<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 25, 1995
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------
CHECKPOINT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 22-1895850
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
101 WOLF DRIVE
THOROFARE, NEW JERSEY 08086
(609) 848-1800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
NEIL D. AUSTIN
VICE PRESIDENT -- GENERAL COUNSEL AND SECRETARY
CHECKPOINT SYSTEMS, INC.
101 WOLF DRIVE
THOROFARE, NEW JERSEY 08086
(609) 848-1800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------------
Copies to:
<TABLE>
<S> <C>
JAMES M. PAPADA, III, ESQ. WINTHROP B. CONRAD, JR., ESQ.
STRADLEY, RONON, STEVENS & YOUNG DAVIS POLK & WARDWELL
2600 ONE COMMERCE SQUARE 450 LEXINGTON AVENUE
PHILADELPHIA, PENNSYLVANIA 19103-7098 NEW YORK, NEW YORK 10017
</TABLE>
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. _____
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. _____
------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE
<S> <C> <C> <C> <C>
Common Stock, $.10 par value.......................................... 3,450,000 $ 24.375 $ 84,093,750 $ 28,998.05
</TABLE>
(1) Including 450,000 shares subject to the over-allotment option granted to the
Underwriters.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457 and based on the average of the high and low prices of
the registrant's Common Stock on the New York Stock Exchange on January 20,
1995.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET TO FORM S-3 FURNISHED
PURSUANT TO ITEM 501(B) OF REGULATION S-K
WITH RESPECT TO THE PROSPECTUS
<TABLE>
<CAPTION>
ITEM AND CAPTION IN FORM S-3 CAPTION OR LOCATION IN PROSPECTUS
- --------------------------------------------------------------- ----------------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Front Cover Page of Registration Statement; Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Front Cover Pages of
Prospectus.......................................... Inside Front Cover Page of Prospectus; Outside Back
Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors
4. Use of Proceeds..................................... Use of Proceeds
5. Determination of Offering Price..................... Not Applicable
6. Dilution............................................ Not Applicable
7. Selling Security Holders............................ Not Applicable
8. Plan of Distribution................................ Outside Front Cover Page of Prospectus; Underwriters
9. Description of Securities to be Registered.......... Prospectus Summary; Description of Capital Stock
10. Interests of Named Experts and Counsel.............. Legal Matters; Experts
11. Information with respect to the Registrant.......... Prospectus Summary; Business; Index to Consolidated
Financial Statements
12. Incorporation of Certain Information by Reference... Incorporation of Certain Documents by Reference
13. Disclosure of Commission Position on Indemnification
for Securities Act
Liabilities......................................... Not Applicable.
</TABLE>
<PAGE>
PROSPECTUS (Subject to Completion)
Issued January 25, 1995
3,000,000 Shares
Checkpoint Systems, Inc.
COMMON STOCK
------------------------
All of the shares of Common Stock offered hereby are being sold by the Company.
The Common Stock of the Company is listed on the New York Stock Exchange under
the symbol 'CKP.' On January 20, 1995, the reported last sale
price of the Common Stock on the New York Stock Exchange was $24 1/2.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY (2)
------------- --------------- -------------
<S> <C> <C> <C>
Per Share...................................................... $ $ $
Total (3)...................................................... $ $ $
</TABLE>
- ------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 450,000
additional shares at the price to public less underwriting discounts and
commissions, for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$ , $ and $ , respectively. See 'Underwriters.'
------------------------
The shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein, and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the shares will be made on or about , 1995 at the
office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment
therefor in New York funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
NATWEST SECURITIES LIMITED
PAINEWEBBER INCORPORATED
, 1995
<PAGE>
[ ART TO COME ]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW
YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT
CONTAINED OR INCORPORATED BY REFERENCE HEREIN MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE AT ANY TIME
IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Incorporation of Certain Documents by Reference... 3
Prospectus Summary................................ 4
Investment Considerations......................... 8
The Company....................................... 10
Use of Proceeds................................... 11
Common Stock Price Range and
Dividends....................................... 12
Capitalization.................................... 13
Pro Forma Combined Financial
Information..................................... 14
Selected Historical Financial Information......... 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 18
Business.......................................... 24
Management........................................ 34
Description of Capital Stock...................... 35
Underwriters...................................... 36
Legal Matters..................................... 37
Experts........................................... 38
Available Information............................. 38
Index to Consolidated Financial
Statements...................................... F-1
</TABLE>
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Securities
and Exchange Commission (the 'Commission') are incorporated by reference in this
Prospectus:
1. Annual Report on Form 10-K for the fiscal year ended December 26,
1993 filed on March 23, 1994.
2. Proxy Statement for the Company's Annual Meeting of Shareholders
dated March 29, 1994.
3. Quarterly Report on Form 10-Q for the quarter ended March 27, 1994
filed on May 10, 1994.
4. Quarterly Report on Form 10-Q for the quarter ended June 26, 1994
filed on August 11, 1994.
