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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 26, 1999 Commission File No. 1-11257
CHECKPOINT SYSTEMS, INC.
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(Exact name of Registrant as specified in its Articles of Incorporation)
Pennsylvania 22-1895850
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(State of Incorporation) (IRS Employer Identification No.)
101 Wolf Drive, PO Box 188, Thorofare, New Jersey 08086
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(Address of principal executive offices) (Zip Code)
856-848-1800
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(Registrant's telephone number, including area code)
Securities 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 6, 2000 the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $245,000,000.
As of March 6, 2000, there were 30,164,884 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 4, 2000.
This report may include information that could constitute forward-looking
statements made pursuant to the safe harbor provision of the Private Securities
Litigation Reform Act of 1995. Any such forward-looking statements may involve
risk and uncertainties that could cause actual results to differ materially from
any future results encompassed within the forward-looking statements.
PART I
Item 1. BUSINESS
Checkpoint Systems, Inc. (Company) is a $750 million multinational manufacturer
and marketer of retail asset tracking and protection products including
integrated security, automatic identification (auto ID), and retail
merchandising solutions. On December 10, 1999, the Company acquired 98.57% of
the outstanding shares of Meto AG (Meto) by means of a public tender offer.
Subsequently, the Company has increased its ownership to 99.2%. Through the
acquisition, the Company has doubled its revenues and marked its entry into the
rapidly expanding automatic identification marketplace. The Company is a leading
provider of radio frequency (RF) and electromagnetic (EM) electronic article
surveillance (EAS) systems and tags, security source tagging, handheld labeling
systems, bar code labeling systems, and retail merchandising systems. The
Company's labeling systems and services are designed to improve efficiency,
reduce costs and furnish value-added solutions for customers across many markets
and industries. Applications for bar code labeling systems include auto ID,
retail security, pricing and promotional labels. The Company also markets closed
circuit television (CCTV) systems and point-of-sale (POS) monitoring systems
primarily to help retailers prevent losses caused by theft of merchandise, as
well as electronic access control systems (EAC) for commercial and industrial
applications. The Company holds or licenses over 1000 patents and proprietary
technologies (including 800 acquired in connection with the 1999 acquisition of
Meto AG) relating to its products and their manufacture. The Company has
achieved substantial growth since 1993, primarily through internal expansion and
acquisitions, new product introductions, broadened and more direct distribution
(particularly in international markets) and increased and more efficient
manufacturing capabilities.
1
The Company's products and services can be categorized into three groups:
Retail Loss Prevention
The Company's historical business is retail loss prevention. Its diversified
security product lines are designed to help retailers prevent inventory losses
caused by theft (both by customers and employees) and reduce selling costs
through lower staff requirements. The Company's products facilitate the open
display of consumer goods, which allows retailers to maximize sales
opportunities with impulse buying. Offering both its own proprietary RF-EAS
technology, as well as RF and EM EAS capabilities acquired from Meto, the
Company holds a 42% share of worldwide EAS installations. Products and services
of the Company's Security Systems Group and Electronic Access Control Group also
fall within the loss prevention and security business segment. Checkpoint's
broad and flexible product lines, marketed and serviced by its extensive sales
and service organization, have helped the Company emerge as the preferred
supplier to premier retailers around the world. Retail loss prevention and
security is expected to represent approximately 61% of the Company's business.
Auto ID
Auto ID, is another core business for the Company, and is estimated to generate
21% of the Company's revenue in the year 2000. All participants in the retail
supply chain are concerned with maximizing efficiency. Reducing time-to-market
requires refined production and logistics systems to ensure just-in-time
delivery as well as shorter development, design and production cycles. A further
critical objective is to reduce loss, whether through misdirection or tracking
failure, theft or counterfeiting, and to reduce labor costs by tagging and
labeling products at the source. The Company supports these objectives with its
radio frequency identification (RFID) technology, as well as bar code labeling
systems (BCS), tags and supplies, and a global network of e-commerce-enabled
service bureaus.
Retail Merchandising Systems
Retail merchandising systems include hand-held label applicators, promotional
displays and queuing systems. These traditional products broaden the Company's
reach among retailers and enable the Company to serve a segment of the retail
market that has not converted to the more advanced BCS and EAS technologies.
Many of the products in this business segment represent high-margin items with a
high level of recurring sales of associated consumables such as labels.
2
The Company's business strategy focuses on providing comprehensive,
single-source solutions that help manufacturers, distributors and retailers
identify, track and protect their assets throughout the entire supply chain.
Innovative new products and greatly expanded product offerings will provide
significant opportunities to enhance the value of legacy products while
expanding the product base in existing accounts to grow the Company. 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 synergies of its RF
technology with its bar code capabilities within the burgeoning auto-ID
industry.
To achieve these objectives, the Company will work to continually enhance and
expand its technologies and products, provide superior service to its customers
and expand its direct sales activities through acquisitions and start-up
operations. The Company is focused on providing its customers with a wide
variety of fully integrated electronic security systems, Auto ID, and retail
merchandising solutions characterized by superior quality, ease of use, good
value and merchandising opportunities for the manufacturer, distributor and
retailer.
The Company has its principal executive offices at 101 Wolf Drive, Thorofare,
New Jersey 08086, (856-848-1800). Unless the context requires otherwise, the
"Company" means Checkpoint Systems, Inc. and its subsidiaries on a consolidated
basis.
COMPANY HISTORY
Founded in 1969, the Company was incorporated in Pennsylvania as a wholly-owned
subsidiary of Logistics Industries Corporation (Logistics). In 1977, Logistics,
pursuant to the terms of its merger into Lydall, Inc., distributed the Company's
Common Stock to Logistics' shareholders as a dividend.
Historically, the Company has expanded its business both domestically and
internationally through acquisitions, the formation of wholly owned
subsidiaries, and the utilization of independent distributors. In 1993 and 1995
the Company completed two key acquisitions which gave the Company direct access
into Western Europe. In 1993, the Company acquired ID Systems International BV
and ID Systems Europe BV, a company engaging in the manufacture, distribution
and sale of EAS systems throughout Europe. In 1995, the Company acquired Actron
Group Limited, a company engaging in the manufacture, distribution and sale of
radio frequency electronic security systems to the retail industry throughout
Western Europe.
On December 10, 1999, the Company completed by means of a public tender offer
the acquisition of 98.57% of Meto AG, a German Corporation and a leading
international provider of value-added labeling solutions for article
identification and security. The acquisition will double the Company's revenues,
and will increase its breadth of product offerings, enhancing its ability to
serve its customer base, and vastly increase its global reach.
3
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 retail stores and libraries. The Company's
diversified product lines are designed to help reduce both customer and employee
theft, reduce inventory shrink, and enable retailers to capitalize on consumer
impulse buying by openly displaying high-margin and high-cost items.
EAS systems are generally comprised of three components: detectable 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 removal devices for
non-deactivatable tags as well as deactivation equipment that disarms disposable
tags when customers follow proper check-out procedures.
CCTV Systems and Monitoring Services
The Company offers a full line of closed-circuit television products along with
its EAS products, providing a total systems solution package for retail
establishments. The Company's video surveillance solutions address shoplifting
and internal theft as well as customer/employee safety and security needs. The
product line consists of fixed and high-speed pan/tilt/zoom camera systems,
programmable switcher controls, time-lapse recording, 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 loss prevention
solutions. All systems supplied can be included in the Company's 24-hour Central
Station Monitoring services.
Access Control Systems
Electronic access control systems protect restricted areas 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 integrating these systems into the
infrastructure of the customers facilities.
RFID - Intelligent Tagging
Radio frequency identification is an auto ID technology. RFID tags, or
"intelligent tags", contain an integrated circuit powered by a radio frequency
circuit. Tags can be variably coded, and RFID readers can capture data from
multiple tags simultaneously, with no line-of-sight requirements. Through a
joint development project with Mitsubishi Materials Corporation (Mitsubishi),
the Company has developed RFID intelligent tags that are a fraction of the cost
of those RFID tags currently in use for tracking livestock and automating toll
lanes. This development puts the benefits of RFID in reach of the retail market
for the first time.
4
Bar Code Labeling Systems
A bar code is a linear or two-dimensional symbol that can be read by a laser
scanner and transmitted to a computer for auto ID applications. Bar codes can be
printed on hang tags and pressure-sensitive labels using laser or thermal
printers and applied to the product at any of several points in the supply
chain. The Company offers both turn-key in-house bar code printing systems
(laser and thermal printers) and a worldwide network of service bureaus that can
supply customers with bar coded labels. Barcoding is widely used in retail
stores, supermarkets, warehouses, manufacturing, libraries and other
environments where inventory identification and tracking is critical.
Hand-Held Labeling Systems
The hand-held labeling systems include a complete line of hand-held price
marking solutions, primarily sold to retailers. A significant percentage of
sales are generated by repeat business, such as service and sale of labels and
consumables to customers with the Company's systems.
Retail Merchandising Systems
Retail merchandising systems include a wide range of products for customers in
certain retail sectors, such as supermarkets and do-it-yourself (DIY), where
in-store price promotion is an important factor. Product categories include
traditional retail promotional systems for in-store communication and electronic
graphics systems, as well as customer priority systems.
Products and Services
- ---------------------
Product and Service Descriptions
EAS Systems
The Company offers a wide variety of RF and EM EAS solutions to meet the varied
requirements of retail store configurations for multiple market segments
worldwide. The Company's EAS systems are primarily comprised of sensors and
deactivation units, which respond to or act upon the Company's tags and labels.
The Company's EAS products are designed and built to comply with applicable
Federal Communications Commissions (FCC) regulations governing radio frequencies
(RF), signal strengths and other factors. In addition, the Company's present EAS
products meet all regulatory specifications for the countries in which they are
sold.
Sensors
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). A "live" tag
passing through the sensor triggers an alarm. The Company offers its sensor
electronics in a variety of configurations including glass, metal, plastic,
wood, or built into the floor.
5
The Company markets its family of RF and EM EAS systems under various brand
names including Strata (R), Pillar(R), QS series and the EM series. These
systems are designed to meet the detection and aisle width requirements, as well
as the aesthetic needs, of various retail markets. Product offerings range from
narrow-aisle, in-lane systems for environments such as supermarkets and drug
stores, to weatherproof exterior systems for garden centers, to in-floor systems
that provide "invisible" coverage from six feet to forty feet wide for
image-conscious department stores, specialty apparel shops and mall-based
retailers, the DIY and home center market, and warehouses/distribution centers.
The Strata(R) and Pillar(R) systems use the latest Digital Signal Processing(TM)
(DSP) technology, along with the Company's newly developed Advanced Digital
Discrimination(TM) (ADD/RF) digital filtering technology. The Strata(R) family
can protect aisle widths of twelve 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 Company also offers EM systems acquired in the Meto acquisition. These
include EM System 2200, 2300, 2600 and System 2700, which are configured for
various aisle widths. Meto has developed an intermodulation operating system,
based on the principle of two frequencies being transmitted by a single system
and "combined" in the tag to create a third frequency. This unique third
frequency can only be detected by a proprietary system and allows the detection
of smaller labels.
Deactivation Units
RF deactivation units disarm the disposable tag to prevent recognition by the
sensors located at the exits. Deactivation usually occurs at the point-of-sale.
The Company's patented integrated scan/deactivation provides simultaneous
reading of the bar code information, while deactivating the tag in one single
step at the point-of-sale. By virtually eliminating the need for cashier
training and maximizing point-of-sale efficiency, this capability has helped
establish the Company as the supplier with the preferred technology for
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(R) (formerly
SpectraPhysics), Symbol Technologies, Inc.(R), Metrologic, Inc.(R), NCR
(National Cash Register,Inc.(R)), ICL Systems, Inc(R)./Fujitsu Ltd.(R), IBM
(International Business Machines(R)), and ScanTech BV(R).
These scanners have a deactivation range up to 14 inches. Most can be configured
to provide verification of a reusable tag if left on the merchandise
accidentally, eliminating embarrassing cashier errors. Deactivation pads are
available for a variety of retail environments with deactivation heights up to
18 inches.
