alternative to manage
shrinkage caused by theft.
The Company also offers a line of value-priced, reusable tag detection systems
designed primarily for providing wide-aisle protection for the apparel
marketplace. Marketed under the name QS1500(tm) and QS1600(tm), the system
offers detection on either side of a single sensor, or it can protect up to
six feet between two sensors. For wider detection, the QS1600 with two
pedestals can detect tags at distances of up to twelve feet, which is ideal
for mall environments. This system is an inexpensive solution for wide-aisle
detection.
The Pillar (R) family of products was introduced in January, 1998. The Pillar
family offers flexibility in packaging and style and unobtrusive wide-aisle
protection. The Pillar system utilizes Digital Signal Processing (DSP)
technology along with the Company's newly developed Advanced Digital
6
Discrimination (ADD/RF (R))digital filtering technology. This combination
allows the retailer to protect wide-aisles while using the full range of tags
and Source Tagged merchandise. The sensor can be customized to "blend" into
the retail store, making EAS part of the retail space. With ADD/RF, the
Pillar family offers the highest level of wide aisle protection for the
sophisticated retailer.
The Strata (R) family of sensors will also be introduced in 1998. A
significant feature of these technically advanced EAS systems is the
combination of a receiver and transmitter in a single sensor. Utilizing the
latest Digital Signal Processing (DSP) technology along with the Company's
newly developed Advanced Digital Discrimination ADD/RF (R)) digital filtering
technology, the Strata family can protect aisle widths of 12 feet using only
two sensors. One sensor is capable of three feet of detection on either side
of the sensor. Currently available in a high impact plastic housing, the
Strata will be released in a glass and metal version in mid 1998. Additional
features include merchandising panels, alarm counter, pager interface, people
counters and alarm sounding devices.
The Company makes the QS4000 (tm), QS4500 (tm) and QS5500 (tm) for mid-isle
(four to five feet) applications. All of these sensors use the Company's
advanced sensor technology and are compatible with the full range of tags and
scan/deactivation systems.
Deactivation Units
Deactivation units eliminate the ability of the tag to be recognized by the RF
field in the sensor which sets off an alarm. Deactivation usually occurs at
the point of sale.
In 1986, the Company introduced Counterpoint (R) I, a non-contact deactivation
unit which eliminated the need to search for and remove or manually detune
disposable tags. In 1989, the Company patented and introduced integrated
scan/deactivation. Integrated scan/deactivation provides simultaneous reading
of the bar code information, while deactivating the tag in one single step at
the point-of-sale.
Counterpoint VII was introduced in 1997. With its deactivation and
scan/deactivation technology, cashier training is virtually eliminated and
through-put speed is maximized. This capability has helped establish the
Company as the preferred technology with retailers concerned about customer
through-put at their point-of-sale.
Deactivation configurations include horizontal counter-mounted slot scanners,
vertical mounted scanners, hand-held scanners and weigh scale scanners. The
Company integrates the deactivation capability with more than 40 bar code
scanners. These scanners are available from companies such as PSC (formerly
SpectraPhysics), Symbol Technologies, Inc., Metrologic, Inc., NCR (National
Cash Register,Inc.), ICL Systems, Inc./Fujitsu Ltd., IBM (International
Business Machines), and ScanTech BV.
These scanners have a deactivation range up to 18 inches. Most of these units
can be configured to provide verification of a reusable tag if left on the
merchandise accidentally, eliminating embarrassing cashier errors. Two types
of deactivation pads are available for a variety of retail environments.
The Company has pioneered the development of interlock and post scanner
verification. These tools, working with the Company's patented integrated
scan/deactivation, allow the retailer to reduce the incidence of internal
(cashier) theft due to sliding and sweethearting at the point-of-sale. For
1997, 1996, and 1995, the percentage of the Company's net revenues from
deactivation was 12%, 13%, and 12%, respectively.
7
Tags
All tags contain an electronic circuit that, unless deactivated (disposable
tags) or removed (reusable tags), triggers an alarm when passed through the
sensors. Customers can choose from a wide variety of tags, depending on their
merchandise mix. Tags can be applied either in-store, at the manufacturing
site or at a distribution center.
Disposable Tags
Disposable security tags are affixed to merchandise by pressure sensitive
adhesive or other means. These tags range in size from 1.125" x 1.5" to 2.0"
x 2.0" enabling retailers to protect smaller, frequently-pilfered items.
Disposable tags must be deactivated electronically at the point-of-sale, or
passed around the sensors. The Company provides labels compatible with a wide
variety of standard price-marking/bar-coding printers. The Company's tags can
be integrated with printers from Sato, Zebra, Monarch ,Printronix and Soabar.
This integration, referred to as Cheklink (R) was developed to combine
pricing, merchandising, protection and data collection in a single step.
Disposable tags can be applied at the vendor level, in the distribution
center or in-store. Under the Company's Impulse (R) program, tags can be
embedded in products or packaging at the point-of-manufacture. For 1997, 1996,
and 1995, the percentage of the Company's net revenues from disposable tags
was 22%, 24%, and 26%, respectively.
The Company is licensed to sell and provide tags in roll form for the Model
4021 label applicator printer (Pathfinder (R) manufactured by Monarch Marking
Systems. This product s a sophisticated electronic portable bar code label
printer and applicator ideal for use in high-volume mass merchandise,
drugstore and supermarket environments. In addition, the Model 4021 Applicator
has a self-contained keyboard which allows for easy entry of various types of
label data including bar code, price and size. The Model 4021 Applicator also
has built-in scanning capability that can scan existing product bar codes,
then print identical labels for application without obscuring important
product information.
The Company has working relationships with both Avery Dennison, a worldwide
manufacturer of pressure-sensitive adhesive labels, and Shore to Shore, a
leader in merchandise identification for the retail and apparel industries.
Both Avery Dennison and Shore to Shore offer their customers merchandise
labels and tags that contain embedded RF security circuits provided by the
Company. Avery Dennison embeds the RF circuits into customized tag and label
designs using a fully automated proprietary process. Shore to Shore integrates
the RF circuits into merchandise tags which are available with a customer's
current graphic media, bar code and/or variable information.
In addition, the Company has an agreement with A&H Manufacturing (A&H), the
leadingU.S. supplier of costume jewelry cards, which grants A&H the right to
embed Checkpoint tags in cards during manufacturing.
Reusable Tags
Reusable security tags fall into two categories: (i) flexible tags are
plastic-laminated tags used in a variety of markets and are removed at the
point-of-sale; and (ii) hard tags consist of a tag and a locking mechanism
within a plastic case, also removed at the point-of-sale. Reusable tags are
used primarily in the apparel market and provide a visible deterrent. Both
flexible and hard tags use a nickel-plated steel pin which is pushed through
the protected item with a magnetic fastener. These tags can also be attached
with a lanyard using the magnetic fastener. An easy-to-use detacher unit
removes reusable tags from protected articles without damage. For 1997, 1996,
8
and 1995, the percentage of the Company's net revenues from reusable tags was
10%, 8%, and 9%, respectively.
The Company also supplies the UFO hard tag. In the opinion of the Company's
management, the UFO hard tag design, combined with a superior locking device,
makes the UFO a difficult tag to defeat. The UFO tag, due to its patented
design, combines a unique conical shape with an interior antenna which, due to
its placement at an angle, provides superior detection.
The Company also markets a line of fluid tags marketed under the name ChekInk
(R) II that provides a cost-effective defense against shoplifters.
Unauthorized removal of these tags will cause sealed vials of dye to break
open, rendering the garment unusable. ChekInk II serves as a practical
alternative to securing valuable merchandise. Ideal goods stores, ChekInk II
can be removed quickly and easily at point-of-sale in the same manner as the
reusable tags. In addition to reusable tags described above, the Company
manufactures a variety of other reusable hard tags.
The Company makes a full range of plastic Safer (R) products used to provide
added security to such items as CDs, videos and electronic games. The Company
has a business agreement with MW Trading ApS, a manufacturer and distributor
of home entertainment security products, to license and manufacture these
products for the North and South American marketplace.
CCTV Systems and Monitoring Services
In early 1995, the Company acquired Alarmex, Inc. (Alarmex), a designer,
distributor and installer of CCTV and fire/intrusion alarm systems for retail
establishments. Alarmex, which was renamed Checkpoint Security Systems Group,
Inc., provides a full line of camera, monitoring, perimeter protection and
fire/intrusion alarm equipment and services. Prior to this, the Company
acquired, in 1991, the world wide licensing rights for Viewpoint (R), a POS
total transaction monitoring system designed to help control internal theft.
CCTV products in this product line include fixed high speed and basic black &
white and color cameras, VCR's, digital storage, and the Company's Clarity
Concept (R) dome CCTV product, which is a fully functional pan/tilt/zoom
camera system.
Monitoring products include the Company's Viewpoint (R) and Possi (R) POS
transaction monitoring systems and SiteLineTM video text insertion programs.
All systems can be remotely accessed and are capable of monitoring POS
activities.
To compliment the full line of CCTV and monitoring products, the Company also
provides fire and intrusion alarm systems for its retail customers. Products
such as Secure PointTM, an RF-based burglar alarm system, and KeywriterTM, a
scheduled-access verification system that monitors employee activity, are just
some of the user friendly products offered in the security arena. All of the
customer's facilities can be monitored by the Company's UL approved 24 hour
central monitoring station. For fiscal 1997, 1996, and 1995, the percentage of
the Company's net revenue from CCTV systems and monitoring services was 16%,
13%, and 16%, respectively.
Access Control Systems
Electronic access control systems restrict access to areas requiring
protection from intrusion by unauthorized personnel by granting access only to
selected individuals at specified times. For fiscal years 1997, 1996, and
1995, the percentage of the Company's net revenue from access control systems
was 3%, 3%, and 3% respectively.
9
The Threshold (R) product line consists of eight systems, ranging from a small
non-computer based system to large scale networked Microsoft Windows(R) based
offerings. These sophisticated systems provide a maximum degree of control,
monitoring and reporting for any size facility. The Threshold product line
features a Distributed Network ArchitectureTM which stipulates that no single
point of failure will effect the entire system. These systems are capable of
controlling up to 500 doors for access control and up to 50,000 cardholders.
The incorporation of alarm and control point monitoring (i.e. turning lights
on or off) are also integral features of all eight Threshold offerings.
The Company's remote software packages allow the connection of the controller,
a microprocessor based device, from anywhere in the country via standard
telephone lines. This functionality opens up major markets for
communications, utilities and other large scale customers with remote
facilities to manage.
The newest additions to the Threshold line incorporate the power of
Microsoft's Windows operating systems. Threshold 95 (R) and Threshold NT (R)
make use of a Graphical User Interface (GUI) for easy to use operator
intervention. These two systems allow the integration of third party software
packages, like video imaging, CCTV, and paging systems, to enhance the basic
access control offering. The video imaging feature attaches a video snap shot
of card users in the systems. These images are stored in the users record and
can be called to the monitor when a card is presented to any reader.
All electronic access control systems can also monitor other occurrences, such
as a change in the status of environmental systems, motors, safety devices or
any controller with a digital output. While monitoring these controllers, any
output can, by a pre-programmed decision, cause an alarm to sound or another
event to occur.
The Company has several proprietary proximity card/tag and reader systems for
any environment. The Mirage (R) family of readers provides rapid card
verification with the ability to mount to metal without signal degradation.
The Mirage SG (R) provides the same reliable read performance in a smaller,
more aesthetically pleasing package.
The Mirage proximity cards are comprised of a custom-integrated circuit
attached to an antenna and implanted in a plastic card or key tag. This
circuit is powered by RF energy transmitted by the reader located near the
entrance of a controlled door. Access is granted by the attached controller
when a properly powered card transmits its code to the reader.
The integrity of the internal card code is protected and cannot be copied or
duplicated. In addition, a Mirage reader can be protected from environmental
damage or vandalism by installing it inside a wall or behind glass. Mirage
readers are used throughout the entire Threshold product line.
Principal Markets and Marketing Strategy
- ----------------------------------------
The Company markets its products primarily to retailers in the following
market segments: hard goods (supermarkets, drug stores, mass merchandisers and
music/electronics) and soft goods (apparel). The Company also markets its
products and services to libraries. The Company is a market leader in the
supermarket, drug store and mass merchandiser market segments with customers
such as American Stores Company, Circuit City Stores, Inc., Dayton Hudson
Corporation, Eckerd Corporation, Kohl's Department Stores, Mervyns, Rite Aid
Corporation, Target Stores, Walgreen Co., and Winn Dixie in the U.S.;
Canadian Tire, Shoppers Drug Mart/Pharmaprix, and Toys "R" Us in Canada;
Gigante in Mexico; Hakon Group in Scandinavia; B&Q, British Shoe, Dixons, and
Harrods in the UK; Continente, El Corte Ingles and Intermarche in Southern
10
Europe; and Big W in Australia.
Industry sources estimate that "shrinkage" (the value of goods which are not
paid for) is a $30 billion annual problem for the U.S. retail industry and a
concern of at least a comparable magnitude throughout the rest of the world.
Shrinkage is caused primarily by shoplifting and employee theft.
Sophisticated data collection systems (primarily bar code scanners), available
to retailers, have highlighted the shrinkage problem. As a result, retailers
now recognize that the implementation of an effective electronic security
system can significantly increase profitability. Accordingly, the retail
industry is becoming increasingly focused on theft prevention.
Industry sources estimate there are approximately 330,000 major retail
locations in the United States that would benefit from the installation of an
EAS system. The Company estimates that approximately one-third of these
locations have installed systems. The Company believes, moreover, that in the
hard goods market approximately 20% of such sites are EAS protected.
Retailers generally apply the tags used in EAS systems at the retail store.
Retailers have expressed interest in moving the insertion or application of
the tags to the point-of-manufacture (source tagging). Many manufacturers have
been receptive to source tagging in light of the potential increase in product
volume (that is, more sales at the retail level due to easier customer access
to products). According to one fragrance manufacturer's study, self-service
fragrance sales are 60% greater than sales of products kept under lock and
key. In addition, a study conducted for the Company by Management Horizons, a
division of Price Waterhouse, reported that consumers made to wait in line or
search for a salesperson to buy batteries or camera film from a secured
location are likely to forego the purchase. The Company believes that source
tagging provides retailers, manufacturers and retail customers with distinct
benefits, principal among which are enhanced protection from theft,
deactivation without the need for special training of store employees, more
open display of merchandise resulting in increased sales, and reduced costs
for retail products.
In early 1995, the Company acquired Alarmex (now referred to as Security
Systems Group), which designs and provides CCTV, POS monitoring and burglar
and fire alarm systems to over 10,000 retail sites in the U.S. With the
acquisition of Alarmex, the Company is able to offer its customers a broader
and more sophisticated range of CCTV and POS monitoring products.
