SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 25, 1994 Commission File No. 1-11257
CHECKPOINT SYSTEMS, INC.
(Exact name of Registrant as specified in its Articles of Incorporation)
Pennsylvania 22-1895850
(State of Incorporation) (I.R.S. Employer Identification No.)
101 Wolf Drive, P.O. Box 188, Thorofare, New Jersey 08086
--------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
609-848-1800
---------------------------------------------------
(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 February 21, 1995, the aggregate market value of the Common Stock
held by non-affiliates of the Registrant was approximately $236,000,000.
As of February 21, 1995, there were 10,733,328 shares of the Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - The Company's definitive proxy statement for its Annual Meeting
of Shareholders, presently scheduled to be held on April 27, 1995.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Accountants......................................34
Consolidated Balance Sheets as of December 25, 1994 and
December 26, 1993...................................................35
Consolidated Earnings Statements for each of the years
in the three-year period ended December 25, 1994....................36
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 25, 1994..............36
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 25, 1994....................37
Notes to Consolidated Financial Statements...........................38-53
Financial Schedule
Schedule II - Valuation and Qualifying Accounts...................57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Checkpoint Systems, Inc.
We have audited the consolidated financial statements and financial
statement schedule of Checkpoint Systems, Inc. and subsidiaries listed in
item 14(a)of this Form 10-K. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of
Checkpoint Systems, Inc. and subsidiaries as of December 25, 1994 and
December 26, 1993, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December
25, 1994 in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the information
required to be included therein.
As discussed in Note 1 to the Financial Statements, in 1993, the Company
changed its method of accounting for income taxes.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 15, 1995,
except as to Note 16 for
which the date is March 3, 1995
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 25, December 26,
1994 1993
------------ -----------
ASSETS (Thousands)
CURRENT ASSETS
Cash $ 944 $ -
Accounts receivable, net of allowances
of $1,570,000 and $2,237,000 33,290 24,239
Inventories 29,486 25,450
Other current assets 4,385 5,213
Deferred income taxes 1,117 -
------- -------
Total current assets 69,222 54,902
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 36,799 30,862
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED 10,120 8,919
INTANGIBLES 5,826 5,098
DEFERRED TAXES, net of valuation allowance - 479
OTHER ASSETS 5,958 4,739
------- -------
TOTAL ASSETS $127,925 $104,999
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $10,064 $ 9,716
Accrued compensation and related taxes 2,635 1,907
Income taxes 2,223 792
Unearned revenues 3,357 2,645
Other current liabilities 4,810 7,761
Short-term borrowings and current portion
of long-term debt 6,706 4,097
------- -------
Total current liabilities 29,795 26,918
LONG-TERM DEBT, LESS CURRENT MATURITIES 35,556 24,302
DEFERRED INCOME TAXES 1,271 -
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
11,278,511 and 10,979,198 1,128 1,097
Additional capital 21,592 18,346
Retained earnings 46,789 40,506
Common stock in treasury, at cost,
799,000 shares (5,664) (5,664)
Foreign currency adjustments (2,542) (506)
------- -------
TOTAL SHAREHOLDERS' EQUITY 61,303 53,779
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $127,925 $104,999
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED EARNINGS STATEMENTS
1994 1993 1992
------- ------- -------
(Thousands, except per share data)
Net Revenues $128,331 $93,034 $72,166
Cost of Revenues 66,360 54,421 38,650
------- ------- -------
Gross Profit 61,971 38,613 33,516
Selling, General and Administrative
Expenses 50,243 39,238 28,342
------- ------- -------
Operating Income (loss) 11,728 (625) 5,174
Contract Settlement Income - 3,500 -
Interest Income 529 476 140
Interest Expense 3,118 953 423
Foreign Exchange Loss 762 327 -
------- ------- -------
Earnings Before Income Taxes 8,377 2,071 4,891
Income Taxes 2,094 456 463
------- ------- -------
Net Earnings $ 6,283 $ 1,615 $ 4,428
======= ======= =======
Net Earnings Per Share $ .58 $ .16 $ .45
======= ======= =======
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Foreign
Common Additional Retained Treasury Currency
Stock Capital Earnings Stock Adjust. Total
------- ------- ------- ------- ------- ------
(Thousands)
Balance,
December 29, 1991 1,026 12,262 34,463 (5,664) - 42,087
Net Earnings 4,428 4,428
Exercise of Stock
Options 54 4,492 4,546
------- ------- ------- ------- ------- -------
Balance,
December 27, 1992 1,080 16,754 38,891 (5,664) - 51,061
Net Earnings 1,615 1,615
Exercise of Stock
Options 17 1,592 1,609
Foreign Currency
Adjustments (506) (506)
------- ------- ------- ------- ------- -------
Balance,
December 26, 1993 1,097 18,346 40,506 (5,664) (506) 53,779
Net Earnings 6,283 6,283
Exercise of Stock
Options 31 3,246 3,277
Foreign Currency