The Company has also pioneered the development of interlock and post scanner
verification. Used with the Company's patented integrated scan/deactivation,
these tools allow the retailer to reduce the incidence of internal theft due to
sliding and sweethearting at the point-of-sale.
6
Tags
RF EAS tags contain an electronic circuit that, unless deactivated (disposable
tags) or removed (reusable tags), triggers an alarm when passed through the
sensors. EM EAS tags are made of magnetic materials that initiate an alarm when
carried through the detection zone. They can be deactivated and reactivated.
Within each respective technology, customers can choose from a wide variety of
tags, depending on their merchandise mix. EAS 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. The Company provides tags compatible with a wide
variety of standard price-marking/bar-coding printers to combine pricing,
merchandising, protection and data collection in a single step. The Company's
tags can be integrated into its own hand held price marking tools and laser and
thermal printing systems, and are compatible with many commonly available
printers offered by Sato(R), Zebra Technologies, Inc. (R), Monarch Marking
Systems(R), Printronix(R) and Avery Dennison(R). The Company is also licensed to
sell and provide tags in roll form for the Model 4021(TM) label applicator
printer (Pathfinder(R)) manufactured by Monarch Marking Systems.
In 1999, the Company introduced the Postage Stamp Label, the smallest RF-EAS
circuit ever developed. Measuring just 1.0" x 0.8", it is designed to protect
cosmetics, fragrances, health and beauty care items, and arts, crafts and
figurines when used in conjunction with Strata sensors.
Under the Company's Impulse(R) source tagging program, tags can be embedded in
products or packaging at the point-of-manufacture. As of year-end 1999,
approximately 2,500 suppliers worldwide are participating in this program. In
1999 the Company developed the 1915 blister tag, used in foil-backed blister
packages for products such as analgesics and throat lozenges. The Company also
developed the EASyWear(R) garment integrated label, which allows woven label
manufacturers to integrate an EAS circuit for apparel source tagging.
Reusable Tags
The Company markets a full line of reusable security tags, which protect apparel
items, as well as entertainment products such as music CDs, audio and video
cassettes, and video games. The reusable product line consists of plastic hard
tags, fluid ink tags, and SAFER(R) products.
CCTV Systems and Monitoring Services
The CCTV product line includes basic and high-speed camera systems, programmable
CCTV switcher control systems, CCTV time-lapse recording systems, remote site
CCTV, digital video transmission systems, and video surveillance systems,
designed specifically for retail applications. Fire and burglar alarm system
product offerings include design, installation and centralized monitoring
service.
7
Access Control Systems
Electronic access control systems protect restricted areas by granting access
only to authorized personnel at specified times. Electronic access control
systems can also monitor 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's Threshold(R) product line consists of eight systems, ranging from
a small non-computer based system to large-scale, networked offerings. These
sophisticated systems provide maximum control, monitoring and reporting for any
size facility and features 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 and up to 50,000 cardholders. 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 Threshold 95(R) and Threshold NT(R) also make use of the Microsoft
Windows(R) Graphical User Interface (GUI) for easy operation. The systems allow
integration of third party software packages, like video imaging, CCTV, and
paging systems. The video imaging feature attaches a video snap shot of card
users in the system. These images are stored in the user's record and can be
called to the monitor when a card is presented to any reader.
The newest system, Threshold Xpress(R), is a next-generation mid-range system
that incorporates many large-system capabilities in its feature-rich software
package. Threshold Xpress operates in a Microsoft Windows(R) environment that
enables simple, yet high level, user interaction.
The Company has several proprietary proximity card/tag and reader systems. The
Mirage(R) family of cards and readers, used throughout the Threshold product
line, provides rapid card verification.
RFID
In 1997, the Company entered into a joint development project with Mitsubishi
Materials Corporation (Mitsubishi). This development project, which combines the
Company's RF and manufacturing expertise with Mitsubishi's integrated circuit
and materials expertise, is dedicated to developing a product line which offers
RF intelligent tagging solutions for retail, library, and commercial/industrial
applications. The product line, a family of tags and readers, can effectively
provide solutions for a variety of applications in the auto-ID marketplace.
8
In 1999 the Company introduced the Performa(TM) family of RFID products which
included:
The 13.56 MHz intelligent tags with 96 bits of programmable read-only
memory - These tags possess an anti-collision algorithm enabling the system
to locate and read up to two dozen tags in one second. Tags are available
in five standard sizes for various applications, and custom tags can be
provided to meet specific application requirements. Tags with 1024 bits of
read/write memory are set to enter the testing stage by mid-2000.
The Performa Long Range Reader - features a patented antenna design with
advanced digital signal processes that allow detection on both sides of the
antenna regardless of tag orientation.
The Performa Short Range Reader - features the same technology in a modular
configuration that may be counter mounted, flush mounted or custom
configured.
The Self-Check Reader - combines short-range reading capability with a
graphical user interface and touch screen monitor for simple, efficient
customer/patron self-checkout in a retail or library setting.
The Performa Portable Reader - connects to a belt-mounted, rechargeable
storage/power unit. The hand-held sensing unit allows users to take
"hands-free" inventory.
Bar Code Label Printing Systems
As a result of the acquisition of Meto, the Company now offers both thermal and
laser printers for imprinting variable data, such as bar codes, on plain or
pre-printed tags and labels with or without integrated security devices. The
offerings include a range of thermal printers and high-capacity laser printers
capable of printing more than 10,000 labels per hour. The Company also provides
printer consumables, including tags, labels and toner, as well as software and
support services. Applications include in-store retail product and shelf
labeling, retail supply and distribution center product labeling, express
parcels and manufacturing work-in-progress labeling. An installed printer base
of approximately 50,000 units generates recurring sales of proprietary
consumables and documents (tags and labels).
Thermal Printers
The Company offers two thermal printing technologies, thermal direct printing
and thermal transfer printing.
The Company's line of thermal printers includes units with print widths of two
to eight inches and print speeds from two to ten inches per second, as well as a
modular printer/applicator with speeds of up to 100 cartons per minute for
in-line operation.
9
Laser Printers
The Company offers black-and-white laser printers capable of generating thirty
to sixty pages per minute. These units are targeted to manufacturers as well as
retail distribution and logistic centers. Laser printers offer superior print
quality and high throughput for such applications as price marking and product
identification, integrated tags and labels, shelf mark labels, pick tickets,
tracking or inventory labeling, and shipping and compliance labels. The
Company's laser printers generate a significant recurring revenue stream from
service contracts, consumables and documents.
Service Bureaus
A service bureau imprints variable pricing and article identification data and
bar coding information onto price and fashion tags. The Company has a network of
25 service bureaus worldwide through which it can supply customers with
customized retail apparel price tags and labels at the manufacturing source.
Limited capital and skilled labor requirements allow the service bureaus to be
located near source manufacturing sites, enabling the Company to provide timely
and flexible service.
The Company's network of service bureaus is the most extensive in the industry,
and its ability to offer integrated barcoding and EAS functions places it among
just a handful of suppliers of this caliber in the world.
In addition to its own label integration and service bureau capabilities, the
Company has strategic working relationships with several other label
integrators, including Avery Dennison(R), A&H Manufacturing(R), Paxar(R), J&J
Cash, Ltd.(R), RVL(R), and Shore to Shore(R). 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.
Hand-Held Labeling Systems
The Company offers hand-held price marking and label application systems.
Primarily offered to small to medium sized retailers, products in this area
range from a basic model that can print five characters in one font and one size
to more advanced models that can print up to 35 characters in three different
cells and in five different font sizes. The line also includes the Euro Tool, a
dual pricing tool designed to meet increased demand for dual pricing of products
following the introduction of the Euro, and Mega Meto, a hand-held tool for
printing and dispensing large labels. Hand-held labeling systems are usually
sold as a package including the price marking tool as well as labels, ink and
dispensers, and consumables.
10
Retail Merchandising Systems
The Retail Merchandising Systems (RMS) business unit provides a range of
products that retailers use to merchandise or promote products or to display or
convey information to their customers. RMS includes both Retail Promotion and
Customer Priority Systems.
The Retail Promotion Systems line include pens, markers, highlighters and
papers for creating posters and boards for in-store promotions; price cassettes
and displays to convey price and product information; and plastic and aluminum
frames for use in price displays, departmental signage, gondola promotion and
outdoor signage. The Company also offers an Electronic Graphics Systems product
line comprising software, plotters and printers for creation of in-store
promotional posters.
The Customer Priority System, or Customer Serving System, product line is
designed to ensure that customers will be served in a fair and orderly manner,
and it allows customers to continue shopping while they await their turn for
service. The Turn-O-Matic(R) queuing system comprises displays, dispensers and
tickets. Modular and easily installed by in-house personnel or an electrician,
Turn-O-Matic holds an estimated 80-percent share of its market and represents a
significant source of recurring revenues from ticket sales.
Principal Markets and Marketing Strategy
- ----------------------------------------
The Company traditionally has marketed 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; men's,
women's, and children's apparel; specialty stores, and sporting goods), as well
as to libraries. The Company is a market leader in the supermarket, drug store
and mass merchandiser market segments with customers such as Target Corporation
(Dayton Hudson Department Stores, Mervyns, and Target Stores), American Stores
/Albertsons, Circuit City Stores, Inc., Eckerd Corporation, H.E. Butt Stores,
PETsMART Inc., Rite Aid Corporation, Toys "R" Us, Walgreen Co., and Winn Dixie,
Inc. in the U.S.; Canadian Tire, Shoppers Drug Mart/Pharmaprix, and Toys "R" Us
in Canada; Gigante in Mexico; B&Q, Sainsbury, and Wickes in the United Kingdom;
Continente and El Corte Ingles in Spain; Intermarche, FNAC and Casino 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
recognize that implementation of an effective electronic security system can
significantly increase profitability.
11
In response to consumer demand for e-commerce, traditional bricks-and-mortar
retailers evolved into "click-and-mortar" enterprises, shifting the burden of
single sales from the retail store to the distribution center or point of
manufacture. With this evolution, the complexity of retail logistics increased
as did consumer expectations for lower prices and immediate availability. In
1999, Checkpoint purchased Meto AG, of Heppenheim, Germany, a $375 million
multinational manufacturer and marketer of labeling systems designed to improve
efficiency, reduce costs and provide value-added label solutions for customers
across many applications and industries. This acquisition enables the Company to
participate in this dynamic new marketplace and offer its customers the support
needed to accelerate the pace of distribution in the e-commerce environment.
The Company is focused on providing its customers with a wide variety of fully
integrated electronic security and auto ID 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:
- - Open new and expand existing retail accounts with new products that enhance
its EAS offering and increase penetration with fully integrated, supply chain,
value-added labeling solutions.
- - Expand supply-side market opportunities to manufacturers and distributors,
including source tagging and complete value-added tag and labeling solutions.
- - Continue to promote Impulse Source Tagging around the world with extensive
integration and automation capabilities.
- - Establish a business-to-business web-based interface to enable retailers and
manufacturers to design custom tag and label solutions and initiate orders.
- - Provide retailers with the next generation of security and supply chain
management systems utilizing RF-EAS/ID (RFID) and barcoding technology.
The Company promotes its products primarily through: (i) ease of integration
into the retail environment; (ii) emphasizing Impulse Source Tagging; (iii)
serving as a single point of contact for auto ID and EAS labeling and ticketing
needs; (iv) providing total loss prevention solutions to the retailer; (v)
superior service and support capabilities; (vi) direct sales efforts and
targeted trade show participation; and (vii) offering flexible financing options
including various leasing options, as well as the comprehensive tag program.
During 1999, over 800 million disposable tags were provided to approximately
2,500 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 and EM equipment on a chainwide basis with
leading retailers around the world; (ii) offer integrated tag solutions,
including custom tag conversion that address the needs of logistics and
information services as well as loss prevention; (iii) assist retailers in
promoting source tagging with vendors; (iv) broaden penetration of existing
accounts by promoting the Company's in-house printing, service bureau, and
labeling solution capabilities; (v) increase staffing for source tagging efforts
supporting manufacturers and suppliers to speed implementation; and (vi) expand
RF tag products to accommodate more packaging schemes.