The Company is focused on providing its customers with a wide variety of fully
integrated electronic security system solutions characterized by superior
quality, ease of use, good value and merchandising opportunity for the
retailer. More specifically, the Company's strategy includes the following:
- - Expand the Company's presence in under-penetrated EAS markets such as
supermarket, apparel and automotive- Broaden the line of security products
to serve under-penetrated markets
- - Continue expansion of its CCTV program on a worldwide basis to bring
a total solution offering to retail customers
- - Continue to promote Impulse (R) Source Tagging on a worldwide basis
- - Focus on strategic acquisitions and start-up opportunities both
domestically and internationally
- - Provide retailers with the next generation of security systems
utilizing RF-EAS/ID(tm) systems and intelligent technologies
The Company promotes its products primarily through: (i) ease of integration
into the retail environment; (ii) emphasizing Impulse (R) Source Tagging;
(iii) providing total loss prevention solutions to the retailer; (iv) superior
11
service and support capabilities; (v) direct sales efforts and targeted trade
show participation; and (vi) the offering of flexible financing options
including the comprehensive tag program.
The Impulse (R) Source Tagging program was developed more than ten years ago
to encourage retailers and manufacturers to work together to improve the
protection of a retail establishments' merchandise and bring greater
visibility to the manufacturer's products in the store. The Impulse program
assists manufacturers in understanding how easily EAS tags can be applied, and
more importantly, the simplicity in which the tags can be integrated into the
manufacturing process. Engineering support, product evaluations and on-site
source tagging specialists have been added to the Impulse program since its
inception.
Studies conducted by retail trade associations and major universities indicate
that source tagging provides major benefits to retailers. Source tagging
greatly enhances security, creating a package-integrated theft deterrent that
is virtually tamper-proof. Source tagging provides retailers with an array of
merchandise display options previously impractical because of the threat of
theft. This benefit has a positive impact on sales with reported increases as
much as 200 percent. Source tagging eliminates the labor costs associated with
manual, in-store application of security labels, and eliminates excessive
packaging materials required for theft deterrence.
During 1997, over 500 million disposable tags were provided to over 1,000
worldwide manufacturers participating in the Company's source tagging program.
Strategies to increase acceptance of source tagging are as follows:
(i)intensify vertical market focus into key product segments where RF
technology is the logical choice; (ii) expand source tagging activities into
international markets; (iii) increase staffing for source tagging efforts
supporting manufacturers and suppliers to speed implementation; and (iv)
expand RF tag products to accommodate more packaging schemes.
The Company's Comprehensive Tag Program (Comp Tag) is a financial
marketing/sales tool designed to remove capital investment costs as an
obstacle to the potential customer's decision to purchase EAS systems. Through
the Comp Tag program, the Company internally finances the leasing of equipment
to retailers under long-term non-cancelable contracts, usually three to five
years. Customers pay a premium price for an agreed-upon minimum number of
tags shipped on a quarterly or other periodic basis. The comprehensive tag
price reflects the cost of hardware, disposable RF labels, installation and
interest.
The Company attempts to anticipate the needs of its retail customers and to
answer those needs by utilizing the versatility of RF technology.
RF-EAS/ID combines an intelligent chip with the Company's Radio Frequency (RF)
circuit to deliver a tag capable of storing, processing and communicating
product information while simultaneously protecting merchandise from theft.
This product represents a rational progression of the Company's ongoing focus
on RF technology. The Company believes this will revolutionize retail
operations as well as provide benefits to manufacturers and distributors in
the retail supply chain.
To accelerate the development of the RF-EAS/ID technology, the Company entered
into a joint research and development agreement, on February 12, 1997, with
Mitsubishi Materials Corporation, a Japanese company based in Tokyo. This
multi-year agreement, which creates a joint product research and development
project, is dedicated to developing radio frequency intelligent tagging
solutions for retail and library applications. The project combines funding,
personnel, and other resources as well as the RF-ID technology portfolios of
the two companies.
12
Distribution
- ------------
EAS Systems
The Company sells its EAS systems principally throughout North America, South
America, Europe, and Asia Pacific. During 1997, EAS revenues from outside the
United States represented approximately 55% of the Company's EAS net revenues.
In the United States, the Company markets its EAS products almost entirely
through its own sales personnel and independent representatives. The Company,
at December 28, 1997, employed 102 salespeople who sell the Company's products
to the domestic retail market and who are compensated by salary plus
commissions. The Company's independent representatives sell the Company's
products to the domestic library market on a commission basis. At the end of
1997, the Company had three such independent representatives. Of total EAS
domestic revenues during 1997, 98% 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 foreign subsidiaries, as of December
28, 1997, employed a total of 185 salespeople who sell the Company's products
to the retail and library markets. The Company's international sales
operations are currently located in Western and Southern Europe, Scandinavia,
Canada, Mexico, Argentina, Brazil, Australia, and Japan.
Until 1993, the Company's sales in Western Europe were made principally
through distributors. In mid 1993, the Company acquired ID Systems Group, a
competing EAS company located in Western Europe. On November 30, 1995, the
Company acquired all of the share capital of Actron, another competing EAS
company based in Western Europe and combined Actron's operations with the
Company's existing European operations.
Independent distributors accounted for 8.5% of the Company's EAS international
revenues during 1997. Foreign distributors sell the Company's products to
both the retail and library markets. The Company's distribution agreements
generally appoint an independent distributor as an exclusive distributor for a
specified term and for a specified territory. The agreements normally require
the distributor to purchase a specified dollar amount of the Company's
products over the term of the agreement. The Company sells its products to
independent distributors at prices below those charged to end-users because
the distributors make volume purchases and assume marketing, installation,
customer training, maintenance and financing responsibilities.
CCTV Systems and Monitoring Services
The Company markets its CCTV systems and services throughout the world using
its own internal sales staff. These products and services are provided to
both the Company's existing EAS retail customers as well as non-EAS retailers.
Access Control Systems
The Company's Access Control Products Group sales personnel market electronic
access control products to approximately 149 independent dealers. The Company
employs seven 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.
13
Salespeople
- -----------
The Company presently employs approximately 300 salespeople. On average,
these salespeople have over five years experience in the industry. The Company
invests heavily in sales training programs and experiences little turnover
among its top performers.
Backlog
- -------
The Company's backlog of orders was approximately $24,200,000 at December 28,
1997, compared to approximately $8,400,000 at December 29, 1996. The Company
anticipates that substantially all of the backlog at the end of 1997 will be
delivered during 1998. In the opinion of management, the amount of backlog is
not indicative of trends in the Company's business. The Company's business
generally follows the retail cycle so that revenues are weighted toward the
last half of the calendar year as retailers prepare for the holiday season.
Technology
- ----------
The Company believes that its patented and proprietary technologies are
important to its business and strategies for growth and provide it with
distinct competitive advantages. The Company holds or licenses over 200
patents and proprietary technologies relating to its products and their
manufacture. Due to a recent evaluation, certain of the Company's patents,
both domestic and international, will not be renewed. It has been determined
that the value of such patents, does not warrant the continued costs
associated with maintenance of the patents in various countries.
Substantially all of the Company's revenues were derived from products or
technologies which are patented or licensed. The Company's competitive
position is supported by its extensive manufacturing experience and know-how
and, to a lesser degree, its technology and patents. There can be no
assurance, however, that a competitor could not develop products comparable to
those of the Company.
The Company also licenses 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. Royalties amounted to
approximately 1.2%, 1.4%, and 1.5% of EAS net revenues for fiscal years 1997,
1996, and 1995, respectively.
EAS
Until October 1995, the Company was the exclusive worldwide licensee of Arthur
D. Little, Inc. (ADL) for certain patents and improvements thereon related to
EAS products and manufacturing processes. On October 1, 1995, the Company
acquired these patents for $1.9 million plus a certain percentage of future
EAS RF product revenue. Prior to October 1, 1995, the Company paid a royalty
to ADL of approximately 2% of net revenues generated by the sale and lease of
the licensed products, with the actual amount of the royalty depending upon
revenue volume.
CCTV Systems and Monitoring Services
The Company has a worldwide license to distribute a point-of-sale front-end
monitoring system being marketed under the name Viewpoint (R). Marketing of
this product began during 1992. The Company pays a one time site license fee
for each site installed.
Access Control Systems
The Company is the worldwide licensee of certain patents and technical
knowledge related to proximity card and card reader products. It pays a
14
royalty equal to 2% of the net revenues from the licensed products. Such
royalties are payable through January 29, 2000, or until all of the subject
patents have been adjudicated invalid. Royalty expense for fiscal years 1997,
1996, and 1995 was less than 1% of the Company's EAC net revenues.
Manufacturing, Raw Materials and Inventory
- ------------------------------------------
EAS
The Company manufactures most of its products in state-of-the-art facilities
located in Puerto Rico and the Dominican Republic and has a highly integrated
manufacturing capability. The Company's manufacturing strategy is to rely
primarily on in-house capability and to vertically integrate manufacturing
operations to the extent economically practical. This integration and
in-house capability provides significant control over costs, quality and
responsiveness to market demand which, it 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 engineering, manufacturing, marketing and customers early
in the development process.
While the Company sold approximately 2.3 billion disposable RF tags in 1997,
the recent expansion of the manufacturing facility in Puerto Rico increased
the Company's capacity to five billion disposable RF tags per year.
On February 2, 1998, the Company purchased the assets of Tokai Electronics
Co., Ltd., a Japanese manufacturer of disposable RF labels. This acquisition
provides in additional capacity of one billion disposable RF tags.
The Company purchases raw materials from outside suppliers and assembles
electronic components for the majority of its sensor product lines at its
facilities in Puerto Rico. For its tag production, the Company purchases raw
materials and components from outside sources and completes the manufacturing
process at its facilities in Puerto Rico (disposable tags) and the Dominican
Republic (reusable tags). Certain components of sensors are manufactured at
the Company's facilities in the Dominican Republic and shipped to Puerto Rico
for final assembly. The principal raw materials and components used by the
Company in the manufacture of its products are electronic components for its
systems, aluminum foil, resins and paper used for its disposable tags, ferric
chloride solutions for the Company's etching operation of disposable tags and
printed circuit boards. While most of these materials are purchased from
several suppliers, there are numerous alternative sources for all such
materials. In general, there is an adequate supply of raw materials to
satisfy the needs of the industry. The Company's general practice is to
maintain a level of inventory sufficient to meet anticipated demand for its
products.
CCTV Systems and Monitoring Services
The Company does not manufacture any of the components for its CCTV product
line other than small interface circuit boards. The Company purchases all the
hardware components of its CCTV products from major distributors. Limited
inventory levels are maintained since the Company places orders with these
distributors as customer orders are received. The software component of the
system is added at the customer's site.
Access Control Systems
The Company purchases raw materials from outside suppliers and assembles the
15
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.
Competition
- -----------
EAS
Currently, EAS systems are sold to two principal markets: retail
establishments and libraries. The Company's principal global competitor in
the EAS industry is Sensormatic Electronics Corporation (Sensormatic).
Sensormatic is a fully integrated supplier of electronic security systems,
with revenues of approximately $1.0 billion for its most recent fiscal year
and an approximate 55% of the worldwide market share. Management estimates
that the Company's market share of installed systems in the EAS industry is
approximately 33%.
Within the U.S. market, additional competitors include Sentry Technology
Corporation, principally in the retail market, and Minnesota Mining and
Manufacturing Company, principally in the library market. Within the
Company's international markets, mainly Western Europe, Esselte Meto, NEDAP,
along with Sensormatic, are the Company's most significant competitors. On
November 30, 1995, the Company acquired all of the stock of Actron which,
prior to acquisition, had been a principal competitor of the Company in
Western Europe.
The Company believes that its product line offers more diversity than its
competition in protecting different kinds of merchandise with soft disposable
tags, hard reusable tags and flexible reusable tags, all of which operate with
the same RF system. As a result, the Company believes it appeals to a wider
segment of the market than does its competition and competes in marketing its
products primarily on the basis of their versatility, reliability,
affordability, accuracy and integration into operations. This combination
provides many system solutions and allows for the protection of a variety of
retail merchandise theft.
CCTV Systems and Monitoring Services
The Company's CCTV and POS Monitoring products, which are sold through its
Security Systems Group subsidiary, compete primarily with similar products
offered by Sensormatic, Ultrak, Pelco, and Sentry Technology. The Company
competes based on its superior service and believes that its product offerings
provide its retail customers with distinct system features.
Electronic Access Control
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, Software House Inc. (a subsidiary of Sensormatic),
Northern Computers, and Cardkey Systems. The Company believes that its
products offer higher reliability and value than those of its competitors.
Research and Development
- ------------------------
The Company expended approximately $7,604,000, $6,408,000, and $6,862,000 in
research and development activities during 1997, 1996, and 1995 respectively.
16
The emphasis of these activities is the continued broadening of the product
lines offered by the Company and an expansion of the markets and applications
for the Company's products. The Company's continued growth in revenue can be
attributed, in part, to the products and technologies resulting from these
efforts.
Another important source of new products and technologies has been the
acquisition of companies and products during the last few years. The Company
expects to continue to make acquisitions of related businesses or products
consistent with its overall product and marketing strategies.
The Company continues to expand its product line with improvement in
disposable tag performance and wide-aisle RF detection sensors. In addition,
the Company holds or licenses over 200 patents and proprietary technologies
relating to its products and their manufacture. Due to a recent evaluation,
certain of the Company's patents, both domestic and international, will not be
renewed. It has been determined that the value of such patents, does not
warrant the continued costs associated with maintenance of the patents in
various countries.
The Company entered into a joint research and development agreement, on
February 12, 1997, with Mitsubishi Materials Corporation, a Japanese company
based in Tokyo, to develop RF-EAS/ID technology. This multi-year agreement,
which creates a joint product research and development project, is dedicated
to developing radio frequency intelligent tagging solutions for retail and
library applications. The project combines funding, personnel, and other
resources as well as the RF-ID technology portfolios of the two companies.
Employees
- ---------
As of December 28, 1997, the Company had 3,605 employees, including 9
executive officers, 78 employees engaged in research and development
activities and 349 employees engaged in sales and marketing activities. In
the United States, fewer than 16 of the Company's employees are represented by
a union.
The Company announced plans to reduce its workforce by approximately 60
employees in connection with cost saving plans (primarily in Western Europe)
and the consolidation of research and development facilities.
Financial Information About Domestic and Foreign Operations
- -----------------------------------------------------------
The Company operates both domestically and internationally. The financial
information regarding the Company's geographic segments, which includes net
sales and profit from operations for each of the three years in the period
ended December 28, 1997, and identifiable assets as of December 28, 1997,
December 29, 1996, and December 31, 1995, is provided in Note 19 to the
Consolidated Financial Statements.
Item 2. PROPERTIES
The Company's headquarters and distribution center are located in leased
facilities in Thorofare, New Jersey. Of the total 104,000 square feet,
approximately 64,000 square feet are used for office space and approximately
40,000 square feet are used for storage facilities. The Company has entered
into a twelve year lease for the facilities starting in 1995. The rent for
the first five years is $692,000 annually.
17
In 1997, the Company leased two additional facilities located in Thorofare,
NJ. The first is a warehouse facility consisting of 10,000 square feet. The
lease term is for one year, through October 1998 with an annual payment of
$58,000. The second is a training/research facility consisting of 18,240
square feet. This facility has a ten year lease through September 2007 and
has an average annual rent of $128,000.
