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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 27, 1998 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 1, 1999 the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $254,000,000.
As of March 1, 1999, there were 30,126,884 shares of the Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Certain portions of the Company's definitive proxy statement for
its Annual Meeting of Shareholders, presently scheduled to be held on
May 5, 1999.
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.
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 modern
facilities in Puerto Rico and Japan 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 provide a significant source of recurring revenues and
accounted for approximately 32% of the Company's net revenues for fiscal year
1998. With the recent expansion of the Company's manufacturing facilities in
Puerto Rico, combined with the Japanese facilities acquired in early 1998,
the Company now has the capacity to produce up to approximately 5.4 billion
disposable RF tags per year.
The Company's diversified product lines are designed to help retailers
prevent losses caused by theft (both by customers and employees) and reduce
selling costs through lower staff requirements. The Company's products
facilitate the open display of consumer goods, which allow the retailer to
maximize sales opportunities. 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
Department Stores, Eckerd Corporation, H.E. Butt Stores, Mervyns, Rite Aid
Corporation, Target Stores, Toys "R" Us, Walgreen Co., and Winn Dixie in the
U.S.; Canadian Tire, Shoppers Drug Mart/Pharmaprix, and Toys "R" Us in
Canada; Gigante in Mexico; B&Q, Dixons, Sainsbury, and Wickes in the UK;
Continente and El Corte Ingles in Spain; Intermarche and FNAC in France;
Carrefour in Italy; Norte in Argentina, and Big W, Coles Myer Ltd., and
KMart in Australia.
The Company's business strategy focuses on providing solutions to retailers'
concerns regarding product shrinkage. Through new product innovations to the
RF-based platform, the Company will seek to continue its leadership position
in certain key hard goods markets, expand its market share in the soft goods
market, and dominate in new geographic markets as well. The Company will also
continue to capitalize on its installed base of large global retailers to
aggressively promote Impulse(R) source tagging. Furthermore, the Company
will seek to exploit the flexibility of RF-technology to develop RF-based
auto-ID products for the library and retail marketplace, capitalizing on the
increased attention to supply-chain management.
To achieve these objectives, the Company will work to 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.
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 (Logistics). In 1977,
Logistics, pursuant to the terms of its merger into Lydall, Inc., distributed
the Company's Common Stock to Logistics' shareholders as a dividend.
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 (ID Systems Group), related
Dutch Companies engaged in the manufacture, distribution and sale of EAS
systems throughout Europe. 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
installs CCTV, POS monitoring, and burglar and fire alarm systems. The
Company 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 Eletronicos Ltda. (Mercatec). Mercatec is
a 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
Vysions Systems, Inc. (Vysions) 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. The acquisition
provided the Company its first direct presence in the growing Asian market.
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 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.
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.
On February 2, 1998, the Company acquired the operating assets of Tokai
Electronics Co., Ltd., (Tokai), a Japanese manufacturer of radio frequency
disposable labels. The Company had held a one-third interest in Tokai since
1995.
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, security personnel, and POS
auditing programs. EAS systems, when combined with other systems, provide
retail management with the ability to monitor consumer activity, impact
merchandise shrinkage, and merchandise products more efficiently.
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
point-of-sale data collection systems 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 fixed and high-speed
pan/tilt/zoom camera systems, programmable switcher controls, time-lapse
recording, remote tele-surveillance, and point-of-sale (POS) monitoring
systems.
The Company's custom designed fire/intrusion alarm systems provide protection
against internal and external theft, completing the full 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 services.
Access Control Systems
Electronic access control systems restrict access to areas requiring
protection by granting access only to authorized personnel at specified times.
Continued developments in processing and software technology have enhanced the
sophistication of electronic access control systems by embedding these systems
into the infrastructure of the business.
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.
RFID - Intelligent Tagging
The joint development of a new product undertaken by the Company and
Mitsubishi Materials Corporation (Mitsubishi) for retail, library and
commercial industrial applications is called RF-EAS/ID(TM). This joint
project combines the Company's RF and manufacturing expertise with
Mitsubishi's integrated circuit and materials expertise. The product line, a
family of tags and readers, can effectively provide solutions to a variety of
applications in the auto-ID marketplace. The Performa(TM) family of RFID
products is expected to be released in early 1999.
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 systems are 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.
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 sensor'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 1998, 1997, and 1996, the percentage
of the Company's net revenues from sensors was 22%, 26%, and 27%,
respectively.
In 1998, the Company introduced the Strata(TM) family of sensors -
Checkpoint's new family of wide aisle products. The Strata PX has been
targeted at all applications where the retailer needs to protect large
entry/exit ways with few antennas. During 1999, the Company plans to offer
new package styles with enhanced functionality of the Strata line of products.
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(TM) (ADD/RF) 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. Additional features include merchandising panels, alarm
counter, pager interface, people counter, and alarm sounding devices.
The Pillar(TM) family of products was also introduced in 1998. The Pillar
family offers flexibility in packaging and style with unobtrusive wide-aisle
protection. The Pillar system also utilizes DSP technology along with the
Company's newly developed ADD/RF 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 Company makes the QS4000(TM), QS4500(TM) and QS5500(TM) for mid-aisle
(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.
Introduced in 1990, the QS2000(R) remains a popular narrow aisle product line,
especially with smaller 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 in-lane EAS sensors that are
compatible with the full range of EAS tags and deactivators. Marketed under
the name Corvus(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.
Deactivation Units
Deactivation units disarm the disposable tag to prevent recognition by the
sensors located at the exits. 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, the latest Counterpoint version, was introduced in 1997.
With its non-contact 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 supplier with the preferred
technology with retailers concerned about customer through-put at
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 50 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 15 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 also 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
1998, 1997, and 1996, the percentage of the Company's net revenues from
deactivation was 11%, 12%, and 13%, respectively.
Tags
All tags contain an electronic RF 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 at the store location, 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 frequently-pilfered items. Disposable
tags must be deactivated electronically at the point-of-sale, or passed around
the sensors. The Company provides tags compatible with a wide variety of
standard price-marking/bar-coding printers. The Company's tags can be
integrated into many commonly available printers offered by Sato, Zebra,
Monarch, Printronix and Avery Dennison. 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
manufacturing site, in the distribution center, or in-store. Under the
Company's Impulse source tagging program, tags can be embedded in products or
packaging at the point-of-manufacture. For 1998, 1997, and 1996, the
percentage of the Company's net revenues from disposable tags was 24%, 22%,
and 24%, respectively.
The Company is licensed to sell and provide tags in roll form for the Model
4021(TM) label applicator printer (Pathfinder(R)) manufactured by Monarch
Marking Systems. This product is 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 strategic working relationships with several label integrators
including Avery Dennison, A&H Manufacturing, Paxar, J&J Cash, Ltd., RVL, and
Shore to Shore. Avery Dennison offers customers a variety of labels and
tickets that contain the Company's embedded RF security circuit, utilizing a
fully automated proprietary process.
Reusable Tags
The Company markets a full line of reusable products, which provide security
for apparel items, as well as for entertainment products such as music CDs,
audio and video cassettes, and video games. Consisting of plastic hard tags,
fluid ink tags, and SAFER(R) products, the reusable product line accounted for
8%, 10%, and 8% of the Company's net revenue in 1998, 1997, and 1996,
respectively.
The Company's most popular reusable products are its plastic hard tags which
are attached via a pin to men's and women's apparel items. The Company's
product line includes the UFO, Mini UFO, and Super UFO tags and consist of a
plastic housing, a magnetic based lock, and an RF coil for detection in the
Company's EAS sensors. The Mini hard tag combines solid detection and
security performance with value pricing. Several new hard tags are currently
in test for release in 1999 that will further enhance Checkpoint's apparel EAS
portfolio.
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 for use in stores such as
department stores, mass merchandise, and sporting 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 the reusable tags described above, the Company
manufactures a variety of other reusable hard tags.
The Company markets a full range of plastic Safer 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, worldwide licensing rights for Viewpoint(R), a POS
total transaction monitoring system designed to help control internal theft.
CCTV products include fixed, high speed dome cameras in basic black & white
and color, covert CCTV investigative kits, VCRs, digital storage components,
and the Company's Clarity Concept(TM) dome CCTV product, which is a fully
functional pan/tilt/zoom camera system.
Monitoring products include the Company's Viewpoint and Possi(R) POS
transaction monitoring systems. 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 Point(TM), an RF-based burglar alarm system, and Keywriter(TM),
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/FM approved 24
hour central monitoring station. For fiscal 1998, 1997, and 1996, the
percentage of the Company's net revenue from CCTV systems and monitoring
services was 19%, 16%, and 13%, respectively.
Access Control Systems
Electronic access control systems restrict access to areas requiring
protection by granting access only to authorized personnel at specified times.
For fiscal years 1998, 1997, and 1996, the percentage of the Company's net
revenue from access control systems remained at approximately 3% of total
revenues.
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 Architecture(R) which stipulates that no single
point of failure will affect the entire system. These systems are capable of
controlling over 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), integrated ID Badging, and CCTV functionality, 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 has opened the possibility of
broadcasting controller information over corporate networks (i.e. LAN/WAN)
allowing both increased speed and lower cost.
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
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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 (department stores; mens, womens and
childrens apparel; specialty stores, and sporting goods). 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 Department Stores, Eckerd Corporation, H.E. Butt Stores,
Mervyns, Rite Aid Corporation, Target Stores, Toys "R" Us, Walgreen Co., and
Winn Dixie in the U.S.; Canadian Tire, Shoppers Drug Mart/Pharmaprix, and Toys
"R" Us in Canada; Gigante in Mexico; B&Q, Dixons, Sainsbury, and Wickes in the
UK; Continente and El Corte Ingles in Spain; Intermarche and FNAC in France;
Carrefour in Italy; Norte in Argentina; and Big W, Coles Myer Ltd., and Kmart
in Australia.
Industry sources estimate that "shrinkage" (the value of goods which are not
paid for) is a $25-35 billion annual problem for the North American retail
industry and a $30-45 billion annual problem throughout the rest of the world.
Shrinkage is caused primarily by shoplifting and employee theft.
Sophisticated data collection systems (primarily 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 360,000 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.
In early 1995, the Company acquired Alarmex (now referred to as Checkpoint
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:
- - Continue to promote Impulse Source Tagging on a worldwide basis
- - Provide retailers with the next generation of security and supply chain
management systems utilizing RF-EAS/ID (RFID) technology
- - 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
- - Expand the Company's presence in all EAS markets with specific focus on
supermarket, apparel, department store, and hypermarkets
- - Seek acquisitions and strategic alliances both domestically and
internationally
The Company promotes its products primarily through: (i) ease of integration
into the retail environment; (ii) emphasizing Impulse Source Tagging;
(iii) providing total loss prevention solutions to the retailer; (iv) superior
service and support capabilities; (v) direct sales efforts and targeted trade
show participation; and (vi) the offering of flexible financing options
including various leasing options as well as the comprehensive tag program.