12
In 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.
The acquisition of Meto, with its extensive bar coding and data management
capabilities, further increased the Company's presence in the auto ID market, a
$10 billion industry that is growing at an estimated rate of 10% per annum.
Distribution
- ------------
EAS Systems
The Company sells its EAS systems principally throughout North America, South
America, Europe, and the Asia Pacific region.
In North America, the Company markets its EAS products almost entirely
through its own sales personnel and independent representatives. Of total EAS
North American revenues during 1999, 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 sales operations are currently located
in Western, Eastern and Southern Europe, Scandinavia, Mexico, Argentina, Brazil,
Australia, Malaysia, Japan, and New Zealand.
13
Independent distributors accounted for 8.2% of the Company's EAS revenues
outside the United States during 1999. 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 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 166 independent dealers. The Company
employs 7 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.
Barcode Label Printing Systems, Hand Held Labeling Systems, and Retail
Merchandising Systems
Through the acquisition of Meto, the Company has gained several hundred thousand
customers worldwide across all of the Meto product areas. These customers are
primarily found within the retail sector and retail supply chain. However,
successful efforts are being made to develop a wider customer base in high
growth non-retail sectors. Major customers include companies within industries
such as food retailing, D.I.Y. (Do-It-Yourself), department stores, textile
retailing and garden centers.
Large national and international customers are handled centrally by Key Account
sales specialists supported by appropriate business specialists. The Company has
approximately 500 of such Key Account Specialists worldwide. Smaller customers
are served by either a general sales force capable of representing all products,
or if the complexity or size of the business demands, a dedicated business
specialist.
Many of these customers have been with Meto for many years, despite significant
changes in the industry. Meto has been successful in the transition of many
customers from its traditional HLS and RMS products to the newer BCS and EAS
product lines.
Salespeople
- -----------
The Company presently employs approximately 711 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.
14
Backlog
- -------
The Company's backlog of orders was approximately $34.1 million at December
26, 1999, compared to approximately $18.8 million at December 27, 1998. This
increase includes a $16.7 million backlog associated with the Meto acquisition.
The Company anticipates that substantially all of the backlog at the end of 1999
will be delivered during 2000. In the opinion of management, the amount of
backlog is not indicative of trends in the Company's business. The Company's RF
and EM EAS business generally follows the retail cycle so that revenues are
weighted toward the last half of the calendar year as retailers prepare for the
holiday season.
Technology
- ----------
The Company believes that its patented and proprietary technologies are
important to its business and future growth opportunities, and provide it with
distinct competitive advantages. The Company holds or licenses over 1000 patents
and proprietary technologies (including approximately 800 acquired in connection
with the 1999 acquisition of Meto AG) 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.
EAS
Until October 1995, the Company was the exclusive worldwide licensee of Arthur
D. Little, Inc. (ADL) for certain patents and improvements thereon related to
EAS products and manufacturing processes. On October 1, 1995, the Company
acquired these patents for $1.9 million plus a royalty of 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.
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.
CCTV Systems and Monitoring Services
The Company has a worldwide license to distribute a point-of-sale front-end
monitoring system being marketed under the name Viewpoint(R). Marketing of this
product began during 1992. The Company pays a one time site license fee for each
site installed.
Access Control Systems
The Company is the worldwide licensee of certain patents and technical knowledge
related to proximity card, 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.
15
The Company pays royalties relative to the feature set imbedded within certain
software products. These agreements are renewed annually.
In 1999, the Company also paid a royalty equal to 3.5% on hardware revenue
associated with the sale of certain software products. This agreement expired at
the end of 1999.
Bar Code Label Printing Systems, Hand-Held Labeling Systems, and Retail
Merchandising Systems
Meto focuses its in-house product development efforts on product areas where the
Company believes it can achieve and sustain a competitive cost and positioning
advantage, and where delivery service is critical. Meto also develops and
maintains technological expertise in areas that it believes to be important for
new product development in its principal business areas, and where Meto aims to
exercise control over the technology development process. Meto has developed a
base of technology expertise in the label conversion, printing, electronics, and
software areas and is particularly focused on EAS and BCS technology to support
the development of higher value-added labels. Meto has three principal license
agreements covering its EAS products, including Allied Signal, Inc. as licensor
for EM markers, Miyake as licensor for RF tags, and a group of former owners of
Intermodulation and Safety System AB as licensors of EM systems. These licenses
expire in 2004, 2005, and 2004 respectively.
Manufacturing, Raw Materials and Inventory
- ------------------------------------------
EAS
The Company manufactures its RF EAS 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 2.8 billion disposable RF tags in 1999. 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 5.6 billion disposable RF tags per year.
16
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 operational facilities.
Access Control Systems
The Company purchases raw materials from outside suppliers and assembles the
electronic components for controllers and proximity readers at its facilities in
the Dominican Republic and Puerto Rico. For non-proximity electronic access
control components, the Company subcontracts manufacturing activities. All
electronic access control final system assembly and testing is performed at the
Company's facilities in Thorofare, New Jersey.
Bar Code Label Printing Systems, Hand-Held Labeling Systems, and Retail
Merchandising Systems
Meto's principal manufacturing focus is on the production of labels, tags and
hand-held tools. Meto's main production facilities are located in Germany
(Hirschhorn), in the Netherlands (the Kimball Company), in the US and in
Malaysia. Local production facilities are also situated in the UK, Spain,
Australia, Sweden, Finland and in New Zealand, where production is primarily for
the local markets. Manufacturing at Hirschhorn is focused on print heads for HLS
tools and labels for the HLS, EAS and BCS product areas. The Company's facility
in the Netherlands manufactures labels and tags for laser overprinting, thermal
labels, EAS labels and supports the service bureau network worldwide. The
Malaysian facility produces standard bodies for HLS tools for Europe, complete
hand-held tools for the rest of the world, and labels for the local market.
The products that are not manufactured by Meto are sub-contracted to
manufacturers selected for their manufacturing and assembly skills, quality and
price. Three BCS printer suppliers and three EAS systems suppliers are
considered as strategic partners. Supplies from other smaller suppliers are
being combined where possible.
17
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
42%.
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, NEDAP and 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. 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.
Bar Code Labeling Systems
The worldwide bar code systems product market, including printers and labels, is
estimated to be approximately $7.0 billion, and Checkpoint's targeted retail and
retail-related markets account for about 40% of the total. Major competitors are
Paxar(R) and Avery Dennison(R), who are also customers for Checkpoint's RF-EAS
circuitry. The Company also competes with a number of bar code printer
manufacturers, including Zebra Technologies(R) and Intermec Technologies(R).
18
Retail Merchandising Systems
The Company faces no single competitor across its entire retail merchandising
product range or across all international markets. However, HL Display is its
strongest competitor in the Retail Promotions Systems segment. In the Hand-Held
Labeling Systems segment, the Company competes with Paxar, Garvey, Sato, Hallo,
Contact and Prix.
Research and Development
- ------------------------
The Company expended approximately $7,278,000, $8,018,000, and $7,604,000, in
research and development activities during 1999, 1998, and 1997, 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 1000 patents and proprietary technologies(including
approximately 800 patents acquired in connection with the 1999 acquisition of
Meto AG) 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 26, 1999, the Company had 5,017 employees, including 7 executive
officers, 73 employees engaged in research and development activities and 753
employees engaged in sales and marketing activities. In the United States, 13 of
the Company's employees are represented by a union. In Europe, approximately 400
of the Company's employees are represented by various unions or work councils.
19
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 26, 1999,
and identifiable assets as of December 26, 1999, December 27, 1998, and December
28, 1997, is provided in Note 19 to the Consolidated Financial Statements.
20
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. In 1997, the
Company leased one additional facility located in Thorofare, New Jersey. This
facility is a training/research facility consisting of 18,240 square feet. This
facility has a ten year lease through September 2007.
The Company owns its principal manufacturing facilities, located in Ponce,
Puerto Rico. These facilities consisting of two buildings have a total of
159,000 square feet. Included in the 159,000 square feet is approximately 18,000
square feet of office space and 32,000 square feet of warehouse space. Adjacent
to these properties, the Company leases additional facilities containing
approximately 32,000 square feet including 19,400 of warehouse space. The lease
expires in 2006.
The Company leases three manufacturing facilities in Dominican Republic Free
Zones. The facilities, located in La Vega Free Zone, include two buildings
containing approximately 63,000 square feet, which consist of approximately
4,000 square feet of office space, approximately 9,600 square feet of warehouse
space and an 8,000 square foot distribution center. The reusable tags,
electronic sub-assemblies of the Company's sensors, and proximity cards are
assembled at this site. The other facility, located in Los Alcarrizos Free Zone,
contains approximately 60,000 square feet. It includes approximately 6,000
square feet of office space and approximately 7,000 square feet of warehouse
space. This facility performs the bending, chroming and wiring of antenna loops
used in the Company's chrome sensor products and the production of plastic parts
used in the assembly of the Company's reusable security tags.
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. The other facility
contains approximately 22,000 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 2002.
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. These locations have an average of 6,500
square feet of office space and an average of 3,500 square feet of warehouse
space. The lease terms of these foreign subsidiaries range from one to eighteen
years.
21
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 2005.
In December 1999 the Company completed the acquisition of Meto AG. Meto
maintains various sales, distribution, and manufacturing facilities throughout
Europe, Asia Pacific and North America. In Europe, the Company leases 20 sales
locations with an average square footage of 19,300; 17 distribution facilities
with an average square footage of 16,600; and seven manufacturing facilities
with an average square footage of 26,600. In the Asia Pacific region, the
Company leases nine sales locations with an average square footage of 12,500;
six distribution facilities with an average square footage of 21,000. In North
America, the Company leases nine sales locations with an average square footage
of 11,400; four distribution facilities with an average square footage of
42,000; and two manufacturing facilities with an average square footage of
2,300. In addition to the leased facilities, the company owns five sales
locations in France, Netherlands, Australia, New Zealand, and Germany with an
average square footage of 55,800 and four manufacturing locations in
Netherlands, Australia, New Zealand, and Germany with an average square footage
of 119,600.
Item 3. LEGAL PROCEEDINGS
The Company is involved in certain legal and regulatory actions all of which
have arisen in the ordinary course of business, except for the matter described
in the following paragraph. 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 1999 to a vote of security
holders.
22
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 51 1988 President and Chief
Executive Officer
William J. Reilly, Jr. 51 1989 Executive Vice President
Michael E. Smith 44 1990 Executive Vice President
Luis A. Aguilera 51 1982 Senior Vice President -
Manufacturing
Jeffrey A. Reinhold 42 1995 Senior Vice President -
Finance, Chief Financial
Officer and Treasurer
Neil D. Austin 53 1989 Vice President, General
Counsel and Secretary
W. Craig Burns 40 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.
23
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 of the Company's Puerto Rico subsidiary from February
1979 until August 1993.
Mr. Reinhold has been Senior Vice President, 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.
24
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
1999:
First Quarter............................ $12 3/8 $ 8 1/4
Second Quarter....................... 10 7/16 7 1/4
Third Quarter.......................... 10 3/16 8 7/16
Fourth Quarter........................ 9 9/16 7 3/16
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 6, 2000, there were 1,384 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.
25
Item 6. SELECTED FINANCIAL DATA
SELECTED ANNUAL FINANCIAL DATA
--------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
(Thousands, except per share data)
FOR YEARS ENDED:
Net revenues $370,542 $362,407 $335,964 $291,769 $204,741 $128,331
Earnings before
income taxes $ 10,207(1)$ 26,184(2)$ 13,565(3) $ 29,877 $ 16,598 $ 8,377
Income taxes $ 2,655(4)$ 8,509 $ 5,445 $ 9,430 $ 5,189 $ 2,094
Earnings before
extraordinary
item $ 7,258 $ 17,685 $ 8,228 $ 20,447 $ 11,409 $ 6,283
Net earnings $ 6,666 $ 17,685 $ 8,228 $ 20,447 $ 11,409 $ 6,283
Earnings per
common share
before
extraordinary
item
Basic $ .24 $ .55 $ .24 $ .64 $ .43 $ .30
Diluted $ .24 $ .53 $ .23 $ .60 $ .42 $ .29
Net earnings
per common
share
Basic $ .22 $ .55 $ .24 $ .64 $ .43 $ .30
Diluted $ .22 $ .53 $ .23 $ .60 $ .42 $ .29
Depreciation &
amortization $ 28,028 $ 25,676 $ 23,762 $ 18,322 $ 12,178 $ 8,023
(1) Includes a $11.8 million pre-tax restructuring charge.