5. Quarterly Report on Form 10-Q for the quarter ended September 25,
1994 filed on November 3, 1994.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the 'Exchange Act'),
after the date of this Prospectus and prior to the termination of the offering
made hereunder shall be deemed to be incorporated by reference into this
Prospectus and to be a part of this Prospectus from the respective dates of the
filing of such documents. The Company will provide without charge to each person
to whom this Prospectus is delivered, on the written or oral request of such
person, a copy of any or all of the documents incorporated by reference herein
(other than exhibits not specifically incorporated by reference into the text of
such documents). Requests should be directed to Neil D. Austin, Vice
President-General Counsel and Secretary, Checkpoint Systems, Inc., 101 Wolf
Drive, Thorofare, New Jersey 08086 (telephone (609) 848-1800).
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in this
Prospectus or in any other subsequently filed document which also is or is
deemed to be incorporated herein by reference modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements appearing elsewhere, or incorporated by reference, in this
Prospectus. Unless the context otherwise requires, the information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option. In
addition, unless otherwise indicated, references in this Prospectus to
'Checkpoint' or the 'Company' mean Checkpoint Systems, Inc. and its predecessors
and subsidiaries. The Company's fiscal year is a rolling fifty-two or
fifty-three week year generally ending at or close to the end of the calendar
year. References in this Prospectus to the Company's fiscal years for 1989,
1990, 1991, 1992, 1993 and 1994 are to the fifty-two or fifty-three week periods
ending on December 31, 1989, December 30, 1990, December 29, 1991, December 27,
1992, December 26, 1993 and December 25, 1994, respectively; and references to
the first nine months of 1993 and the first nine months of 1994 are to the
thirty-nine week periods ending on September 26, 1993 and September 25, 1994,
respectively.
THE COMPANY
Checkpoint is a designer, manufacturer and distributor of integrated
electronic security systems -- utilizing proprietary radio frequency ('RF')
technologies -- designed primarily to help retailers prevent losses caused by
theft of merchandise. The Company markets a wide range of these systems,
including electronic article surveillance ('EAS') systems, closed circuit
television ('CCTV') systems, point of sale ('POS') monitoring systems and access
control systems. Over the past three years, the Company has achieved substantial
growth, both through internal expansion and acquisitions, as a result of the
repositioning of the Company by current management through the introduction of
new products, broadened and more direct distribution (particularly in its
international markets) and increased and more efficient manufacturing
capability. The Company holds or licenses over 200 patents and proprietary
technologies relating to its products and their manufacture.
The Company's key product offerings use a low-cost disposable, paper-thin
tag (or 'target') which triggers an alarm when passed through the Company's
sensors at the point of exit from the retail site. These disposable targets,
which are manufactured using the Company's proprietary technology at its
state-of-the-art facility in Puerto Rico, can be easily installed on products or
within packaging at the retail outlet or at the product manufacturing source and
can be easily deactivated without locating the tag. Sales of these disposable
targets and field service of their associated sensors and deactivation units
provide a significant and growing source of recurring revenues and accounted for
approximately 38% and 36% of the Company's net revenues for fiscal year 1993 and
the first nine months of 1994, respectively. The Company believes that the net
proceeds from the sale of the shares of Common Stock offered hereby will provide
it with the additional capital resources necessary to continue to implement the
Company's business strategy, which focuses on capitalizing on retailers'
increasing attention to theft prevention through use of the Company's
proprietary RF technology-based products.
The Company's diversified product lines are designed to help retailers
prevent losses caused by theft (both by customers and employees) while at the
same time enabling retailers to capitalize on consumer impulse buying by openly
displaying higher volume, higher margin merchandise, and to reduce associated
selling costs through lower staff requirements. The Company's broad and flexible
product lines, marketed and serviced by its extensive sales and service
organization, have helped the Company emerge as the preferred supplier to such
hard goods retail chains as Caldor, Circuit City, Kroger, Lucky's Grocery,
Payless, Ralph's, Rite-Aid, Ross, Target, and Walgreens. In addition, the
Company's manufacturing facilities have the current capacity to produce up to
three billion disposable RF targets per year at a low cost.
THE RETAIL OPPORTUNITY
The Company markets its products primarily to retailers in the following
market segments: hard goods (supermarkets, drug stores, mass merchandisers and
music/electronics) and soft goods (apparel). The U.S. Department of Commerce
estimates that over 15% of retail costs are attributable to inventory
'shrinkage' (the value of goods which are not paid for). Shrinkage is caused
primarily by shoplifting and employee theft. Industry sources estimate that
shrinkage is a $30 billion annual problem for the U.S. retail industry and a
concern of at least a comparable magnitude throughout the rest of the world.
4
<PAGE>
Sophisticated data collection systems (primarily barcode scanners) available to
retailers have highlighted the shrinkage problem and, consequently, retailers
now realize that the implementation of an effective electronic security system
can significantly increase profitability. Accordingly, the retail industry is
becoming increasingly focused on theft prevention.
Industry sources estimate there are approximately 330,000 major retail
locations in the United States that would benefit from the installation of an
EAS system and the Company estimates that less than one-third of these locations
have installed systems. The Company believes, moreover, that in the hard goods
market less than 10% of such sites are EAS protected. While industry sources
expect the growth of EAS systems in the retail soft goods market to be about 5%
to 10% annually, the retail hard goods market is expected to grow at
approximately 20% per year over the next five years, thus providing an even more
significant growth opportunity.