The Impulse 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 embedded
into product or packaging, and more importantly, the simplicity with 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%. Source tagging also eliminates the labor costs associated with
manual, in-store application of security tags, and eliminates excessive
packaging materials required for theft deterrence.
During 1998, over 600 million disposable tags were provided to over 1,700
worldwide manufacturers participating in the Company's source tagging program.
Strategies to increase acceptance of source tagging are as follows:
(i)increase installation of RF-EAS equipment on a chainwide basis with leading
retailers around the world; (ii) assist retailers in promoting source tagging
with vendors; (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.
In the anticipation of the needs of the Company's retail customers, the
Company is utilizing the versatility of radio frequency (RF) technology by
combining an integrated circuit with the Company's RF circuit to deliver a
RFID tag capable of storing, processing and communicating product information
while simultaneously protecting merchandise from theft. This product
represents a rational progression of the Company's ongoing focus on RF
technology. The Company believes RFID will revolutionize retail operations as
well as provide benefits to manufacturers and distributors in the retail
supply chain.
To accelerate the development of the RFID 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. Under
this multi-year agreement, which creates a joint product research and
development project, the parties are dedicated to developing radio frequency
intelligent tagging solutions for retail, library, and commercial/industrial
applications. The project combines funding, personnel, and other resources as
well as the RFID technology portfolios of the two companies.
Distribution
- ------------
EAS Systems
The Company sells its EAS systems principally throughout North America, South
America, Europe, and Asia Pacific. During 1998, EAS revenues from outside of
North America represented approximately 50% of the Company's EAS net revenues.
In North America, the Company markets its EAS products almost entirely
through its own sales personnel and independent representatives. The Company,
at December 27, 1998, employed 113 salespeople who sell the Company's products
to the North American retail market and who are compensated by salary plus
commissions. Of total EAS domestic revenues during 1998, 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 international subsidiaries, as of
December 27, 1998 employed a total of 177 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,
Mexico, Argentina, Brazil, Australia, and Japan.
Independent distributors accounted for 6.8% of the Company's EAS revenues
outside the United States during 1998. Foreign distributors sell the
Company's products to both the retail and library markets. The Company,
pursuant to written distribution agreements, generally appoints an independent
distributor as an exclusive distributor for a specified term and for a
specified territory. 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 153 independent dealers. The Company
employs six 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.
Salespeople
- -----------
The Company presently employs approximately 309 salespeople worldwide. On
average, these salespeople have over five years experience in the industry.
The Company invests heavily in sales training programs and experiences little
turnover among its top performers.
Backlog
- -------
The Company's backlog of orders was approximately $18.8 million at December
27, 1998, compared to approximately $24.2 million at December 28, 1997. The
Company anticipates that substantially all of the backlog at the end of 1998
will be delivered during 1999. 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 future growth opportunities, 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. The Company continually evaluates its domestic and international
patent portfolio, and where the cost of maintaining the patent exceeds its
value, such patent may not be renewed. The majority of the Company's revenue
is derived from products or technologies which are patented or licensed. 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 1.5%, 1.2%, and 1.4% of EAS net revenues for fiscal years 1998,
1997, and 1996, 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 1% to 1.5% 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. 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, card reader products, and software
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 pays royalties relative to the feature set imbedded within certain
software products. This agreement is renewed annually.
The Company also pays a royalty equal to 3.5% on hardware revenue associated
with the sale of certain software products. This agreement will remain in
place through 1999.
Royalty expense for fiscal years 1998, 1997, and 1996 was less than 2% of the
Company's EAC net revenues.
Manufacturing, Raw Materials and Inventory
- ------------------------------------------
EAS
The Company manufactures its products in modern facilities located in Puerto
Rico, Japan, 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.
The Company sold approximately 2.7 billion disposable RF tags in 1998. With
the recent expansion of the manufacturing facility in Puerto Rico and the
acquisition of the assets of Tokai Electronics Co., Ltd., the Company has the
capacity to produce 5.4 billion disposable RF tags per year.
The Company purchases raw materials from outside suppliers and assembles
electronic components at its facilities in Puerto Rico for the majority of its
sensor product lines. For its tag production, the Company purchases raw
materials and components from suppliers 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 and
circuit boards for its systems; and aluminum foil, resins, paper, and ferric
chloride solutions for the Company's disposable tags. While most of these
materials are purchased from several suppliers, there are numerous alternative
sources for all such materials. The 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 during product assembly at the Company's operation facilities.
Access Control Systems
The Company purchases raw materials from outside suppliers and assembles the
electronic components for controllers and proximity readers at its facilities
in the Dominican Republic and Puerto Rico. For non-proximity electronic
access control components, the Company subcontracts manufacturing activities.
All electronic access control final system assembly and testing is performed
at the Company's facilities in Thorofare, New Jersey.
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 45% share of the worldwide installation base. Management
estimates that the Company's market share of installed systems in the EAS
industry is approximately 36%.
Within the U.S. market, additional competitors include Sentry Technology
Corporation and Ketec, Inc., principally in the retail market, and Minnesota
Mining and Manufacturing Company, principally in the library market. Within
the Company's international markets, mainly Western Europe, Esselte Meto,
NEDAP, along with Sensormatic, are the Company's most significant competitors.
The Company believes that its product line offers more diversity than its
competition in protecting different kinds of merchandise with disposable
tags, hard reusable tags and flexible reusable tags, 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. Furthermore, the Company believes that its
manufacturing know-how and efficiencies relating to disposable and reusable
tags give it a significant cost advantage over its competitors.
CCTV Systems and Monitoring Services
The Company's CCTV and POS Monitoring products, which are sold domestically
through its Security Systems Group subsidiary and internationally through its
international sales subsidiaries, compete primarily with similar products
offered by 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 Rusco, Software
House Inc. (a subsidiary of Sensormatic), Northern Computers, and Lenel
Systems.
Research and Development
- ------------------------
The Company expended approximately $8,018,000, $7,604,000, and $6,408,000 in
research and development activities during 1998, 1997, and 1996, respectively.
The emphasis of these activities is the continued broadening of the product
lines offered by the Company and an expansion of the markets and applications
for the Company's products. The Company's continued growth in revenue can be
attributed, in part, to the products and technologies resulting from these
efforts.
Another important source of new products and technologies has been the
acquisition of companies and products during the last few years. The Company
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. The Company continually
evaluates its domestic and international patent portfolio, and where the cost
of maintaining a patent exceeds its value, such patent may not be renewed.
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. Under this multi-year
agreement, which creates a joint product research and development project, the
parties are 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 RFID technology portfolios of
the two companies.
Employees
- ---------
As of December 27, 1998, the Company had 3,044 employees, including 7
executive officers, 60 employees engaged in research and development
activities and 353 employees engaged in sales and marketing activities. In
the United States, 19 of the Company's employees are represented by a union.
Financial Information About Geographic and Business Segment
- ------------------------------------------------------------
The Company operates both domestically and internationally as well as in four
distinct business segments. The financial information regarding the Company's
geographic and business segments, which includes net sales and profit from
operations for each of the three years in the period ended December 27, 1998,
and identifiable assets as of December 27, 1998, December 28, 1997, and
December 29, 1996, 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. In 1998, the Company leased two
additional facilities located in Thorofare, New Jersey. The first is a
warehouse facility consisting of 10,000 square feet. The lease term is
currently month-to-month with a monthly payment of $4,575. 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
$129,000.
The Company's principal manufacturing facilities, for the production of most
of its products, are 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 8,000 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 $64,000. The leases for
both locations have been prepaid for their entire terms.
In 1998, the Company acquired the assets of Tokai Electronics Co. located in
Japan. Included as a part of this acquisition were two locations consisting
of 70,000 square feet of building space comprised of 3,200 square feet of
office space and 66,800 square feet of manufacturing and warehouse space
located on approximately 12 acres of land.
The Company's Security Systems Group subsidiary leases two facilities in Eden
Prairie, Minnesota. One facility contains approximately 29,000 square feet of
office and warehouse space. Assembly and distribution functions are
performed at this site. The lease on this facility expires in June 2001 with
an annual rent of approximately $157,000. The other facility contains
approximately 19,000 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 5,500 square feet of office space and an average of 3,800 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 $89,000 in 1998.
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 $232,000.
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 is a defendant in a Civil Action No. 99-CV-577, served February
10, 1999, in the United States District Court for the Eastern District of
Pennsylvania filed by Plaintiff, ID Security Systems Canada Inc. The suit
alleges a variety of antitrust claims; claims related to unfair competition
and related matters. Plaintiff alleges damages in excess of $20 million.
Management is of the opinion that the claims are baseless both in fact and in
law, and intends to vigorously defend the suit.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1998 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 Positions with the
Name Age Since Company
- ----------------------------- -- ------- --------------------
Kevin P. Dowd 50 1988 President and Chief
Executive Officer
William J. Reilly, Jr. 50 1989 Executive Vice President
Michael E. Smith 43 1990 Executive Vice President
Luis A. Aguilera 50 1982 Senior Vice President -
Manufacturing
Jeffrey A. Reinhold 41 1995 Senior Vice President -
Finance, Chief Financial
Officer and Treasurer
Neil D. Austin 52 1989 Vice President, General
Counsel and Secretary
W. Craig Burns 39 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 was Executive Vice President - Marketing, Sales and Service from
April 1989 to May 1992 and Vice President of Sales from August 1988 to April
1989.
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. Reinhold has been Senior Vice President - Finance, Chief Financial Officer
and Treasurer since February 1999. Mr. Reinhold was Vice President - Finance,
Chief Financial Officer and Treasurer from January 1996 until February 1999.
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 1992
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.
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.
High Low
------ ------
Closing Price
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
1998:
First Quarter............................ $21 7/8 16 3/16
Second Quarter....................... 21 1/4 14 5/8
Third Quarter.......................... 14 3/8 8 7/16
Fourth Quarter........................ 14 7 1/16
As of March 1, 1999, there were 1,481 record holders of the Company's Common
Stock.
The Company has never paid a cash dividend on the Common Stock (except for a
nominal cash distribution in April, 1997 to redeem the rights outstanding
under the Company's 1988 Shareholders' Rights Plan). The Company does not
anticipate paying any cash dividend in the near future and is limited by
existing covenants in the Company's debt instruments with regard to paying
dividends. The Company has retained, and expects to continue to retain, its
earnings for reinvestment in its business. The declaration and payment of
dividends in the future, and their amounts, will be determined by the Board of
Directors in light of conditions then existing, including the Company's
earnings, its financial condition and requirements (including working capital
needs) and other factors.