The Company's principal manufacturing facilities, for the production of most
of its products, is located in Ponce, Puerto Rico. These facilities consist
of two buildings, the first being a two-story building, which was completed in
1990, is owned by the Company and contains approximately 90,000 square feet.
Included in the 90,000 square feet is approximately 11,000 square feet of
office space and approximately 14,000 square feet of warehouse space. The
second manufacturing facility, also owned by the Company, became operational
in the fourth quarter of 1997, and is approximately 54,000 square feet. The
Company leases an additional warehouse facility in Puerto Rico containing
approximately 32,000 square feet. The lease expires in 2006 with an average
annual rent over the term of the lease of approximately $80,000.
The Company leases two manufacturing facilities in the Dominican Republic.
One facility, located in La Vega, contains approximately 63,000 square feet.
It includes approximately 5,000 square feet of office space and approximately
25,000 feet of warehouse space. Certain components of the Company's sensors,
hard targets and proximity cards are assembled at this site. The lease for
this property expires in December 2007 with an annual rent of approximately
$32,000. The other facility, located in Los Alcarrizos, contains
approximately 56,000 square feet. It includes approximately 6,000 square feet
of office space and approximately 10,000 square feet of warehouse space. This
facility performs the bending, chroming and wiring of antenna loops used in
the Company's Quicksilver sensor products. This facility also performs
certain injection molding production used in the assembly of the Company's
reusable security tags. The lease for the Los Alcarrizos property expires in
December 2002 with an annual rent of approximately $23,000. The leases for
both locations have been prepaid for their entire terms.
The Company's Security Systems Group subsidiary leases two facilities in Eden
Prairie, Minnesota. One facility contains approximately 24,000 square feet of
office and warehouse space. Assembly and distribution functions are performed
at this site. The lease on this facility expires in March 2000 with an annual
rent of approximately $148,000. The other facility contains approximately
16,000 square feet of office space. Customer service, sales support and
administrative functions are performed at this site. The lease on this
facility expires in March 2000 with an annual rent of approximately $197,000.
The Company's foreign subsidiaries maintain various sales and distribution
locations principally in Australia, Argentina, Brazil, Canada, Denmark,
France, Germany, Italy, Japan, Mexico, The Netherlands, Sweden, Norway,
Portugal, Spain, Switzerland, and the United Kingdom. The locations have an
average of 6,600 square feet of office space and an average of 5,000 square
feet of warehouse space. The lease terms of these foreign subsidiaries range
from one to eighteen years with an aggregate average annual lease expense per
location of $88,000 in 1997.
In November 1996, the Company's European Distribution Center became
operational. The facility, located in Mechelen, Belgium, has approximately
13,000 square feet of office space and 33,000 square feet of warehouse space.
The Company's Belgium sales subsidiary occupies approximately 3,000 square
feet of office space. The lease for this facility expires in 2004 with an
annual rent of approximately $256,000.
18
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. While the Company is unable
to predict the outcome of these matters, it does not believe that the ultimate
resolution of such matters will have a material adverse effect on its
consolidated financial position or results of operations.
The Company was involved in a United States Federal Trade Commission (FTC)
investigation which was commenced on February 14, 1996 (refer to form 10-Q for
the quarter ended September 28, 1997). As a result of the investigation,
which was concluded, the Company entered into a Consent Order related to a
certain provision of an agreement dated June 1993, with one of the Company's
competitors. The Company believes that such Consent Order will not adversely
affect its normal operations.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1997 to a vote of
security holders.
Item A. EXECUTIVE OFFICERS OF THE REGISTRANT
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
Name Age Since Positions with the Company
Kevin P. Dowd 49 1988 President and Chief Executive Officer
Steven G. Selfridge 42 1988 Executive Vice President and Chief
Operating Officer
William J. Reilly, Jr. 49 1989 Executive Vice President
Michael E. Smith 42 1990 Executive Vice President
Luis A. Aguilera 49 1982 Senior Vice President - Manufacturing
Lukas A. Geiges 59 1995 Senior Vice President - International
Business Development
Jeffrey A. Reinhold 40 1995 Vice President - Finance, Chief
Financial Officer and Treasurer
Neil D. Austin 51 1989 Vice President, General Counsel and
Secretary
W. Craig Burns 38 1997 Vice President - Corporate Controller
and Chief Accounting Officer
Mr. Dowd has been President of the Company since August 1993, and was named
Chief Executive Officer and a Director of the Company in January 1995. Mr.
Dowd was also Chief Operating Officer from August 1993 to April 1997. Mr.
Dowd was Executive Vice President of the Company from May 1992 to August 1993.
Mr. Dowd as Executive Vice President - Marketing, Sales and Service from April
1989 to May 1992 and Vice President of Sales from August 1988 to August 1989.
19
Mr. Selfridge has been Executive Vice President and Chief Operating Officer
since April 1997. Mr. Selfridge was Executive Vice President from January
1996 to April 1997. He was Senior Vice President - Operations and Chief
Financial Officer from August 1993 to January 1996, and was Treasurer from
September 1989 to April 1995. He was Chief Financial Officer and Vice
President - Finance and Treasurer of the Company from December 1990 to August
1993; and Vice President - Finance and Treasurer of the Company from September
1989 to December 1990. Mr. Selfridge was Corporate Controller, Chief
Accounting Officer and Secretary from April 1988 to September 1989 and
Controller of Domestic Operations from July 1986 to April 1988. Mr. Selfridge
is a Certified Public Accountant.
Mr. Reilly has been Executive Vice President since April 1997. Mr. Reilly was
Senior Vice President from August 1993 to April 1997. He was Vice President -
Sales of the Company from April 1989 to August 1993. Mr. Reilly was Eastern
Regional Sales Manager from March 1989 to April 1989.
Mr. Smith has been Executive Vice President since April 1997. Mr. Smith was
Senior Vice President from August 1993 to April 1997. He was Vice President -
Marketing from August 1990 to August 1993. Mr. Smith was Director of
Marketing from April 1989 to August 1990 and Program Manager - National/Major
Accounts from December 1988 to April 1989.
Mr. Aguilera has been Senior Vice President - Manufacturing since August 1993.
He was Vice President - Manufacturing of the Company from April 1982 to August
1993, and Vice President and General Manager of the Company's Puerto Rico
subsidiary since February 1979.
Mr. Geiges has been Senior Vice President - International Business Development
since April 1994. Prior to joining the Company, Mr. Geiges was a consultant
to the Actron AG Board of Directors from 1993 to March 1994 and Chairman of
the Board of Directors and President of Actron AG from 1988 to 1993.
Mr. Reinhold has been Vice President - Finance, Chief Financial Officer and
Treasurer since January 1996. Mr. Reinhold was Vice President and Treasurer
of the Company from April 1995 until January 1996. Prior to joining the
Company, Mr. Reinhold spent thirteen years at First Fidelity Bank, N.A. where
he held a variety of management positions in various lending departments and
loan workout. Mr. Reinhold was Senior Vice President and Division Manager -
Middle Market Lending from 1994 to March 1995.
Mr. Austin has been Vice President - General Counsel and Secretary since
joining the Company in 1989.
Mr. Burns has been Vice President - Corporate Controller and Chief Accounting
Officer since December 1997. 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, L.L.P. from June 1989 to February 1996. Mr.
Burns is a Certified Public Accountant.
20
PART II
Item 5. MARKET for the REGISTRANT'S COMMON STOCK and RELATED SECURITY
HOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange
(NYSE)under the symbol CKP. The following table sets forth, for the periods
indicated, the high and low sale prices for the Company's Common Stock as
reported on the NYSE Composite Tape after giving retroactive effect to the
February 1996 two-for-one Stock Split.
High Low
---- ---
Closing Price
1996:
First Quarter............................. $25 $18
Second Quarter............................ 38 7/8 24 1/2
Third Quarter............................. 36 3/4 24 7/8
Fourth Quarter............................ 26 7/8 21 1/2
1997:
First Quarter............................. $24 1/8 $17 3/4
Second Quarter............................ 17 3/8 10
Third Quarter............................. 16 3/16 13 7/16
Fourth Quarter............................ 17 14 1/4
As of March 2, 1998 there were 1,626 record holders of the Company's Common
Stock.
The Company has never paid a cash dividend on the Common Stock (except for a
nominal cash distribution in April, 1997 to redeem the rights outstanding
under the Company's 1988 Shareholders' Rights Plan). The Company does not
anticipate paying any cash dividend in the near future and is limited by
existing covenants in the Company's debt instruments from 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.
21
Item 6. SELECTED ANNUAL FINANCIAL DATA
1997 1996 1995 1994 1993
======== ======== ======== ======== ========
(Thousands, except per share data)
FOR YEARS ENDED:
Net revenues $335,964 $291,769 $204,741 $128,331 $ 93,034
Earnings before
income taxes $ 13,565(1) $ 29,877 $ 16,598 $ 8,377 $ 2,071
Income taxes $ 5,445 $ 9,430 $ 5,189 $ 2,094 $ 456
Net earnings $ 8,228(1) $ 20,447 $ 11,409 $ 6,283 $ 1,615
Earnings per
common share (4)
Basic $ .24 $ .64 $ .43 $ .30 $ .08
Diluted $ .23 $ .60 $ .42 $ .29 $ .08
AT YEAR-END:
Working capital $211,570 $285,753 $148,074 $ 39,427 $ 27,984
Long-term debt $150,855 $153,356 $155,674 $ 35,556 $ 24,302
Shareholders'
equity $277,550 $300,794 $137,658 $ 61,303 $ 53,779
Total assets $516,434 $521,653 $362,151 $127,925 $104,999
SELECTED QUARTERLY FINANCIAL DATA
QUARTERS (unaudited)
--------------------------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
(Thousands, except per share data)
1997
- ----
Net revenues $68,178 $81,036 $87,959 $98,791 $335,964
Gross profit $28,037 $34,539 $37,586 $34,078(2) $134,240(2)
Net earnings
(loss) $ 2,435 $ 4,866 $ 6,050 $(5,123)(1) $ 8,228(1)
Earnings (loss)
per common
share:(3),(4)
Basic $ .07 $ .14 $ .18 $ (.15) $ .24
Diluted $ .07 $ .14 $ .17 $ (.15) $ .23
1996
- ----
Net revenues $66,994 $74,792 $73,765 $76,218 $291,769
Gross profit $27,438 $32,333 $30,064 $33,910 $123,745
Net earnings $ 2,946 $ 6,210 $ 5,358 $ 5,933 $ 20,447
Earnings
per common
share:(3),(4)
Basic $ .10 $ .20 $ .16 $ .17 $ .64
Diluted $ .10 $ .18 $ .15 $ .16 $ .60
(1) Includes a $9.0 million pre-tax restructuring charge and non-recurring
pre-tax charges of $8.1 million.
(2) Included in gross profit is a $1.1 million pre-tax restructuring charge
and non-recurring pre-tax charges of $6.6 million.
(3) Quarterly earnings per common share are computed independently; therefore
the sum of the quarters may not equal full year earnings per share.
(4) Earnings per share for prior periods have been restated to conform with
the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share".
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net Revenues
The Company's unit volume is driven by product offerings, number of direct
sales personnel, recurring revenues and, to some extent, pricing. The
Company's increasing base of installed systems provides a growing source of
recurring revenues from the sale of disposable tags and service revenues. For
fiscal year 1997, approximately 30% of the Company's net revenues were
attributed to sales of disposable tags and service to its installed base of
customers.
Due to the broad geographic marketplace in which the company operates, the
Company's revenues are susceptible to currency fluctuations. Approximately 47%
of fiscal 1997 revenues were generated from outside the U.S.
Cost of Revenues
The principal elements comprising cost of revenues are product cost,
development cost, and field service and installation cost. Across all of the
Company's product lines, product costs averaged approximately 47% of net
revenues for 1997. The components of product cost are as follows: 72%
material, 14% labor, and 14% manufacturing overhead. The principal raw
materials and components used by the Company in the manufacture of its
products are electronic components for its systems, aluminum foil, resins and
paper used for its disposable tags, ferric chloride solutions for the
Company's etching operation of disposable tags and printed circuit boards.
While most of these materials are purchased from several suppliers, there are
numerous alternative sources for all such materials. In general, there is an
adequate supply of raw materials to satisfy the needs of the industry. The
Company's general practice is to maintain a level of inventory sufficient to
meet anticipated demand for its products.
The Company believes that its manufacturing know-how and efficiencies relating
to disposable and reusable tags give it a significant cost advantage over its
competitors.
During 1997, the Company expanded its manufacturing capacity in Puerto Rico.
As capacity will exceed product demand in the near term, production costs will
be negatively impacted.
For fiscal year 1997, field service and installation costs approximated 10% of
net revenues. The Company believes that it has 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
For fiscal year 1997, sales, marketing and customer service comprised
approximately 55% of all selling, general and administrative expenses.
Taxes
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 (Section 936) and are substantially exempt from Puerto
Rico income taxes. The Company's effective tax rate for fiscal 1997 was 40.1%.
The Company anticipates that its effective tax rate will decrease in 1998 as
23
restructuring and cost savings programs decrease the impact of foreign losses
on the global effective tax rate.
In August 1996, the Small Business Job Protection Act of 1996 was signed into
law. The Act generally repeals the Puerto Rico Possessions tax credit (Sec
936) for taxable years beginning after December 31, 1995. However, the Act
provides grandfather rules for corporations which are existing credit
claimants.
Since the Company is an existing credit claimant and uses the wage credit
method, the possession tax credit, attributable to business income for the
possession, continues to be determined as under present law for taxable years
beginning after December 31, 1995 and before January 1, 2002. For taxable
years beginning after December 31, 2001 and before January 1, 2006, the
corporation's possession business income that is eligible for the wage credit
is subject to an income cap. For taxable years beginning in 2006 and
thereafter, the credit is eliminated. This act does not have a material
impact on the current financial position of the Company or the effective tax
rate for fiscal year 1998.
Exposure to International Operations
As a result of the Company's strategy to increase its direct sales to
customers (as opposed to sales through independent distributors),
approximately 91% of the Company's international sales for fiscal year 1997
were made in local currencies. This increase in sales denominated in
currencies other than U.S. dollars increases the Company's potential exposure
to currency fluctuations which can adversely affect results.
To reduce the Company's exposure, resulting from the impact of currency
fluctuations on foreign denominated currency receivables, the Company has been
purchasing currency exchange forward contracts on a regular basis. These
contracts guarantee a predetermined exchange rate at the time the contract is
purchased. This allows the Company to shift the risk, whether positive or
negative, of currency fluctuations from the date of the contract to a third
party. As of December 28, 1997, the Company had currency exchange forward
contracts totaling approximately $42.0 million related to foreign currency
denominated receivables. The term of the currency exchange forward contracts
is rarely more than one year. The contracts are in the various local
currencies covering the Company's European operations, Australia, Japan, and
Canada. The Company's operations in Argentina, Mexico, and Brazil were not
covered by forward exchange contracts at December 28, 1997.