Retailers generally apply the targets used in EAS systems at the retail
site. Retailers have expressed significant interest in moving the insertion or
application of the targets to the point of manufacture ('source tagging').
Manufacturers have been very receptive to source tagging in light of the
potential increase in product volume provided by more sales due to easier
customer access. Bausch & Lomb, Duracell, Eastman Kodak, Texas Instruments and
United Distillers are just some of the vendors currently participating in source
tagging programs. The Company believes that source tagging provides retailers,
manufacturers and retail customers with distinct benefits, principal among which
are: enhanced protection from theft, activation and deactivation without the
need for special training of store employees, more open display of merchandise
resulting in increased sales for manufacturers and reduced costs for retail
products.
CHECKPOINT PRODUCTS AND TECHNOLOGY
The Company believes its single proprietary RF technology approach to the
EAS marketplace has certain product advantages, especially in the faster
growing, hard goods market. First, the Company can produce a high volume of
paper-thin targets at a low per unit cost. Second, the small size and
flexibility of the Company's RF targets enable them to be used in a broad array
of products and markets. Third, the Company's RF technology allows retailers to
simultaneously deactivate the target and scan barcodes. Finally, RF technology
permits retailers to deactivate targets without specifically locating or making
contact with the targets.
The Company also believes that its RF technology is more conducive to usage
in source tagging because: (i) manufacturers can machine-insert the Company's
easily concealed flexible targets at high production speeds during the
manufacturing or packaging process (e.g., in boxes or other types of packaging)
at little or no additional cost, (ii) using RF technology, targets can be more
easily activated and deactivated and (iii) the retailer can deactivate the
target and scan the bar code simultaneously with readily available scanning
equipment.
Checkpoint's principal global competitor in the EAS industry is Sensormatic
Electronics Corporation ('Sensormatic'). Sensormatic is a fully integrated
supplier of electronic security systems with an approximately 60% market share
and revenues of approximately $656.0 million in its most recent fiscal year.
Unlike Checkpoint which utilizes its compatible RF technologies across all
market segments, Sensormatic employs five separate, non-compatible technologies
- -- acoustic-magnetic, magnetic, radio frequency, microwave, and frequency
division magnetic. Sensormatic's recommendation of a technology depends on the
market. Checkpoint'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, including
Sensormatic, could not develop a product comparable to that of Checkpoint.
STRATEGY
The Company is, and will continue to be, focused on providing its customers
with a wide variety of fully integrated electronic security system solutions
characterized by superior quality, ease of use, good value and merchandising
opportunity for the retailer. Beginning in September 1991, the Company's current
management started to reposition the Company through the introduction of new
products, broadened and more direct distribution (particularly in its
international markets) and increased and more efficient manufacturing
capability. Checkpoint's strategy is to continue to increase
5
<PAGE>
its sales penetration in existing markets and develop a significant presence in
new geographic markets. These objectives will be attained by continually
enhancing and expanding its RF technologies and products, providing superior
service to its customers and expanding its direct sales activities through
acquisitions and start-up operations.
More specifically, in order to interact more closely with retailers and
better understand and respond to their needs (including reducing shrinkage and
providing retailers with enhanced sales opportunities through more open display
of merchandise), the Company is pursuing the following strategies:
Expanding its direct sales and service capabilities in strategic
geographic areas;
Broadening its product lines;
Increasing its penetration of the hard goods retail market (currently
estimated to be less than 10% penetrated);
Continuing to promote source tagging;
Continuing to improve the Company's highly integrated and state-of-the-art
manufacturing processes and technologies; and
Continuing to explore strategic acquisitions or start-up opportunities in
the following areas: distribution, alternate source manufacturing and
product line diversification within the Company's core businesses.
PENDING ACQUISITION
On October 20, 1994, the Company entered into a letter of intent to
purchase Alarmex, Inc. and its related company Bayport Controls, Inc. (together,
'Alarmex') for approximately $13.5 million ($10 million in cash and the balance
in 200,717 shares of Checkpoint Common Stock) (the 'Alarmex Acquisition'). The
Alarmex Acquisition is subject to the negotiation of a definitive purchase
agreement which is expected to contain conditions to closing standard for a
transaction of this nature. The Company intends to finance the cash portion of
the Alarmex Acquisition with the private placement of the Company's long-term
notes.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............................ 3,000,000 shares
Common Stock to be outstanding after the
Offering(1)................................... 13,698,228 shares
Use of proceeds................................. For general corporate purposes including (i) funding strategic
acquisitions or start-up opportunities, (ii) repaying certain
indebtedness and (iii) funding the Company's leasing programs.
See 'Investment Considerations' and 'Use of Proceeds.'
NYSE Symbol..................................... CKP
</TABLE>
- ------------------
(1) Includes 200,717 shares to be issued by the Company in connection with the
Alarmex Acquisition. Excludes 1,468,151 shares subject to options to
purchase granted pursuant to the Company's Stock Option Plan (1992).