Item 6. SELECTED FINANCIAL DATA
SELECTED ANNUAL FINANCIAL DATA
--------------------------------
1998 1997 1996 1995 1994 1993
====== ====== ====== ===== ===== ======
(Thousands, except per share data)
FOR YEARS ENDED:
Net revenues $362,407 $335,964 $291,769 $204,741 $128,331 $93,034
Earnings before
income taxes $ 26,184(1)$ 13,565(2) $ 29,877 $ 16,598 $ 8,377 $ 2,071
Income taxes $ 8,509 $ 5,445 $ 9,430 $ 5,189 $ 2,094 $ 456
Net earnings $ 17,685 $ 8,228 $ 20,447 $ 11,409 $ 6,283 $ 1,651
Earnings per
common share
Basic $ .55 $ .24 $ .64 $ .43 $ .30 $ .08
Diluted $ .53 $ .23 $ .60 $ .42 $ .29 $ .08
Depreciation &
amortization $ 25,676 $ 23,762 $ 18,322 $ 12,178 $ 8,023 $ 6,476
(1) Includes a $0.6 million pre-tax reversal of the restructuring charge
recorded in the fourth quarter of 1997.
(2) Includes a $9.0 million pre-tax restructuring charge and non-recurring
pre-tax charges of $8.1 million.
AT YEAR-END:
Working capital $186,261 $211,570 $285,753 $148,074 $ 39,427 $ 27,984
Long-term debt $165,976 $150,855 $153,356 $155,674 $ 35,556 $ 24,302
Shareholders'
equity $261,936 $277,550 $300,794 $137,658 $ 61,303 $ 53,779
Total assets $507,663 $516,434 $521,653 $362,151 $127,925 $104,999
Capital
expenditures $ 12,301 $ 26,714 $ 10,454 $ 9,379 $ 4,532 $ 4,600
Cash provided
(used) by
operating
activities $ 29,157 $(59,559) $(17,212)$(14,753)$ (7,612)$ (6,317)
Cash used by
investing
activities $(39,460) $(36,548) $(19,882)$(79,652)$ (8,584)$(11,444)
Cash provided
(used) by
financing
activities $(18,386) $(24,508) $145,738 $170,917 $ 17,140 $ 15,441
Ratios
- ------
Return on
net sales(a) 4.88% 2.45% 7.01% 5.57% 4.90% 1.74%
Return on
average
equity(b) 6.56% 2.85% 9.33% 11.47% 10.92% 3.08%
Return on
average
assets(c) 3.45% 1.59% 4.63% 4.66% 5.39% 1.80%
Current
ratio(d) 3.37 3.46 5.58 3.22 2.32 2.04
Percent of total
debt to
capital(e) 48.40% 46.26% 42.34% 61.99% 52.08% 48.78%
(a) "Return on net sales" is calculated by dividing net earnings by net
sales.
(b) "Return on average equity" is calculated by dividing net earnings by
weighted average equity.
(c) "Return on average assets" is calculated by dividing net earnings by
average assets.
(d) "Current ratio" is calculated by dividing current assets by current
liabilities.
(e) "Percent of total debt to capital" is calculated by dividing total debt
by total debt and equity.
1998 1997 1996 1995 1994 1993
====== ====== ====== ====== ====== ======
(Thousands, except per share and employee data)
Other Information
- -----------------
Average number
of diluted
shares
outstanding 33,272 35,184 34,087 27,375 21,612 20,772
Number of
Employees 3,044 3,605 2,628 2,540 1,804 1,366
Backlog $18,800 $24,200 $ 8,400 $ 8,000 $ 7,053 $6,673
SELECTED QUARTERLY FINANCIAL DATA
QUARTERS (unaudited)
--------------------------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
(Thousands, except per share data)
1998
- ----
Net revenues $79,857 $90,578 $94,042 $97,930 $362,407
Gross profit $31,555 $35,660 $39,440 $40,442 $147,097
Net earnings $ 1,273 $ 3,692 $ 6,720 $ 6,000(1) $ 17,685
Earnings
per common
share:(4),
Basic $ .04 $ .11 $ .21 $ .20 $ .55
Diluted $ .04 $ .11 $ .20 $ .19 $ .53
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)(3) $ 8,228(3)
Earnings (loss)
per common
share:(4)
Basic $ .07 $ .14 $ .18 $ (.15) $ .24
Diluted $ .07 $ .14 $ .17 $ (.15) $ .23
(1) Includes a $0.6 million pre-tax reversal of the 1997 restructuring
charge.
(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) Includes a $9.0 million pre-tax restructuring charge and non-recurring
pre-tax charges of $8.1 million.
(4) Quarterly earnings per common share are computed independently;
therefore the sum of the quarters may not equal full year earnings per
share.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the Consolidated
Financial statements and the Notes to the Consolidated Financial Statements.
Results of Operations
(All comparisons are with the previous year, unless otherwise stated.)
Management's discussion and analysis of results of operations has been
presented on an as reported basis except for the exclusion in "Cost of
revenues" and "Selling general and administrative expense" (SG&A), of the
non-recurring and restructuring charges recorded in 1997 and 1998. The 1997
charges which totaled $17.1 million, represented (i) pre-tax restructuring
charges of $9.0 million of which $1.1 million was includable in the cost of
revenues and $7.9 million in SG&A; and (ii) pre-tax non-recurring charges of
$8.1 million of which $6.6 million was includable in the cost of revenues and
$1.5 million in SG&A. The 1998 amount represents a $0.6 million reversal of
the restructuring charge recorded in 1997. The table below reflects the
income from operations before restructuring and non-recurring charges.
Accordingly, the discussion that follows speaks to the comparisons in the
table through income from operations before restructuring and non-recurring
items.
1998 1997 1996
---- ---- ----
(Thousands)
Net Revenues $ 362,407 $ 335,964 $ 291,769
Cost of revenues 215,310 194,024 168,024
--------- --------- ---------
Gross Profit 147,097 141,940 123,745
Selling, general and administrative
expenses 117,034 113,091 93,676
--------- --------- ---------
Income from operations before
restructuring and non-recurring
charges 30,063 28,849 30,069
Restructuring and non-recurring
charges (600) 17,145 -
--------- --------- ---------
Income from operations after
restructuring and non-recurring
charges $ 30,663 $ 11,704 $ 30,069
========= ========= =========
Net revenues by product segment
Electronic Article Surveillance(1) $ 297,200 $ 278,635 $ 248,009
Domestic CCTV, Fire, and Burglary 53,745 45,834 35,232
Access Control 11,462 11,495 8,528
--------- --------- ---------
$ 362,407 $ 335,964 $ 291,769
========= ========= =========
(1) Included in the EAS amounts are the Company's foreign CCTV, Fire, and
Burglary which represents approximately 4%, 3%, and 1% of the Company's total
consolidated revenue for 1998, 1997, and 1996, respectively.
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 1998 and 1997 approximately 32% and 28%, respectively of the Company's
net revenues were attributable to sales of disposable tags and service to its
installed base of customers.
The Company's customers are substantially dependent on retail sales which are
seasonal and subject to significant fluctuations which are difficult to
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. Furthermore, as major contracts have
become a more significant component of revenue, quarterly revenue recognition
and earnings will be volatile and susceptible to the timing of the receipt of
orders.
During 1998, revenues increased by approximately $26.4 million or 7.9% from
$336.0 million to $362.4 million. This increase in revenues was due primarily
to (i) increased sales of the Company's Electronic Article Surveillance (EAS)
product line in North America (United States and Canada), and to a lesser
extent in the Company's International retail markets (excluding Canada); and
(ii) increased sales of the Company's CCTV/Fire and Burglar products in both
the North American and International markets.
In 1997, revenues increased by approximately $44.2 million or 15.1% from
$291.8 million to $336.0 million. This increase in revenues was due primarily
to increased sales of the Company's Electronic Article Surveillance (EAS)
product line in North America; and (ii) increased sales of the Company's
CCTV/Fire and Burglar products in both the North American and International
markets.
North American net revenues accounted for 58.7%, 57.5%, and 55.4% in 1998,
1997, and 1996, respectively. North American EAS net revenues increased by
$11.6 million or 8.5% and $18.3 million or 15.5%, in 1998 and 1997,
respectively. Sales of the Company's Domestic CCTV/Fire and Burglar products
increased by $7.9 million or 17.3% and $10.6 million or 30.1%, in 1998 and
1997, respectively. In 1998, net revenues of the Company's Access Control
product line, primarily in the United States, were consistent with the prior
year, while in 1997, net revenues increased $3.0 million or 34.8%.
International net revenues accounted for 41.3%, 42.5%, and 44.6% in 1998,
1997, and 1996, respectively. International net revenues, consisting of EAS
and CCTV/Fire and Burglar, increased by $6.9 million or 4.9% and $12.4 million
or 9.5% in 1998, and 1997, respectively.
Cost of Revenues
During 1998, cost of revenues increased $21.3 million or 11.0% from $194.0
million to $215.3 million. As a percentage of net revenues, cost of revenues
increased 1.6% (from 57.8% to 59.4%). The increase in the Company's cost of
sales is primarily attributable to: (i) product mix i.e. higher growth rate in
revenue of lower margin products such as CCTV/Fire and Burglar systems,
partially offset by the growth rate in revenue from high margin disposable
tags (during 1998, CCTV/Fire and Burglar revenue increased by 26.2% while
disposable label revenue increased by 16.3%);(ii) the costs associated with
excess capacity in the Puerto Rico manufacturing facilities resulting from the
recent expansion; (iii) an increase in field service costs to support existing
and future revenues; (iv) higher costs of disposable tags manufactured in
Japan; and (v) an increase in Research and Development activities associated
with the development of RFID products.
During 1997, cost of revenues increased $26.0 million or 15.5% from $168.0
million to $194.0 million. As a percentage of net revenues, cost of revenues
increased 0.2% (57.6% to 57.8%).
The principal elements comprising cost of revenues are product cost, research
and development cost, and field service and installation cost. 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 and circuit boards
for its systems; and aluminum foil, resins, paper, and ferric chloride
solutions for the Company's disposable tags. While most of these materials
are purchased from several suppliers, there are numerous alternative sources
for all such materials. The Company's general practice is to maintain a level
of inventory sufficient to meet anticipated demand for its products.
As a result of the Company's expansion of its manufacturing facilities in
Puerto Rico (1997) and the acquisition of the assets of Tokai Electronics Co.,
Ltd. (1998), capacity is expected to exceed product demand in the near term
and negatively impact production costs.