During 1997, the Company purchased a series of put options denominated in
German marks. The put options gave the Company the right, but not the
obligation, to convert marks into U.S. dollars at a specified exchange rate.
The Company will continue to evaluate the use of currency options in order to
reduce the impact that exchange rate fluctuations have on the Company's gross
margins for sales made by the Company's international operations. The
combination of forward exchange contracts and currency options should result
in reducing the Company's risks associated with significant exchange rate
fluctuations.
In November 1997, the Company also purchased currency exchange forward
contracts with the notional amount of 1.0 billion yen in connection with the
Company's obligation to acquire Tokai Electronics Company, Ltd. on February 2,
1998.
Seasonality
The Company's customers are substantially dependent on retail sales which are
seasonal and subject to significant fluctuations which are difficult to
24
predict. The Company's sales are impacted by such seasonality and
fluctuations. Historically, the Company has experienced lower sales in the
first and second quarters of each year.
Acquisition of Actron Group Limited
On November 30, 1995 the Company completed the purchase from ADT (UK) Limited
of all the capital stock of Actron Group Limited, a wholly owned subsidiary of
ADT. The original purchase price was $54.0 million subsequently adjusted to
$51.5 million. Actron previously manufactured, sold and distributed radio
frequency electronic security systems to the retail industry throughout
Western Europe. For the year ended December 31, 1994, Actron had revenues of
approximately $50 million. The Company believes that the acquisition of Actron
has resulted in: (i) consolidation of critical mass in the Western European
market leading to a more rational product offering and pricing; (ii) cost
savings, as expenses have been eliminated through consolidation; (iii)
additional patent protection; and (iv) a lower cost structure.
Year 2000
The Company's management believes that its major financial and manufacturing
applications are year 2000 compliant. The Company expects no material impact
on its internal information systems from the year 2000 issue. The Company has
recently initiated communications with its significant suppliers to determine
the extent that the Company may be impacted by third parties' failure to
address the issue. The Company will continue to monitor and evaluate the
impact of the year 2000 on its operations.
Earnings Per Share
Effective December 28, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." The provisions of SFAS No. 128 establish standards for computing and
presenting earnings per share (EPS). This standard replaces the presentation
of primary EPS with a presentation of basic EPS. Additionally, it requires
dual presentation of basic and diluted EPS for all entities with complex
capital structures. Per share amounts for all periods reflect diluted EPS,
unless otherwise noted.
Statements of Financial Accounting Standards Not Yet Adopted
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" which are effective for fiscal years beginning after December 15,
1997. The provisions of SFAS No. 130 establish standards for reporting and
display of comprehensive income and its components in the financial
statements. The provisions of SFAS No. 131 establish standards for the way
that enterprises report information about operating segments in annual
financial statements and require that selected information about operating
segments in interim financial statements be reported. The Company is reviewing
these new standards for adoption in 1998.
25
Results of Operations
- ---------------------
Fiscal Year 1997 Compared to Fiscal Year 1996
- ---------------------------------------------
Overview
During 1997, revenues increased by approximately $44.2 million (or 15.1%) over
the fiscal year 1996. The increase in revenues was due primarily to increased
sales of the Company's EAS and CCTV product lines within the United States.
Before the impact of non-recurring charges and restructuring, the cost of
revenues increased slightly as a percentage of sales (from 57.6% to 57.8%).
Including the non-recurring and restructuring charges, cost of revenues
increased from 57.6% to 60.0%. Selling, general and administrative ("SG&A")
expenses increased $20.9 million and increased as a percentage of revenues by
2.0% (from 32.1% to 34.1%). Income from operations, excluding non-recurring
and restructuring charges, decreased $1.3 million (from $30.1 million to $28.8
million). Net earnings for fiscal year 1997, including non-recurring and
restructuring charges, decreased by $12.2 million (from $20.4 million to $8.2
million) resulting in diluted earnings per share of $.23 for fiscal year 1997
versus $.60 achieved in fiscal year 1996.
Net Revenues
Net revenues increased approximately $44.2 million (or 15.1%) over fiscal year
1996 (from $291.8 million to $336.0 million). Domestic and international net
revenues accounted for approximately 53% and 47%, respectively, of total net
revenues compared to 50% each of total net revenues for fiscal year 1996.
Domestic retail Electronic Article Surveillance (EAS) net revenues increased
by $18.0 million (or 18.7%) as a result of increased unit sales resulting from
various chain wide installations. International EAS net revenues increased
$6.3 million (or 4.4%) as a result of increased EAS sales volume generated by
the Company's operations in Argentina ($3.4 million), Australia ($3.0 million)
and Japan ($2.7 million increase over 1996 Japanese distributor sales), offset
by a decrease in EAS sales in the European operations. The strengthening of
the U.S. dollar negatively impacted the Company's revenue from its
international operations by approximately $10.0 million. Worldwide sales of
the Company's Security Systems Group products and related CCTV product lines
increased $16.4 million or 43.2% (from $37.9 million to $54.3 million) over
fiscal year 1996. The Company's Access Control product line had sales growth
of 34.1% (from $8.5 million to $11.4 million) compared to the fiscal year
1996.
Cost of Revenues
Cost of revenues increased approximately $33.7 million (or 20.1%) over fiscal
year 1996 (from $168.0 million to $201.7 million). As a percentage of net
revenues, cost of revenues increased 2.4% (from 57.6% to 60.0%) compared to
fiscal year 1996. Included in the costs of revenues are non-recurring charges
of $6.6 million and restructuring charges of $1.1 million. Before the impact
of non-recurring and restructuring charges, the costs of revenues increased
from 57.6% to 57.8% as a percentage of net revenue. The non-recurring charges
relate to the conversion to the new manufacturing facilities in Puerto Rico,
market penetration expenses in connection with international chain-wide
roll-outs, and training costs of domestic CCTV service technicians. The
restructuring charges included in costs of revenues relate to the termination
of international master reseller agreements and the consolidation of European
inventory within the European distribution center in anticipation of direct
shipments from the distribution center to end-users within Europe.
26
Selling, General and Administrative Expenses
SG&A expenses increased $20.9 million (or 22.3%) over fiscal year 1996 (from
$93.7 million to $114.6 million). As a percentage of net revenues, SG&A
expenses increased by 2.0% (from 32.1% to 34.1%). The higher expenses (in
dollars) were due to: (i) approximately $13.5 million increase in variable
selling costs to support an increase in revenues; (ii) approximately $4.4
million from an increase in general and administrative costs primarily related
to the operation of the European headquarters; (iii) approximately $1.5
million of non-recurring charges relating to the charge-off of an account
receivable (Nobody Beats the Wiz) and miscellaneous selling costs; and (iv)
approximately $1.5 million of costs associated with the termination of the
merger agreement with Ultrak, Inc.
Restructuring Charge
In December 1997, the Company recorded a pre-tax restructuring charge of $9.0
million. This charge, relating directly to the Company's international
operations, includes: (i) the elimination of approximately 60 positions
internationally under a cost savings program ($5.4 million); (ii) the lease
terminations of six of the company's international sales facilities to
relocate into more suitable office/warehouse facilities ($1.0 million); (iii)
the consolidation of the Company's European research and development center to
the corporate headquarters ($0.5 million); (iv) the costs associated with the
termination of two master re-seller agreements in Asia and Southern Europe
($1.6 million); and (v) the consolidation of inventory to the European
distribution center ($0.5 million). Of the $9.0 million 1997 restructuring
charge, $1.1 million is included in the cost of revenues. The estimated cash
outlay for the restructuring is $8.0 million of which $0.5 million has been
expended during 1997. At December 28, 1997, $7.5 million of the restructuring
charges remained in Other Current Liabilities. The restructuring activity is
expected to be substantially complete prior to the end of 1998.
Other Income (Expense), net
Other income (expense), net increased by $1.7 million over fiscal 1996. Other
income of $2.8 million in 1997 includes: (i) a payment of $1.3 million from
Mitsubishi Materials Corporation in connection with the establishment of a
joint product research and development project; (ii) an insurance claim of
$1.0 million relating to the loss of business income caused by a fire at the
Company's warehouse facility in France; and (iii) a net foreign exchange gain
of $0.5 million.
Interest Expense and Interest Income
Interest expense for fiscal year 1997 remained flat from prior year at $9.6
million. The majority of the interest expense is attributable to the $120
million 5.25% convertible subordinated debentures issued in October of 1995.
Interest income for fiscal year 1997 increased by $0.4 million (from $8.3
million to $8.7 million). (See "Management's Discussion and Analysis-Liquidity
and Capital Resources", for additional information)
Income Taxes
The effective tax rate of 40.1% is higher than the effective tax rate used in
fiscal year 1996 of 31.6%. The increase in the tax rate is primarily due to
certain foreign losses (resulting from the restructuring charges) for which
tax benefits have not been recorded, as it is not more than likely that
certain tax loss carryforwards will be utilized.
27
Net Earnings
Net earnings were $8.2 million or $.23 per share for fiscal year 1997, versus
$20.4 million or $.60 per share for fiscal year 1996. The weighted average
number of shares used in the diluted earnings per share computation for fiscal
year 1997 increased compared to fiscal year 1996 (from 34.1 million to 35.2
million). This increase was primarily due to the exercise of stock options and
an increase in stock options outstanding, offset by the repurchase of common
shares in 1997.
Exposure to International Operations
As a result of the Company's strategy to increase direct sales to customers
(as opposed to sales through independent distributors), approximately 91% of
the Company's international sales for fiscal year 1997 were made in local
currencies. This increase in sales denominated in currencies other than U.S.
dollars, increases the Company's potential exposure to currency fluctuations
which can adversely affect results. During fiscal year 1997, currency
exchange gains amounted to $0.5 million compared to currency exchange gains of
$1.0 million for fiscal year 1996. Included in the currency exchange gains for
1997 is income of $0.6 million realized from the exercise of German mark put
options, and an unrealized loss of $0.3 million on a yen denominated forward
contract purchased in connection with the obligation to acquire the assets of
Tokai Electronics Co., Ltd.
Results of Operations
- ---------------------
Fiscal Year 1996 Compared to Fiscal Year 1995
- ---------------------------------------------
Overview
During 1996, revenues increased by approximately $87.0 million (or 42.5%) over
the fiscal year 1995. The increase in revenues was due primarily to increased
sales of the Company's EAS product line within the Company's international
distribution channels which was positively impacted by the Company's
acquisition of Actron (completed in November of 1995). Cost of revenues
increased as a percentage of sales (from 55.7% to 57.6%). The increase in cost
of revenues was primarily the result of: (i) higher field service costs
resulting from increased service personnel, primarily from the Actron
acquisition; (ii) domestic chain wide rollouts; and (iii) the sale of
inventory acquired with the Actron acquisition which carry a lower margin than
the Company's existing EAS products.
Selling, general and administrative (SG&A) expenses increased $23.5 million
but declined as a percentage of revenues by 2.2% (from 34.3% to 32.1%).
Income from operations increased $11.0 million (from $19.1 million to $30.1
million). Net earnings for fiscal year 1996 increased by $9.0 million (from
$11.4 million to $20.4 million) resulting in diluted earnings per share of
$.60 for fiscal year 1996 versus $.42 achieved in fiscal year 1995.
Net Revenues
Net revenues increased approximately $87.1 million (or 42.5%) over fiscal year
1995 (from $204.7 million to $291.8 million). Domestic and international net
revenues accounted for approximately 50% each of total net revenues compared
to 62.3% and 37.7%, respectively in fiscal year 1995. Domestic retail
Electronic Article Surveillance (EAS) net revenues increased $14.7 million (or
18.0%) primarily as a result of increased unit sales resulting from various
chain-wide installations. International EAS net revenues increased $68.7
million (or 89.0%) as a result of higher unit sales volume generated by the
Company's operations in Europe ($53.7 million) which was primarily impacted by
28
the Company's acquisition of Actron which was completed in November of 1995.
In addition, the Company's Canadian, Mexican and Argentinean operations
realized significant sales increases of $6.9 million, $1.9 million and $3.1
million respectively. Sales of the Company's Security Systems Group products
(formerly Alarmex) and CCTV product lines increased slightly (from $33.2
million to $35.2 million) over fiscal year 1995. The Company's Access Control
product line had sales growth of 20.6% (from
$7.1 million to $8.5 million) compared to the fiscal year 1995.
Cost of Revenues
Cost of revenues increased approximately $54.0 million (or 47.3%) over fiscal
year 1995 (from $114.0 million to $168.0 million). As a percentage of net
revenues, cost of revenues increased 1.9% (from 55.7% to 57.6%) compared to
fiscal year 1995. The increase in cost of revenues was primarily the result
of: (i) higher field service costs resulting from increased service personnel,
primarily from the Actron acquisition; (ii) domestic chain wide rollouts;
(iii) sales of Actron related products which carry higher product costs; and
to a lesser extent, (iv) a loss of manufacturing efficiencies caused by
Hurricane Hortense which forced the closure of the production facility in
Ponce, Puerto Rico for eight days.
Selling, General and Administrative Expenses
SG&A expenses increased $23.5 million (or 33.4%) over fiscal year 1995 (from
$70.2 million to 93.7 million). As a percentage of net revenues, however, SG&A
expenses decreased by 2.2% (from 34.3% to 32.1%). The higher expenses (in
dollars) were due to: (i) approximately $11.8 million increase in variable
selling costs to support the increase in revenues; (ii) approximately $7.7
million increase in general and administrative costs; and (iii) approximately
$2.6 million related to the amortization of goodwill and intangibles generated
from the Actron acquisition.
Interest Expense and Interest Income
Interest expense for fiscal year 1996 increased $4.5 million (from $5.1
million to $9.6 million) primarily as a result of interest on the $120 million
5.25% convertible subordinated debentures issued in October of 1995. Interest
income for fiscal year 1996 increased by $5.5 million (from $2.8 million to
$8.3 million) as a result of the cash investment of the remaining proceeds of
the $120 million debentures previously mentioned combined with the proceeds
from the Company's equity offering during the second quarter of 1996 (see
"Management's Discussion and Analysis - Liquidity and Capital Resources" for
additional information).
Income Taxes
The effective tax rate of 31.6% is marginally higher than the effective tax
rate used in fiscal year 1995 of 31.3%. This is primarily due to higher
charges for amortization of goodwill and intangibles resulting from the Actron
acquisition which are not tax deductible.
Net Earnings
Net earnings were $20.4 million or $.60 per share versus $11.4 million or $.42
per share for fiscal year 1995. The weighted average number of shares used in
the diluted earnings per share computation for fiscal year 1996 increased
substantially compared to the fiscal year 1995 (from 27.4 million to 34.1
million) primarily due to: (i) shares issued during the second quarter of 1996
in connection with the Company's secondary equity offering previously
mentioned (4,600,000 shares of common stock sold); and (ii) the exercise of
stock options and an increase in stock options outstanding.