Adjustments (2,036) (2,036)
------- ------- ------- ------- ------- -------
Balance,
December 25, 1994 $ 1,128 $21,592 $46,789 $(5,664) $(2,542) $61,303
======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1994 1993 1992
(Thousands)
Cash inflow (outflow) from operating
activities:
Net earnings 6,283 $ 1,615 $ 4,428
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Net book value of rented equipment
sold 1,652 1,268 452
Long-term customer contracts (919) 421 (1,111)
Depreciation and amortization 8,023 6,476 3,993
Deferred Taxes 633 (479) -
Provision for losses on accounts
receivable 1,221 520 88
(Increase) decrease in current assets:
Accounts receivable (11,289) (2,716) (1,445)
Inventories (13,095) (10,792) (7,169)
Other current assets 828 (2,024) (833)
Increase (decrease) in current
liabilities:
Accounts payable (669) 2,062 1,284
Accrued compensation and related
taxes 728 (269) 727
Income taxes 1,431 (385) 819
Unearned revenues 712 (7) 220
Other current liabilities (3,151) (2,007) 79
------- ------- -------
Net cash provided (used) by
operating activities (7,612) (6,317) 1,532
Cash inflow (outflow) from investing ------- ------- -------
activities:
Acquisition of property, plant and
equipment (4,532) (4,600) (6,143)
Proceeds of investment securities - - 825
Acquisitions, net of cash acquired (1,786) (3,184) (1,030)
Patent defense costs - (1,998) -
Other investing activities (2,266) (1,662) (1,147)
------- ------- -------
Net cash used by investing
activities (8,584) (11,444) (7,495)
Cash inflow (outflow) from financing ------- ------- -------
activities:
Proceeds from stock options 3,277 1,609 4,546
Proceeds of debt 28,306 14,774 3,830
Payment of debt (14,443) (942) (609)
------- ------- -------
Net cash provided by financing
activities 17,140 15,441 7,767
Net increase (decrease) in cash and ------- ------- -------
cash equivalents 944 (2,320) 1,804
Cash and cash equivalents:
Beginning of year - 2,320 516
------- ------- -------
End of Year $ 944 - $ 2,320
------- ------- -------
See accompanying notes to consolidated financial statements.
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its wholly-owned subsidiaries ("Company"). All material
intercompany transactions are eliminated in consolidation.
Fiscal Year
----------
The Company's fiscal year is the 52 or 53 week period ending the last
Sunday of December. References to 1994, 1993 and 1992 are for: the 52
weeks ended December 25, 1994, the 52 weeks ended December 26, 1993, and
the 52 weeks ended December 27, 1992.
Reclassifications
-----------------
Certain reclassifications have been made to the 1993 and 1992 financial
statements and related footnotes to conform to the 1994 presentation.
Revenue Recognition
-------------------
Revenue from the sale of equipment is recognized upon shipment of
equipment or the acceptance of a customer order to purchase equipment
currently rented. Equipment leased to customers under sales-type leases
is accounted for as the equivalent of a sale. The present value of such
lease revenues is recorded as net revenues, and the related cost of the
equipment is charged to cost of revenues. The deferred finance charges
applicable to these leases are recognized over the terms of the leases
using the effective interest method. Rental revenue from equipment under
operating leases is recognized over the term of the lease. Service
revenue is recognized over the contractual period or as services are
performed. Sales to third party leasing companies are recognized as the
equivalent of a sale. These sales were all made on a non-recourse basis.
Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out method)
or market. Cost includes material, labor and applicable overhead.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are carried at cost. Depreciation and
amortization generally are provided on a straight-line basis over the
estimated useful lives of the assets; for certain manufacturing equipment,
the units-of-production method is used. Maintenance, repairs and minor
renewals are expensed as incurred. Additions, improvements and major
renewals are capitalized. The cost and accumulated depreciation
applicable to assets retired are removed from the accounts and the gain or
loss on disposition is included in income.
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Excess of Purchase Price Over Fair Value of Net Assets Acquired
---------------------------------------------------------------
The excess of purchase price over the fair value of net assets acquired is
amortized on a straight-line basis over their economic useful lives which
is considered to be 20 years. Accumulated amortization approximated
$2,437,000 and $1,852,000 at December 25, 1994 and December 26, 1993,
respectively.
Research and Development Costs
------------------------------
Research and development costs are expensed as incurred, and approximated
$4,877,000, $5,392,000, and $4,498,000 in 1994, 1993 and 1992,
respectively.
Royalty Expense
---------------
Royalty expenses incurred approximated $2,227,000, $1,619,000 and
$1,279,000 in 1994, 1993, and 1992, respectively.
Per Share Data
--------------
Per share data is based on the weighted average number of common and
common equivalent shares (stock options) outstanding during the year. The
number of shares used in the per share computations were 10,806,000
(1994), 10,386,000 (1993), and 9,951,000 (1992).