For fiscal year 1998 and 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
During 1998, SG&A expenses increased $3.9 million or 3.5% from $113.1 million
to $117.0 million. As a percentage of net revenues, SG&A expenses decreased by
1.4% (from 33.7% to 32.3%). The higher expenses (in dollars) were due to:
$1.5 million in variable costs (selling, commissions, and royalties) and sales
support costs (marketing and customer service) and $2.4 million in support
costs (finance, administration, legal, MIS, and operations).
During 1997, SG&A expenses increased $19.4 million or 20.7% from $93.7 million
to $113.1 million. As a percentage of net revenues, SG&A expenses increased
by 1.6% (from 32.1% to 33.7%). The higher expenses (in dollars) were due to:
$13.5 million in variable costs (selling, commissions, and royalties) and
sales support cost, $4.4 million in support costs (finance, administration,
legal, MIS, and operations), and $1.5 million in costs associated with the
terminated Ultrak merger.
Other Income, net
Other income, net was $0.3 million, $2.8 million, and $1.0 million for 1998,
1997, and 1996, respectively. Other income, net of $0.3 million in 1998
included $1.3 million of proceeds from the final settlement of the insurance
claim relating to the loss of business income caused by a fire at the
Company's warehouse facility in France offset by a net foreign exchange loss
of $1.0 million.
Other income, net 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.
Other income, net of $1.0 million in 1996 resulted from net foreign exchange
gains.
Interest Expense and Interest Income
Interest expense for 1998 remained flat when compared to 1997 and 1996 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 1998, 1997, and 1996 was $4.7 million, $8.7
million, and $8.3 million, respectively. The decrease in 1998 was a result of
a direct reduction in cash and cash investments primarily related to: (i) cash
used to purchase the Company's common stock in 1998 and 1997; (ii) cash used
to support operations in 1997; (iii) the costs related to the expansion of the
Company's manufacturing facility in Ponce, Puerto Rico during the second half
of 1997; and (iv) the acquisition of the assets of Tokai Electronics Co., in
February 1998.
Income Taxes
The Company's effective tax rate for fiscal 1998, 1997, and 1996 was 32.5%,
40.1%, and 31.5%, respectively. The higher tax rate in 1997 was primarily due
to certain foreign losses (resulting from the restructuring charges) for which
tax benefits were not expected to be realized, as it was not more than likely
that certain tax loss carryforwards would be utilized. The Company
anticipates that its effective tax rate will decrease in 1999 as restructuring
and cost savings programs decrease the impact of foreign losses on the
effective tax rate.
The Company's net earnings generated by the operations of its Puerto Rico
subsidiary are substantially exempt from Federal income taxes under Section
936 of the Internal Revenue Code (Section 936) and are substantially exempt
from Puerto Rico income taxes.
Net Earnings
Net earnings were $17.7 million or $.53 per share, $8.2 million or $.23 per
share, and $20.4 million or $.60 per share for fiscal years 1998, 1997, and
1996, respectively. The weighted average number of shares used in the diluted
earnings per share computation were 33.3 million, 35.2 million, and 34.1
million for fiscal years 1998, 1997, and 1996, respectively. The decrease in
the weighted average number of shares from 1997 to 1998 was primarily due to
the repurchase of common stock in 1998. The increase in the weighted average
number of shares from 1996 to 1997 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.
Financial Condition
Liquidity and Capital Resources
The Company's liquidity needs have related to, and are expected to continue to
relate to, capital investments, acquisitions and working capital requirements.
The Company has met its liquidity needs over the last three years primarily
through funds provided by long-term borrowings, 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, should be adequate for its presently foreseeable working capital
and capital investment requirements.
The Company's operating activities during fiscal 1998 generated approximately
$29.2 million compared to approximately $60.0 million consumed during 1997.
This change from the prior year was primarily the result of a decreased
investment in working capital and long-term customer contracts partially
offset by approximately $5.1 million in cash utilized in 1998 associated with
the restructuring.
The Company's Comprehensive Tag Program (Comp Tag) is a financial
marketing/sales program designed to remove capital investment costs as an
obstacle to the potential customer's decision to purchase an EAS system. This
program is offered to large potential customers in strategic vertical markets
who are considering chainwide EAS installations. 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 SFAS No. 13, are recognized as a sale upon shipment
of the EAS hardware. If the terms and conditions 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
for 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 Revenue Equipment on Operating Lease on the Consolidated Balance
Sheets.
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 has an existing $100 million multi-currency unsecured revolving
credit facility. At December 27, 1998, 2.43 billion Japanese Yen
(approximately $20.9 million) was outstanding under this credit agreement.
These borrowings, along with approximately $8 million from cash on hand, were
utilized in February 1998, to acquire the assets of Tokai Electronics Co.,
Ltd., a Japanese manufacturer of radio frequency tags, for approximately $28
million.
The Company has never paid a cash dividend (except for a nominal cash
distribution in April 1997, to redeem the rights outstanding under the
Company's 1988 Shareholders' Rights Plan). The Company does not anticipate
paying any cash dividend in the near future and is limited by existing
covenants in the Company's debt instruments with regard to paying dividends.
Management believes that its anticipated cash needs for the foreseeable future
can be funded from cash and cash equivalents on hand and the availability
under the $100 million unsecured revolving credit facility.
Capital Expenditures
The Company's capital expenditures during fiscal 1998 totaled $12.3 million
compared to $26.7 million during fiscal 1997. This decrease when compared to
1997 is primarily due to the 1997 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 Company anticipates its capital
expenditures to approximate $10.0 million in 1999.
Stock Repurchase
During 1997, the Board of Directors approved the purchase of up to 10% or
approximately 3.5 million shares of the Company's common stock at an average
cost not to exceed $14.00 per share. On October 23, 1998, the Board of
Directors authorized the additional purchase of up to $20 million of the
Company's outstanding common stock at an average cost not to exceed $14.00 per
share. As of December 27, 1998, the Company has purchased under the 1997
program, 3,441,300 shares of common stock for an average price of $12.02 per
share, and 1,319,900 shares of common stock for an average price of $13.02 per
share under the 1998 program.
Exposure to International Operations
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 sale and resale gives rise to the risk of gains or losses as a
result of currency exchange rate fluctuations.
In order to reduce the Company's exposure resulting from currency
fluctuations, the Company has been selectively purchasing currency exchange
forward contracts on a regular basis. These contracts guarantee a
predetermined exchange rate at the time the contract is purchased. This
allows the Company to shift the risk, whether positive or negative, of
currency fluctuations from the date of the contract to a third party.
As of December 27, 1998, the Company had currency exchange forward contracts
totaling approximately $41.9 million. The contracts are in the various local
currencies covering primarily the Company's Western European operations along
with the Company's Canadian, and Australian operations. The Company's
operations in Japan, Argentina, Mexico and Brazil were not covered by currency
exchange forward contracts at December 27, 1998.
During 1998, the Company also purchased a series of put options denominated in
Canadian dollars which gave the Company the right, but not the obligation, to
convert Canadian dollars at a specified exchange rate into U.S. dollars.
These options expire in 1999.
The Company will continue to evaluate the use of currency options in order to
reduce the impact that exchange rate fluctuations have on the Company's net
earnings from sales made by the Company's international operations. The
combination of forward exchange contracts and currency options should reduce
the Company's risks associated with significant exchange rate fluctuations.
Other Matters
Statements of Financial Accounting Standards Not Yet Adopted
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes new standards for
accounting for derivatives and hedging activities and amends a number of
existing standards. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. Although the Company has not fully completed its
evaluation of the impact of this new standard, we do not anticipate the
adoption of this standard to have a material effect on the Company's
consolidated financial statements.
Year 2000
Year 2000 Readiness
The Company's year 2000 readiness plan is primarily directed towards ensuring
business continuity by mitigating any year 2000 computer failures that could
interrupt business processes, damage customer service, and/or cause financial
loss. The plan addresses the year 2000 effect on the following areas: (i)
information systems; (ii) the Company's product offerings; and (iii) internal
and external supply chain readiness which includes the Company's internal
manufacturing processes.
The Company is involved in an ongoing assessment of year 2000 readiness and
is undergoing a company-wide program of adapting its computer systems and
applications for the year 2000. This assessment is expected to be
substantially complete by April 1999. The Company's primary applications
software has been procured through third party vendors, and the Company has
begun to address potential year 2000 deficiencies through updates provided by
the vendors. The Company's other non-mission critical information systems and
applications software, some of which are not year 2000 compliant, are also in
the process of being evaluated.
As a result of an evaluation of the Company's product lines for year 2000
compliance, the Company's primary products, comprised of EAS products, are not
date dependant and therefore, will not require modifications. The Company's
current Access Control products are determined to be compliant. Certain of
the Company's Access Control Products, which are no longer offered for sale,
were determined as not being year 2000 compliant. The Company has offered,
through its web site at http://www.checkpointacpg.com/y2kinfo.htm, an upgrade
path for such non-compliant products. The Company's CCTV and Fire and Burglar
alarm products are generally purchased from outside vendors and the Company is
currently working with such vendors to determine compliance.
The Company has begun an assessment of year 2000 issues associated with its
various business partners, including vendors and service providers, and is
working with these third parties to identify and mitigate common risks. The
Company also recognizes the potential for year 2000 issues in external areas
such as telephone and communication systems, utilities, banks and alarm
systems and is contacting all mission critical business partners to obtain
year 2000 readiness certifications. Initial responses from mission critical
business partners are expected back to the Company by April 1999.
Costs
Costs associated with the year 2000 compliance have not been material to date,
and the total costs to achieve year 2000 compliance are being evaluated.
Currently, management estimates the cost to test and remedy the Company's
information systems to be approximately $2.4 million. This estimate includes
the acceleration of hardware purchases of approximately $1.2 million and other
expenses consisting primarily of outside year 2000 consulting services of $1.2
million. However, there can be no assurance that costs will not exceed this
level. The Company has begun to determine the potential cost associated with
the Company's product offerings and supply chain readiness. The Company does
not expect these costs to be material.
Risks
The variety, nature and complexity of year 2000 issues, the dependence on
technical skills and expertise of Company employees and independent
contractors and issues associated with the readiness of third parties are
factors which could result in the Company's efforts toward year 2000
compliance being less than fully effective.
The failure to correct a material year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. As of the date of this filing, the Company has not received any
information from its vendors or suppliers, or developed any information
internally, indicating that a material adverse impact on its business, results
of operations, liquidity, or financial condition is considered likely due to
year 2000 matters. While the Company believes that it is unlikely to
experience a material adverse effect, the Company is unable to provide
assurances at this time that the consequences of year 2000 failures will not
have a material impact on the Company's results of operations, liquidity or
financial condition. The execution of the Company's year 2000 plan is
expected to significantly reduce the Company's level of uncertainty associated
with the year 2000 problem.