29
Exposure to International Operations
Approximately 83% of the Company's international sales during fiscal year 1996
were made in local currencies. Sales denominated in currencies other than
U.S. dollars increased the Company's potential exposure to currency
fluctuations which can affect results. For fiscal year 1996, currency
exchange gains amounted to approximately $1.0 million compared to losses of
$.2 million for fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's liquidity needs have related to, and are expected to continue
to relate to, capital investments, acquisitions and working capital
requirements. The Company has met its liquidity needs over the last three
years primarily through funds provided by long-term borrowings, issuance of
convertible subordinated debt, and through two separate issuances of common
stock in underwritten public offerings. The Company believes that cash
provided from operating activities and funding available under its current
credit agreements, together with the remaining proceeds generated from the
sale of shares of the Company's Common Stock and the issuance of convertible
subordinated debt, should be adequate for its presently foreseeable working
capital and capital investment requirements.
Net cash used in operations during fiscal 1997 was approximately $60.6 million
compared to $17.5 million during fiscal 1996. This use of cash was primarily
the result of the following activities: (i) an increase in accounts receivable
resulting from increased sales and the granting of extended payment terms to
certain strategic customers during fiscal 1997; (ii)increases in inventory
levels primarily due to an increase in disposable labels, resulting from the
Company's increased manufacturing capacity and increased supplies from Tokai
Electronics Co., Ltd., and (iii)the Company's Comprehensive Tag Program which
provides equipment financing to retailers utilizing the Company's EAS systems
in exchange for a multi-year agreement to purchase disposable labels.
The Company's Comprehensive Tag Program (Comp Tag) is a financial
marketing/sales tool designed to remove capital investment costs as an
obstacle to the potential customer's decision to purchase an EAS system.
Through the Comp Tag program, the Company internally finances the leasing of
equipment to retailers under long-term non-cancelable contracts, usually three
to five years. Customers pay a premium price for an agreed-upon minimum
number of tags shipped on a quarterly or other periodic basis. The
comprehensive tag price reflects the cost of hardware, disposable RF labels,
installation and interest.
Comp Tag agreements that meet all the necessary requirements for sales-type
leasing as defined under FAS 13, are recognized as a sale upon shipment of the
EAS hardware. If the terms and conditions as specified in the Comp Tag
agreement do not meet all the necessary requirements for sales-type lease
accounting, then the accounting requires operating lease treatment. The cash
flow impact is independent of the accounting used for the Consolidated
Earnings Statement. In the majority of cases, the Company is able to recover
equipment and installation costs between 18-24 months under the five-year
contract and within a shorter period of time for contracts which run three or
four years. The impact of the Comp Tag agreement is reflected on the statement
of cash flows under two captions: i)Long-term customer contracts of those
meeting sales-type lease accounting; or ii)Revenue equipment placed under
operating lease. Comp Tag Contracts under the sales-type lease accounting
method are included in Other Assets on the Consolidated Balance Sheets. Comp
Tag contracts under the operating lease accounting method are included in
30
Revenue Equipment on Operating Lease on the Consolidated Balance Sheets.
In summary, the Company's management has determined that the risks of the Comp
Tag Program (i.e. cash outlay, credit risk, equipment and tag monitoring
costs) are far outweighed by the acceleration of chain-wide installations,
which drive market share and faster acceptance of source tagging by
manufacturers. This, in turn, reduces the retailers' costs of hand applying
labels, thereby further increasing the favorable impact to the retailers'
bottom line.
The Company's capital expenditures during fiscal 1997 totaled $26.7 million
compared to $10.5 million during fiscal 1996. This increase is primarily due
to the plant expansion at the Company's main manufacturing facility located in
Ponce, Puerto Rico which became operational at the end of the fourth quarter
1997.
The Board of Directors has approved the purchase of up to 10% or
approximately3.5 million shares of the Company's outstanding common stock at
an average cost not to exceed $14.00 per share. The stock will be repurchased
in the open market or in other transactions pursuant to SEC Rule 10b-18.
During fiscal 1997, the Company purchased 1,590,700 shares of its common stock
for a total cash outlay of approximately $22.3 million. The timing of
additional repurchases of common shares will depend on a variety of factors
including price.
In December 1997, the Company replaced its existing $60 million revolving
credit facility with a $100 million multi-currency unsecured revolving credit
facility. At the end of fiscal 1997, there were no outstanding borrowings
under this credit agreement.
Management believes that its anticipated cash needs for the foreseeable future
can be funded from cash and cash equivalents on hand and the $100 million bank
line of credit.
The Company exports products for international sales to its foreign
subsidiaries. The subsidiaries, in turn, sell these products to customers in
their respective geographic area of operation, generally in local currencies.
This method of sales and resale gives rise to the risk of gains or losses as a
result of currency exchange rate fluctuations.
In order to reduce the Company's exposure resulting from currency
fluctuations, the Company has been selectively purchasing currency exchange
forward contracts on a regular basis. These contracts guarantee a
predetermined exchange rate at the time the contract is purchased. This
allows the Company to shift the risk, whether positive or negative, of
currency fluctuations from the date of the contract to a third party.
As of December 28, 1997, the Company had currency exchange forward contracts
totaling approximately $42.0 million. The contracts are in the various local
currencies covering primarily the Company's Western European operations along
with the Company's Canadian, Japanese and Australian operations. The
Company's operations in Argentina, Mexico and Brazil were not covered by
currency exchange forward contracts at December 28, 1997.
In November 1997, the Company also purchased forward exchange contracts with
the notional amount of 1.0 billion yen in connection with the Company's
obligation to acquire Tokai Electronics Co., Ltd. on February 2, 1998.
During 1997, the Company also purchased a series of put options denominated in
German marks which gave the Company the right but not the obligation to
convert German marks at a specified exchange rate into U.S. dollars. At the
end of fiscal 1997, the Company had no remaining currency options outstanding.
31
The Company will continue to evaluate the use of currency options in order to
reduce the impact that exchange rate fluctuations have on the Company's net
earnings from sales made by the Company's international operations. The
combination of forward exchange contracts and currency options should reduce
the Company's risks associated with significant exchange rate fluctuations.
The Company has never paid a cash dividend (except for a nominal cash
distribution in April 1997, to redeem the rights outstanding under the
Company's 1988 Shareholders' Rights Plan). The Company does not anticipate
paying any cash dividend in the near future and is limited by existing
covenants in the Company's debt instruments from paying dividends.
32
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Accountants......................................34
Consolidated Balance Sheets as of December 28, 1997 and
December 29, 1996...................................................35
Consolidated Earnings Statements for each of the years
in the three-year period ended December 28, 1997....................36
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 28, 1997..............37
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 28, 1997....................38
Notes to Consolidated Financial Statements..........................39-56
Financial Schedule
Schedule II -Valuation and Qualifying Accounts......................60
33
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders Checkpoint Systems, Inc.
We have audited the consolidated financial statements and financial statement
schedule of Checkpoint Systems, Inc. and subsidiaries listed in item 14 (a) of
this Form 10K. These financial statements and the financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Checkpoint
Systems, Inc. and subsidiaries as of December 28, 1997 and December 29, 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 28, 1997 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 13, 1998
34
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 28, December 29,
1997 1996
------------ ------------
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 64,138 $185,836
Accounts receivable, net of allowances
of $5,703,000 and $4,282,000 136,748 96,891
Inventories, net 77,631 53,073
Other current assets 13,570 9,608
Deferred income taxes 5,593 2,736
------- -------
Total current assets 297,680 348,144
REVENUE EQUIPMENT ON OPERATING LEASE, net 24,718 18,033
PROPERTY, PLANT AND EQUIPMENT, net 58,674 41,178
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, net 72,304 71,622
INTANGIBLES, net 14,003 15,572
OTHER ASSETS 49,055 27,104
------- -------
TOTAL ASSETS $516,434 $521,653
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and
current portion
of long-term debt $ 6,957 $ 8,161
Accounts payable 13,200 12,677
Accrued compensation and
related taxes 7,745 8,667
Income taxes 13,687 7,920
Unearned revenues 11,413 10,264
Other current liabilities 33,108 14,702
------ ------
Total current liabilities 86,110 62,391
LONG-TERM DEBT, LESS CURRENT MATURITIES 30,855 33,356
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
DEFERRED INCOME TAXES 1,458 5,112
MINORITY INTEREST 461 -
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized
500,000 shares, none issued - -
Common stock, par value $.10 per share,
authorized 100,000,000 shares, issued
36,338,228 and 36,134,622 3,633 3,61
Additional capital 232,079 230,580
Retained earnings 86,873 78,645
Common stock in treasury, at cost,
3,188,700 shares and 1,598,000 shares (27,986) (5,664)
Foreign currency adjustments (17,049) (6,380)
------- -------
TOTAL SHAREHOLDERS' EQUITY 277,550 300,794
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $516,434 $521,653
======= =======
See accompanying notes to consolidated financial statements.
35
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED EARNINGS STATEMENTS
1997 1996 1995
------- ------- -------
(Thousands, except per share data)
Net Revenues $335,964 $291,769 $204,741
Cost of Revenues 201,724 168,024 114,044
------- ------- -------
Gross Profit 134,240 123,745 90,697
Selling, General and Administrative
Expenses 114,591 93,676 70,232
Restructuring Charge 7,945 - 1,410
------- ------- -------
Operating Income 11,704 30,069 19,055
Interest Income 8,676 8,339 2,791
Interest Expense 9,573 9,557 5,050
Other Income, (Expense), net 2,758 1,026 (198)
------- ------- -------
Earnings Before Income Taxes 13,565 29,877 16,598
Income Taxes 5,445 9,430 5,189
Minority Interest 108 - -
------- ------- -------
Net Earnings $8,228 $20,447 $11,409
======= ======= =======
Earnings Per Share (note 11)
Basic $ .24 $ .64 $ .43
======= ======= =======
Diluted $ .23 $ .60 $ .42
======= ======= =======
See accompanying notes to consolidated financial statements.
36
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Foreign
Common Additional Retained Treasury Currency
Stock Capital Earnings Stock Adjust. Total
------- ------- ------- ------- ------- ------
(Thousands)
Balance
December 25, 1994 $1,128 $21,592 $46,789 $(5,664) $(2,542) $61,303
(Common shares:
issued 22,557,022;
reacquired, 1,598,000)
Net Earnings 11,409 11,409
Exercise of Stock
Options 44 5,200 5,244
Stock Issuances 329 57,835 58,164
Stock Split,
Effective
February 22,1996 1,501 (1,501) -
Foreign Currency
Adjustments 1,538 1,538
------- ------- ------- ------- ------- ------
Balance,
December 31, 1995 3,002 83,126 58,198 (5,664) (1,004) 137,658
(Common shares:
issued 30,019,758;
reacquired, 1,598,000)
Net Earnings 20,447 20,447
Exercise of Stock
Options 151 11,984 12,135
Stock Issuances 460 135,470 135,930
Foreign Currency
Adjustments (5,376) (5,376)
------ ------- ------- -------- ------- -----
Balance,
December 29, 1996 3,613 230,580 78,645 (5,664) (6,380) 300,794
(Common shares:
issued 36,134,622;
reacquired, 1,598,000)
Net Earnings 8,228 8,228
Exercise of Stock
Options 20 1,499 1,519
Foreign Currency
Adjustments (10,669) (10,669)
Purchase of Common
Stock (22,322) (22,322)
------ -------- ------- -------- -------- -------
Balance,
December 28, 1997 $3,633 $232,079 $86,873 ($27,986)($17,049) $277,550
====== ======== ======= ======== ======== ========
(Common shares:
issued 36,338,228;
reacquired, 3,188,700)
See accompanying notes to consolidated financial statements.
37
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995
---- ---- ----
Cash inflow (outflow) from operating (Thousands)
activities:
Net earnings $8,228 $20,447 $11,409
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Net book value of rented equipment sold 811 4,391 1,502
Revenue Equipment placed under
operating lease (15,699) (13,987) (11,680)
Long-term customer contracts (20,814) (10,804) (2,017)
Depreciation and amortization 23,526 18,322 12,178
Deferred Taxes (6,511) 363 362
Provision for losses on accounts
receivable 1,822 2,219 1,188
Restructuring charge 8,500 - 1,254)
(Increase) decrease in current assets:
Accounts receivable (46,657) (25,148) (25,600)
Inventories (27,863) 3,032 (11,738)
Other current assets (4,777) (3,046) 1,706
Increase (decrease) in current
liabilities:
Accounts payable 709 (5,246) (1,820)
Accrued compensation and related
taxes (626) 935 2,460
Income taxes 5,638 2,847 2,256
Unearned revenues 1,535 1,848 1,612
Other current liabilities 11,536 (13,649) 2,175
------- ------- -------
Net cash used by operating
activities (60,642) (17,476) (14,753)
Cash outflow from investing ------- ------- -------
activities:
Acquisition of property, plant and
equipment (26,714) (10,454) (9,379)
Acquisitions, net of cash acquired (4,396) (5,898) (65,997)
Other investing activities (5,438) (3,530) (4,276)
------- ------- -------
Net cash used by investing
activities (36,548) (19,882) (79,652)
Cash inflow (outflow) from financing ------- ------- -------
activities:
Proceeds from stock issuances 1,519 148,065 59,910
Proceeds of debt - 1,653 157,281
Payment of debt (3,705) (3,980) (46,274)
Purchase of treasury stock (22,322) - -
Net cash provided by (used by) ------- ------- -------
financing activities (24,508) 145,738 170,917
Net increase (decrease) in cash and ------- ------- -------
cash equivalents (121,698) 108,380 76,512
Cash and cash equivalents:
Beginning of year 185,836 77,456 944
------- ------- -------
End of Year $ 64,138 $185,836 $ 77,456
======= ======= =======
See accompanying notes to consolidated financial statements.
38
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
- ----------------------
The Company is a multinational designer, manufacturer and distributor of
integrated electronic security systems-utilizing proprietary RF
technologies-designed primarily to help retailers prevent losses caused by
theft of merchandise. The Company markets a wide range of these systems,
including EAS systems, CCTV systems, POS monitoring systems and access control
systems, primarily to retailers in the following market segments: hard goods
(supermarkets, drug stores, mass merchandisers and music/electronics stores)
and soft goods (apparel). The Company also markets its products and services
to libraries.
Principles of Consolidation
- ----------------------------
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its majority owned subsidiaries (Company). All material
intercompany transactions are eliminated in consolidation.
Use of Estimates
- ------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fiscal Year
- ----------
The Company's fiscal year is the 52 or 53 week period ending the last Sunday
of December. References to 1997, 1996, and 1995 are for: the 52 weeks ended
December 28, 1997, the 52 weeks ended December 29, 1996, and the 53 weeks
ended December 31, 1995.
Reclassifications
- -----------------
Certain reclassifications have been made to the 1996 and 1995 financial
statements and related footnotes to conform to the 1997 presentation.
Stock Split
- -----------
On January 4, 1996, the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a 100% tax-free stock dividend distributed
on February 22, 1996 to stockholders of record as of January 18, 1996.
Stockholders' equity at December 31, 1995 reflects the retroactive effect of
the stock split by reclassifying from additional capital to common stock the
par value of the additional shares arising from the split. All prior year
share and per share amounts were restated to reflect the February 1996 stock
split.
Revenue Recognition
- -------------------
Revenue from the sale of equipment is recognized upon shipment of equipment or
the acceptance of a customer order to purchase equipment currently rented.