Intangibles
-----------
Intangibles consist of patents, rights, customer lists and software
development costs. The costs relating to the acquisition of patents,
rights and customer lists are amortized on a straight-line basis over
their useful lives of ten years or legal life, whichever is shorter.
Accumulated amortization approximated $1,027,000 and $473,000 at December
25, 1994 and December 26, 1993, respectively.
The costs of internally developed software are expensed until the
technological feasibility of the software has been established.
Thereafter, all software development costs are capitalized and
subsequently reported at the lower of unamortized cost or net realizable
value. The costs of capitalized software are amortized over the products'
estimated useful lives or five years, whichever is shorter. During 1994
and 1993, $743,000 and $575,000 of software development costs were
capitalized. Accumulated amortization of these costs approximated
$965,000 and $444,000 at December 25, 1994 and December 26, 1993,
respectively.
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Taxes on Income
---------------
In 1993, Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" was adopted. Under this method, deferred
tax liabilities and assets are determined based on the difference between
financial statement and tax basis of assets and liabilities using enacted
statutory tax rates in effect at the balance sheet date. The adoption of
this new standard did not have a material effect on the Company's
financial statements. For 1992, taxes on income are determined under
Accounting Principles Board Opinion 11 (APB 11) whereby the income tax
provision is calculated under the deferred method. Generally, the
deferred method recognizes income taxes on financial statement income and
the tax effect of differences with taxable income are deferred at tax
rates in effect during the period.
Accounting for Foreign Currency Translation and Transactions
------------------------------------------------------------
The Company's balance sheet accounts of foreign subsidiaries are
translated into U.S. dollars at the rate of exchange in effect at the
balance sheet dates. Revenues, costs and expenses of the Company's
foreign subsidiaries are translated into U.S. dollars at the average rate
of exchange in effect during each reporting period. The resulting
translation adjustment is recorded as a separate component of
stockholders' equity. In addition, gains or losses on long-term
intercompany transactions are excluded from the results of operations and
accumulated in the aforementioned separate component of consolidated
stockholders' equity. All other foreign transaction gains and losses are
included in the results of operations.
Aggregate foreign currency transaction losses in 1994, 1993 and 1992 were
$762,000, $327,000 and zero, respectively, and are included in "Foreign
Exchange Loss" in the Consolidated Earnings Statement.
2. INVENTORIES
Inventories consist of the following:
1994 1993
---- ----
(Thousands)
Raw materials $ 6,078 $ 8,256
Work-in-process 193 705
Finished goods 23,215 16,489
------ ------
Totals $29,486 $25,450
====== ======
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY, PLANT AND EQUIPMENT
The major classes are:
1994 1993
---- ----
(Thousands)
Land $ 892 $ 892
Building 9,751 9,733
Equipment rented to customers 10,364 3,736
Machinery and equipment 35,162 31,434
Leasehold improvements 1,129 1,949
Leased equipment under capital
leases 15 15
------- -------
$57,313 $47,759
Accumulated depreciation
and amortization (20,514) (16,897)
------- -------
$36,799 $30,862
======= =======
4. SHORT-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT
The short-term debt and current portion of long-term debt at December 25,
1994 and at December 26, 1993 consisted of the following:
December 25, 1994 December 26, 1993
----------------- ------------------
(Thousands)
Current portion of Long-term Debt $3,277 $1,733
$2 million credit line held by
Puerto Rico subsidiary with
interest at 8.5% 2,000 1,000
Line of credit held by Argentine
subsidiary with interest at 13.0% 1,429 1,215
Various loans obtained by the
Company's subsidiaries - 149
------- -------
Total short-term debt and
current portion long-term debt $ 6,706 $ 4,097
======= =======
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT
The long-term debt at December 25, 1994 and December 26, 1993 consisted of
the following:
December 25, 1994 December 26, 1993
----------------- -----------------
(Thousands)
$13 million credit line with
interest at 8.5% $12,880 $17,830
Seven year $7 million term
note with interest at 4.9% 5,250 6,300
Six year $8 million term note
with interest at 6.5% 7,059 -
Eight year $12 million private
placement note with interest
at 8.27% 12,000 -
Acquisition of rights in a point
of sale monitoring system with
interest imputed at 6% 281 542
Note payable for the purchase of
licensing agreement 300 -
Three year $1.4 million term note
held by Canadian subsidiary with
interest at 7.868% 823 1,288
Various loans obtained by the
Company's subsidiaries 240 75
------- -------
Total 38,833 26,035
Less current portion (3,277) (1,733)
------- -------
Total long-term portion $35,556 $24,302
======= =======
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a Revolving Credit Agreement with its principal lending
bank which currently provides a line of credit of up to $13,000,000
through May 1, 1996. At December 25, 1994, borrowings at $12,880,000
under this credit agreement were outstanding with an interest rate of 8.5%.
In December 1992, the Company entered into a $7,000,000 seven year loan
agreement at a fixed rate of 4.9% with its principal lending bank. Three
equal installments of $350,000 are due during each year for a total of
$1,050,000 per year with interest due monthly. At December 25, 1994,
$5,250,000 was outstanding.