(2) Includes a $0.6 million pre-tax reversal of the restructuring charge
recorded in the fourth quarter of 1997.
(3) Includes a $9.0 million pre-tax restructuring charge and non-recurring
pre-tax charges of $8.1 million.
(4) Includes tax benefit of $0.26 million associated with the extraordinary loss
on early extinguishment of debt.
AT YEAR-END:
Working capital $ 183,186 $186,261 $211,570 $285,753 $148,074 $ 39,427
Long-term debt $ 383,595 $164,934 $150,068 $152,616 $155,397 $ 35,556
Shareholders'
equity $ 255,795 $261,936 $277,550 $300,794 $137,658 $ 61,303
Total assets $ 944,873 $507,663 $516,434 $521,653 $362,151 $127,925
Capital
expenditures $ 8,774 $ 12,301 $ 26,714 $ 10,454 $ 9,379 $ 4,532
Cash provided
by (used in)
operating
activities $ 87,536 $ 29,157 $(59,559) $(17,212) $(14,753) $ (7,612)
Cash used in
investing
activities $(250,891) $(39,460) $(36,548) $(19,882) $(79,652) $ (8,584)
26
Cash provided
by (used in)
financing
activities $216,924 $(18,386) $(24,508) $145,738 $170,917 $ 17,140
Ratios
- ------
Return on
net sales(a) 1.80% 4.88% 2.45% 7.01% 5.57% 4.90%
Return on
average
equity(b) 2.54% 6.56% 2.85% 9.33% 11.47% 10.92%
Return on
average
assets(c) 1.04% 3.45% 1.59% 4.63% 4.66% 5.39%
Current
ratio(d) 1.77 3.37 3.46 5.58 3.22 2.32
Percent of total
debt to
capital(e) 62.77% 40.10% 36.13% 34.83% 53.66% 40.81%
(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
weighted 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.
1999 (1) 1998 1997 1996 1995 1994
------- ---- ---- ---- ---- ----
(Thousands, except per share and employee data)
Other Information
- -----------------
Average number
of diluted
shares
outstanding 30,528 33,272 35,184 34,087 27,375 21,612
Number of
Employees 5,017 3,044 3,605 2,628 2,540 1,804
Backlog $34,100 $18,800 $24,200 $ 8,400 $ 8,000 $ 7,053
(1) Includes increase in employees and backlog as a result of the Meto
acquisition.
27
SELECTED QUARTERLY FINANCIAL DATA
QUARTERS (unaudited)
------------------------------------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
(Thousands, except per share data)
1999
- ----
Net revenues $81,754 $87,305 $90,742 $110,741 $370,542
Gross profit $31,127 $35,690 $37,038 $ 42,917 $146,773
Earnings before
extraordinary
item $ 1,392 $ 4,146 $ 6,241 $ (4,521)(1) $ 7,258
Net earnings $ 1,392 $ 4,146 $ 6,241 $ (5,113)(1) $ 6,666
Earnings per
common share
before
extraordinary
item
Basic $ .05 $ .14 $ .21 $ (.15) $ .24
Diluted $ .05 $ .14 $ .20 $ (.15) $ .24
Net earnings
per common
share: (3)
Basic $ .05 $ .14 $ .21 $ (.17) $ .22
Diluted $ .05 $ .14 $ .20 $ (.17) $ .22
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(2) $ 17,685
Earnings
per common
share:(3),
Basic $ .04 $ .11 $ .21 $ .20 $ .55
Diluted $ .04 $ .11 $ .20 $ .19 $ .53
(1) Includes a $11.8 million pre-tax restructuring charge related to the
acquisition of Meto AG.
(2) Includes a $0.6 million pre-tax reversal of the 1997 restructuring
charge.
(3) Quarterly earnings per common share are computed independently; therefore
the sum of the quarters may not equal full year earnings per share.
28
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, 1998 and 1999.
On December 10, 1999, the Company consummated its acquisition of 98.57% of the
outstanding shares of Meto AG pursuant to a cash tender offer. Subsequently, the
Company has increased its ownership to approximately 99.2%. Included in the 1999
results is a $11.8 million restructuring charge related to the integration of
the Meto business. The 1999 restructuring charges relate to employee severance
costs ($3.1 million), facility lease termination costs ($3.3 million) certain
asset impairments ($4.5 million), and other integration expenses ($0.9 million)
of Checkpoint Systems, the acquiring company. Most of the employees affected by
the restructuring were in support services including selling, technical and
administrative staff functions.
The 1998 restructuring charge represents a $0.6 million reversal of the
restructuring charge recorded in 1997. The 1997 charges, which totaled $17.1
million, represented (i) pre-tax restructuring charges of $9.0 million of which
$1.1 million was included in 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 included
in cost of revenues and $1.5 million in SG&A.
The table below reflects the income from operations before restructuring and
non-recurring charges. Accordingly, the discussion that follows speaks to the
comparisons in this table through income from operations before restructuring
and non-recurring items.
1999(1) 1998 1997
-------- --------- ---------
(Thousands)
Net Revenues $ 370,542 $ 362,407 $ 335,964
Cost of revenues 223,769 215,310 194,024
--------- --------- ---------
Gross Profit 146,773 147,097 141,940
Selling, general and administrative
expenses 118,803 117,034 113,091
--------- --------- ---------
Income from operations before
restructuring and non-recurring
charges 27,970 30,063 28,849
Restructuring and non-recurring
charges 11,796 (600) 17,145
--------- --------- ---------
Income from operations after restruc-
turing and non-recurring charges $ 16,174 $ 30,663 $ 11,704
========= ========= =========
29
Net revenues by product segment
Electronic Article Surveillance(2) $ 293,209 $ 297,200 $ 278,635
Domestic CCTV, Fire, and Burglary 48,905 53,745 45,834
Access Control 14,269 11,462 11,495
Meto(1) 14,159 - -
--------- --------- ---------
$ 370,542 $ 362,407 $ 335,964
========= ========= =========
(1) The 1999 results include the operations of the Meto business from the
date acquired, December 10, 1999.
(2) Included in the EAS amounts are (i) the Company's foreign CCTV, Fire,
and
Burglary which represents approximately 4%, 4%, and 3% of the Company's
total consolidated revenue for 1999, 1998, and 1997, respectively and (ii)
the initial sales of the Company's RFID products.
Net Revenues
The Company's unit volume is driven by product offerings, number of direct sales
personnel, recurring sales and, to some extent, pricing. The Company's
increasing base of installed systems provides a growing source of recurring
revenues from the sale of disposable tags and service revenues. For fiscal 1999,
1998 and 1997, approximately 34%, 33%, 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.
In 1999, revenues increased by approximately $8.1 million or 2.2% from
$362.4 million to $370.5 million. This increase was attributable to (i) the
revenue generated from the Meto acquisition (ii) increased sales of the
Company's Electronic Article Surveillance (EAS) product line in Europe and
International retail markets (iii) an increase in revenue of the Company's
Access Control products offset by (iv) a decrease in the Company's EAS and
CCTV/Fire and Burglary products in North America.
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 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.
North American net revenues accounted for 51.5%, 58.7%, and 57.5% in 1999,
1998, and 1997, respectively. In 1999, North American EAS net revenues decreased
by $20.0 million or 14.7% compared to an increase of $11.6 million or 8.5% in
1998. Sales of the Company's Domestic CCTV/Fire and Burglary products decreased
by $4.8 million or 9.0% in 1999 compared to an increase of $7.9 million or 17.3%
in 1998. In 1999, net revenues of the Company's Access Control product line,
primarily in the United States, increased $2.8 million or 24.4% when compared to
1998, while in 1998, net revenues remained consistent with the prior year.
30
International net revenues (excluding Canada) accounted for 48.5%, 41.3%, and
42.5% in 1999, 1998, and 1997, respectively. International net revenues,
consisting primarily of EAS and CCTV/Fire and Burglary, increased by $30.1
million or 20.1% and $6.9 million or 4.9% in 1999, and 1998, respectively.
Cost of Revenues
During 1999, cost of revenues increased $8.5 million or 3.9% from $215.3 million
to $223.8 million. As a percentage of net revenues, cost of revenues increased
1.0% (from 59.4% to 60.4%). The increase in the Company's cost of revenues is
primarily attributable to: (i) an increase in field service costs to support
international chain wide installations; and (ii) an increase in product cost
related to idle capacity. These increases were partially offset by a reduction
in research & development expenses.
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
revenues is primarily attributable to: (i) product mix, i.e., higher growth rate
on 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 1997 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.
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. This excess capacity
negatively impacted product costs in 1999 and while improving, the Company
expects it to continue to negatively impact product costs in the year 2000.
For fiscal year 1999 and 1998, field service and installation costs were 10.6%
and 10.4% of net revenues, respectively. 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.
31
Selling, General and Administrative Expenses
During 1999, SG&A expenses increased $1.8 million or 1.5% from $117.0 million to
$118.8 million. As a percentage of net revenues, SG&A expenses decreased by 0.2%
(from 32.3% to 32.1%). The higher expenses (in dollars) were due to a $4.5
million increase in support costs (finance, administration, legal, MIS, and
operations) offset by a $2.7 million decrease in variable costs (selling,
commissions, and royalties) and sales support costs (marketing and customer
service). SG&A expenses in 1999, included approximately $1.0 million of year
2000 consulting costs, additional Board of Director and Advisory fees of $0.4
million, and additional legal costs of $0.7 million related to law suits
involving ID Security Systems Canada, Inc. and Checkpoint Software Technologies,
Inc. Also included in SG&A expenses in 1999 is approximately $5.2 million
related to the operations of the Meto business from the date of acquisition.
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).
Other Income/(loss), net
Other Income/(loss), net was $(1.7) million, $0.3 million, and $2.8 million for
1999, 1998, and 1997, respectively. Other Income/(loss), net of $(1.7) million
in 1999 resulted from net foreign exchange losses. Other Income/(loss), 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/(loss), 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.
Interest Expense and Interest Income
Interest expense was $9.8 million, $9.6 million, and $9.6 million for 1999,
1998, and 1997, respectively. 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 1999, 1998, and 1997
was $5.5 million, $4.7 million, and $8.7 million, respectively. The increase in
1999 was directly attributable to the increased cash investments as a result of
the cash generated from operations beginning with 1998 and continuing throughout
1999. 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 1999, 1998, and 1997 was 28.6%,
32.5%, and 40.1%, respectively. The lower rate in 1999 was a result of
proportionally higher tax-exempt earnings in Puerto Rico, and the benefit of tax
32
loss carryforwards which previously had been subject to a full valuation
allowance. The Company anticipates that its effective tax rate will increase in
2000 as high taxed foreign earnings will represent a greater percentage of total
earnings. Also, the non-deductible amortization of goodwill, resulting from the
Meto acquisition, will have a negative impact on the effective tax rate in the
future.
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 $6.7 million or $.22 per share, $17.7 million or $.53 per
share, and $8.2 million or $.23 per share for fiscal years 1999, 1998, and 1997,
respectively. The weighted average number of shares used in the diluted earnings
per share computation were 30.5 million, 33.3 million, and 35.2 million for
fiscal years 1998, 1997, and 1996, respectively. The decrease in the weighted
average number of shares from 1997 to 1999 was primarily due to the repurchase
of common stock throughout 1998 and 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, through a secondary issuance of
common stock in an underwritten public offering, and more recently through cash
generated from operations. The Company believes that cash provided from
operating activities and funding available under its current credit agreements,
should be adequate for its presently foreseeable working capital and capital
investment requirements.
The Company's operating activities during fiscal 1999 generated approximately
$87.5 million compared to approximately $29.2 million during 1998.