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
39
revenues. The deferred finance charges applicable to these leases are
recognized over the terms of the leases using the straight-line method which
approximates the effective interest method. Rental revenue from equipment
under operating leases is recognized over the term of the lease. Service
revenue is recognized on a straight-line basis over the contractual period or
as services are performed. Sales to third party leasing companies are
recognized as the equivalent of a sale. Revenue from the sale of CCTV and
monitoring systems is recognized on a percentage of completion basis. All
sales are made on a non-recourse basis.
Cash and Cash Equivalents
- -------------------------
Cash in excess of operating requirements is invested in short-term, income
producing instruments. Cash equivalents include commercial paper and other
securities with original maturities of 90 days or less. 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.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment is carried at cost. Depreciation and
amortization 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 under 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
life ranges from five to ten years. Maintenance, repairs and minor renewals
are expensed as incurred. Additions, improvements and major renewals are
capitalized. The cost, and accumulated depreciation, applicable to assets
retired is removed from the accounts and the gain or loss on disposition is
included in income.
Excess of Purchase Price Over Fair Value of Net Assets Acquired
- ---------------------------------------------------------------
The excess of purchase price over the fair value of net assets acquired is
amortized on a straight-line basis over their economic useful lives which is
considered to range between 20 and 30 years.
Long-Lived Assets
- -----------------
Effective January 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." The provisions of SFAS No. 121
require the Company to review its long-lived assets for impairment on an
exception basis whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through future cash
flows. If it is determined that an impairment loss has occurred based on
expected future cash flows, than the loss is recognized on the Consolidated
Earnings Statement.
Long Term Customer Contracts
- ----------------------------
Included in Other Assets are unbilled receivables and other assets relating to
long term customer contracts generated primarily from the leasing of the
Company's EAS equipment to retailers under long-term sales-type leasing
arrangements (referred to by management as Comprehensive Tag Program). The
duration of these programs typically range from three to five years. The
40
receivables approximated $42,278,000 and $21,929,000 at December 28,1997 and
December 29, 1996, respectively.
Research and Development Costs
- ------------------------------
Research and development costs are expensed as incurred, and approximated
$7,604,000, $6,408,000, and $6,862,000, in 1997, 1996, and 1995, respectively.
Royalty Expense
- ---------------
Royalty expenses incurred approximated $4,134,000, $3,951,000, and $2,863,000
in
1997, 1996, and 1995, respectively.
Per Share Data
- --------------
Effective December 28, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." The provisions of SFAS No. 128 establish standards for computing and
presenting earnings per share (EPS). This standard replaces the presentation
of primary EPS with a presentation of basic EPS. Additionally, it requires
dual presentation of basic and diluted EPS for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Per share amounts for all periods presented have
been restated to conform with the provisions of SFAS No. 128 (see note 11).
Intangibles
- -----------
Intangibles consist of patents, rights, customer lists and software
development costs. The costs relating to the acquisition of patents, rights
and customer lists are amortized on a straight-line basis over their useful
lives which range between seven and thirteen years, or legal life, whichever
is shorter. Accumulated amortization approximated $6,914,000 and $4,511,000 at
December 28, 1997 and December 29, 1996, respectively.
Capitalized Software
- --------------------
The costs of internally developed software are expensed until the
technological feasibility of the software has been established. Thereafter,
all software development costs are capitalized and subsequently reported at
the lower of unamortized cost or net realizable value. The costs of
capitalized software are amortized over the products' estimated useful lives
or five years, whichever is shorter and are included in Intangibles.
Capitalized software development costs were $5,334,000 and $4,563,000 at
December 28, 1997 and December 29, 1996, respectively, net of accumulated
amortization costs of $2,048,000 and $1,586,000 at December 28, 1997 and
December 29, 1996, respectively.
Taxes on Income
- ---------------
Income taxes are determined in accordance with SFAS No. 109. Under this
method, deferred tax liabilities and assets are determined based on the
difference between financial statement and tax basis of assets and liabilities
using enacted statutory tax rates in effect at the balance sheet date. Changes
in enacted tax rates are reflected in the tax provision as they occur. A
valuation allowance is recorded to reduce deferred tax assets when realization
of a tax benefit is less likely than not.
41
Accounting for Foreign Currency Translation and Transactions
- ------------------------------------------------------------
The Company's balance sheet accounts of foreign subsidiaries are translated
into U.S. dollars at the rate of exchange in effect at the balance sheet
dates. The resulting translation adjustment is recorded as a separate
component of shareholders' equity. Revenues, costs and expenses of the
Company's foreign subsidiaries are translated into U.S. dollars at the average
rate of exchange in effect during each reporting period. In addition, gains or
losses on long-term intercompany transactions are excluded from the results of
operations and accumulated in the aforementioned separate component of
consolidated shareholders' equity. All other foreign transaction gains and
losses are included in the results of operations.
The Company enters into certain foreign exchange forward and option contracts
in order to hedge anticipated rate fluctuations in Europe, Canada, Japan and
Australia. Transaction gains or losses resulting from these contracts are
recognized over the contract 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 Income (Expense), net
on the Company's Consolidated Earnings Statements.
Note 2. INVENTORIES
Inventories consist of the following:
1997 1996
---- ----
(Thousands)
Raw materials $10,329 $10,912
Work-in-process 2,312 1,106
Finished goods 64,990 41,055
------- ------
Totals $77,631 $53,073
====== ======
Note 3. REVENUE EQUIPMENT ON OPERATING LEASE AND PROPERTY, PLANT, AND
EQUIPMENT
The major classes are:
1997 1996 *
---- ----
(Thousands)
Revenue Equipment on operating lease
Equipment rented to customers $42,357 $28,675
Accumulated depreciation (17,639) (10,642)
------- -------
$24,718 $18,033
======= =======
Property, Plant and Equipment
Land $2,063 $1,387
Building 17,156 10,056
Machinery & Equipment 73,727 57,205
Leasehold improvements 3,424 2,475
Leased equipment under capital leases - 15
------- -------
$96,370 $71,138
Accumulated depreciation
and amortization (37,696) (29,960)
------- -------
$58,674 $41,178
======= =======
*Machinery and equipment in 1996 includes $5,514,000 for construction in
progress associated with the expansion of the Puerto Rico manufacturing
facility.
42
Note 4. SHORT-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT
The short-term debt and current portion of long-term debt at December 28, 1997
and at December 29, 1996 consisted of the following:
1997 1996
------ -------
(Thousands)
Current portion of long-term debt $2,537 $4,150
Line of credit in connection
with foreign exchange contracts
at 6.0% and 7.0% - 1,653
Line of credit held by Japanese
subsidiary with interest at 1.625% 4,420 433
Line of credit held by Japanese
subsidiary with interest at 3.0% - 1,925
------ ------
Total short-term debt and
current portion long-term debt $6,957 $8,161
====== ======
Note 5. LONG-TERM DEBT
The long-term debt at December 28, 1997 and December 29, 1996 consisted of the
following:
1997 1996
-------- --------
(Thousands)
Seven year $7 million term
note with interest at 4.9% $2,100 $3,150
Six year $8 million term note
with interest at 6.5% 2,824 4,235
Eight year $12 million private
placement note with interest
at 8.27% 12,000 12,000
Eight year $15 million private
placement note with interest
at 9.35% 15,000 15,000
Other loans with interest rates
ranging from 1.75% to 7.87% and
maturity dates through
January 2000 1,468 3,121
------- -------
Total 33,392 37,506
Less current portion (2,537) (4,150)
------- -------
Total long-term portion $30,855 $33,356
======= =======
In December 1997, the Company replaced its $60,000,000 revolving credit
facility with a $100,000,000 unsecured multi-currency revolving credit
facility with a consortium of five banks led by the Company's principal
lending bank. Interest under this line is determined at the time of borrowing
and varies based on the banks base rate or LIBOR rate. The agreement requires
payment of a fee that varies between .125 to .15 percent of the unused portion
of the facility. At December 28, 1997, there were no outstanding borrowings
under this credit agreement.
43
In December 1992, the Company entered into a $7,000,000 seven year loan
agreement at a fixed rate of 4.9% with its principal lending bank. Three
equal installments of $350,000 are due during each year for a total of
$1,050,000 per year with interest due monthly. At December 28, 1997,
$2,100,000 was outstanding.
In February 1994, the Company entered into a $8,000,000 six year loan
agreement at a fixed rate of 6.5% with its principal lending bank. Three
equal installments of $470,588 are due during each year for a total of
$1,411,764 per year with interest due monthly. At December 28, 1997,
$2,824,000 was outstanding.
In March 1994, the Company entered into a $12,000,000 private placement debt
funding agreement at a fixed rate of 8.27%. Principal payments of $4,000,000
annually are to be made starting in year 2000 with interest due semi-annually.
In February 1995, the Company issued and sold $15,000,000 aggregate principal
amount of 9.35% Series B Notes (The Notes) pursuant to a Note Agreement dated
as of January 15, 1995, among the Company and Principal Mutual Life Insurance
Company. The Notes are due January 30, 2003 and interest is payable semi-
annually. Notes of $3,000,000 are due on each January 30 commencing January
30, 1999 and ending January 30, 2002, with the remaining principal payable on
January 30, 2003. The Notes are uncollateralized.
The above loan agreements contain certain restrictive covenants which, among
other things, require maintenance of specified minimum financial ratios
including debt to capitalization, interest coverage and tangible net worth. In
addition, these agreements limit the Company's ability to pay cash dividends.
The aggregate maturities on all long-term debt are:
(Thousands)
1998 $ 2,537
1999 5,462
2000 7,158
2001 7,158
2002 7,158
Thereafter 3,919
-------
Total $33,392
=======
Note 6. SUBORDINATED DEBENTURES
In November 1995, the Company completed the private placement of $120,000,000
of Convertible Subordinated Debentures (Debentures) with an annual interest
rate of 5.25%. The debentures are uncollateralized, subordinated to all senior
indebtedness and convertible at any time into shares of the Company's stock at
a conversion price of $18.38 per share (equivalent to approximately 54.4
shares of Common Stock for each $1,000 principal amount of Debentures). The
Debentures will mature on November 1, 2005 and are redeemable, in whole or in
part, at the option of the Company on or after November 1, 1998. The net
proceeds generated to the Company from this transaction approximated
$116,000,000. The conversion price reflects the February 1996 Stock Split.
On April 19, 1996, the Company completed its Shelf Registration Statement on
Form S-3 covering the resale of $47,250,000 5.25% Convertible Subordinated
Debentures due 2005 and 2,571,428 shares of the Company's stock, $.10 par
value per share, issuable upon conversion of the Debentures. The Registration
Statement also covered the registration of 350,000 shares of the Company's
Common Stock presently issuable upon exercise of certain options granted by
the Company.
44
Note 7. STOCK OPTIONS
The Company's Stock Option Plan 1992 (1992 Plan) allows the Company to grant
either Incentive Stock Options (ISOs) or Non-Incentive Stock Options (NSOs) to
purchase up to 12,000,000 shares of Common Stock after giving effect to the
February 1996 stock split. Under the 1992 Plan, only employees are eligible
to receive ISOs and both employees and non-employee directors of the Company
are eligible to receive NSOs. NSOs and ISOs issued under the 1992 Plan
through December 28, 1997 total 9,807,886 shares. At December 28, 1997,
December 29, 1996, and December 31, 1995 a total of 2,192,114; 690,114; and
1,592,152 shares, respectively, were available for grant after giving effect
to the February 1996 stock split.
All ISOs under the 1992 Plan expire not more than 10 years (plus six months in
the case of NSOs) from the date of grant. Both ISOs and NSOs require a
purchase price of not less than 100% of the fair market value of the stock at
the date of grant.
The 1992 Plan is administered by the Compensation and Stock Option Committee
of the Company's Board of Directors. All of the options outstanding at
December 28, 1997 were issued pursuant to the 1992 Plan. 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 that 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) 33% on or
after the second anniversary date of option grant; and (iii) 33% on or after
the third anniversary date of option grant.
Options that were fully vested and exercisable totaled 3,401,616 as of
December 28, 1997. Options that were outstanding but not yet vested or
exercisable totaled 1,120,000 as of December 28, 1997.
The following schedules summarize stock option activity and status:
NUMBER OF SHARES
--------------------------------
1997 1996 1995
--------------------------------
Outstanding at beginning of year 3,222,222 3,835,048 2,892,302
Granted 1,574,600 923,538 1,824,848
Exercised (198,606) (1,514,864) (882,102)
Canceled (76,600) (21,500) -
---------- --------- ---------
Outstanding at end of year 4,521,616 3,222,222 3,835,048
========== ========= =========
45
WEIGHTED-AVERAGE PRICE
--------------------------------
1997 1996 1995
--------------------------------
Outstanding at beginning of year $13.94 $ 8.12 $ 5.59
Granted $16.85 $27.31 $11.06
Exercised $ 7.65 $ 7.16 $ 5.90
Canceled $17.17 $27.87 -
-------- -------- --------
Outstanding at end of year $14.78 $13.94 $ 8.12
======== ======== ========
Following is a summary of stock options outstanding as of December 28, 1997:
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 12/28/87 Life Price 12/28/87 Price
- -----------------------------------------------------------------------------
$ 3.88--$ 9.69 1,132,442 4.93 $ 6.56 1,132,442 $ 6.56
$ 9.81--$15.50 1,867,636 8.81 $13.33 938,136 $11.56
$15.78--$28.37 1,517,538 9.02 $23.92 1,327,038 $25.06
$30.81--$31.37 4,000 8.56 $31.09 4,000 $31.09
--------- ---------
4,521,616 3,401,616
Stock options granted prior to July 1, 1997, were vested upon grant.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company continues to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the Company's stock at
the date of grant over the amount an employee must pay to acquire the stock.
Since all options were granted at market value, there is no compensation cost
to be recognized.
Had compensation cost for the Company's stock option plans been determined
based upon the fair value at the grant date using the Black Scholes option
pricing model prescribed under SFAS No. 123, the Company's net income and
earnings per share would approximate the pro forma amounts as follows:
1997 1996 1995
---- ---- ----
(Thousands)
Net Income
As reported $ 8,228 $20,447 $11,409
Pro forma $ 4,380 $12,647 $ 4,609
Diluted earnings per share
As reported $ 0.23 $ 0.60 $ 0.42
Pro forma $ 0.11 $ 0.37 $ 0.17
46
The following assumptions were used in estimating fair value of stock options:
1997 1996 1995
---- ---- ----
Dividend yields None None None
Expected volatility .555 .474 .474
Risk-free interest rates 6.25% 6.05% 6.05%
Expected life (in years) 3.2 3.1 3.1
Note 8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in 1997, 1996, and 1995, respectively, included payments for
interest of $9,570,658, $9,457,783,and $2,970,761 and income taxes of
$8,142,621, $5,978,000 and $1,806,000.