INVESTMENT CONSIDERATIONS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN MATTERS RELATING TO
AN INVESTMENT IN THE COMPANY. SEE 'INVESTMENT CONSIDERATIONS.'
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary historical and pro forma financial information presented below
has been derived from the consolidated financial statements of the Company and
Alarmex and the pro forma financial information of the Company appearing
elsewhere, or incorporated by reference, in this Prospectus and should be read
in conjunction with 'Use of Proceeds,' 'Pro Forma Combined Financial
Information,' 'Selected Historical Financial Information,' 'Management's
Discussion and Analysis of Results of Operations and Financial Condition' and
the consolidated financial statements of the Company and Alarmex appearing
elsewhere, or incorporated by reference, in this Prospectus. The summary pro
forma statement of operations data presented below give effect to the Alarmex
Acquisition and the sale of the shares of Common Stock offered hereby, and the
application of the net proceeds therefrom, as if they had occurred at the
beginning of fiscal year 1993. The summary as adjusted balance sheet data give
effect to the Alarmex Acquisition and the sale of the shares of Common Stock
offered hereby, and the application of net proceeds therefrom, as if they had
occurred on September 25, 1994.
<TABLE>
<CAPTION>
FISCAL YEAR FIRST NINE MONTHS
-------------------------------------------- ---------------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
------------------------------- ----------- -------------------- -----------
1991 1992 1993 1993 1993 1994 1994
--------- --------- --------- ----------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $ 52,943 $ 72,166 $ 93,034 $ 111,252 $ 64,646 $ 88,807 $ 104,986
Cost of revenues.......................... 28,479 38,650 54,421 67,798 37,681 45,969 56,796
--------- --------- --------- ----------- --------- --------- -----------
Gross profit............................ 24,464 33,516 38,613 43,454 26,965 42,838 48,190
Selling, general and administrative
expenses................................ 23,646 28,342 39,238 44,387 28,163 35,946 40,092
--------- --------- --------- ----------- --------- --------- -----------
Operating income (loss)................. 818 5,174 (625) (933) (1,198) 6,892 8,098
Contract settlement income................ -- -- 3,500 3,500 3,500 -- --
Interest expense (income), net............ 183 283 477 1,235 375 1,642 1,928
Other expense............................. -- -- 327 382 -- 243 244
--------- --------- --------- ----------- --------- --------- -----------
Income before income taxes.............. 635 4,891 2,071 950 1,927 5,007 5,926
Income taxes.............................. 127 463 456 370 424 1,252 1,672
--------- --------- --------- ----------- --------- --------- -----------
Net earnings............................ $ 508 $ 4,428 $ 1,615 $ 580 $ 1,503 $ 3,755 $ 4,254
--------- --------- --------- ----------- --------- --------- -----------
--------- --------- --------- ----------- --------- --------- -----------
Net earnings per share.................... $ .05 $ .45 $ .16 $ .04 $ .14 $ .35 $ .31
Weighted average number of common and
common equivalent shares................ 9,591 9,951 10,386 13,587 10,386 10,721 13,922
</TABLE>
<TABLE>
<CAPTION>
FISCAL NINE MONTHS
FISCAL YEAR
------------------------------- --------------------
1991 1992 1993 1993 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT TOTAL DEACTIVATION SYSTEMS
INSTALLED AND TOTAL SENSORS INSTALLED)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Disposable labels sold (during period)............................. 537,833 691,494 733,530 528,323 623,766
Total deactivation systems installed (at period end)............... 30,003 43,771 61,417 56,937 81,181
Total sensors installed (at period end)............................ 58,859 70,256 91,648 88,649 102,349
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 25, 1994
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................................... $ 38,581 $ 101,305
Total assets.............................................................................. 120,659 197,140
Long-term debt............................................................................ 35,550 38,720
Total debt................................................................................ 41,080 41,961
Shareholders' equity...................................................................... 59,726 130,224
</TABLE>
7
<PAGE>
INVESTMENT CONSIDERATIONS
Prospective purchasers of the Common Stock offered hereby should consider
carefully the following considerations, as well as the other information
appearing elsewhere in this Prospectus, in evaluating an investment in the
Common Stock.
COMPETITION
The Company's business is intensely competitive. Competition in the EAS
market is principally based upon the technologies underlying security systems,
as well as price, breadth and quality of product offering, and service to
customers. While there are a number of competitors in the market, Sensormatic, a
fully integrated supplier of electronic security systems to retail and other
markets, has a dominant market share of the electronic security systems
industry, with over 60% of the global market for electronic security systems.