This change from the prior year was primarily the result of a decreased
investment in working capital and long-term customer contracts.
In December 1999, the Company completed the acquisition of Meto AG. In
connection with the acquisition, the Company entered into a new $425 million six
and one-half year senior collateralized multi-currency credit facility with a
consortium of twenty-one banks led by the Company's principal lending bank. The
credit facility, which expires on March 31, 2006, includes a $275 million
equivalent multi-currency term note and a $150 million equivalent multi-currency
revolving line of credit. Interest on the new facility resets quarterly and is
based on the Eurocurrency base rate plus an applicable margin. At December 26,
1999, 244 million Euro (approximately $246.9 million) and $25 million were
outstanding under the term loan and 2.23 billion Japanese Yen (approximately
$21.8 million) was outstanding under the revolving credit facility.
33
The Company's Comprehensive Tag Program (Comp Tag(TM)) 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 and 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 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 $150 million, six and one-half year revolving credit facility.
Capital Expenditures
The Company's capital expenditures during fiscal 1999 totaled $8.8 million
compared to $12.3 million during fiscal 1998. The higher expenditures during
1998 were a direct result of the costs associated with the completion of the
plant expansion at the Company's main manufacturing facility located in Ponce,
Puerto Rico. The Company anticipates its capital expenditures to approximate
$15.0 million in 2000.
34
Stock Repurchase
On October 23, 1998, the Board of Directors authorized the purchase of up to $20
million of the Company's outstanding common stock at an average cost not to
exceed $14.00 per share. 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. As of December
26, 1999, the Company has purchased 3,441,300 shares of common stock for an
average price of $12.02 per share under the 1997 program, and 1,319,900 shares
of common stock for an average price of $13.02 per share under the 1998 program.
There were no stock repurchases in 1999.
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.
Furthermore, approximately 20% of the Company's disposable tags offered for sale
are manufactured in Japan. As material and production costs are denominated in
Japanese Yen, the related product costs are subject to 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 26, 1999, the Company had currency exchange forward contracts
totaling approximately $44,787,000 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 26, 1999.
During 1999, the Company entered into a foreign exchange option contract for the
conversion of 6.0 million Euros into USD with an expiration date of May 2000.
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.
35
Other Matters
Pending Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes a new model for the accounting and
reporting of derivative and hedging transactions. The statement amends a number
of existing standards and, as amended by SFAS No. 137, is scheduled to be
effective for fiscal years beginning after June 15, 2000. The Company expects to
adopt this standard as required in fiscal year 2001 and, because of continual
business-driven changes to its derivatives and hedging programs, has not fully
assessed its potential impact on its financial position or results of
operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements.
The Company is currently assessing the impact, if any, that the SAB will have on
its revenue recognition policy. The Company currently recognizes revenue upon
shipment of EAS hardware. The SAB could require the Company to recognize revenue
upon installation of EAS hardware. Any change resulting from the application of
the accounting described in the SAB will be reported as a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes, in the
first quarter of 2000. Should the Company determine that the aforementioned
change in policy is required, the cumulative effect would range from $1.0
million - $3.0 million.
Year 2000
During 1997, management initiated an enterprise-wide program to prepare the
Company's computer systems and applications for the year 2000 along with
assessing supply chain and customer implications. All of the Company's
centralized computer systems were inventoried and assessed to determine their
year 2000 readiness, and remediation of all systems was completed in 1999. When
the date change occurred, the Company did not experience any computer-related
failures.
A significant proportion of the costs associated with the year 2000 effort
represented the redeployment of existing information technology resources. In
addition, there were consulting and other expenses related to software
application and hardware enhancements necessary to prepare the systems for the
year 2000.
The cost to test and remedy the Company's information systems was approximately
$2.3 million. This amount included the acceleration of hardware and software
purchases of approximately $1.3 million and outside consulting services of $1.0
million.
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
36
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, Note 1; and "Financial
Instruments and Risk Management", 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
fixed rate debt instruments. These debt instruments have a net fair value of
$92.7 million and $157.2 million as of December 26, 1999 and December 27, 1998,
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 26, 1999
would result in a $2.0 million decrease in the net market value of the
liability. Conversely, a 100-basis point decrease in interest rates at December
26, 1999, would result in a $3.8 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 $92.7 million
and $99.7 million at December 26, 1999 and December 27, 1998, 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 26, 1999, a 10% strengthening in the Company's common stock would
result in a net increase in the fair value liability of $3.0 million, while a
10% weakening in the Company's common stock would result in a net decrease in
the fair value liability of $0.7 million.
The Company's financial instruments subject to foreign currency exchange risk
includes the Company's 244 million Euro term loan and $150 million
multi-currency revolving credit facility. At December 26, 1999, 244 million Euro
(approximately $246.9 million) and 2.23 billion Japanese Yen (approximately
$21.8 million) were 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 26, 1999, a
10% strengthening of the U.S. dollar versus the Euro would result in a $22.4
million decrease in the liability of the term loan, while a 10% weakening of the
U.S. dollar versus the Euro would result in a $27.4 million increase in the
liability of the term loan. At December 26, 1999, a 10% strengthening of the
U.S. dollar versus the Japanese Yen would result in a $2.0 million decrease in
the liability of the revolving credit facility, while a 10% weakening of the
U.S. dollar versus the Japanese Yen would result in a $2.4 million increase in
the liability of the revolving credit facility.
Also subject to foreign currency exchange risk is the Company's foreign currency
forward exchange contracts and options which represent a net asset position of
$2.5 million and $0.5 million at December 26, 1999 and December 27, 1998,
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 26, 1999, a 10% strengthening of the U.S. dollar
versus other currencies would result in an increase of $4.6 million in the net
asset position, while a 10% weakening of the dollar versus all other currencies
would result in a decrease of $4.3 million.
37
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.
38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Accountants...................................... 40
Consolidated Balance Sheets as of December 26, 1999 and
December 27, 1998................................................... 41
Consolidated Earnings Statements for each of the years
in the three-year period ended December 26, 1999.................... 42
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 26, 1999............. 43
Consolidated Statements of Comprehensive Income (Loss) for each of the
years in the three-year period ended December 26, 1999.............. 44
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 26, 1999.................... 45
Notes to Consolidated Financial Statements............................. 46-73
Financial Schedule
Schedule II -Valuation and Qualifying Accounts...................... 78
39
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, consolidated statements of shareholders'
equity, comprehensive income (loss) and cash flows present fairly, in all
material respects, the financial position of Checkpoint Systems, Inc. and
Subsidiaries at December 26, 1999 and December 27, 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 26, 1999, in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States, 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 the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 29, 2000
40
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 26, December 27,
1999 1998
------------ ------------
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 87,718 $ 35,934
Accounts receivable, net of allowances
of $10,479,000 and $5,556,000 184,378 135,078
Inventories, net 99,148 78,625
Other current assets 27,346 10,748
Deferred income taxes 21,210 4,464
------- -------
Total current assets 419,800 264,849
REVENUE EQUIPMENT ON OPERATING LEASE, net 18,665 24,188
PROPERTY, PLANT AND EQUIPMENT, net 128,881 85,762
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, net 316,536 72,388
INTANGIBLES, net 14,211 10,917
OTHER ASSETS 46,780 49,559
------- -------
TOTAL ASSETS $944,873 $507,663
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and
current portion
of long-term debt $ 47,680 $ 10,453
Accounts payable 45,892 17,346
Accrued compensation and
related taxes 25,750 8,295
Income taxes 35,370 11,784
Unearned revenues 18,338 11,288
Restructuring reserve 27,047 -
Other current liabilities 36,537 19,422
------ ------
Total current liabilities 236,614 78,588
LONG-TERM DEBT, LESS CURRENT MATURITIES 263,595 44,934
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
OTHER LONG TERM LIABILITIES 67,893 1,042
DEFERRED INCOME TAXES - 712
MINORITY INTEREST 976 451
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
36,522,584 and 36,471,584 3,652 3,647
Additional capital 233,617 233,180
Retained earnings 111,224 104,558
Common stock in treasury, at cost,
6,359,200 shares and 6,359,200 shares (64,410) (64,410)
Other comprehensive loss (28,288) (15,039)
------- -------
TOTAL SHAREHOLDERS' EQUITY 255,795 261,936
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $944,873 $507,663
======= =======
See accompanying notes to consolidated financial statements.
41
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED EARNINGS STATEMENTS
1999 1998 1997
-------- -------- --------
(Thousands, except per share data)
Net Revenues $370,542 $362,407 $335,964
Cost of Revenues 223,769 215,310 201,724
------- ------- -------
Gross Profit 146,773 147,097 134,240
Selling, General and Administrative
Expenses 118,803 117,034 114,591
Restructuring Charge 11,796 (600) 7,945
------- ------- -------
Operating Income 16,174 30,663 11,704
Interest Income 5,495 4,746 8,676
Interest Expense 9,792 9,568 9,573
Other Income (Loss), net (1,670) 343 2,758
------- ------- ------
Earnings Before Income Taxes 10,207 26,184 13,565
Income Taxes 2,915 8,509 5,445
Minority Interest (34) 10 108
------- ------- -------
Earnings before extraordinary item 7,258 17,685 8,228
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $260) (592) - -
======= ======= =======
Net Earnings $ 6,666 $ 17,685 $ 8,228
======= ======= =======
Earnings per share before
extraordinary item:
Basic .24 .55 .24
======= ======= =======
Diluted .24 .53 .23
======= ======= =======
Net earnings per share:
Basic $ .22 $ .55 $ .24
======= ======= =======
Diluted $ .22 $ .53 $ .23
======= ======= =======
See accompanying notes to consolidated financial statements.
42
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Other
Compre-
hensive
Common Additional Retained Income Treasury
Stock Capital Earnings (Loss) Stock Total
------ ------- ------- ------- ------- ------
(Thousands)
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)
Net Earnings 6,666 6,666
Exercise of Stock
Options 5 437 442
Foreign Currency
Translation
Adjustment (13,249) (13,249)
Purchase of
Common Stock - -
------ ------- ------- -------- ------- --------
Balance,
December 26, 1999 $3,652 $233,617 $111,224 $(28,288) $(64,410) $255,795
(Common shares: ====== ======== ======== ========= ========= ========
issued 36,522,584
reacquired, 6,359,200)
See accompanying notes to consolidated financial statements.
43
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
1999 1998 1997
---- ---- ----
(Thousands)
Net Earnings $ 6,666 $17,685 $ 8,228
Foreign Currency Translation
Adjustment, net of tax (13,249) 2,010 (10,669)
------ ------- -------
Comprehensive Income(Loss) $(6,583) $19,695 $(2,441)
====== ======= =======
See accompanying notes to consolidated financial statements.
44
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1999 1998 1997
---- ---- ----
Cash flows from operating (Thousands)
activities:
Net earnings $6,666 $ 17,685 $ 8,228
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Net book value of rented equipment
sold 2,638 1,682 811
Revenue equipment placed under
operating lease (7,419) (9,989) (15,579)
Long-term customer contracts 6,547 (1,433) (20,735)
Depreciation and amortization 28,028 25,676 23,762
Deferred taxes (3,120) 383 (6,511)
Provision for losses on accounts
receivable 2,180 1,672 1,822
Restructuring and extraordinary
charges 12,648 (6,692) 8,500
(Increase) decrease in current assets,
net of the effects of the acquired
company:
Accounts receivable 15,174 1,310 (46,063)
Inventories 16,931 1,313 (27,479)
Other current assets 5,201 3,046 (4,694)
Increase (decrease) in current
liabilities net of the effects of
the acquired company:
Accounts payable 9,347 3,999 626
Accrued compensation and related
taxes 2,015 498 (656)
Income taxes 1,804 (1,365) 5,570
Unearned revenues 1,541 (703) 1,496
Other current liabilities (12,645) (7,925) 11,343
------- ------- -------
Net cash provided by (used in)
operating activities 87,536 29,157 (59,559)
Cash flows from investing ------- ------- -------
activities:
Acquisition of property, plant and
equipment (8,774) (12,301) (26,714)
Acquisitions, net of cash acquired (239,792) (27,584) (4,396)
Other investing activities (2,325) 425 (5,438)
------- ------- -------
Net cash used in investing
activities (250,891) (39,460) (36,548)
Cash flows from financing ------- ------- -------
activities:
Proceeds from stock issuances 442 1,115 1,519
Proceeds of debt 293,722 19,548 -
Payment of debt (77,240) (2,625) (3,705)
Purchase of treasury stock - (36,424) (22,322)
Net cash provided by (used in) ------- ------- -------
financing activities 216,924 (18,386) (24,508)
------- ------- -------
Effect of Foreign currency rate
fluctuations on cash and cash
equivalents (1,785) 485 (1,083)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 51,784 (28,204) (121,698)
Cash and cash equivalents:
Beginning of year 35,934 64,138 185,836
------- ------- -------
End of year $87,718 $ 35,934 $ 64,138
======= ======= =======
See accompanying notes to consolidated financial statements.