Contingency Plans
The Company believes that its program of assessment, correction and testing,
along with selected system upgrades will enable it to successfully meet the
year 2000 challenge. After completion of the assessment and remediation
process, estimated to be June 1999, the Company will formalize a contingency
plan to address potential failures associated with year 2000 compliance.
Forward Looking Statement
The foregoing year 2000 discussion includes forward-looking statements of the
Company's efforts and management's expectations relating to year 2000
readiness. The Company's ability to achieve year 2000 compliance and the
level of incremental costs associated therewith, could be adversely affected
as a result of the numerous factors described in the above discussion.
Conversion to Euro Currency
On January 1, 1999, certain member nations of the European Economic and
Monetary Union ("EMU") adopted a common currency, the Euro. For the three-
year transition period, both the Euro and individual participant's currencies
will remain in circulation. After January 1, 2002, the Euro will be the sole
legal tender for EMU countries. The adoption of the Euro affects a multitude
of financial systems and business applications as the commerce of these
nations will be transacted in the Euro and the existing national currency.
For the year ended December 27, 1998, approximately 16.6% of the Company's
revenues were derived from EMU countries.
The Company is currently addressing Euro related issues and its impact on
information systems, currency exchange rate risk, taxation, contracts,
competition and pricing. Action plans currently being implemented are
expected to result in compliance with all laws and regulations. While the
Company does not expect the Euro conversion will have a material impact on its
operations, financial condition or liquidity, there can be no certainty that
action plans will be successfully implemented or that external factors will
not have an adverse effect on the Company's operations.
Market Risk Factors
Fluctuations in interest and foreign currency exchange rates affect the
Company's financial position and results of operations. The Company enters
into exchange forward contracts and purchases options denominated in foreign
currency to hedge foreign currency exposure and minimize the effect of such
fluctuations on reported earnings and cash flow. (See "Accounting for Foreign
Currency Translation and Transactions" and "Financial Instruments and Risk
Management" in the Summary of Significant Accounting Policies and Note 14.)
Sensitivity of the Company's financial instruments to selected changes in
market rates and prices, which are reasonably possible over a one-year period,
are described below. Market values are the present value of projected future
cash flows based on the market rates and prices.
The Company's financial instruments subject to interest rate risk consist of
debt instruments. Net fair value of these instruments, which include the
Company's $120 million Subordinated Debentures at December 27, 1998 and
December 28, 1997 was a liability of $157.2 million and $164.2 million,
respectively. The sensitivity analysis assumes an instantaneous 100-basis
point move in interest rates from their levels, with all other variables held
constant. A 100-basis point increase in interest rates at December 27, 1998
would result in a $4.8 million decrease in the net market value of the
liability. Conversely, a 100-basis point decrease in interest rates at
December 27, 1998, would result in a $6.2 million increase in the net market
value of the liability.
The Company's $120 million Subordinated Debentures are also subject to equity
price risk. The fair value of these debentures was a liability of $99.7
million and $125.1 million at December 27, 1998 and December 28, 1997,
respectively. The sensitivity analysis assumes an instantaneous 10% change in
the year-end closing price of the Company's common stock, with all other
variables held constant. At December 27, 1998, a 10% strengthening in the
Company's common stock would result in a net increase in the fair value
liability of $3.1 million, while a 10% weakening in the Company's common stock
would result in a net decrease in the fair value liability of $2.6 million.
The Company's financial instruments subject to foreign currency exchange risk
consist of foreign currency forwards and options and represent a net asset
position of $0.5 million and $0.8 million at December 27,1998 and December 28,
1997, respectively. The sensitivity analysis assumes an instantaneous 10%
change in foreign currency exchange rates from year-end levels, with all other
variables held constant. At December 27, 1998, a 10% strengthening of the
U.S. dollar versus other currencies would result in an increase of $3.4
million in the net asset position, while a 10% weakening of the dollar versus
all other currencies would result in a decrease of $4.0 million.
Also subject to foreign currency exchange risk, is the Company's $100 million
multi-currency revolving credit facility. At December 27, 1998, 2.43 billion
Japanese Yen (approximately $20.9 million) was outstanding under this
agreement. The sensitivity analysis assumes an instantaneous 10% change in
foreign currency exchange rates from year-end levels, with all other variables
held constant. At December 27, 1998, a 10% strengthening of the U.S. dollar
versus the Japanese Yen would result in a $1.9 million decrease in the
liability, while a 10% weakening of the U.S. dollar versus the Japanese Yen
would result in a $2.3 million increase in the liability.
Foreign exchange forward and option contracts are used to hedge the Company's
firm and anticipated foreign currency cash flows. Thus, there is either an
asset or cash flow exposure related to all the financial instruments in the
above sensitivity analysis for which the impact of a movement in exchange
rates would be in the opposite direction and substantially equal to the impact
on the instruments in the analysis. There are presently no significant
restrictions on the remittance of funds generated by the Company's operations
outside the United States.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Accountants......................................34
Consolidated Balance Sheets as of December 27, 1998 and
December 28, 1997...................................................35
Consolidated Earnings Statements for each of the years
in the three-year period ended December 27, 1998....................36
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 27, 1998..............37
Consolidated Statements of Comprehensive Income for each of the
years in the three-year period ended December 27,1998...............38
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 27, 1998....................38
Notes to Consolidated Financial Statements..........................39-59
Financial Schedule
Schedule II -Valuation and Qualifying Accounts......................62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Checkpoint Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated earnings statements, and consolidated statements of shareholders'
equity, comprehensive income and cash flows present fairly, in all material
respects, the financial position of Checkpoint Systems, Inc. and Subsidiaries
at December 27, 1998 and December 28, 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 27, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 12, 1999
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 27, December 28,
1998 1997
------------ ------------
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 35,934 $ 64,138
Accounts receivable, net of allowances
of $5,556,000 and $5,703,000 135,078 136,748
Inventories, net 78,625 77,631
Other current assets 10,748 13,570
Deferred income taxes 4,464 5,593
------- -------
Total current assets 264,849 297,680
REVENUE EQUIPMENT ON OPERATING LEASE, net 24,188 24,718
PROPERTY, PLANT AND EQUIPMENT, net 85,762 58,674
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, net 72,388 72,304
INTANGIBLES, net 10,917 14,003
OTHER ASSETS 49,559 49,055
------- -------
TOTAL ASSETS $507,663 $516,434
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and
current portion
of long-term debt $ 10,453 $ 6,957
Accounts payable 17,346 13,200
Accrued compensation and
related taxes 8,295 7,745
Income taxes 11,784 13,687
Unearned revenues 11,288 11,413
Other current liabilities 19,422 33,108
------ ------
Total current liabilities 78,588 86,110
LONG-TERM DEBT, LESS CURRENT MATURITIES 45,976 30,855
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
DEFERRED INCOME TAXES 712 1,458
MINORITY INTEREST 451 461
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
36,471,584 and 36,338,228 3,647 3,633
Additional capital 233,180 232,079
Retained earnings 104,558 86,873
Common stock in treasury, at cost,
6,359,200 shares and 3,188,700 shares (64,410) (27,986)
Foreign currency translation adjustment (15,039) (17,049)
------- -------
TOTAL SHAREHOLDERS' EQUITY 261,936 277,550
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $507,663 $516,434
======= =======
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED EARNINGS STATEMENTS
1998 1997 1996
-------- -------- --------
(Thousands, except per share data)
Net Revenues $362,407 $335,964 $291,769
Cost of Revenues 215,310 201,724 168,024
------- ------- -------
Gross Profit 147,097 134,240 123,745
Selling, General and Administrative
Expenses 117,034 114,591 93,676
Restructuring Charge (600) 7,945 -
------- ------- -------
Operating Income 30,663 11,704 30,069
Interest Income 4,746 8,676 8,339
Interest Expense 9,568 9,573 9,557
Other Income, net 343 2,758 1,026
------- ------- ------
Earnings Before Income Taxes 26,184 13,565 29,877
Income Taxes 8,509 5,445 9,430
Minority Interest 10 108 -
------- ------- -------
Net Earnings $ 17,685 $ 8,228 $ 20,447
======= ======= =======
Earnings Per Share (note 11)
Basic $ .55 $ .24 $ .64
======= ======= =======
Diluted $ .53 $ .23 $ .60
======= ======= =======
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Foreign
Currency
Common Additional Retained Trans. Treasury
Stock Capital Earnings Adjust. Stock Total
------ ------- ------- ------- ------- ------
(Thousands)
Balance,
December 31, 1995 $3,002 $ 83,126 $ 58,198 $(1,004) $(5,664) $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
Translation
Adjustment (5,376) (5,376)
------ ------- ------- -------- -------- -------
Balance,
December 29, 1996 3,613 230,580 78,645 (6,380) (5,664) 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
Translation
Adjustment (10,669) (10,669)
Purchase of Common
Stock (22,322) (22,322)
------ ------- ------- -------- -------- -------
Balance,
December 28, 1997 3,633 232,079 86,873 (17,049) (27,986) 277,550
(Common shares:
issued 36,338,228;
reacquired, 3,188,700)
Net Earnings 17,685 17,685
Exercise of Stock
Options 14 1,101 1,115
Foreign Currency
Translation
Adjustment 2,010 2,010
Purchase of
Common Stock (36,424) (36,424)
------ ------- ------- -------- ------- -------
Balance
December 27,1998 $3,647 $233,180 $104,558 $(15,039) $(64,410) $261,936
(Common shares: ====== ======== ======== ========= ========= ========
issued 36,471,584
reacquired, 6,359,200)
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
1998 1997 1996
---- ---- ----
(Thousands)
Net Earnings $17,685 $ 8,228 $20,447
Foreign Currency Translation
Adjustment, net of tax 2,010 (10,669) (5,376)
------ ------ ------
Comprehensive Income(Loss) $19,695 $(2,441) $15,071
====== ====== ======
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1998 1997 1996
---- ---- ----
Cash inflow (outflow) from operating (Thousands)
activities:
Net earnings $ 17,685 $ 8,228 $ 20,447
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Net book value of rented equipment
sold 1,682 811 4,391
Revenue Equipment placed under
operating lease (9,989) (15,579) (13,987)
Long-term customer contracts (1,433) (20,735) (10,804)
Depreciation and amortization 25,676 23,762 18,322
Deferred Taxes 383 (6,511) 363
Provision for losses on accounts
receivable 1,672 1,822 2,219
Restructuring charge (6,692) 8,500 -
(Increase) decrease in current assets:
Accounts receivable 1,310 (46,063) (25,016)
Inventories 1,313 (27,479) 3,164
Other current assets 3,046 (4,694) (3,046)
Increase (decrease) in current
liabilities:
Accounts payable 3,999 626 (5,246)
Accrued compensation and related
taxes 498 (656) 935
Income taxes (1,365) 5,570 2,847
Unearned revenues (703) 1,496 1,848
Other current liabilities (7,925) 11,343 (13,649)
------- ------- -------
Net cash generated/(used) by
operating activities 29,157 (59,559) (17,212)
Cash outflow from investing ------- ------- -------
activities:
Acquisition of property, plant and
equipment (12,301) (26,714) (10,454)
Acquisitions, net of cash acquired (27,584) (4,396) (5,898)
Other investing activities 425 (5,438) (3,530)
------- ------- -------
Net cash used by investing
activities (39,460) (36,548) (19,882)
Cash inflow (outflow) from financing ------- ------- -------
activities:
Proceeds from stock issuances 1,115 1,519 148,065
Proceeds of debt 19,548 - 1,653
Payment of debt (2,625) (3,705) (3,980)
Purchase of treasury stock (36,424) (22,322) -
Net cash provided by (used by) ------- ------- -------
financing activities (18,386) (24,508) 145,738
Effect of Foreign currency rate ------- ------- -------
fluctuations on cash and cash
equivalents 485 (1,083) (264)
Net increase (decrease) in cash and ------- ------- -------
cash equivalents (28,204) (121,698) 108,380
Cash and cash equivalents:
Beginning of year 64,138 185,836 77,456
------- ------- -------
End of year $ 35,934 $ 64,138 $185,836
======= ======= =======
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
- --------------------
The Company is a multi-national 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, fire and burglar alarm 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 week period ending the last Sunday
of December. References to 1998, 1997, and 1996 are for the 52 weeks ended
December 27, 1998, December 28, 1997, and December 29, 1996, respectively.