In February 1994, the Company entered into a $8,000,000 six year loan
agreement at a fixed rate of 6.5% with its principal lending bank. Three
equal installments of $470,588 are due during each year for a total of
$1,411,764 per year with interest due monthly. At December 25, 1994,
$7,058,824 was outstanding.
In March 1994, the Company entered into a $12,000,000 private placement
debt funding agreement at a fixed rate of 8.27%. Principal payments of
$4,000,000 annually are to be made starting in year 2000 with interest due
semi-annually.
The above loan agreements contain certain restrictive covenants which,
among other things, requires maintenance of specified minimum financial
ratios including debt to capitalization, interest coverage and tangible
net worth. In addition, these agreements limit the Company's ability to
pay dividends.
Long-term debt also relates to the acquisition of a licensing agreement.
Remaining payments of $100,000 under this note are due February 1995,
February 1996 and February 1997.
Long-term debt also relates to the acquisition of rights in a
point-of-sale monitoring system being marketed under the name Viewpoint.
One remaining payment of $280,500 under this note is due December 24,
1995. Interest has been imputed using a 6.5% annual rate. The amount due
on December 24, 1995 is classified as a current portion of long-term debt.
In October 1993, the Company's Canadian subsidiary entered into a three
year $1.4 million term note to finance certain sales-type leases.
Payments are due monthly with a fixed interest rate of 7.87%.
The aggregate maturities on all long-term debt are:
(Thousands)
1995 $3,277
1996 16,070
1997 2,562
1998 2,462
1999 2,462
Thereafter 12,000
-------
Total $38,833
=======
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. STOCK OPTIONS
Under a stock option plan for all employees adopted by the shareholders of
the Company in 1987 ("1987 Plan"), the Company granted either incentive
stock options ("ISOs") or non-incentive stock options to purchase up to
2,000,000 shares of Common Stock (amended in 1990 from a previous level of
1,000,000).
The Company amended, restated and renamed the 1987 plan in 1992 ("1992
Plan") allowing the Company to grant either ISOs or non-incentive stock
options to purchase up to 3,000,000 shares of Common Stock (amended in
1992 from a previous level of 2,000,000 shares). Under the 1992 Plan,
only employees are eligible to receive ISOs and both employees and non-
employee directors of the Company are eligible to receive non-incentive
stock options. Non-incentive stock options issued under the 1992 Plan
through December 25, 1994 total 817,247 shares. At December 25, 1994,
December 26, 1993 and December 27, 1992 a total of 208,500, 364,500 and
845,500 shares, respectively, were available for grant.
All ISO's under the 1992 Plan expire not more than 10 years (plus six
months in the case of non-incentive options) from the date of grant. Both
ISO's and non-incentive options require a purchase price of not less than
100% of the fair market value of the stock at the date of grant.
The 1992 Plan is administered by the Company's Compensation and Stock
Option Committee of the Board of Directors. Of the options outstanding at
December 25, 1994, options for 38,351 shares were not part of any plans
and did not qualify as ISOs. Options that were fully vested and
exercisable totaled 1,446,151 as of December 25, 1994.
The following schedule summarizes stock option activity and status:
1994 1993 1992
---- ---- ----
Outstanding at beginning of year 1,593,464 1,281,114 1,639,500
Granted 198,500 489,000 299,000
Exercised (298,313) (168,650) (548,334)
Canceled (47,500) (8,000) (109,052)
--------- --------- --------
Outstanding at end of year 1,446,151 1,593,464 1,281,114
========= ========= =========
Price range of options outstanding $4.88 to $4.88 to $4.88 to
at end of year $17.25 $16.50 $13.50
Price range of options exercised $4.88 to $4.88 to $4.88 to
during the year $16.50 $13.50 $13.50
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in 1994, 1993 and 1992, respectively, included payments for
interest of $2,410,000, $860,000 and $423,000 and income taxes of
$375,000, $638,000 and $123,000.
Excluded from the 1994 Consolidated Statements of Cash Flows is a non-cash
activity of $200,000 relating to the purchase of a licensing agreement in
which the Company recorded the full cost of the agreement and the
associated liability. Also excluded from investing activities in the
Consolidated Statements of Cash flows are net transfers from inventory to
property, plant and equipment of $9,059,000, $3,976,000 and $1,188,000 in
1994, 1993 and 1992 respectively, relating to equipment rented to
customers.
