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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, IN