New Accounting Standards
- ------------------------
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise, replacing the "industry segment" approach
with the "management" approach. The management approach designates the
internal organization that is used by management for making operating
decisions and assessing performance as the source of the Company's reportable
segments. SFAS No. 131 also requires disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 131 did not
affect results of operations or financial position but did affect the
disclosure of segment information (see note 19).
Effective December 29, 1997, the Company adopted SFAS No. 130 Reporting
Comprehensive Income. The provisions of SFAS No. 130 established standards
for reporting and display of comprehensive income and its components in the
financial statements.
Reclassifications
- -----------------
Certain reclassifications have been made to the 1997 and 1996 financial
statements and related footnotes to conform to the 1998 presentation.
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
revenues. The deferred finance charges applicable to these leases are
recognized over the terms of the leases using the straight-line method which
approximates the effective interest method. Rental revenue from equipment
under operating leases is recognized over the term of the lease. Installation
revenue from EAS equipment is recognized when the systems are installed.
Service revenue is recognized on a straight-line basis over the contractual
period or as services are performed. Sales to third party leasing companies
are recognized as the equivalent of a sale. 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 over the estimated future periods to be benefited, ranging from 20
to 30 years. Accumulated amortization approximated $14,077,000 and $9,921,000
at December 27, 1998 and December 28, 1997, respectively.
Long-Lived Assets
- -----------------
The Company reviews its long-lived assets, including the excess of purchase
price over fair value of net assets acquired and intangibles, for impairment
on an exception basis whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable through future
cash flows. If it is determined that an impairment loss has occurred based on
expected future cash flows, then 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 the "Comprehensive Tag Program").
The duration of these programs typically range from three to five years. The
receivables approximated $44,083,000 and $42,278,000 at December 27,1998 and
December 28, 1997, respectively.
Research and Development Costs
- ------------------------------
Research and development costs are expensed as incurred, and approximated
$8,018,000, $7,604,000, and $6,408,000, in 1998, 1997, and 1996, respectively.
Royalty Expense
- ---------------
Royalty expenses incurred approximated $4,354,000, $4,134,000, and $3,951,000
in 1998, 1997, and 1996, respectively.
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 $9,730,000 and $6,918,000
at December 27, 1998 and December 28, 1997, 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 $5,768,000 and $5,334,000 at
December 27, 1998 and December 28, 1997, respectively, net of accumulated
amortization costs of $2,708,000 and $2,048,000 at December 27, 1998 and
December 28, 1997, 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.
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, 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, net on the
Company's Consolidated Earnings Statements.
Note 2. INVENTORIES
Inventories consist of the following:
1998 1997
---- ----
(Thousands)
Raw materials $ 6,661 $ 10,329
Work-in-process 1,821 2,312
Finished goods 70,143 64,990
------- -------
Totals $ 78,625 $ 77,631
======= =======
Note 3. REVENUE EQUIPMENT ON OPERATING LEASE AND PROPERTY, PLANT, AND
EQUIPMENT
The major classes are:
1998 1997
---- ----
(Thousands)
Revenue equipment on operating lease
Equipment rented to customers $ 48,404 $ 42,357
Accumulated depreciation (24,216) (17,639)
------- -------
$ 24,188 $ 24,718
======= =======
Property, plant and equipment
Land $ 8,064 $ 2,063
Building 27,728 17,156
Machinery & equipment 91,423 73,727
Leasehold improvements 3,952 3,424
------- -------
131,167 96,370
Accumulated depreciation (45,405) (37,696)
------- -------
$ 85,762 $ 58,674
======= =======
Depreciation expense on the Company's revenue equipment on operating lease and
property, plant and equipment, was $18,191,000, $16,307,000, and $13,319,000
for 1998, 1997, and 1996, respectively.
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 27, 1998
and at December 28, 1997 consisted of the following:
1998 1997
------ ------
(Thousands)
Current portion of long-term debt $ 5,462 $ 2,537
Line of credit held by Japanese
Subsidiary with interest at 1.625% 4,991 4,420
------ ------
Total short-term debt and
current portion long-term debt $10,453 $ 6,957
======= =======
Note 5. LONG-TERM DEBT
The long-term debt at December 27, 1998 and December 28, 1997 consisted of the
following:
1998 1997
------ ------
(Thousands)
Seven year $7 million term
note with interest at 4.9% $ 1,050 $ 2,100
Six year $8 million term note
with interest at 6.5% 1,412 2,824
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
Five year $100 million
multi currency variable interest
rate unsecured revolving
credit facility 20,934 -
Other loans with interest rates
ranging from 1.75% to 7.87% and
maturity dates through
January 2000 1,042 1,468
------- -------
Total 51,438 33,392
Less current portion (5,462) (2,537)
------- -------
Total long-term portion $45,976 $30,855
======= =======
The Company has an existing $100 million 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. Additionally, the agreement requires the company to make
principal payments when the aggregate translated outstanding balance on
alternative currency loans exceeds $20 million. At December 27, 1998, 2.43
billion Japanese Yen (approximately $20.9 million) was outstanding under this
credit agreement. These borrowings, along with approximately $8.0 million
from cash on hand, were utilized in February 1998, to acquire the assets of
Tokai Electronics, Ltd., a Japanese manufacturer of radio frequency tags.
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 27, 1998,
$1,050,000 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 27, 1998,
$1,411,764 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)
1999 $ 5,462
2000 7,158
2001 7,158
2002 28,092
2003 3,158
Thereafter 410
-------
Total $51,438
=======
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 and subordinated to all
senior indebtedness. The Debentures will be convertible into Common Stock, at
a conversion price of $18.38 per share (equivalent to approximately 54.4
shares of Common Stock for each $1,000 principal amount of Debentures), at
any time on and after the Exchange Date (as defined in the Debentures) and
prior to redemption or maturity. The Debentures will mature on November 1,
2005 and are redeemable, in whole or in part, at the option of the Company on
or after November 1, 1998. The net proceeds generated to the Company from
this transaction approximated $116,000,000.
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 common 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.
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 27, 1998 total 10,218,019 shares. At December 27, 1998,
December 28, 1997, and December 29, 1996 a total of 1,781,981; 2,192,114; and
690,114 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 27, 1998 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 than Vice President shall vest as follows: (i)
34% on or after the first anniversary date of option grant; (ii) an additional
33% on or after 18 months of the date of option grant; and (iii) the remaining
33% on or after the second anniversary date of the option grant.
Incentive Stock Options and Non-Incentive Stock Options issued to all
employees whose title is Vice President and above shall vest as follows: (i)
34% on or after the first anniversary date of option grant; (ii) 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 3,428,990 as of
December 27, 1998. Options that were outstanding but not yet vested or
exercisable totaled 1,353,775 as of December 27, 1998.
The following schedules summarize stock option activity and status:
NUMBER OF SHARES
--------------------------------
1998 1997 1996
--------------------------------
Outstanding at beginning of year 4,521,616 3,222,222 3,835,048
Granted 800,100 1,574,600 923,538
Exercised (138,356) (198,606) (1,514,864)
Canceled (400,595) (76,600) (21,500)
--------- --------- ---------
Outstanding at end of year 4,782,765 4,521,616 3,222,222
========= ========= =========
WEIGHTED-AVERAGE PRICE
---------------------------
1998 1997 1996
---------------------------
Outstanding at beginning of year $14.78 $13.94 $ 8.12
Granted $12.09 $16.85 $27.31
Exercised $ 8.07 $ 7.65 $ 7.16
Canceled $18.24 $17.17 $27.87
------ ------ ------
Outstanding at end of year $14.27 $14.78 $13.94
====== ====== ======
Following is a summary of stock options outstanding as of December 27, 1998:
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 12/27/98 Life Price 12/27/98 Price
- -----------------------------------------------------------------------------
$ 3.88--$ 9.78 1,111,442 4.28 $ 6.68 1,051,442 $ 6.59
$ 9.81--$12.44 1,374,280 8.13 $11.31 793,780 $11.54
$12.63--$21.75 1,545,505 8.64 $17.01 832,230 $17.96
$21.94--$30.81 751,538 7.82 $27.83 751,538 $27.83
- -----------------------------------------------------------------------------
$ 3.88--$30.81 4,782,765 7.27 $14.27 3,428,990 $14.56
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
interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the Company's common
stock at the date of grant over the amount an employee must pay to acquire the
stock. Since all options were granted at market value, there is no
compensation cost to be recognized.
Had compensation cost for the Company's stock option plans been determined
based upon the fair value at the grant date using the Black Scholes option
pricing model prescribed under SFAS No. 123, the Company's net income and
earnings per share would approximate the pro forma amounts as follows:
1998 1997 1996
---- ---- ----
(Thousands)
Net Income
As reported $17,685 $ 8,228 $20,447
Pro forma $15,252 $ 4,380 $12,647
Diluted earnings per share
As reported $ 0.53 $ 0.23 $ 0.60
Pro forma $ 0.46 $ 0.11 $ 0.37
The following assumptions were used in estimating fair value of stock options:
1998 1997 1996
---- ---- ----
Dividend yields None None None
Expected volatility .485 .555 .474
Risk-free interest rates 6.1% 6.25% 6.05%
Expected life (in years) 3.1 3.2 3.1
Note 8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in 1998, 1997, and 1996, respectively, included payments for
interest of $9,569,000, $9,571,000, and $9,458,000 and income taxes of
$9,555,000, $8,143,000, and $5,978,000.