In March 1993, the Company purchased all of the capital stock of its
Argentinean distributor for $2,103,000. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired ...................$3,690,000
Cash paid and direct costs
incurred for the capital stock.................$2,103,000
----------
Liabilities assumed..............................$1,587,000
==========
In July 1993, the Company purchased all of the capital stock of ID Systems
International B.V. and ID Systems Europe B.V. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired ...................$14,575,000
Cash paid and direct costs incurred
for the capital stock including advances ........$ 1,690,000
-----------
Liabilities assumed..............................$12,885,000
===========
8. SHAREHOLDERS' EQUITY
In December 1988, the Company's Board of Directors approved a
Shareholders' Rights Plan (the "Plan"), and declared a dividend
distribution of one common share purchase right ("Right") for each
outstanding share of the Company's Common Stock to shareholders of
record on December 29, 1988. The Rights are designed to ensure all
Company shareholders fair and equal treatment in the event of a proposed
takeover of the Company, and to guard against partial tender offers and
other abusive tactics to gain control of the Company without paying all
shareholders a fair price.
The Rights are exercisable only as a result of certain actions (defined by
the Plan) of an Acquiring Person or Adverse Person, as defined.
Initially, upon payment of the exercise price (currently $40), each Right
will be exercisable for one share of Common Stock. Upon the occurrence of
certain events as specified in the Plan, each Right will entitle its
holder (other than an Acquiring Person or an Adverse Person) to purchase a
number of the Company's or Acquiring Person's common shares having a
market value of twice the Right's exercise price. The Rights expire on
December 28, 1998. Generally, within ten days after a person becomes an
Acquiring Person or is determined to be an Adverse Person, the Company
can redeem the Rights.
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
The Company's net earnings generated by the operations of its Puerto Rican
subsidiary are exempt from Federal income taxes under Section 936 of the
Internal Revenue Code and substantially exempt from Puerto Rican income
taxes.
In 1991, the Company was granted a new local tax exemption agreement with
a twenty year 90% local tax exemption retroactive to 1988 on both the
target and sensor manufacturing operations.
Repatriation of the Puerto Rico subsidiary's unremitted earnings could
result in the assessment of Puerto Rico "tollgate" taxes at a maximum rate
of 3.5% of the amount repatriated. During 1994 and 1993, a provision was
made for tollgate taxes and during 1992, no provision was made for
tollgate taxes. The Company has not provided for tollgate taxes on
$24,321,000 of its subsidiary's unremitted earnings since they are
expected to be reinvested indefinitely.
The domestic and foreign components of earnings before income taxes are:
1994 1993 1992
---- ---- ----
Domestic $ 6,931 $ 1,720 $ 4,891
Foreign 1,446 351 -
------- ------- -------
Total $ 8,377 $ 2,071 $ 4,891
======= ======= =======
The related provision for income taxes consist of:
1994 1993 1992
---- ---- ----
Currently Payable (Thousands)
Federal $ 914 $ 369 $ 632
State - 5 94
Puerto Rico 444 186 (263)
Foreign 103 375 -
Deferred
Federal 176 (509) -
State (33) 30 -
Puerto Rico - - -
Foreign 490 - -
------- ------- -------
Total Provision $ 2,094 $ 456 $ 463
======= ======= =======
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (continued)
Deferred tax liabilities (assets) at December 25, 1994 and
December 26, 1993 consist of:
1994 1993
---- ----
(Thousands)
Depreciation $ 856 $ 805
Deferred maintenance 260 318
Unbilled receivable 155 138
------- --------
Gross deferred tax liabilities 1,271 1,261
------- --------
R & E credit carryforward - (982)
Inventory (332) (277)
Alternative minimum tax (513) (258)
Accounts receivable (117) (100)
Net operating loss carryforwards (4,668) (4,494)
Warranty (52) (41)
Other (103) (82)
------- --------
Gross deferred tax assets (5,785) (6,234)
------- --------
Valuation allowance 4,668 4,494
------- --------
Net deferred tax liability (asset) $ 154 $ (479)
======= ========
Included in net operating loss carryforwards of $13,874,000 is $11,794,000
that were acquired in connection with the acquisition of the ID Systems
Group. If realization of the benefit of such carryforwards occur, the
Company will apply such benefit to goodwill in connection with the
acquisition.
Of the total foreign net operating loss carryforwards available, $500,000
expire beginning January 1999 whereas the remaining portion may be carried
forward indefinitely.
The valuation allowance in 1993 totaling $4,494,000 relates to the net
operation losses acquired in connection with the ID Systems Group along
with subsequent losses. The increase of the valuation allowance by
$174,000 from 1993 to 1994, primarily relates to the incurrence of certain
state net operating losses during fiscal year 1994.
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (continued)
A reconciliation of the statutory U.S. Federal income tax rate with the
effective income tax rate follows:
1994 1993 1992
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
Tax exempt earnings of subsidiary in
Puerto Rico (13.3) (14.0) (23.8)
Change in tax exempt earnings of
subsidiary in Puerto Rico - - (8.5)
Research and Experimentation tax credit (0.8) (17.2) -
Foreign losses with no benefit - 8.4 -
State and local income taxes, net
of federal benefit 3.5 9.1 5.7
Other 1.6 1.7 2.1
------ ------ ------
Effective tax rate 25.0% 22.0% 9.5%
====== ====== ======
During 1992, the effective tax rate was favorably impacted by a refinement
of an estimate relating to tax exempt earnings of the Puerto Rico
subsidiary.