With revenues of approximately $656.0 million for its most recent fiscal year,
Sensormatic has economic and other resources substantially greater than those of
the Company.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company believes that its patented and proprietary technologies are
important to its business and strategies for growth and provide it with distinct
competitive advantages. The Company holds or licenses over 200 patents and
proprietary technologies relating to its products and their manufacture. On
March 10, 1993, the Company instituted proceedings in the International Trade
Commission (the 'ITC') alleging that certain parties had imported into the
United States anti-theft tags that infringed certain patents, of which the
Company is exclusive licensee, which relate to the methods of deactivation of
the tags. On March 10, 1994, the ITC issued a Notice of Determination Not to
Review an Initial Determination Finding No Violation of Section 337 of the
Tariff Act of 1930. This notice was based upon a finding by the ITC that the
Company's patents were not infringed by defendant's tags and, further, that such
patents were invalid. This issue has yet to be resolved, as the Company has
appealed the ITC's Determination to the U.S. Court of Appeals for the Federal
Circuit. In addition, the ITC's findings of no infringement and of invalidity
are not binding on the Federal courts regardless of the Court of Appeals'
holding with respect to the ITC's Final Determination. In addition, a proceeding
in the Court of Commerce of the canton of Zurich, Switzerland involving certain
of the same parties and the Swiss counterpart of the U.S. patent found that the
defendants' tags do infringe the Company's patents; such finding is being
appealed by those defendants.
The patents at issue in these proceedings provide patent protection for the
Company's disposable tag. However, the Company believes that the manufacture of
its disposable tags involves significant proprietary information and know-how
which it believes would be difficult for a competitor to duplicate. Accordingly,
management believes that if the patents at issue were to be held invalid, it
would not have a material adverse impact on the Company.
In conjunction with the ITC proceedings, the Company has capitalized
approximately $1.9 million in patent defense costs, which is included in
'Intangibles' on the Company's balance sheet at September 25, 1994. An
unfavorable resolution of the current suit in the Federal Circuit would result
in a charge to earnings of these deferred patent costs at the time of such
resolution.
SINGLE MANUFACTURING SOURCE FOR DISPOSABLE TARGETS
The Company manufactures all of its disposable targets at its recently
constructed, fully integrated facility in Puerto Rico. While the Company has
substantial excess capacity at this facility, any event which would
significantly reduce production at this facility would materially affect results
of operations. The Company is currently exploring development of a second source
for the manufacture of its disposable targets, although no assurance can be
given that it will be successful.
8
<PAGE>
EXPOSURE TO INTERNATIONAL OPERATIONS
During fiscal year 1993, sales of the Company's products outside the United
States accounted for approximately 35.9% of net revenues. Substantial dependence
on foreign markets increases the risks associated with economic and other
developments in other jurisdictions. In 1993, due to the termination of the
Company's European distribution arrangement, the Company moved from indirect
sales to direct sales and substantially increased its sales force. As a result,
the Company experienced a significant increase in selling and service expenses
attributable to foreign operations.
Prior to fiscal year 1993, substantially all the Company's overseas sales
were made to distributors and were paid in U.S. dollars. As a result of the
Company's strategy to increase distribution directly to its customers (as
opposed to sales through independent distributors), approximately 79.7% of the
Company's international sales for the first nine months of 1994 were made in
local currencies. This increases the Company's exposure to foreign currency
fluctuations, which can adversely affect results. During the first nine months
of 1994, 'other expense' on the Company's statement of operations reflects a
loss of $243,000 for the impact of losses on foreign exchange forward contracts.
There was no impact in prior years. In addition, the Company does not engage in
any other financial hedging activities. The Company is evaluating various
strategies in order to minimize the impact of foreign currency fluctuations and
the Company's current policy is to purchase foreign exchange forward contracts
so that at any point in time approximately 50% of its foreign currency
receivables outstanding are covered by such contracts. These activities serve to
minimize, but not eliminate, the risk from fluctuations in exchange rates.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's customers are substantially dependent on the retail market
which is subject to significant seasonal fluctuations in operations. As a
result, the Company's sales can generally be expected to be impacted by
fluctuations in retail sales. Historically, the Company has experienced greater
sales in the third and fourth fiscal quarters of each year. Disposable tag
sales, which accounted for approximately 29.8% of net revenues in fiscal year
1993 and which are expected to remain an important contributor to net revenues
as more of the Company's EAS systems are installed, are directly tied to retail
inventory turnover rates and can also be expected to vary with retailers'
seasonal fluctuations.
USE OF PROCEEDS
The Company intends to use approximately $27 million of the net proceeds
from the sale of the Common Stock offered hereby for strategic acquisitions,
start-up operations and related capital expenditures. There can be no assurance,
however, that any acquisition or start-up operation will be consummated or, if
consummated, that any such acquisition or start-up operation will be profitable
or successfully enhance the Company's competitive position now or in the future.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock, does not
anticipate paying any cash dividends in the near future and is limited by
existing covenants in the Company's debt instruments from paying dividends. The
Company has retained, and expects to continue to retain, its earnings for
reinvestment in its business. See 'Common Stock Price Range and Dividends.'
9
<PAGE>
THE COMPANY
OVERVIEW
Checkpoint is a designer, manufacturer and distributor of integrated
electronic security systems -- utilizing proprietary RF technologies -- designed
primarily to help retailers prevent losses caused by theft of merchandise. The
Company markets a wide range of these systems, including EAS systems, CCTV
systems, POS monitoring systems and access control systems. Over the past three
years, the Company has achieved substantial growth, both through internal
expansion and acquisitions, as a result of the repositioning of the Company by
current management through the introduction of new products, broadened and more
direct distribution (particularly in its international markets) and increased
and more efficient manufacturing capability. The Company holds or licenses over
200 patents and proprietary technologies relating to its products and their
manufacture.