In 1996, the Company acquired all of the capital stock of: (i) Mercatec
Sistemas e Comercio de Equipmentos Eletronicos Ltda.; (ii) Vysion Systems,
Inc.; and (iii) Checkpoint Systems Japan Co. Ltd.
In conjunction with these acquisitions, the aggregate fair value of assets
acquired, cash paid and direct costs incurred, and liabilities assumed were as
follows:
Fair value of assets acquired...................$ 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.
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
===========
On February 2, 1998, the Company acquired the assets of Tokai Electronics Co.,
Ltd., a Japanese manufacturer of radio frequency tags. The Company had held a
one-third interest in Tokai since 1995.
In conjunction with the acquisition, the aggregate fair value of assets
acquired, cash paid and direct costs incurred, and liabilities assumed were as
follows:
Fair value of assets acquired...................$ 28,560,000
Cash paid and direct costs incurred
for the capital stock.......................... 28,285,000
-----------
Liabilities assumed.............................$ 275,000
===========
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
During 1997, the Board of Directors approved the purchase of up to 10% or
approximately 3.5 million shares of the Company's common stock at an average
cost not to exceed $14.00 per share. On October 23, 1998, the Board of
Directors authorized the additional purchase of up to $20 million of the
Company's outstanding common stock at an average cost not to exceed $14.00 per
share. As of December 27, 1998, the Company has purchased under the 1997
program, 3,441,300 shares of common stock for an average price of $12.02 per
share, and 1,319,900 shares of common stock for an average price of $13.02 per
share under the 1998 program.
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
have been restated to give effect to the application of SFAS No. 128.
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:
-------------------------------------
1998 1997 1996
-------------------------------------
(In thousands, except per share amounts)
Basic earnings per share:
Net income $17,685 $ 8,228 $20,447
======= ======= =======
Average Common Stock outstanding 32,302 34,020 32,097
Basic earnings per share $ 0.55 $ .24 $ .64
======= ======= =======
Diluted earnings per share:
Net income available for Common
Stock and dilutive securities (1) $17,685 $ 8,228 $20,447
======= ======= =======
Average Common Stock outstanding 32,302 34,020 32,097
Additional common shares
Resulting from Stock Options 970 1,164 1,990
------- ------- -------
Average Common Stock and dilutive
stock outstanding (1) 33,272 35,184 34,087
======= ======= =======
Diluted earnings per share $ .53 $ .23 $ .60
======= ======= =======
(1) Conversion of the subordinated debentures for 1998, 1997, and 1996 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 the year 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 1998, 1997, and 1996, a provision was made for
tollgate taxes. The Company has not provided for tollgate taxes on
$31,662,000 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:
1998 1997 1996
---- ---- ----
(Thousands)
Domestic $27,864 $35,496 $29,487
Foreign (1,680) (21,931) 390
------- ------- -------
Total $26,184 $13,565 $29,877
======= ======= =======
The related provision for income taxes consist of:
1998 1997 1996
---- ---- ----
Currently Payable (Thousands)
Federal $ 5,970 $10,739 $ 6,691
State 300 391 350
Puerto Rico 572 513 354
Foreign 1,284 313 1,672
Deferred
Federal 2,935 (2,857) (898)
State - (81) (50)
Puerto Rico 192 193 399
Foreign (2,744) (3,766) 912
------- ------- ------
Total Provision $ 8,509 $ 5,445 $ 9,430
======= ======= =======
Deferred tax liabilities (assets) at December 27, 1998 and December 28, 1997
consist of:
1998 1997
---- ----
(Thousands)
Depreciation $ 2,414 $ 1,727
Intangibles 1,669 2,066
Other 1,198 440
------- -------
Gross deferred tax liabilities 5,281 4,233
------- -------
Inventory (2,878) (2,486)
Accounts receivable (1,123) (885)
Net operating loss carryforwards (22,224) (20,259)
Warranty (436) (371)
Restructuring (640) (2,097)
Other (822) (2,401)
------- -------
Gross deferred tax assets (28,123) (28,499)
------- -------
Valuation allowance 19,090 20,131
------- -------
Net deferred tax (asset)
liability $(3,752) $(4,135)
======= =======
The net operating loss carryforwards as of December 27, 1998 in the amount of
$80,372,000 includes $38,052,000 of loss carryforwards that were acquired in
connection with the acquisition of the ID Systems Group and Actron Group
Limited. If the benefit of the pre-acquisition loss carryforwards is
realized, the Company will apply such benefit to goodwill in connection with
the acquisition. In 1998, $10,657,000 of foreign tax losses expired. A full
valuation allowance had been recorded in 1997 against these losses. In 1998,
a valuation allowance was recorded due to certain foreign losses where it is
more than likely that tax loss carryforwards will not be utilized.
Of the total foreign net operating loss carryforwards available, $42,636,000
expire beginning January 1999 through December 2008, and the remaining portion
may be carried forward indefinitely.
A reconciliation of the statutory U.S. Federal income tax rate with the
effective income tax rate follows:
1998 1997 1996
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax exempt earnings of subsidiary in
Puerto Rico (13.8) (35.5) (12.4)
Non-deductible goodwill 5.1 8.0 3.5
Foreign losses with no benefit 9.1 30.3 6.1
State and local income taxes, net
of federal benefit 2.2 5.2 2.0
Benefit of foreign sales corporation (2.7) (2.6) (2.4)
Foreign loss carryforwards utilized (2.4) - -
Other - (0.3) (0.3)
------ ------ ------
Effective tax rate 32.5% 40.1% 31.5%
====== ====== ======
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 $690,000, $579,000, and $577,000,
in 1998, 1997, and 1996, respectively.
Generally, any full-time, non-union employee of the Company who has completed
one month of service, and any part-time non-union employee of the Company who
has completed one year of service, other than employees of the Company's
foreign subsidiaries, may participate in the Company's United States Savings
Plan. All full-time employees of the Puerto Rico subsidiary who have
completed three months of service may participate in the Company's Puerto Rico
Savings Plan. Part-time employees are not entitled to participate in the
Company's Puerto Rico Savings Plan.
Under the Company's non-qualified Employee Stock Purchase Plan, employees,
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 the Company's Common Stock at fair market value. The
Company matches employee contributions up to a maximum of $20.75 per week.
The Company's contributions under this plan approximated $220,000, $238,000,
and $231,000, in 1998, 1997, and 1996, respectively.
Under the Company's 1998 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. In 1998, 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.
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. The term of the currency exchange
forward contracts is rarely more than one year. During 1998, the Company also
purchased a series of put options denominated in Canadian dollars which gave
the Company the right but not the obligation to convert Canadian dollars 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 net.
Notional amounts of currency exchange forward contracts outstanding at
December 27, 1998 were $41,898,000, with various maturity dates ranging
through the end of 1999. At December 28, 1997, the notional amounts of
currency exchange forward contracts outstanding were $42,013,000.
Counterparties to these contracts are major financial institutions, and credit
loss from counterparty non-performance is not anticipated.
Aggregate foreign currency transaction gains/(losses) in 1998, 1997, and 1996
were ($981,000), $458,000, and $1,026,000, respectively, and are included in
Other Income, net in the Consolidated Earnings Statement.
Additionally, there were no deferrals of gains or losses on currency exchange
forward contracts at December 27, 1998.
Fair Values
- -----------
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 27, 1998 and December 28, 1997:
1998 1997
------------------- ------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(Thousands)
Long-term debt (including
current maturities) (1) $( 56,429) $( 57,498) $( 37,812) $( 39,112)
Subordinated debentures (1) (120,000) ( 99,750) (120,000) (125,100)
Currency exchange
forward contracts
and options (2) 554 554 811 811
(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 and options at the end of the period. Such amounts
are included in "Other Current Liabilities."
Long-term debt is carried at the original offering price, less any payments of
principal. Rates currently available to the Company for long-term
borrowings with similar terms and remaining maturities are used to estimate
the fair value of existing borrowings as the present value of expected cash
flows. The long-term debt agreements have various due dates with none of the
agreements extending beyond the year 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 common stock. The debentures will mature on November
1, 2005 and are redeemable, in whole or in part, at the option of the Company
on or after November 1, 1998. In order to estimate the fair value of these
debentures, the Company used currently quoted market prices.
Note 15. RESTRUCTURING CHARGE
In December 1997, the Company recorded a pre-tax restructuring charge of
$9,000,000 of which $600,000 was reversed in the fourth quarter of 1998. The
net charge, relating directly to the Company's international operations,
includes:(i) the elimination of approximately 60 positions ($4,850,000); (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). The 1998 reversal related to the
expedited settlement of the employee termination costs in France, which was
less than originally anticipated. At December 27, 1998, $1,807,000 of
restructuring remains in Other Current Liabilities. This amount is primarily
related to future obligations under employee severance agreements ($800,000)
and lease termination costs ($1,007,000). The restructuring activity is
expected to be substantially completed by mid 1999.
Note 16. COMMITMENTS AND CONTINGENCIES
The Company leases its offices, distribution centers and certain production
facilities. Rental expense for all operating leases approximated $7,613,000,
$7,055,000, and $6,408,000 in 1998, 1997, and 1996, respectively. Future
minimum payments for operating leases having non-cancelable terms in excess of
one year at December 27, 1998 are: $5,554,000 (1999); $4,337,000 (2000);
$3,241,000 (2001); $2,596,000 (2002); and $9,680,000 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. The 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 the year 2008. 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.
The Company has exclusive distribution rights for the USA, Canada and the
Dominican Republic, and the non-exclusive distribution rights in Middle and
South America for the sale of Safer products for which an annual minimum
payment of $125,000 is required. This agreement runs through the year 2001.
The Company is the worldwide licensee of certain patents and technical
knowledge related to proximity cards 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.
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, drug, home entertainment, mass merchandise, music,
shoe, supermarket, and video markets. The Company performs ongoing
credit evaluations of its customers' financial condition and generally
requires no collateral from its customers.
Note 18. ACQUISITIONS
All acquisitions have been accounted for under the purchase method. The
results of the operations of the acquired businesses are included in the
consolidated financial statements from the date of acquisition.
On March 21, 1996, the Company purchased all of the capital stock of Mercatec
Sistemas e Comercio de Equipamentos Eletronicos Ltda (Mercatec). Mercatec is
a 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.
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.
On February 2, 1998, the Company acquired the assets of Tokai Electronics Co.,
Ltd., a Japanese manufacturer of radio frequency tags, for approximately $28.0
million, which resulted in an excess of purchase price over the fair value of
net assets acquired of approximately $2.4 million. The Company had held a
one-third interest in Tokai since 1995.