10. EMPLOYEE BENEFIT PLANS
Under the Company's defined contribution savings plans, eligible employees
(see below) may make basic (up to 6% of an employee's earnings) and
supplemental contributions to a trust. The Company matches 50% of
participant's basic contributions. Company contributions vest to
participants in increasing percentages over three to six years of service.
The Company's contributions under the plans approximated $628,000,
$478,000, and $323,000 in 1994, 1993 and 1992, respectively.
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EMPLOYEE BENEFIT PLANS (continued)
Generally, any full-time, non-union employee of the Company (other than
someone holding the position of Vice President or higher) who has
completed one month of service, and any part-time non-union employee of
the Company who has completed one year of service, other than employees of
the Company's subsidiaries, may participate in the Company's United States
Savings Plan. All full-time employees of the Puerto Rico subsidiary who
have completed three months of service may participate in the Company's
Puerto Rico Savings Plan. Part-time employees are not entitled to
participate in the Company's Puerto Rico Savings Plan.
Under the Company's non-qualified Employee Stock Purchase Plan, employees,
other than employees of the Company's subsidiaries in Australia,
Argentina, Europe and Mexico may contribute up to $60 per week to a trust
for the purchase of Company Common Stock at fair market value. The
Company matches employee contributions up to a maximum of $17 per week.
The Company's contributions under this plan approximated $110,000, $94,000
and $76,000 in 1994, 1993 and 1992, respectively.
Under the Company's Profit Incentive Plan, bonuses are provided for
certain executives based on a percentage of the amount by which
consolidated net earnings exceed a specified portion of shareholders'
equity at the beginning of the year. During the last three years net
earnings did not exceed this criteria and, accordingly, no bonuses were
provided.
11. COMMITMENTS AND CONTINGENCIES
The Company leases its offices, distribution center and certain production
facilities. Rental expense for all operating leases approximated
$2,307,000, $1,424,000 and $811,000 in 1994, 1993 and 1992, respectively.
Future minimum payments for operating leases having non-cancellable terms
in excess of one year at December 25 1994 are: $1,611,000 (1995),
$1,495,000 (1996), $1,052,000 (1997), $778,000 (1998), $720,000 (1999) and
$5,440,000 thereafter.
The Company has entered into a twelve year lease agreement for a newly
constructed facility in 1994 which will be the Company's new headquarters
for administrative offices, research and development and warehouse
distribution. These lease payments have been included in the future
minimum payments for operating leases above.
The Company, in order to reduce its exposure to fluctuations in foreign
currency exchange rates, has entered into currency exchange forward
contracts. These agreements involve the exchange of various foreign
currencies for U.S. dollars at some future date. The Company makes
settlement of foreign currencies for U.S. dollars at maturity, at exchange
rates agreed to at inception of the contract. Counterparties to these
agreements are major financial institutions. As of December 25, 1994 and
December 26, 1993, the U.S. dollar equivalent of currency exchange forward
contracts outstanding approximated $8,800,000 and $2,803,000,
respectively. These agreements have various maturities through 1995.
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES (continued)
The Company is the exclusive worldwide licensee of Arthur D. Little, Inc.
("ADL") for certain patents and improvements thereon related to EAM
products and manufacturing processes. The Company pays a royalty to ADL
ranging from 2% to 5% 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 is the worldwide licensee of certain patents and technical
knowledge related to proximity card and card reader products. It pays a
royalty equal to 2% of the net revenues from the licensed products. Such
royalties are payable through January 29, 2000, or until all of the
subject patents have been adjudicated invalid.
The Company has a worldwide license to distribute a point-of-sale front-
end monitoring system being marketed under the name Viewpoint. Marketing
of this product began during 1992. The Company pays a one time site
license fee for each site installed.
On March 10, 1993, the United States International Trade Commission
("Commission") instituted an investigation of a complaint filed by the
Company under Section 337 of the Tariff Act of 1930. The complaint, as
amended, alleged that six respondents imported, sold for importation, or
sold in the United States after importation certain anti-theft
deactivatable resonant tags and components thereof that infringed certain
U.S. Letters Patents of which the Company is exclusive licensee. The
Commission's notice of investigation named six respondents, each of whom
was alleged to have committed one or more unfair acts in the importation
or sale of components or finished tags that infringe the asserted patent
claims. Those respondents are: Actron AG; Tokai Denshi Co. Ltd.; ADT,
Limited; All Tag Security AG; Toyo Aluminum Ltd.; and Custom Security
Industries, Inc.
On March 10, 1994 the United States International Trade Commission issued
a Notice of Commission Determination Not to Review an Initial
Determination Finding No Violation of Section 337 of the Tariff Act of
1930. The Company has capitalized approximately $1.9 million in patent
defense costs, which is included in 'Intangibles' as of December 25, 1994.