45
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
Electronic Article Surveillance Systems (EAS) systems, CCTV 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.
On December 10, 1999 the Company consummated its acquisition of 98.57% of the
outstanding shares of Meto AG, an international provider of value-added labeling
solutions for article identification and security to improve customer sales and
processes, primarily in the retail sector and in the retail supply chain. Meto
has four principal products: Barcode Labeling Systems, which are automatic
identification systems primarily for use in the retail sector and retail-related
industries; Hand-held Labeling Systems, which are hand-held price marking
systems used primarily by retailers; Retail Merchandising Systems, which are a
range of products, primarily for in-store retail promotion, display and other
information delivery purposes; and EAS systems.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its majority owned subsidiaries (Company). All 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 1999, 1998, and 1997 are for the 52 weeks ended December
26, 1999, December 27, 1998, and December 28, 1997, respectively.
46
Reclassifications
- -----------------
Certain reclassifications have been made to the 1998 and 1997 financial
statements and related footnotes to conform to the 1999 presentation.
Revenue Recognition
- -------------------
Revenue from the sale of equipment is recognized upon shipment 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.
Cash and Cash Equivalents
- -------------------------
Cash in excess of operating requirements is invested in short-term, income
producing instruments. Cash equivalents include commercial paper and other
securities with original maturities of 90 days or less at the time of purchase.
Book value approximates fair value because of the short maturity of those
instruments.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
47
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 $18,267,000 and $14,077,000
at December 26, 1999 and December 27, 1998, 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 (undiscounted), then the loss is recognized on the
Consolidated Earnings Statement. The amount of an impairment loss is the excess
of the carrying amount of the impaired asset over the fair value of the asset.
The fair value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.
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 $36,088,000 and $44,083,000 at December 26,1999 and
December 27, 1998, respectively.
Research and Development Costs
- ------------------------------
Research and development costs are expensed as incurred, and approximated
$7,278,000, $8,018,000, and $7,604,000,in 1999, 1998, and 1997, respectively.
Royalty Expense
- ---------------
Royalty expenses incurred approximated $3,986,000, $4,354,000, and $4,134,000,
in 1999, 1998, and 1997, respectively.
48
Intangibles
- -----------
Intangibles consist of patents, rights, customer lists and software
development. Intangibles 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 $12,678,000 and
$9,730,000 at December 26, 1999 and December 27, 1998, 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 $6,834,000 and $5,768,000 at
December 26, 1999 and December 27, 1998, respectively, net of accumulated
amortization costs of $3,461,000 and $2,708,000 at December 26, 1999 and
December 27, 1998, 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 as a 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.
49
Note 2. INVENTORIES
Inventories consist of the following:
1999 1998
---- ----
(Thousands)
Raw materials $ 14,544 $ 6,661
Work-in-process 10,984 1,821
Finished goods 73,620 70,143
------- -------
Totals $ 99,148 $ 78,625
======= =======
Note 3. REVENUE EQUIPMENT ON OPERATING LEASE AND PROPERTY, PLANT, AND
EQUIPMENT
The major classes are:
1999 1998
---- ----
(Thousands)
Revenue equipment on operating lease
Equipment rented to customers $ 51,667 $ 48,404
Accumulated depreciation (33,002) (24,216)
------- -------
$ 18,665 $ 24,188
======= =======
Property, plant and equipment
Land $ 11,291 $ 8,064
Building 56,627 27,728
Machinery & equipment 183,784 91,423
Leasehold improvements 8,736 3,952
------- -------
260,438 131,167
Accumulated depreciation (131,557) (45,405)
------- -------
$128,881 $ 85,762
======= =======
Depreciation expense on the Company's revenue equipment on operating lease and
property, plant and equipment, was $19,698,000, $18,191,000, and $16,307,000,
for 1999, 1998, and 1997, respectively.
50
Note 4. SHORT-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT
Short-term debt and current portion of long-term debt at December 26, 1999 and
at December 27, 1998 consisted of the following:
1999 1998
------ ------
(Thousands)
Current portion of long-term debt $30,127 $ 5,462
Overdraft facilities and lines of
credit with interest rates ranging
from 1.625% to 5.50% 17,553 4,991
------ ------
Total short-term debt and
current portion long-term debt $47,680 $10,453
======= =======
Note 5. LONG-TERM DEBT
Long-term debt at December 26, 1999 and December 27, 1998 consisted of the
following:
1999 1998
------ ------
(Thousands)
Seven year $7 million term
note with interest at 4.9% $ - $ 1,050
Six year $8 million term note
with interest at 6.5% - 1,412
Eight year $12 million private
placement note with interest
at 8.27% - 12,000
Eight year $15 million private
placement note with interest
at 9.35% - 15,000
Five year $100 million multi-
currency variable interest rate
uncollateralized revolving credit
facility - 20,934
Six and one-half year EUR 244
million variable interest rate
collateralized term loan 246,904 -
Six and one-half year $25 million
variable interest rate
collateralized loan 25,000 -
Six and one-half year $150 million
multi-currency variable interest
rate collateralized revolving
credit facility 21,818 -
------- -------
Total 293,722 50,396
Less current portion (30,127) (5,462)
------- -------
Total long-term portion $263,595 $44,934
======= =======
51
In connection with the acquisition of Meto AG, the Company entered into a new
$425 million six and one-half year senior collateralized multi-currency credit
facility with a consortium of twenty-one banks led by the Company's principal
lending bank. The credit facility, which expires on March 31, 2006, includes a
$275 million equivalent multi-currency term note and a $150 million equivalent
multi-currency revolving line of credit. Interest on the new facility resets
quarterly and is based on the Eurocurrency base rate plus an applicable margin.
At December 26, 1999, 244 million Euro (approximately $246.9 million) and $25
million were outstanding under the term loan and 2.23 billion Japanese Yen
(approximately $21.8 million) was outstanding under the revolving credit
facility.
The terms of the new credit facility required the Company to retire all existing
senior debt. In connection with the senior debt restructuring, the Company
incurred an after-tax extraordinary loss of $0.6 million, or $.02 per share.
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)
-----------
2000 $30,127
2001 34,532
2002 39,426
2003 39,426
2004 49,758
2005 59,003
Thereafter 41,450
--------
Total $293,722
========
52
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. 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 1992 Stock Option Plan (1992 Plan) allows the Company to grant
either Incentive Stock Options (ISOs) or Non-Incentive Stock Options (NSOs) to
purchase up to 12,000,000 shares of Common Stock after giving effect to the
February 1996 stock split. Under the 1992 Plan, only employees are eligible to
receive ISOs and both employees and non-employee directors of the Company are
eligible to receive NSOs. NSOs and ISOs issued under the 1992 Plan through
December 26, 1999 total 10,703,910. At December 26, 1999, December 27, 1998 and
December 28, 1997 a total of 1,296,090; 1,781,981 and 2,192,114 shares,
respectively, were available for grant after giving effect to the February 1996
stock split.
Options that were fully vested and exercisable totaled 3,631,112 as of December
26, 1999. Options that were outstanding but not yet vested or exercisable
totaled 1,597,172 as of December 26, 1999.
53
The following schedules summarize stock option activity and status:
NUMBER OF SHARES
----------------------------------
1999 1998 1997
----------------------------------
Outstanding at beginning of year 4,782,765 4,521,616 3,222,222
Granted 905,500 800,100 1,574,600
Exercised (51,000) (138,356) (198,606)
Canceled (408,981) (400,595) (76,600)
--------- --------- ---------
Outstanding at end of year 5,228,284 4,782,765 4,521,616
========= ========= =========
WEIGHTED-AVERAGE PRICE
---------------------------
1999 1998 1997
---------------------------
Outstanding at beginning of year $14.27 $14.78 $13.94
Granted 7.77 $12.09 $16.85
Exercised 8.65 $ 8.07 $ 7.65
Canceled 17.67 $18.24 $17.17
------ ------ ------
Outstanding at end of year $13.24 $14.27 $14.78
====== ====== ======
Following is a summary of stock options outstanding as of December 26, 1999:
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 12/26/99 Life Price 12/26/99 Price
- -----------------------------------------------------------------------------
$ 3.88--$ 7.56 1,429,038 6.42 $ 6.18 638,538 $ 4.46
$ 7.66--$11.00 1,380,098 7.19 $10.04 877,426 $ 9.83
$11.25--$16.06 1,342,100 7.35 $14.53 1,064,826 $14.33
$16.50--$28.38 1,077,048 7.07 $25.12 1,050,322 $25.29
- -----------------------------------------------------------------------------
$ 3.88--$28.38 5,228,284 7.00 $13.24 3,631,112 $14.68
54
Stock options granted prior to July 1, 1997, were vested upon grant.
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company continues to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees. 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:
1999 1998 1997
---- ---- ----
(Thousands)
Net Income
As reported $6,666 $17,685 $ 8,228
Pro forma $3,595 $15,252 $ 4,380
Diluted earnings per share
As reported $0.22 $ 0.53 $ 0.23
Pro forma $0.12 $ 0.46 $ 0.11
The following assumptions were used in estimating fair value of stock options:
1999 1998 1997
---- ---- ----
Dividend yields None None None
Expected volatility .487 .485 .555
Risk-free interest rates 6.1% 6.1% 6.25%
Expected life (in years) 3.1 3.1 3.2
Note 8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in 1999, 1998, and 1997, respectively, included payments for
interest of $9,674,000, $9,569,000 and, $9,571,000, and income taxes of
$2,950,000, $9,555,000, and $8,143,000.
55
On December 10, 1999, the Company consummated its acquisition of 98.57% of the
outstanding shares of Meto AG pursuant to a cash tender offer.
In 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............... $460,252,000
Cash paid and direct costs incurred
for the capital stock...................... 265,135,000
------------
Liabilities assumed......................... $195,117,000
============
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
============
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
============
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
56
the Company, and to guard against partial tender offers and other abusive
tactics to gain control of the Company without paying all shareholders a fair
price.
The Rights are exercisable only as a result of certain actions (defined by the
Plan) of an Acquiring Person, as defined. Initially, upon payment of the
exercise price (currently $100.00), each Right will be exercisable for one share
of Common Stock. Upon the occurrence of certain events as specified in the Plan,
each Right will entitle its holder (other than the Acquiring Person) to purchase
a number of the Company's or Acquiring Person's common shares having a market
value of twice the Right's exercise price. The Rights expire on March 10, 2007.
Note 10. STOCK REPURCHASE
On October 23, 1998, the Board of Directors authorized the purchase of up to $20
million of the Company's outstanding common stock at an average cost not to
exceed $14.00 per share. 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. As of December
26, 1999, the Company has purchased 3,441,300 shares of common stock for an
average price of $12.02 per share under the 1997 program, and 1,319,900 shares
of common stock for an average price of $13.02 per share under the 1998 program.
There were no stock repurchases in 1999.
57
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.