The Company's key product offerings use a low-cost disposable, paper-thin
target which triggers an alarm when passed through the Company's sensors at the
point of exit from the retail site. These disposable targets, which are
manufactured using the Company's proprietary technology at its state-of-the-art
facility in Puerto Rico, can be easily installed on products or within packaging
at the retail outlet or at the product manufacturing source and can be easily
deactivated without locating the tag. Sales of these disposable targets and
field service of their associated sensors and deactivation units provide a
significant and growing source of recurring revenues and accounted for
approximately 38% and 36% of the Company's net revenues for fiscal year 1993 and
the first nine months of 1994, respectively. The Company believes that the net
proceeds from the sale of the shares of Common Stock offered hereby will provide
it with the additional capital resources necessary to continue to implement the
Company's business strategy, which focuses on capitalizing on retailers'
increasing attention to theft prevention through use of the Company's
proprietary RF technology-based products.
The Company's diversified product lines are designed to help retailers
prevent losses caused by theft (both by customers and employees) while at the
same time enabling retailers to capitalize on consumer impulse buying by openly
displaying higher volume, higher margin merchandise, and to reduce associated
selling costs through lower staff requirements. The Company's broad and flexible
product lines, marketed and serviced by its extensive sales and service
organization, have helped the Company emerge as the preferred supplier to such
hard goods retail chains as Caldor, Circuit City, Kroger, Lucky's Grocery,
Payless, Ralph's, Rite-Aid, Ross, Target, and Walgreens. In addition, the
Company's manufacturing facilities have the current capacity to produce up to
three billion disposable RF targets per year at a low cost.
The Company is, and will continue to be, focused on providing its customers
with a wide variety of fully integrated electronic security system solutions
characterized by superior quality, ease of use, good value and merchandising
opportunity for the retailer. Beginning in September 1991, the Company's current
management started to reposition the Company through the introduction of new
products, broadened and more direct distribution (particularly in its
international markets) and increased and more efficient manufacturing
capability. Checkpoint's strategy is to continue to increase its sales
penetration in existing markets and develop a significant presence in new
geographic markets. These objectives will be attained by continually enhancing
and expanding its RF technologies and products, providing superior service to
its customers and expanding its direct sales activities through acquisitions and
start-up operations.
The Company has its principal executive offices at 101 Wolf Drive,
Thorofare, New Jersey 08086, (609) 848-1800.
COMPANY HISTORY
In 1969, the Company was incorporated in Pennsylvania as a wholly-owned
subsidiary of Logistics Industries Corporation. In 1977, Logistics, pursuant to
the terms of its merger into Lydall, Inc., distributed the Company's Common
Stock to Logistics' shareholders as a dividend. In February, 1986, the Company
acquired Sielox Systems, Inc., which developed, produced and marketed EAC
10
<PAGE>
systems for use in commercial and institutional applications. In August, 1990,
Sielox's operations were combined with the Company's.
ACQUISITION OF ALARMEX
The Company has entered into a letter of intent to purchase Alarmex for
approximately $13.5 million ($10 million in cash and the balance in 200,717
shares of Common Stock of Checkpoint). The Company intends to finance the cash
portion of the Alarmex Acquisition with the private placement of the Company's
long-term notes. The Alarmex Acquisition is subject to the negotiation of a
definitive purchase agreement which is expected to contain conditions to closing
standard for a transaction of this nature. While there can be no assurance that
the Alarmex Acquisition will be consummated, the Company anticipates
consummating the Alarmex Acquisition in the first quarter of fiscal year 1995.
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. The Company believes the acquisition of
Alarmex will complement Checkpoint's current CCTV and POS monitoring products.
With the acquisition of Alarmex, Checkpoint will be able to offer its customers
a broader and more sophisticated range of CCTV and POS monitoring products. In
addition, Alarmex will enable Checkpoint to enter the burglar and fire alarm
market with related central station alarm monitoring capabilities.
USE OF PROCEEDS
The net proceeds from the sale of shares of Common Stock offered hereby are
estimated to be approximately $67.0 million ($77.3 million if the Underwriters'
over-allotment option is exercised in full). These proceeds are expected to be
used for general corporate purposes including the following: (i) approximately
$27 million for potential strategic acquisitions and related start-up operations
and capital expenditures, (ii) approximately $14 million to retire existing
short and long-term indebtedness and an additional $6 million to retire short
and long-term indebtedness expected to be outstanding at the time of the
consummation of the Offering, and (iii) approximately $20 million to provide the
necessary capital to enable the Company to lease equipment to retailers under
long-term leases. The indebtedness outstanding at December 31, 1994, to be
repaid from the net proceeds of the sale of shares of Common Stock offered
hereby, bore an average interest rate of approximately 7% at such date and
becomes due in 1995 and 1996.