The ultimate resolution is undetermined at this time due to the various
courses of action available to management. The Company has appealed this
determination to the appropriate United States Court of Appeals. Although
the Company's management ultimately expects a favorable outcome, should
resolution of this matter result in a less than successful defense of the
patents in question the deferred patent costs will be written off as a
charge to earnings at the time of such resolution.
Effective January 1, 1995, A.E. Wolf, former Chief Executive Officer, and
current Chairman of the Board of Directors entered into an agreement with
the Company to provide consulting services on an as-needed basis. As
compensation, Mr. Wolf will receive $530,014 per year for five years, of
which $255,014 will be deferred annually. In addition, the Company will
pay the sum of $125,000 in five equal installments of $25,000 each
commencing January 1, 1995 to Mr. Wolf for his agreement not to compete.
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EXPORT SALES
The Company's export sales to foreign distributors which are principally
in Europe and Scandinavia approximated $10,430,000, $12,163,000, and
$22,732,000 in 1994, 1993, and 1992, respectively. Sales of the Company's
foreign subsidiaries in Argentina, Australia, Canada, Western Europe and
Mexico totaled $40,120,000 in 1994 and $21,200,000 in 1993. Sales to one
foreign distributor of the Company's products amounted to $2,786,000,
$5,000,000 and $13,147,000 in 1994, 1993 and 1992 respectively.
13. CONCENTRATION OF CREDIT RISK
Prior to 1993, most of the Company's export sales were to one foreign
distributor. Currently, the Company's foreign subsidiaries, along with
many foreign distributors, provide diversified international sales thus
minimizing credit risk to one or a few distributors. In addition, the
Company maintains foreign credit insurance to provide coverage for
potential foreign political or economic risks. Domestically, the
Company's sales are well diversified among numerous retailers in the
apparel, shoe, drug, mass merchandise, video, music, supermarket and home
entertainment market. The Company performs ongoing credit evaluations of
its customers' financial condition and generally requires no collateral
from its customers.
14. ACQUISITIONS
On March 3, 1993, the Company purchased all of the capital stock of its
Argentinean distributor for $2,103,000 plus a contingent amount to be
determined equal to fifty percent of the Argentinean subsidiary's annual
profits for the four year period ending on November 30, 1996. The Company
paid $564,000 pursuant to this contingent purchase price arrangement
during 1994. The total purchase price shall not exceed $5,000,000. This
acquisition was accounted for under the purchase method, and accordingly
the results of operations of this business have been included with those
of the Company since the date of acquisition. The purchase price resulted
in an excess of acquisition cost over net assets acquired of $2,926,000.
Such excess, (which will increase for any future contingent cash payments)
is being amortized over twenty years.
On March 8, 1993, the Company purchased a customers list from the
Company's former Mexican distributor for $560,000 in connection with the
Company establishing direct operations in Mexico. The cost related to
this customers list is included in "Intangibles" and is being amortized on
a straight line basis over ten years.
On July 8, 1993, the Company purchased all of the capital stock of ID
Systems International B.V. and ID Systems Europe B.V. ("The ID Systems
Group"), related Dutch companies engaged in the manufacture, distribution
and sale of security products and services. The Company advanced the ID
Systems Group $1,290,000 during the period in which the Company held an
option to purchase all the outstanding capital stock. The purchase price
of the capital stock, exclusive of such advances, was $60 plus direct
acquisition cost of approximately $400,000. This acquisition was
accounted for under the purchase method and, accordingly, the results of
operations of this business have been included with those of the Company
since the date of acquisition. The purchase price resulted in an excess
of acquisition cost over net assets acquired of approximately $5,510,000
which is being amortized over twenty years.
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. ACQUISITIONS (continued)
The Company acquired three production units in connection with the
purchase of the capital stock of the ID Systems Group. The Company shut
down all three of these facilities during 1994. Accordingly, the
estimated operating losses and shut down costs of these facilities
amounting to $3,434,000 were accrued for in the purchase price allocation.
As a part of the purchase price allocation, the values assigned to these
assets were based upon estimated residual values upon ultimate disposition
which represents a nominal amount.
The following unaudited summary of operations presents the consolidated
results of operations as if the acquisition of the ID Systems Group had
occurred at the beginning of the years presented. Other acquisitions made
during the year were not material to results of operations and thus are
not presented. The following results are not necessarily indicative of
what would have occurred had the acquisition been consummated as of that
date or of future results.
1993 1992
---- ----
(Thousands, except per share data)
Net revenues $99,426 $92,334
Earnings (loss) before
income taxes $(4,059) $(2,270)
Net earnings (loss) $(4,410) $(2,271)
Earnings (loss) per share $ (.41) $ (.23)
15. GEOGRAPHIC SEGMENTS
The following tables shows sales, operating earnings and other financial
information by geographic area for the years 1994 and 1993.