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:
-------------------------------------
1999 1998 1997
-------------------------------------
(In thousands, except per share amounts)
Basic earnings per share:
Earnings before
extraordinary item $ 7,258 $17,685 $ 8,228
======= ======= =======
Net earnings $ 6,666 $17,685 $ 8,228
======= ======= =======
Average Common Stock outstanding 30,146 32,302 34,020
Basic earnings per share before
extraordinary item $ .24 $ .55 $ .24
======= ======= =======
Basic earnings per share $ .22 $ .55 $ .24
======= ======= =======
Diluted earnings per share:
Earnings before extraordinary
item available for Common Stock
and diluted securities (1) $ 7,258 $17,685 $ 8,228
======= ======= =======
Net earnings available for Common
Stock and dilutive securities (1): $ 6,666 $17,685 $ 8,228
====== ======= =======
Average Common Stock outstanding 30,146 32,302 34,020
Additional common shares
Resulting from Stock Options 382 970 1,164
------- ------- -------
Average Common Stock and dilutive
stock outstanding (1) 30,528 33,272 35,184
======= ======= =======
Diluted earnings per share before
extraordinary item $ .24 $ .53 $ .23
======= ======= =======
Diluted earnings per share $ .22 $ .53 $ .23
======= ======= =======
(1) Conversion of the subordinated debentures for 1999, 1998, and 1997 are not
included in the above calculation as they are anti-dilutive.
58
Note 12. INCOME TAXES
The domestic and foreign components of earnings (losses) before income taxes
are:
1999 1998 1997
---- ---- ----
(Thousands)
Domestic $19,009 $27,864 $35,496
Foreign (8,802) (1,680) (21,931)
------- ------- -------
Total $10,207 $26,184 $13,565
======= ======= =======
The related provision for income taxes consist of:
1999 1998 1997
---- ---- ----
Currently Payable (Thousands)
Federal $ 3,531 $ 5,970 $10,739
State 300 300 391
Puerto Rico 554 572 513
Foreign 1,650 1,284 313
Deferred
Federal 927 2,935 (2,857)
State - - (81)
Puerto Rico 137 192 193
Foreign (4,184) (2,744) (3,766)
------- ------- ------
Total Provision $ 2,915 $ 8,509 $ 5,445
======= ======= =======
59
Deferred tax assets/liabilities at December 26, 1999 and December 27, 1998
consist of:
1999 1998
---- ----
(Thousands)
Inventory $ 5,754 $ 2,878
Accounts receivable 1,579 1,123
Net operating loss carryforwards 24,656 22,224
Restructuring 11,357 640
Pension 4,598 -
Other 2,519 1,258
Valuation allowance (19,717) (19,090)
------- -------
Deferred tax assets 30,746 9,033
------- -------
Depreciation 2,855 2,414
Intangibles 1,272 1,669
Other 2,621 1,198
------- -------
Deferred tax liabilities 6,748 5,281
------- -------
Net deferred tax asset
(liability) $23,998 $ 3,752
======= =======
The Company's net earnings generated by the operations of its Puerto Rico
subsidiary are exempt from Federal income taxes under Section 936 of the
Internal Revenue Code and substantially exempt from Puerto Rico income taxes.
Repatriation of the Puerto Rico subsidiary's unremitted earnings could result in
the assessment of Puerto Rico "tollgate" taxes at a maximum rate of 3.5% of
the amount repatriated. During 1999, 1998, and 1997, a full provision was made
for tollgate taxes. The Company has not provided for tollgate taxes on
approximately $31,000,000 of its subsidiary's unremitted earnings since they are
expected to be reinvested indefinitely.
The net operating loss carryforwards as of December 26, 1999 in the amount of
$76,379,000 includes $37,600,000 of loss carryforwards that were acquired in
connection with the acquisition of the ID Systems Group, Actron Group Limited,
and Meto AG. If the benefit of the pre-acquisition loss carryforwards is
realized, the Company will apply such benefit to goodwill in connection with the
acquisition. In 1999, $15,643,000 of foreign tax losses expired. A full
valuation allowance had been recorded in 1998 against these losses. In 1999,
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, $20,480,000
expire beginning January 2000 through December 2009, and the remaining portion
may be carried forward indefinitely.
60
A reconciliation of the statutory U.S. Federal income tax rate with the
effective income tax rate follows:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax exempt earnings of subsidiary in
Puerto Rico (26.9) (13.8) (35.5)
Non-deductible goodwill 12.8 5.1 8.0
Foreign losses with no benefit 16.0 9.1 30.3
State and local income taxes, net
of federal benefit 6.0 2.2 5.2
Benefit of foreign sales corporation (4.1) (2.7) (2.6)
Foreign loss carryforwards utilized (17.1) (2.4) -
Foreign rate differentials 4.9 - (0.3)
Other 2.0 - -
------ ------ ------
Effective tax rate 28.6% 32.5% 40.1%
====== ====== ======
61
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 $672,000, $690,000, and $579,000, in 1999, 1998,
and 1997, 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 $176,000, $220,000, and $238,000, in
1999, 1998, and 1997, respectively.
Under the Company's 1999 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 1999, 1998 and 1997, net
earnings did not exceed the required criteria and, accordingly, no bonuses were
provided.
With the acquisition of Meto, the Company maintains several defined benefit
pension plans covering approximately 60% of the total Meto workforce at December
26, 1999. The table below sets forth the funded status of plans and amounts
recognized in the accompanying balance sheets.
62
December 26,
1999
------------
Actuarial Present Value of:
Vested benefits $45,342
Unvested benefits 1,240
-------
Accumulated benefit obligation 46,582
Effect of projected future compensation
Levels 6,577
-------
Projected benefit obligations 53,159
Fair value of plan assets 5,000
-------
Net Pension Benefit Obligation $48,159
=======
The weighted average rate assumptions used in determining pension costs and the
projected benefit obligation are as follows:
Discount rate 6.0%
Expected rate of return on plan assets 6.5%
Expected rate of increase in future
Compensation levels 3.5%
As Meto was acquired on December 10, 1999, the pension expense had an
insignificant impact on the results of operations.
63
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 1999, the Company also entered into a range
forward option in Euros which provided the Company with limited protection
against exchange rate volatility for converting Euros into U.S. dollars.
Unrealized and realized gains and losses on these contracts and options are
included in Other Income (loss),net. Notional amounts of currency exchange
forward contracts outstanding at December 26, 1999 were $44,787,208, with
various maturity dates ranging through the end of 2000. At December 27, 1998,
the notional amounts of currency exchange forward contracts outstanding were
$41,898,000. 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 1999, 1998, and 1997
were ($1,610,000), ($981,000), and $458,000, respectively, and are included in
Other Income (loss), net in the Consolidated Earnings Statement.
Additionally, there were no deferrals of gains or losses on currency exchange
forward contracts or options at December 26, 1999.
64
Fair Values
- -----------
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 26, 1999 and December 27, 1998:
1999 1998
------------------- ------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(Thousands)
Long-term debt (including
current maturities) (1) $(311,275) (311,275) $(56,429) $(57,498)
Subordinated debentures(1) (120,000) (92,664) (120,000) (99,750)
Currency exchange
forward contracts
and options(2) 2,457 2,457 554 554
(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.
65
Long-term debt is carried at the original offering price, less any payments of
principal. Rates currently available to the Company for long-term borrowings
with similar terms and remaining maturities are used to estimate the fair value
of existing borrowings as the present value of expected cash flows. The
long-term debt agreements have various due dates with none of the agreements
extending beyond the year 2006.
Convertible Subordinated Debentures are carried at the original offering price,
less any payments of principal. The debentures are unsecured, subordinated to
all senior indebtedness and convertible at any time into shares of the Company's
common stock. The debentures will mature on November 1, 2005 and are redeemable,
in whole or in part, at the option of the Company on or after November 1, 1998.
In order to estimate the fair value of these debentures, the Company used
currently quoted market prices.
Note 15. PROVISION FOR RESTRUCTURING
A restructuring reserve was established in 1999 for costs related to the
integration of Meto AG. A portion of these costs resulted in a before-tax charge
of $11.8 million ($0.27 per-share after tax) largely for severance costs for
approximately 135 employees ($3.1 million), lease termination costs for 15
office/warehouse facilities ($3.3 million), asset impairments ($4.5 million)and
other integration expenses ($0.9 million) of Checkpoint Systems, the acquiring
company. The charge for asset impairments relates to leasehold improvements on
facilities to be abandoned, and related computer hardware and software as well
as previously acquired goodwill. The impairment was measured based on the
assumption that the identified assets are held for use until the projected date
of abandonment. An additional $20.7 million associated with severance costs for
approximately 289 employees of the acquired company, and lease termination costs
of the acquired company was recorded as an increase to goodwill. Most of the 424
employees affected were in the support services, including selling, technical
and administrative staff functions.
The company anticipates that the restructuring will be substantially completed
by the end of year 2000.
Further charges for restructuring are expected during year 2000 as the Company
continues to evaluate and align its business portfolio with its stated goal.
Reserve
at Begin- Charged Increase/ Reserve
ning of to (Decrease) at End
year Earnings Goodwill of Year
--------- --------- ---------- ---------
(Thousands of Dollars)
Severance and
other employee
related charges $ - $3,097 $17,642 $20,739
Lease termination
Costs - 3,248 3,060 6,308
--------- --------- --------- ---------
$ - $6,345 $20,702 $27,047
========= ========= ========= =========
66
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.
Note 16. COMMITMENTS AND CONTINGENCIES
The Company leases its offices, distribution centers and certain production
facilities. Rental expense for all operation leases approximated $5,619,000,
$7,613,000, and $7,055,000, in 1999, 1998 and 1997, respectively. Future minimum
payments for operating leases having non-cancelable terms in excess of one year
at December 26, 1999 are: $11,110,726 (2000); $8,060,054 (2001); $5,816,630
(2002); $4,595,339 (2003); and $8,202,557 thereafter.
As a result of the Meto acquisition, the Company obtained several other
non-cancelable operating leases. Future minimum payments included above under
the Meto operating leases having non-cancelable terms at December 26, 1999 are:
$6,692,431 (2000); $4,685,105 (2001); $3,451,068 (2002); $2,695,926 (2003); and
$3,572,052 thereafter. In addition, Meto Germany is renting its German
laminating facility, to Raflatac Produktions GmbH. In connection with the rental
agreement the Company has agreed to purchase a certain volume of paper, which
equates to approximately 50% of its current annual world-wide paper consumption,
for the duration of the rental term. The facility rental agreement provides for
a termination fee of $2,061,769 prior to 2009 and $515,190 after 2009 to be paid
by the terminating party.
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.
67
The Company has a worldwide license to distribute a point-of-sale front-end
monitoring system being marketed under the name Viewpoint(R). Marketing of this
product began 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 December 10, 1999, the Company consummated its acquisition of 98.57% of the
outstanding shares of Meto AG pursuant to a cash tender offer. Subsequently, the
Company has increased its ownership to approximately 99.2%. The aggregate
purchase price for the shares acquired was $260.5 million, plus transaction
costs of $4,635,000. In connection with the acquisition, the Company entered
into a new $425 million credit facility provided by several lenders. The credit
facility includes a $275 million term note and a $150 million revolving line of
credit. The terms of the new credit facility required the Company to retire all
existing senior debt. In connection with the senior debt restructuring,
Checkpoint incurred $7.2 million in placement fees which have been capitalized
and are being amortized over the term of the new facility. In addition, the
Company incurred a $852,000 pre-tax extraordinary charge consisting of $745,000
prepayment penalty and the write-off of $107,000 of unamortized deferred
financing costs related to debt extinguishment.
The financial statements reflect the preliminary allocations of the purchase
price based on estimated fair values at the date of acquisition. This allocation
has resulted in acquired goodwill of approximately $252 million which is being
amortized on a straight-line basis over 30 years. The purchase price allocation
is a preliminary allocation and the recorded goodwill is subject to further
adjustment resulting primarily from the completion of the exit plans associated
with the Meto integration, which could result in additional liabilities, and
adjustments to the fair value of net assets acquired. The allocation of the
purchase price is expected to be completed during the year 2000.
68
The following unaudited pro forma information presents the results of operations
of the Company as if the acquisition Meto had taken place at the beginning of
each period presented.
1999 1998
-------- -------
(Thousands, except per share data)
Net revenue $736,523 $745,571
Net earnings (loss) $ (7,612)(1) $ 6,638(1)
Diluted earnings (loss)per share $ (.25) $ .20
(1) Amounts include extraordinary loss after-tax of $592 relating to early
extinguishment of debt.