The Company is currently engaged in discussions with several companies with
respect to proposed acquisitions and has entered into a letter of intent with
respect to the Alarmex Acquisition. The Company intends to finance the cash
portion of the Alarmex Acquisition with the private placement of the Company's
long-term notes. There can be no assurance, however, that any particular
acquisition will be consummated or, if consummated, that such acquisition will
be profitable or successfully enhance the Company's competitive position now or
in the future. If the Company is unable to consummate any particular
acquisition, the proceeds will be applied to alternative start-up operations or
capital expenditures.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of the sale of shares of Common Stock offered hereby based upon
current economic and industry conditions and the current state of its business
operations and plans. Pending the application of the proceeds, the Company
intends to invest such proceeds in short-term, investment-grade,
interest-bearing securities.
11
<PAGE>
COMMON STOCK PRICE RANGE AND DIVIDENDS
Checkpoint's Common Stock is listed on the New York Stock Exchange ('NYSE')
under the symbol CKP. Trading on such exchange commenced on October 29, 1993,
prior to which Checkpoint's Common Stock was traded on the Nasdaq National
Market ('NASDAQ') under the symbol CHEK. The following table sets forth for the
periods indicated the high and low closing sale prices for the Company's Common
Stock as reported by NASDAQ prior to October 29, 1993 and as reported on the
NYSE Composite Tape commencing October 29, 1993.
<TABLE>
<CAPTION>
HIGH LOW
----- ---------
<S> <C> <C>
Fiscal Year 1992
First Quarter................................................................... $ 13 $ 7 3/4
Second Quarter.................................................................. 11 7 1/8
Third Quarter................................................................... 10 7/8 8 5/8
Fourth Quarter.................................................................. 18 1/8 9 1/8
Fiscal Year 1993
First Quarter................................................................... 20 1/8 8 3/4
Second Quarter.................................................................. 12 7/8 8 3/4
Third Quarter................................................................... 11 3/4 8 1/8
Fourth Quarter.................................................................. 14 8 1/2
Fiscal Year 1994
First Quarter................................................................... 14 1/2 10 3/8
Second Quarter.................................................................. 17 1/4 12 3/4
Third Quarter................................................................... 18 7/8 14 7/8
Fourth Quarter.................................................................. 21 1/2 16 3/8
Fiscal Year 1995
First Quarter (through January 20, 1995)........................................ 24 3/4 18 3/4
</TABLE>
A recent reported last sale price per share for the Company's Common Stock
on the NYSE is set forth on the cover page of this Prospectus.
The Company has never paid a cash dividend on its Common Stock and does not
anticipate paying any cash dividends in the near future. The Company has
retained, and expects to continue to retain, its earnings for reinvestment in
its business. The payment of dividends in the future will depend on the
financial condition and results of operations of the Company, its cash needs and
other factors deemed relevant by the Board of Directors. In addition, certain
covenants in the Company's debt instruments limit the amounts available for
dividends on its common stock. See 'Description of Capital Stock -- Common
Stock.'
12
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and total capitalization
of the Company at September 25, 1994, and as adjusted to give effect to the (i)
Alarmex Acquisition and (ii) sale of the shares of the Common Stock offered
hereby and the application of the net proceeds therefrom as described under 'Use
of Proceeds.' This table should be read in conjunction with 'Use of Proceeds,'
'Pro Forma Combined Financial Information,' 'Selected Historical Financial
Information,' and the consolidated financial statements of the Company and
Alarmex appearing elsewhere, or incorporated by reference, in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 25, 1994
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Line of Credit................................................................... $ 2,289 $ --
Current portion of long-term debt................................................ 3,241 3,241
--------- -----------
Total short-term debt......................................................... $ 5,530 $ 3,241
--------- -----------
--------- -----------
Long-term debt (less current portion):
Revolving Credit Facility........................................................ $ 11,830 $ --
Term Debt........................................................................ 23,720 38,720
--------- -----------
Total long-term debt.......................................................... 35,550 38,720
--------- -----------
Shareholders' equity
Preferred stock, no par value, authorized 500,000 shares, none issued............ -- --
Common Stock, par value $.10 per share, 100,000,000 shares authorized, 11,211,311
shares issued and outstanding; 14,412,028 shares issued and outstanding (as
adjusted)..................................................................... 1,121 1,441(1)
Additional capital............................................................... 20,860 91,038(1)
Retained earnings................................................................ 44,261 44,261
Common stock in treasury, at cost, 799,000 shares................................ (5,664) (5,664)
Foreign currency adjustments..................................................... (852) (852)
--------- -----------
Total shareholders' equity.................................................... 59,726 130,224
--------- -----------
Total capitalization....................................................... $ 95,276 $ 168,944
--------- -----------
--------- -----------
</TABLE>
- ------------------
(1) Reflects the (i) issuance of 200,717 shares of Common Stock in connection
with the Alarmex Acquisition (valued at a price of $17.43 per share) and
(ii) issuance and sale of 3,000,000 shares of the Common Stock offered
hereby (assuming an offering price of $24.00) less underwriting discounts
and offering expenses.