In February 1995, the Company purchased all of the capital stock of Alarmex,
Inc. together with a related company, Bayport Controls, Inc. (collectively
Alarmex), for $13,498,000. In conjunction with the acquisition, liabilities
were assumed as follows:
Fair value of assets acquired ...................$21,595,000
Cash paid and direct costs incurred
for the capital stock............................$13,498,000
-----------
Liabilities assumed..............................$ 8,097,000
===========
In November 1995, the Company purchased all of the capital stock of Actron
Group Limited. In conjunction with the acquisition, liabilities were assumed
as follows:
Fair value of assets acquired...................$ 81,000,000
Cash paid and direct costs incurred
for the capital stock...........................$ 54,000,000
-----------
Liabilities assumed.............................$ 27,000,000
===========
In 1996, the Company acquired all of the capital stock of: (i)Mercatec
Sistemas e Comercio de Equipmentos Electronicos Ltds.; (ii)Vysion Systems,
Inc., and (iii)Checkpoint Systems Japan Co. Ltd.
In conjunction with these acquisitions, the aggregate fair value of assets
acquired, cash paid and direct costs incurred, and liabilities assumed were as
follows:
Fair value of assets acquired...................$ 15,376,000
Cash paid and direct costs incurred
for the capital stock...........................$ 6,724,000
-----------
Liabilities assumed.............................$ 8,652,000
===========
In 1997, the Company acquired all of the capital stock of: (i) 2M Holding ApS;
(ii) D&D Security; and (iii) Evagard PLC. In 1997, the Company purchased all
the assets of Check Out Security Systems.
47
In conjunction with these acquisitions, the aggregate fair value of assets
acquired, cash paid and direct costs incurred, and liabilities assumed were as
follows:
Fair value of assets acquired...................$ 9,590,000
Cash paid and direct costs incurred
for the capital stock..........................$ 5,988,000
-----------
Liabilities assumed............................$ 3,602,000
===========
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 which had been adopted in
1988. The Rights under the 1997 Plan attached to the common shares of the
Company as of March 24, 1997. No separate certificate representing the Rights
will be distributed until the occurrence of certain triggering events as
defined in the 1997 Plan. The Rights are designed to ensure all Company
shareholders fair and equal treatment in the event of a proposed takeover of
the Company, and to guard against partial tender offers and other abusive
tactics to gain control of the Company without paying all shareholders a fair
price.
The Rights are exercisable only as a result of certain actions (defined by the
Plan) of an Acquiring Person, as defined. Initially, upon payment of the
exercise price (currently $100.00), each Right will be exercisable for one
share of Common Stock. Upon the occurrence of certain events as specified in
the Plan, each Right will entitle its holder (other than the Acquiring Person)
to purchase a number of the Company's or Acquiring Person's common shares
having a market value of twice the Right's exercise price. The Rights expire
on March 10, 2007.
Note 10. STOCK REPURCHASE
On April 8, 1997, the Board of Directors approved the purchase of up to 10%
orapproximately 3.5 million shares of the Company's outstanding common stock
at an average cost not to exceed $14.00 per share. The stock will be
repurchased in the open market or in other transactions pursuant to SEC Rule
10b-18. During fiscal 1997, the Company purchased 1,590,700 shares of its
common stock for a total cash outlay of approximately $22.3 million. The
timing of additional repurchases of common shares will depend on a variety of
factors including price.
Note 11. EARNINGS PER SHARE
Earnings per share are calculated under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," adopted
in the fourth quarter of 1997. Earnings per share amounts for 1996 and 1995
have been restated to give effect to the application of SFAS No. 128.
48
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:
-------------------------------------
1997 1996 1995
-------------------------------------
(In thousands, except per share amounts)
Basic earnings per share:
Net income $8,228 $20,447 $11,409
====== ======= =======
Average Common Stock outstanding 34,020 32,097 26,414
Basic earnings per share $ .24 $ .64 $ .43
====== ======= =======
Diluted earnings per share:
Net income available for Common
Stock and dilutive securities (1) $8,228 $20,447 $11,409
====== ======= =======
Average Common Stock outstanding 34,020 32,097 26,414
Additional common shares resulting
from Stock Options 1,164 1,990 961
------- ------- -------
Average Common Stock and dilutive
stock outstanding (1) 35,184 34,087 27,375
======= ======= =======
Diluted earnings per share $ .23 $ .60 $ .42
======= ======= =======
(1) Conversion of the subordinated debentures for 1997, 1996, and 1995 are not
included in the above calculation as they are anti-dilutive.
Note 12. INCOME TAXES
The Company's net earnings generated by the operations of its Puerto Rico
subsidiary are exempt from Federal income taxes under Section 936 of the
Internal Revenue Code and substantially exempt from Puerto Rico income taxes.
The Company has a local tax exemption agreement with Puerto Rico granting a
90% local tax exemption on both the tag and sensor manufacturing operations
through 2008.
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 1997, 1996, and 1995, a provision was made for
tollgate taxes. The Company has not provided for tollgate taxes on
$31,662,273 of its subsidiary's unremitted earnings since they are expected to
be reinvested indefinitely.
The domestic and foreign components of earnings (losses) before income taxes
are:
1997 1996 1995
---- ---- ----
(Thousands)
Domestic $35,496 $29,487 $17,626
Foreign (21,931) 390 (1,028)
------- ------- -------
Total $13,565 $29,877 $16,598
======= ======= =======
49
The related provision for income taxes consist of:
1997 1996 1995
---- ---- ----
Currently Payable (Thousands)
Federal $10,739 $6,691 $ 4,003
State 391 350 335
Puerto Rico 513 354 319
Foreign 313 1,672 170
Deferred
Federal (2,857) (898) (81)
State (81) (50) (71)
Puerto Rico 193 399 136
Foreign (3,766) 912 378
------- ------- -------
Total Provision $5,445 $ 9,430 $ 5,189
======= ======= =======
Deferred tax liabilities (assets) at December 28, 1997 and
December 29, 1996 consist of:
1997 1996
---- ----
(Thousands)
Depreciation $ 1,727 $ 1,208
Deferred maintenance - 119
Intangibles 2,066 2,498
Other 440 1,287
------- -------
Gross deferred tax liabilities 4,233 5,112
------- -------
Inventory (2,486) (1,816)
Accounts receivable (885) (535)
Net operating loss carryforwards (20,259) (19,412)
Warranty (371) (296)
Restructuring (2,097) -
Other (2,401) (89)
------- -------
Gross deferred tax assets (28,499) (22,148)
------- -------
Valuation allowance 20,131 19,412
------- -------
Net deferred tax (asset)
liability $(4,135) $ 2,376
======= =======
The net operating loss carryforwards as of December 28, 1997 in the amount of
$80,390,893 includes $7,549,577 of loss carryforwards that were acquired in
connection with the acquisition of the ID Systems Group and $48,488,726 that
were acquired in connection with the acquisition of Actron. If realization of
the benefit of such carryforwards occur, the Company will apply such benefit
to goodwill in connection with the acquisition. In 1997, $3,819,000 of foreign
tax losses expired. A full valuation allowance had been recorded in 1996
against these losses. In 1997, a valuation allowance was recorded due to
certain foreign losses (primarily resulting from restructuring charges) where
it is more than likely that tax loss carryforwards will not be utilized.
Of the total foreign net operating loss carryforwards available, $48,254,733
expire beginning January 1998 through December 2007, and the remaining portion
may be carried forward indefinitely.
50
A reconciliation of the statutory U.S. Federal income tax rate with the
effective income tax rate follows:
1997 1996 1995
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax exempt earnings of subsidiary in
Puerto Rico (35.5) (12.4) (18.0)
Non-deductible goodwill 8.0 3.5 2.1
Foreign losses with no benefit 30.3 6.1 7.4
State and local income taxes, net
of federal benefit 5.2 2.0 4.3
Benefit of foreign sales corporation (2.6) (2.4) (0.6)
Other (0.3) (0.3) 1.1
------ ------ ------
Effective tax rate 40.1% 31.5% 31.3%
====== ====== ======
Note 13. EMPLOYEE BENEFIT PLANS
Under the Company's defined contribution savings plans, eligible employees
(see below) may make basic (up to 6% of an employee's earnings) and
supplemental contributions to a trust. The Company matches 50% of the
participant's basic contributions. Company contributions vest to participants
in increasing percentages over three to six years of service. The Company's
contributions under the plans approximated $579,000, $577,000, and $626,000 in
1997, 1996, and 1995,
respectively.
Generally, any full-time, non-union employee of the Company (other than
someone holding the position of Vice President or higher) who has completed
one month of service, and any part-time non-union employee of the Company who
has completed one year of service, other than employees of the Company's
foreign subsidiaries, may participate in the Company's United States Savings
Plan. All full-time employees of the Puerto Rico subsidiary who have completed
three months of service may participate in the Company's Puerto Rico Savings
Plan. Part-time employees are not entitled to participate in the Company's
Puerto Rico Savings Plan.
Under the Company's non-qualified Employee Stock Purchase Plan, employees,
other than employees of the Company's subsidiaries in Australia, Argentina,
Brazil, Europe, Japan and Mexico may contribute up to $80 per week to a trust
for the purchase of Company 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 $238,000, $231,000, and
$108,000 in 1997, 1996, and 1995 respectively.
Under the Company's 1997 Bonus Plan, employees of the Company are divided into
four groups, with each group having a targeted bonus percentage which is
adjusted depending on earnings per share growth. During 1995, bonuses were
provided for certain executives in the amount of $614,000. In 1997 and 1996,
net earnings did not exceed the required criteria and, accordingly, no bonuses
were provided.
Note 14. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company operates internationally, giving rise to significant exposure to
market risks from changes in foreign exchange rates. Derivative financial
instruments are utilized by the Company to reduce the risk, as explained in
this note. The Company does not hold or issue financial instruments for
trading purposes.
51
Notional Amounts of Derivatives
- -------------------------------
The notional amounts of derivatives are not a complete measure of the
Company's exposure to foreign exchange fluctuation. The amounts exchanged are
calculated on the basis of the notional amounts and the other terms of the
derivatives, which relate to exchange rates.
Foreign Exchange Risk Management
- --------------------------------
The Company enters into currency exchange forward contracts to hedge
short-term receivables denominated in currencies other than the U.S. dollar
from its foreign sales subsidiaries (principally pound sterling, Norwegian
kroner, Spanish peseta, Belgian franc, German mark, Australian dollar,
Japanese yen, and Canadian dollar). The term of the currency exchange forward
contracts is rarely more than one year. During 1997 the Company also purchased
a series of put options denominated in German marks which gave the Company the
right but not the obligation to convert German marks at a specified exchange
rate into U.S. dollars. Unrealized and realized gains and losses on these
contracts and options are included in Other Income (Expense), net. Notional
amounts of currency exchange forward contracts outstanding were $42,013,000 at
December 28, 1997, with various maturity dates ranging through the end of
1998. At December 29, 1996, the notional amounts of currency exchange forward
contracts outstanding were $27,807,000. Counterparties to these contracts are
major financial institutions, and credit loss from counterparty nonperformance
is not anticipated.
Also during 1997, the Company entered into a currency exchange forward
contract to purchase 1.0 billion yen to hedge its obligation in yen in
connection with the acquisition of the assets of Tokai Electronics Co., Ltd.
The contract was outstanding at year-end, and an unrealized loss was included
in Other Income (Expense), net.
Aggregate foreign currency transaction gains/(losses) in 1997, 1996, and 1995
were $458,000, $1,026,000, and ($198,000) respectively, and are included in
Other Income (Expense), net in the Consolidated Earnings Statement.
Additionally, there were no deferrals of gains or losses on currency exchange
forward contracts at December 28, 1997.
Fair Values
- -----------
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 28, 1997 and December 29, 1996:
1997 1996
----------------- ------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- ------- -----
(Thousands)
Long-term debt (including
current maturities)1 $( 37,812) $( 39,112) $( 41,517) $( 43,119)
Subordinated debentures1 (120,000) (125,100) (120,000) (151,200)
Currency exchange
forward contracts2 811 811 292 292
(1) The carrying amounts are reported on the balance sheet under the
indicated captions.
(2) The carrying amounts represent the net unrealized gain (loss) associated
with the contracts at the end of the period. Such amounts are included in
"Other Current Liabilities."
52
Long-term debt is carried at the original offering price, less any payments of
principal. The Company entered into its outstanding loan agreements at a
fixed rate of interest. 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 2003.
Convertible Subordinated Debentures are carried at the original offering
price, less any payments of principal. The debentures are unsecured,
subordinated to all senior indebtedness and convertible at any time into
shares of the Company's stock. The debentures will mature on November 1, 2005
and are redeemable, in whole or in part, at the option of the Company on or
after November 1, 1998. In order to estimate the fair value of these
debentures, the Company used currently quoted market prices.
Note 15. RESTRUCTURING CHARGE
In December 1997, the Company recorded a pre-tax restructuring charge of
$9,000,000. This charge, relating directly to the Company's international
operations, includes:(i) the elimination of approximately 60 positions
($5,450,000); (ii) the lease terminations of six of the company's sales
facilities and the consolidation of the company's European research and
development center to the corporate headquarters ($1,500,000); (iii) the costs
associated with the termination of two master re-seller agreements in Asia and
Southern Europe ($1,550,000); and (iv) costs associated with the consolidation
of inventory to the European distribution center ($500,000). At December 28,
1997, $7,500,000 of restructuring remains in Other Current Liabilities. Of
the $9,000,000 restructuring charge in 1997, $1,055,000 is included in Cost of
Revenues. The restructuring activity is expected to be substantially complete
prior to the end of 1998.
In December 1995, as a result of the Actron acquisition, the Company announced
a restructuring plan to reorganize its workplace on an international basis to
eliminate redundancies. In connection with the restructuring, approximately
28 manufacturing and field service positions in the Company's international
operations were eliminated. The Company incurred a charge of $1,410,000 in
connection with this restructuring.
Note 16. COMMITMENTS AND CONTINGENCIES
The Company leases its offices, distribution center and certain production
facilities. Rental expense for all operating leases approximated $7,055,000,
$6,408,000, and $4,211,000 in 1997, 1996, and 1995, respectively. Future
minimum payments for operating leases having non-cancelable terms in excess of
one year at December 28, 1997 are: $5,580,000 (1998), $3,999,000 (1999),
$2,902,000 (2000), $2,132,000 (2001) and $9,350,000 thereafter.
The Company entered into a twelve year lease agreement for a newly constructed
facility in 1994 for the Company's worldwide headquarters including
administrative offices, research and development activities and warehouse
distribution. These lease payments related to this facility have been
included in the future minimum payments for operating leases above.
Until October 1995, the Company was the exclusive worldwide licensee of
Arthur D. Little, Inc. ("ADL") for certain patents and improvements thereon
related to EAS products and manufacturing processes. On October 1, 1995, the
Company acquired these patents for $1.9 million plus a percent ranging from 1%
to 1.5% of future EAS RF products sold through 2008. Prior to October 1,
1995, the Company paid a royalty to ADL of approximately 2% of net revenues
53
generated by the sale and lease of the licensed products, with the actual
amount of the royalty depending upon revenue volume.