The pro forma results of operations are for comparative purposes only and
reflect increased amortization, interest expense, and restructuring costs
resulting from the acquisitions described above, but do not include any
potential cost savings from combining the acquired businesses with the Company's
operations. Consequently, the pro forma results do not reflect the actual
results of operations had the acquisitions occurred on the dates indicated, and
are not intended to be a projection of future results or trends.
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.
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 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 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 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.
69
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
development. Information by business segment is set forth below:
(A) Business Segments
1999 1998 1997
-------- -------- --------
(Thousands)
Business segment net revenue:
Electronic Article
Surveillance(1)(2) $293,074 $297,200 $278,635
Domestic CCTV, Fire, Burglary 48,905 53,745 45,834
Access Control 14,269 11,462 11,495
RFID 135 - -
Meto (4) 14,159 - -
-------- -------- --------
Total $370,542 $362,407 $335,964
-------- -------- --------
Business segment operating income (loss):
Electronic Article
Surveillance(1)(3) $ 10,126 $ 25,637 $ 8,221
Domestic CCTV, Fire, Burglary 3,486 4,190 2,039
Access Control 3,871 2,877 2,544
RFID - Development (2,512) (2,041) (1,100)
Meto (4) 1,203 - -
-------- -------- --------
Total $ 16,174 $ 30,663 $ 11,704
-------- -------- --------
Business segment assets (net):
Electronic Article
Surveillance(1) $697,142 $464,119 $470,507
Domestic CCTV, Fire, Burglary 30,597 34,672 37,499
Access Control 6,618 7,745 8,419
RFID - Development 1,544 1,127 9
Meto (4) 208,972 - -
-------- -------- --------
Total $944,873 $507,663 $516,434
-------- -------- --------
70
1999 1998 1997
-------- -------- --------
(Thousands)
Business segment property, plant and equipment:
Depreciation
Electronic Article Surveillance(1) $ 17,557 $ 17,303 $ 15,822
Domestic CCTV, Fire, Burglary 749 688 452
Access Control 9 33 32
RFID - Development 283 167 1
Meto(4) 1,100 - -
-------- -------- --------
Total $ 19,698 $ 18,191 $ 16,307
-------- -------- --------
Net Additions
Electronic Article Surveillance(1) $ 10,588 $ 42,741 $ 38,073
Domestic CCTV, Fire, Burglary 117 694 2,400
Access Control - 20 5
RFID - Development (46) 1,294 10
Meto 47,629 - -
-------- -------- --------
Total $ 58,288 $ 44,749 $ 40,488
-------- -------- --------
(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%, 4%, and 3% of the Company's total
consolidated revenue for 1999, 1998, and 1997, respectively.
(2) Included in EAS revenues are the initial sales of the Company's RFID
products.
(3) EAS operating income (loss) includes: (i) a restructuring charge of
$11.8.million in 1999;(ii) a restructuring charge reversal of $0.6
million in 1998; and (iii) a restructuring charge of $9.0 million and
non-recurring charges of $8.1 million in 1997.
(4) The 1999 results include the operations of the Meto business from the
date acquired, December 10, 1999. The Company is currently evaluating the
effects of the acquisition on the Current Segment Reporting.
(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.
71
The following tables show sales, operating earnings and other financial
information by geographic area for the years 1999, 1998, and 1997.
North America
and Puerto Rico Europe Other(1) Total
--------------- --------- -------- -------
(Thousands)
1999
Net Sales from
Unaffiliated Customers $190,117 $122,531 $ 57,894 $370,542
Operating Income(Loss) $ 8,960(2) $ 6,061(3) $ 1,153(4) $ 16,174
Long-lived Assets $311,086 $113,214 $ 53,993 $478,293
1998
Net Sales from
Unaffiliated Customers $211,780 $100,391 $ 50,236 $362,407
Operating Income(Loss) $ 29,668 $ 1,585(5) $ (590) $ 30,663
Long-lived Assets $ 80,921 $ 67,316 $ 45,018 $193,255
1997
Net Sales from
Unaffiliated Customers $192,727 $100,500 $ 42,737 $335,964
Operating Income(Loss) $ 29,372(6) $(12,121)(7) $ (5,547)(8) $ 11,704
Long-lived Assets $ 85,396 $ 66,238 $ 18,065 $169,699
(1) Other includes the Company's operations in Mexico, Argentina,
Australia, Brazil, Japan, Hong Kong, Malaysia and New Zealand.
(2) Includes a pre-tax restructuring charge of $0.7 million.
(3) Includes a pre-tax restructuring charge of $10.1 million.
(4) Includes a pre-tax restructuring charge of $0.1 million.
(5) Operating income(loss) includes a pre-tax restructuring charge
reversal of $0.6 million.
(6) Includes a pre-tax restructuring charge of $1.6 million.
(7) Includes a pre-tax restructuring charge of $6.6 million.
(8) Includes a pre-tax restructuring charge of $0.8 million.
The Company's export sales to foreign distributors approximated $8,899,000,
$10,897,000, and $13,539,000, in 1999, 1998, and 1997, respectively. Sales by
the Company's foreign subsidiaries in Argentina, Australia, Canada, Western
and Southern Europe, Scandinavia, Brazil, Japan, Hong Kong, Malaysia, New
Zealand and Mexico totaled $180,125,000 in 1999, $156,384,000 in 1998, and
$144,994,000 in 1997.
Note 20. MINORITY INTEREST
On December 10, 1999, Checkpoint Systems, Inc. ("Checkpoint" or the "Company")
consummated its acquisition of 98.57% of the outstanding shares of Meto AG
("Meto") pursuant to a cash tender offer. The aggregate purchase price for the
shares was $260.5 million, plus transaction costs of $4,635,000. The Company's
Consolidated Balance Sheet includes 100% of the assets and liabilities of Meto.
The 1.43% interest in Meto, owned by other parties, and the earning/losses
therefrom have been reflected as minority interest on the Company's Consolidated
Balance Sheet and Consolidated Earnings Statement, respectively.
72
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. PENDING ACCOUNTING PRONOUNCMENTS
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes a new model for the accounting and
reporting of derivative and hedging transactions. The statement amends a number
of existing standards and, as amended by SFAS No. 137, is scheduled to be
effective for fiscal years beginning after June 15, 2000. The Company expects to
adopt this standard as required in fiscal year 2001 and, because of continual
business-driven changes to its derivatives and hedging programs, has not fully
assessed its potential impact on its financial position or results of
operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements.
The Company is currently assessing the impact, if any, that the SAB will have on
its revenue recognition policy. The Company currently recognizes revenue upon
shipment of EAS hardware. The SAB could require the Company to recognize revenue
upon installation of EAS hardware. Any change resulting from the application of
the accounting described in the SAB will be reported as a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes, in the
first quarter of 2000. Should the Company determine that the aforementioned
change in policy is required, the cumulative effect would range from $1.0
million - $3.0 million.
73
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.
74
PART IV
Item 14. EXHIBITS, FINANCIAL SCHEDULE, AND REPORTS ON FORM 8-K
All other schedules are omitted either because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto:
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K
----------------------------------------------------------------
Exhibit 3.1 Articles of Incorporation, as amended, are hereby
incorporated by reference to Item 14(a), Exhibit 3(i) of
the Registrant's 1990 Form 10-K, filed with the SEC on
March 14, 1991.
Exhibit 3.2 By-Laws, as Amended and Restated, are hereby
incorporated by Reference to the Registrant's 1992 Form
10-K, filed with the SEC on March 25, 1993.
Exhibit 4.1 Rights Agreement by and between Registrant and
American Stock and Transfer and Trust Company dated as
of March 10, 1997, is hereby incorporated by reference
to Item 14(a), Exhibit 4.1 of the Registrant's 1996 Form
10-K filed with the SEC on March 17, 1997.
Exhibit 4.2 Indenture dated as of October 24, 1995 by and
between Registrant and The Chase Manhattan Bank, as
Trustee, is hereby incorporated herein by reference to
Exhibit 4.3 to Registrant's Form 10-Q/A filed with the
SEC on December 13, 1995.
Exhibit 4.3 First Supplemental Indenture dated as of February
27, 1998 (amending Indenture dated as of October 24,
1995) is hereby incorporated herein by reference to
Exhibit 4.4 to Registrant's Form 10-K for 1997 filed
with the SEC on March 23, 1998.
Exhibit 10.1 1998 Bonus Plan.
Exhibit 10.2 Amended and Restated Stock Option Plan (1992) is
hereby incorporated by reference to Registrant's Form
10-K for 1997 filed with the SEC on March 23, 1998
Exhibit 10.3 Consulting and Deferred Compensation Agreement with
Albert E. Wolf, are incorporated by reference to Item
(a), Exhibit 10(c) of the Registrant's 1994 Form 10-K.
Exhibit 10.4 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 with the SEC on March 22, 1996, is
hereby incorporated by reference.
75
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 therein, is
incorporated herein by reference to Item 7(c), Exhibit
10.1 of the Registrant's Form 8-K filed with the SEC on
February 18, 1998.
Exhibit 10.9 Employment Agreement with Kevin P. Dowd is incorporated
herein by reference.
Exhibit 10.10 Credit Agreement dated October 27, 1999, by and
among Registrant, First Union National Bank, as
Administrative Agent, and the lenders named therein, is
incorporated herein by reference to Item 7(c), Exhibit
10 of the Registrant's Form 8-K filed on December 27,
1999.
Exhibit 10.11 Amendment to 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
The Registrant filed the following reports: (i) Form 8-K filed December
27, 1999 reporting that the Registrant consummated its acquisition of 98.5% of
the outstanding shares of Meto AG and (ii) Form 8-K/A filed February 25, 2000
filing the required financial statements and pro forma financial information
relating to the aforementioned acquisition.
76
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.............................. 40
Consolidated Balance Sheets as of December 26, 1999 and
December 28, 1997 and ......................................... 41
Consolidated Earnings Statements for each of the years
in the three-year period ended December 26, 1999............. 42
Consolidated Statements of Shareholders' Equity for each
of the years in the three-year period ended
December 26, 1999............................................ 43
Consolidated Statements of Comprehensive Income for each of the
years in the three-year period ended December 26,1999........ 44
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 26, 1999............. 45
Notes to Consolidated Financial Statements..................... 46-73
(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............... 78
77
CHECKPOINT SYSTEMS, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Addition
Balance at through Charged to Balance at
Beginning Acqui- Costs and End of
Year Classification of Year sition Expenses Deductions Year
- ---- -------------- -------- -------- ---------- ---------- ---------
1999 Allowance for
doubtful accounts $5,556 $4,539 $2,180 $1,796 $10,479
------ ------ ------ ------ ------
1998 Allowance for
doubtful accounts $5,703 - $1,672 $1,819 $5,556
------ ------ ------ ------ ------
1997 Allowance for
doubtful accounts $4,282 - $1,822 $ 401 $5,703
------ ------ ------ ------ ------
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
EXHIBIT 10.1 1999 Bonus Plan
EXHIBIT 10.11 Amendment to 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
78
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 XX, 2000.
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 27, 2000
- ------------------------ Executive Officer and Director
/s/Jeffrey A. Reinhold Senior Vice President, March 27, 2000
- ------------------------ Chief Financial Officer,
and Treasurer
/s/W. Craig Burns Vice President - Corporate March 27, 2000
- ------------------------ Corporate Controller and
Chief Accounting Officer
/s/Roger D. Blackwell Director March 27, 2000
- ------------------------
/s/Richard J. Censits Director March 27, 2000
- ------------------------
/s/David W. Clark, Jr. Director March 27, 2000
- ------------------------
79
SIGNATURES AND POWER OF ATTORNEY
(continued)
/s/Alan R. Hirsig Director March 27, 2000
- ------------------------
/s/William P. Lyons, Jr. Director March 27, 2000
- ------------------------
/s/Raymond R. Martino Director March 27, 2000
- ------------------------
/s/Albert E. Wolf Director March 27, 2000
- ------------------------
80