United States
and Puerto Rico Europe Other (1)
1994 --------------- ---------- ---------
---- (Thousands)
Net Revenues from Unaffiliated
Customers $88,211 $23,009 $17,111
Operating Income $ 9,930 $ 587 $ 1,211
Identifiable Assets $92,285 $18,987 $16,653
United States
and Puerto Rico Europe Other
1993 --------------- ---------- --------
---- (Thousands)
Net Revenues from Unaffiliated
Customers $71,834 $ 7,994 $13,206
Operating Income (loss) $(1,224) $ (357) $ 956
Identifiable Assets $78,982 $15,707 $10,310
(1) Other includes the Company's operations in Canada, Mexico, Argentina
and Australia.
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUBSEQUENT EVENTS
Legal
-----
The Company, together with two of its senior officers, are defendants in
an action entitled ADT, Inc. and Actron AG v. Checkpoint Systems, Inc. and
Albert E. Wolf and Kevin P. Dowd (D.C.N.J.#95-730) which was filed on
February 9, 1995.
In this action, Actron AG, one of the Company's principal European
competitors, alleges that the Company, in violation of certain common laws
and contractual obligations (1) unlawfully employed in Europe three former
employees of Actron who allegedly are in possession of, and have disclosed
to the Company, certain of Actron's confidential information, (2) has
attempted to employ in Europe certain other of Actron's current
employees,(3) has interfered with certain contractual relationships
between Actron, its former employees, and the supplier of Actron's
disposable EAS tags and (4) has, in allegedly engaging in the activities
complained of, committed acts of unfair competition. The Court has set a
date in early April 1995 to hear arguments on the Company's motion to
dismiss the complaint and has also set a date in mid April 1995 to hear
testimony and arguments on the parties' allegations and defendants
relating to Actron's motion to enjoin the Company from allegedly using
Actron's confidential information. Discovery by both parties has
commenced. The Company intends to defend itself vigorously. While the
outcome of litigation can never be predicted with certainty and the
lawsuit is still in its very preliminary stages, the Company does not
anticipate that its ultimate outcome will have a material effect on its
operations or financial condition.
On March 2, 1995, as a result of a private complaint filed in Switzerland
by Actron against three of its former employees who are now employees of
the Company's Swiss subsidiary, Swiss authorities questioned two of
these employees regarding alleged improper possession and/or use of
confidential information and proprietary data allegedly belonging to
Actron. In addition, Swiss authorities took possession of certain files
from the homes of the employees questioned and from the office of the
Company's Swiss subsidiary. The Company has not been advised that it is
the subject of any legal proceeding in Switzerland. The Company believes
that Actron's private complaint (and the resultant actions of the Swiss
authorities) are directly related to the Company's litigation with Actron
as described above.
Financing
---------
On January 25, 1995, the Company filed a registration statement with the
Securities and Exchange Commission seeking to register 3,450,000 shares of
its common stock (including an underwriters' overallotment option of
450,000 shares).
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This offering is expected to become effective during the first half of
1995. The net proceeds to be received by the Company from this offering
are expected to approximate $67 million. The expected use of proceeds
which are discussed more fully in the Company's S-3 registration is for
general corporate purposes including (i) funding of strategic acquisitions
or start-up opportunities ($27 million), (ii) repaying certain
indebtedness ($20 million) and (iii) funding the Company's leasing
programs ($20 million).
16. SUBSEQUENT EVENTS (continued)
On January 26, 1995, the Company completed a $15,000,000 private placement
debt funding at a fixed rate of 9.35%. Principal payments of $5,000,000
are to be made annually on January 30 of each year starting in year 1999
with interest due semi-annually. This funding was used principally to
finance the Company's acquisition of Alarmex, Inc.
On February 15, 1995, the Company entered into a new $25 million Revolving
Credit Agreement which replaces the Company's Revolving Credit Agreements
that were in existence at year end. Proceeds of approximately $15 million
were used to pay off borrowings under two existing Revolving Credit Lines.
This new agreement expires on May 1, 1996.
Acquisition
-----------
On February 1, 1995 the Company purchased Alarmex, Inc. for approximately
$13.5 million ($10 million in cash and the balance in 200,717 shares of
Common Stock of the Company). Alarmex designs and provides CCTV, POS
monitoring, burglar and fire alarm systems and also provides related
central station monitoring services to over 9,000 retail sites in the
United States.
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Dated: March 14, 1995
CHECKPOINT SYSTEMS, INC.
/s/Steven G. Selfridge
Senior Vice President - Operations
and Chief Financial Officer
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
We consent to the incorporation by reference in the registration
statements of Checkpoint Systems, Inc. on Forms S-8, Numbers 33-16721,
29-00025, 33-10211, 29-03376, 33-37996 and 33-49191 of our report dated
February 15, 1995, except as to Note 16 for which the date is March 3,
1995, on our audits of the consolidated financial statements and financial
statement schedule of Checkpoint Systems, Inc. as of December 25, 1994 and
December 26, 1993, and for the three years in the period ended December
25, 1994, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, PA
March 13, 1995
<PAGE>