The Company is the worldwide licensee of certain patents and technical
knowledge related to proximity card and card reader products. It pays a
royalty equal to 2% of the net revenues from the licensed products. Such
royalties are payable through January 29, 2000, or until all of the subject
patents have been adjudicated invalid.
The Company has a worldwide license to distribute a point-of-sale front-end
monitoring system being marketed under the name Viewpoint. Marketing of this
product began in 1992. The Company pays a one-time site license fee for each
site installed.
Effective January 1, 1995, A.E. Wolf, former Chief Executive Officer, and
current Chairman of the Board of Directors entered into a non-compete
agreement with the Company. In consideration of this agreement, the Company
will pay Mr. Wolf five annual installments of $25,000 each commencing January
1, 1995.
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. In addition, the Company maintains foreign credit
insurance to provide coverage for potential foreign political or economic
risks. Domestically, the Company's sales are well diversified among numerous
retailers in the apparel, shoe, drug, mass merchandise, video, music,
supermarket and home entertainment market. The Company performs ongoing
credit evaluations of its customers' financial condition and generally
requires no collateral from its customers.
Note 18. ACQUISITIONS
On February 1, 1995, the Company purchased Alarmex, Inc.,(Security Systems
Group), for approximately $13.5 million ($10 million in cash and the balance
in 401,434 shares of restricted Common Stock of the Company). Alarmex designs
and provides CCTV, POS monitoring, burglar and fire alarm systems and also
provides related central station monitoring services to over 10,000 retail
sites in the United States. Acquired research and development costs of
approximately $92,000 were expensed as a result of the acquisition. The
purchase price resulted in an excess of acquisition cost over net assets
acquired of approximately $10,400,000, which is being amortized over twenty
years.
On November 30, 1995, the Company purchased all of the capital stock of Actron
Group Limited (Actron) which was engaged in the manufacture, distribution and
sale of security products and services. Actron's operations were combined
with the Company's operations during 1996. The purchase price of the capital
stock was approximately $54,000,000. This acquisition was accounted for under
the purchase method and, accordingly, the results of operations of this
business have been included with those of the Company since the date of
acquisition. The purchase price resulted in an excess of acquisition cost
over net assets acquired of approximately $40,600,000 which is being amortized
over thirty years.
On March 21, 1996, the Company purchased all of the capital stock of Mercatec
Sistemas e Comercio de Equipamentos Electronicos Ltds (Mercatec). Mercatec is
a leading supplier of EAS systems and CCTV systems to retailers in Brazil.
On November 18, 1996, the Company purchased all of the capital stock of
Vysions Systems, Inc. (Vysions) in Ontario, Canada. Vysions is a leading CCTV
systems integrator and solutions provider for the Canadian market.
54
On December 27, 1996, the Company acquired Checkpoint Systems Japan, Co. Ltd.,
its exclusive distributor for retail products throughout Japan. This
acquisition provided the Company its first direct presence in the growing
Asian market.
On January 31, 1997, the Company completed the acquisition of 2M Holding ApS
(2M) for approximately $2.3 million. 2M had been the Company's exclusive
distributor for retail security products throughout Denmark since 1992.
On July 2, 1997, the Company acquired the assets of Check Out Security Systems
for approximately $1.2 million. Check Out Security, located in Denmark, is a
provider of CCTV products, installation and service.
On August 21, 1997, the Company acquired all of the outstanding shares of D&D
Security for approximately $1.0 million. D&D Security, located in Belgium, is
a provider of CCTV products and fire/burglar alarm systems.
On December 18, 1997, the Company acquired all of the outstanding shares of
Evagard PLC for approximately $1.6 million. Evagard, located in the United
Kingdom, is a provider of CCTV products, installation and service.
Note 19. GEOGRAPHIC SEGMENTS
Operating results are prepared on a "customer basis," meaning that net sales
and profit (loss) from operations are included in the geographic area where
the customer is located. Assets are included in the geographic area in which
the producing entities are located. A direct sale from the United States to
an unaffiliated customer in Europe is reported as a European sale. Interarea
sales between the Company's locations are made at transfer prices that
approximate market price and have been eliminated from consolidated net sales.
Operating 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 tables shows sales, operating earnings and other financial
information by geographic area for the years 1997 and 1996.
United States
and Puerto Rico Europe Other (1)
--------------- ---------- ------------
(Thousands)
1997
Sales from Unaffiliated
Customers $177,431 $100,500 $58,033
Operating Income(Loss) (2) $ 29,893 $(12,121) $(6,068)
Identifiable Assets $319,638 $151,112 $45,684
United States
and Puerto Rico Europe Other (1)
--------------- ---------- -------------
(Thousands)
1996
Net Sales from Unaffiliated
Customers $145,876 $101,671 $44,222
Operating Income(Loss) $ 27,810 $ (1,058) $ 3,317
Identifiable Assets $375,353 $100,798 $45,502
(1) Other includes the Company's operations in Canada, Mexico, Argentina,
Australia, Brazil, and Japan.
(2) Operating income (loss) includes pre-tax non-recurring charges of $8.1
million and pre-tax restructuring charges of $9.0 million.
55
The Company's export sales to foreign distributors approximated $13,539,000,
$24,505,000, and $21,785,000 in 1997, 1996, and 1995, respectively. Sales by
the Company's foreign subsidiaries in Argentina, Australia, Canada, Western
and Southern Europe, Scandinavia, Brazil, Japan, and Mexico totaled
$144,994,000 in 1997, and $121,388,000 in 1996 and $55,422,000 in 1995. Sales
to one foreign distributor of the Company's products amounted to $6,456,000,
and $10,721,000 in 1996, and 1995, respectively. There were no sales to this
distributor in 1997.
Note 20. MINORITY INTEREST
On July 1, 1997, Checkpoint Systems Japan Co. Ltd., a wholly-owned subsidiary
of the Company (Checkpoint Japan) 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 Sheet includes 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 Sheet and Consolidated Earnings Statement,
respectively.
Note 21. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which is effective for fiscal years beginning after December 15, 1997. The
provisions of SFAS No. 130 establish standards for reporting and display of
comprehensive income and its components in the financial statements. This
statement requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in the
financial statements and displayed with the same prominence as the other
financial statements. Also in June 1997, the FASB issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. The
provisions of SFAS No. 131 establish standards for the way that enterprises
report information about operating segments in annual financial statements and
require that selected information about operating segments in interim
financial statements be reported. It also establishes standards for related
disclosure about products and services, geographic areas, and major customers.
The Company is reviewing these new standards for adoption in 1998.
Note 22. SUBSEQUENT EVENTS
On February 2, 1998, the Company acquired the assets of Tokai Electronics Co.,
Ltd., a Japanese manufacturer of radio frequency tags, for approximately $27
million. The Company has held a one-third interest in Tokai since 1995.
Item 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no changes or disagreements to report under this item.
56
PART III
The information called for by Item 10, Directors and Executive Officers of the
Registrant (except for the information regarding executive officers called for
by Item 401 of Regulation S-K which is included in Part I hereof as Item A in
accordance with General Instruction G(3)); Item 11, Executive Compensation;
Item 12, Security Ownership of Certain Beneficial Owners and Management: Item
13, Certain Relationships and Related Transactions, is hereby incorporated by
reference to the Registrant's definitive proxy statement for its Annual
Meeting of Shareholders presently scheduled to be held on April 22, 1998,
which management expects to file with the Securities and Exchange Commission
within 90 days of the end of the Registrant's fiscal year.
Note that the sections of the definitive proxy statement entitled
"Compensation Committee Report on Executive Compensation" and "Stock Price
Performance Graph", pursuant to Reg. S-K Item 402 (a)(9) are not deemed
"soliciting material" or "filed" as part of this report.
57
PART IV
Item 14. EXHIBITS, FINANCIAL SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements PAGE
------------------------
The following consolidated financial statements are
included in Part II, Item 8:
Report of Independent Accountants............................. 34
Consolidated Balance Sheets as of December 28, 1997 and
December 29, 1996 and ....................................... 35
Consolidated Earnings Statements for each of the years
in the three-year period ended December 28, 1997............ 36
Consolidated Statements of Shareholders' Equity for each
of the years in the three-year period ended
December 28, 1997........................................... 37
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 28, 1997............ 38
Notes to Consolidated Financial Statements.................... 39
(a) 2. Financial Schedule
-------------------------
The following consolidated schedule is required to be filed
by Part IV, Item, 14(a)2:
Schedule II - Valuation and Qualifying Accounts............... 60
All other schedules are omitted either because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto:
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K
----------------------------------------------------------------
Exhibit 3.1 Articles of Incorporation, as amended, are hereby
incorporated by reference to Item 14(a), Exhibit
3(i) of the Registrant's 1990 Form 10-K, filed with
the SEC on March 14, 1991.
Exhibit 3.2 By-Laws, as Amended and Restated, are hereby
incorporated by Reference to the Registrants 1992
Form 10-K, filed with the SEC on March 25, 1993.
Exhibit 4.1 Rights Agreement by and between Registrant and
American Stock and Transfer and Trust Company dated
As of March 10, 1997, is hereby incorporated by
reference to Item 14(a), Exhibit 4.1 of the
Registrant's 1996 Form 10-K filed with the SEC on
March 17, 1997.
Exhibit 4.3 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 to Registrant's Form 10-Q/A filed with
The SEC on December 13, 1995.
Exhibit 4.4 First Supplemental Indenture dated as of
February 27, 1998 (amending Indenture dated as of
October 24, 1995).
Exhibit 10.1 1997 Bonus Plan
58
PART IV
Item 14. EXHIBITS, FINANCIAL SCHEDULE, AND REPORTS ON FORM 8-K (Continued)
Exhibit 10.2 Amended and Restated Stock Option Plan (1992)
Exhibit 10.3 Consulting and Deferred Compensation Agreement with
Albert E. Wolf, are incorporated by reference to
Item 14(a), Exhibit 10(c) of the Registrant's 1994
Form 10-K.
Exhibit 10.4 Terms and Agreement between Registrant and Principal
Mutual Life Insurance Company is incorporated by
reference to Item 14(a), Exhibit 10(e) of the
Registrant's 1994 Form 10-K.
Exhibit 10.5 First Amendment to Note Agreement between Registrant,
Principal Mutual Life Insurance Company and The
Mutual Group Insurance Company, is incorporated
herein by reference to Item 14(a), Exhibit 10(f) of
the Registrant's 1994 Form 10-K.
Exhibit 10.6 Agreement for Sale and Purchase of Actron Group
Limited between the Registrant and ADT (UK) Limited
and ADT Limited, filed as Exhibit 7(c) on Form 8-K
with the SEC on December 15, 1995; and as further
amended on Form 8-K/A and filed with the SEC on
February 13, 1996, February 15, 1996; and
February 20, 1996 are hereby incorporated by
reference.
Exhibit 10.7 Stock Purchase Agreements by and between the
Registrant and Alarmex, Inc and Bayport Controls,
Inc., filed as Exhibit A and B on Form Form 8-K
with the SEC on February 15, 1995; and as further
amended on March 16, 1995, are hereby incorporated
by reference.
Exhibit 10.8 Amended and Restated Employee Stock Purchase Plan as
Appendix A to the Company's Definitive Proxy
Statement, filed March 22, 1996, is hereby
incorporated by reference.
Exhibit 10.9 Asset Purchase Agreement by and among Tokai Aluminum
Foil Co. Ltd., Tokai Electronics Co. Ltd.,
Checkpoint Production Japan K.K. and the
Registrant, is incorporated herein by reference to
Item 7(c), Exhibit 2 of the Registrant's Form 8-K
filed with the SEC on February 18, 1998.
Exhibit 10.10 Credit Agreement, dated as of December 24, 1997, 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 10.1 of the Registrant's Form 8-K filed with
the SEC on February 18, 1998.
Exhibit 21 Subsidiaries of the Registrant.
Exhibit 23 Consent of Independent Accountants
Exhibit 24 Power of Attorney, contained in signature page.
Exhibit 27 Financial Data Schedule.
Exhibit 27.1 Restated Financial Data Schedule for the Quarter
ended September 28, 1997
Exhibit 27.2 Restated Financial Data Schedule for the Quarter
ended June 29, 1997
Exhibit 27.3 Restated Financial Data Schedule for the Quarter
ended March 30, 1997
Exhibit 27.4 Restated Financial Data Schedule for the Year-Ended
December 29, 1996
Exhibit 27.5 Restated Financial Data Schedule for the Quarter
ended September 29, 1996
Exhibit 27.6 Restated Financial Data Schedule for the Quarter
ended June 30, 1996
Exhibit 27.7 Restated Financial Data Schedule for the Quarter
ended March 31, 1996
Exhibit 27.8 Restated Financial Data Schedule for the Year-Ended
December 31, 1996
(b) Reports on Form 8-K
None
59
CHECKPOINT SYSTEMS, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance at
Beginning Costs and Deductions End of
Year Classification of Year Expenses Year
- ---- -------------- ---------- ---------- ---------- ----------
1997 Allowance for $4,282 $3,809 $2,388 $5,703
doubtful accounts
------ ------ ------ ------
1996 Allowance for
doubtful accounts $1,906 $2,980 $ 604 $4,282
------ ------ ------ ------
1995 Allowance for
doubtful accounts $1,570 $1,801 $1,465 $1,906
------ ------ ------ ------
60
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
EXHIBIT 4.4 First Supplemental Indenture dated as of
February 27, 1998 (amending Indenture dated
As of October 24, 1995)
EXHIBIT 10.1 1997 Bonus Plan
EXHIBIT 10.2 Amended and Restated Employee Stock Option Plan
EXHIBIT 21 Subsidiaries of Registrant
EXHIBIT 23 Consent of Independent Accountants
EXHIBIT 24 Power of Attorney, Contained in Signature
EXHIBIT 27 Financial Data Schedule
61
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 23, 1998.
CHECKPOINT SYSTEMS, INC.
/s/Kevin P. Dowd
- -----------------
President, Chief Executive Officer,
and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Kevin P. Dowd and Jeffrey A. Reinhold and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution in their place and stead, in any and all capacities, to sign any
and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Kevin P. Dowd President, Chief March 23, 1998
- -------------------- Executive Officer and Director
/s/Steven G. Selfridge Executive Vice President March 23, 1998
- -------------------- and Chief Operating Officer
/s/Jeffrey A. Reinhold Vice President - Finance, March 23, 1998
- -------------------- Chief Financial Officer,
and Treasurer
/s/W. Craig Burns Vice President - Corporate March 23, 1998
- -------------------- Corporate Controller and
Chief Accounting Officer
/s/Robert O. Aders Director
- -------------------
/s/Roger D. Blackwell Director March 23, 1998
- --------------------
/s/Richard J. Censits Director March 23, 1998
- --------------------
62
SIGNATURES AND POWER OF ATTORNEY
(continued)
/s/David W. Clark Director March 23, 1998
- --------------------
/s/Elisa Margaona Director March 23, 1998
- -------------------
/s/Raymond R. Martino Director March 23, 1998
- -------------------
/s/Jermain B. Porter Director March 23, 1998
- -------------------
/s/Albert E. Wolf Director March 23, 1998
- -------------------
63