Note 19. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
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
the theft of merchandise. The Company operates in four business segments
consisting of (i) electronic article surveillance (EAS) systems; (ii) domestic
closed circuit television (CCTV) systems, fire and burglary, and point-of-sale
(POS) monitoring systems; (iii) electronic access control systems (EAC); and
(iv) RFID, the joint development of a new product undertaken by the Company
and Mitsubishi Materials Corporation (Mitsubishi) for retail, library and
commercial industrial applications in the auto-ID marketplace. The initial
release of RFID products is expected to occur in early 1999. Information by
business segment is set forth below:
(A) Business Segments
1998 1997 1996
-------- -------- --------
(Thousands)
Business segment net revenue:
Electronic Article Surveillance(1) $297,200 $278,635 $248,009
Domestic CCTV, Fire, Burglary 53,745 45,834 35,232
Access Control 11,462 11,495 8,528
RFID - - -
-------- -------- --------
Total $362,407 $335,964 $291,769
-------- -------- --------
Business segment operating
income (loss):
Electronic Article Surveillance(1)(2) $ 25,637 $ 8,221 $ 25,338
Domestic CCTV, Fire, Burglary 4,190 2,039 2,947
Access Control 2,877 2,544 1,784
RFID (2,041) (1,100) -
-------- -------- --------
Total $ 30,663 $ 11,704 $ 30,069
-------- -------- --------
Business segment assets (net):
Electronic Article Surveillance(1) $464,119 $470,507 $491,006
Domestic CCTV, Fire, Burglary 34,672 37,499 23,643
Access Control 7,745 8,419 7,004
RFID 1,127 9 -
-------- -------- --------
Total $507,663 $516,434 $521,653
-------- -------- --------
1998 1997 1996
-------- -------- --------
(Thousands)
Business segment property,
plant and equipment:
Depreciation
Electronic Article Surveillance(1) $ 17,303 $ 15,822 $ 13,012
Domestic CCTV, Fire, Burglary 688 452 279
Access Control 33 32 28
RFID 167 1 -
-------- -------- --------
Total $ 18,191 $ 16,307 $ 13,319
-------- -------- --------
Net Additions
Electronic Article Surveillance(1) $ 42,741 $ 38,073 $ 16,094
Domestic CCTV, Fire, Burglary 694 2,400 347
Access Control 20 5 62
RFID 1,294 10 -
-------- -------- --------
Total $ 44,749 $ 40,488 $ 16,503
-------- -------- --------
(1) Electronic Article Surveillance (EAS) segment numbers include the
Company's manufacturing and corporate activity. Additionally, included in
the EAS amounts are the Company's foreign CCTV, Fire, and Burglary which
represents approximately 4%, 3%, and 1% of the Company's total
consolidated revenue for 1998, 1997, and 1996, respectively.
(2) EAS operating income (loss) includes: (i) a restructuring charge
reversal of $0.6 million in 1998; and (ii) a restructuring charge of $9.0
million and non-recurring charges of $8.1 million in 1997.
(B) Geographic Information
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 show sales, operating earnings and other financial
information by geographic area for the years 1998, 1997, and 1996.
North America
and Puerto Rico Europe Other(1)
--------------- --------- ----------
(Thousands)
1998
Net Sales from
Unaffiliated Customers $211,780 $100,391 $ 50,236
Operating Income(Loss) $ 29,668 $ 1,585(2) $ (590)
Long-lived Assets $ 80,921 $ 67,316 $ 45,018
1997
Net Sales from
Unaffiliated Customers $192,727 $100,500 $ 42,737
Operating Income(Loss) $ 29,372(3) $(12,121)(4) $ (5,547)(5)
Long-lived Assets $ 85,396 $ 66,238 $ 18,065
1996
Net Sales from
Unaffiliated Customers $161,507 $101,671 $ 28,591
Operating Income(Loss) $ 30,161 $ (1,058) $ 966
Long-lived Assets $ 66,861 $ 62,003 $ 17,541
(1) Other includes the Company's operations in Mexico, Argentina,
Australia, Brazil, and Japan.
(2) Operating income(loss) includes a pre-tax restructuring charge
reversal of $0.6 million.
(3) Includes a pre-tax restructuring charge of $1.6 million.
(4) Includes a pre-tax restructuring charge of $6.6 million.
(5) Includes a pre-tax restructuring charge of $0.8 million.
The Company's export sales to foreign distributors approximated $10,897,000,
$13,539,000, and $24,505,000, in 1998, 1997, and 1996, respectively. Sales by
the Company's foreign subsidiaries in Argentina, Australia, Canada, Western
and Southern Europe, Scandinavia, Brazil, Japan, and Mexico totaled
$156,384,000 in 1998, $144,994,000 in 1997, and $121,388,000 in 1996.
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/losses 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 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes new standards for
accounting for derivatives and hedging activities and amends a number of
existing standards. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. Although the Company has not fully completed its
evaluation of the impact of this new standard, we do not anticipate the
adoption of this standard to have a material effect on the Company's
consolidated financial statements.
Item 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no changes or disagreements to report under this item.
PART III
The information called for by Item 10, Directors and Executive Officers of the
Registrant (except for the information regarding executive officers called for
by Item 401 of Regulation S-K which is included in Part I hereof as Item A in
accordance with General Instruction G(3)); Item 11, Executive Compensation;
Item 12, Security Ownership of Certain Beneficial Owners and Management: Item
13, Certain Relationships and Related Transactions, is hereby incorporated by
reference to the Registrant's Definitive Proxy Statement for its Annual
Meeting of Shareholders presently scheduled to be held on May 5, 1999, which
management expects to file with the Securities and Exchange Commission within
120 days of the end of the Registrant's fiscal year.
Note that the sections of the Company's Definitive Proxy Statement entitled
"Compensation and Stock Option Committee Report on Executive Compensation" and
"Stock Price Performance Graph", pursuant to Regulation S-K Item 402 (a)(9)
are not deemed "soliciting material" or "filed" as part of this report.
PART IV
Item 14. EXHIBITS, FINANCIAL SCHEDULE, AND REPORTS ON 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 27, 1998 and
December 28, 1997 and ......................................... 35
Consolidated Earnings Statements for each of the years
in the three-year period ended December 27, 1998............. 36
Consolidated Statements of Shareholders' Equity for each
of the years in the three-year period ended
December 27, 1998............................................ 37
Consolidated Statements of Comprehensive Income for each of the
years in the three-year period ended December 27,1998........ 38
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 27, 1998............. 38
Notes to Consolidated Financial Statements..................... 39-59
(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............... 62
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 4.2 Indenture dated as of October 24, 1995 by and
between Registrant and The Chase Manhattan Bank, as
Trustee, is hereby incorporated herein by reference
to Exhibit 4.3 to Registrant's Form 10-Q/A filed
with the SEC on December 13, 1995.
Exhibit 4.3 First Supplemental Indenture dated as of
February 27, 1998 (amending Indenture dated as of
October 24, 1995) is hereby incorporated herein by
reference to Exhibit 4.4 to Registrant's Form 10-K
for 1997 filed with the SEC on March 23, 1998.
Exhibit 10.1 1998 Bonus Plan
Exhibit 10.2 Amended and Restated Stock Option Plan (1992) is
hereby incorporated by reference to Registrants
Form 10-K for 1997 filed with the SEC on March 23,
1998
Exhibit 10.3 Consulting and Deferred Compensation Agreement with
Albert E. Wolf, are incorporated by reference to
Item (a), Exhibit 10(c) of the Registrant's 1994
Form 10-K.
Exhibit 10.4 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 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 10.7 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 10.8 Credit Agreement, dated as of December 24, 1997, by
and among Registrant, First Union National Bank, as
Administrative Agent, and the lenders named herein,
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 10.9 Employment Agreement with Kevin P. Dowd
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.
(b) Reports on Form 8-K
On February 18, 1998, the Registrant filed a Current Report on Form 8-K
reporting under:
Item 2 thereof that (i) on February 3, 1998, the Registrant consummated an
Agreement to purchase the operating assets and business of Tokai Electronics
Co. Ltd; and (ii) on February 10, 1998 the Registrant issued a press release
announcing the completion of aforesaid agreement; and
Item 5 thereof that (i) on January 29, 1998, the Registrant issued a press
release announcing its preliminary fourth quarter and year-end results, new
contracts and a new $100 million unsecured credit facility; and (ii) the
Company issued a press release on February 10, 1998 announcing its Fourth
Quarter and year-end results.
On November 4, 1998, the Registrant filed a Current Report on Form 8-K
reporting under:
Item 5 thereof that on October 26, 1998, the Registrant issued a press
release announcing that its Board of Directors authorized up to $20 million to
repurchase additional outstanding common Stock.
CHECKPOINT SYSTEMS, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Costs and Deductions End of
Year Classification of Year Expenses Year
- ---- -------------- ---------- ---------- ---------- ----------
1998 Allowance for
doubtful accounts $5,703 $2,276 $2,423 $5,556
------ ------ ------ ------
1997 Allowance for
doubtful accounts $4,282 $3,809 $2,388 $5,703
------ ------ ------ ------
1996 Allowance for
doubtful accounts $1,906 $2,980 $ 604 $4,282
------ ------ ------ ------
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
EXHIBIT 10.1 1998 Bonus Plan
EXHIBIT 10.9 Employment Agreement with Kevin P. Dowd
EXHIBIT 21 Subsidiaries of Registrant
EXHIBIT 23 Consent of Independent Accountants
EXHIBIT 24 Power of Attorney, Contained in Signature
EXHIBIT 27 Financial Data Schedule
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized in
Thorofare, New Jersey, on March 29, 1999.
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 29, 1999
- ---------------------- Executive Officer and Director
/s/Jeffrey A. Reinhold Senior Vice President - Finance, March 29, 1999
- ---------------------- Chief Financial Officer,
and Treasurer
/s/W. Craig Burns Vice President - March 29, 1999
- ---------------------- Corporate Controller and
Chief Accounting Officer
/s/Robert O. Aders Director March 29, 1999
- ----------------------
/s/Roger D. Blackwell Director March 29, 1999
- ----------------------
/s/Richard J. Censits Director March 29, 1999
- ----------------------
/s/David W. Clark, Jr. Director March 29, 1999
- ----------------------
/s/Alan R. Hirsig Director March 29, 1999
- ----------------------
/s/William P. Lyons, Jr. Director March 29, 1999
- ------------------------
/s/Elisa Margaona Director March 29, 1999
- ----------------------
/s/Raymond R. Martino Director March 29, 1999
- ----------------------
/s/Albert E. Wolf Director March 29, 1999
- ----------------------