13
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The following pro forma financial information is based on the historical
consolidated financial statements of the Company and Alarmex appearing
elsewhere, or incorporated by reference, in this Prospectus adjusted to give
effect to the Alarmex Acquisition and the sale of the shares of the Common Stock
offered hereby, and the application of the net proceeds therefrom. The Pro Forma
Combined Statement of Operations Data for fiscal year 1993 and the first nine
months of 1994 give effect to the Alarmex Acquisition and the sale of the shares
of the Common Stock offered hereby, and the application of the net proceeds
therefrom, as if they had occurred at the beginning of fiscal year 1993 and the
Pro Forma Combined Balance Sheet Data give effect to the Alarmex Acquisition and
the sale of the shares of the Common Stock offered hereby and the application of
the net proceeds therefrom, as if they had occurred on September 25, 1994. The
pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The pro forma financial
information does not purport to represent what the Company's results of
operations or financial position would actually have been had the Alarmex
Acquisition and the sale of the shares of the Common Stock offered hereby, and
the application of the net proceeds therefrom, in fact occurred at such dates or
to project the Company's results of operations or financial position for or at
any future period or date. The pro forma financial information should be read in
conjunction with 'Use of Proceeds,' 'Capitalization,' 'Management's Discussion
and Analysis of Financial Condition and Results of Operations' and the
historical consolidated financial statements of the Company and Alarmex
appearing elsewhere, or incorporated by reference, in this Prospectus.
The Alarmex Acquisition will be accounted for under the purchase method of
accounting. The total purchase price for the Alarmex Acquisition of
approximately $13.5 million ($10 million in cash and the balance in 200,717
shares of Checkpoint Common Stock), including estimated aggregate related
acquisition costs of $300,000, will be allocated to the tangible and
identifiable intangible assets and liabilities of Alarmex based upon
management's estimates of their fair value with the remainder to be allocated to
cost in excess of assets acquired. For purposes of presenting pro forma results,
no changes in revenues or expenses have been made to reflect the result of any
modification to operations that might have been made had the Alarmex Acquisition
been consummated at the beginning of fiscal year 1993. The pro forma expenses
include the recurring costs which are directly attributable to the Alarmex
Acquisition, such as the change in depreciation and the amortization expenses
resulting from the allocation of the purchase price.
14
<PAGE>
PRO FORMA COMBINED BALANCE SHEET DATA
SEPTEMBER 25, 1994
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
ADJUSTMENTS PRO FORMA ALARMEX
FOR THE FOR THE ADJUSTMENTS ACQUISITION
CHECKPOINT ALARMEX ALARMEX ALARMEX FOR THE AND THE
ACTUAL ACTUAL ACQUISITION ACQUISITION OFFERING OFFERING
----------- ----------- ------------- ----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.......... $ 280 $ 1 $ 2,098(1) $ 2,379 $ 52,881(5) $ 55,260
Accounts receivable, net........... 29,790 4,612 -- 34,402 -- 34,402
Inventories........................ 28,499 4,012 1,204(2) 33,715 -- 33,715
Other current assets............... 5,395 729 -- 6,124 -- 6,124
----------- ----------- ------------- ----------- ------------- -----------
Total current assets............... 63,964 9,354 3,302 76,620 52,881 129,501
Property, plant and equipment, net of
accumulated depreciation........... 35,118 572 -- 35,690 -- 35,690
Excess of purchase price over fair
value of net assets acquired....... 9,617 92 9,472(2) 19,181 -- 19,181
Intangibles.......................... 5,707 -- -- 5,707 -- 5,707
Deferred taxes, net of valuation
allowances......................... 479 61 -- 540 -- 540
Other assets......................... 5,774 747 -- 6,521 -- 6,521
----------- ----------- ------------- ----------- ------------- -----------
Total assets......................... $ 120,659 $ 10,826 $ 12,774 $ 144,259 $ 52,881 $ 197,140
----------- ----------- ------------- ----------- ------------- -----------
----------- ----------- ------------- ----------- ------------- -----------
Current liabilities:
Accounts payable................... $ 5,504 $ 2,843 $ -- $ 8,347 $ -- $ 8,347
Accrued compensation............... 3,243 92 -- 3,335 -- 3,335
Income taxes....................... 1,734 400 -- 2,134 -- 2,134
Unearned revenues.................. 3,370 1,019 -- 4,389 -- 4,389
Other current liabilities.......... 6,002 748 -- 6,750 -- 6,750
Short-term borrowings and current
portion long-term debt........... 5,530 1,725 (1,725)(3) 5,530 (2,289)(5) 3,241
----------- ----------- ------------- ----------- ------------- -----------
Total current liabilities.......... 25,383 6,827 (1,725) 30,485 (2,289) 28,196
----------- ----------- ------------- ----------- ------------- -----------
Long-term debt, less current
maturities......................... 35,550 1,177 13,823(3) 50,550 (11,830)(5) 38,720
Shareholders' equity
Preferred stock, no par value...... -- -- -- -- -- --
Common stock, par value $.10 per
share............................ 1,121 9 11(4) 1,141 300(5) 1,441
Additional capital................. 20,860 -- 3,478(4) 24,338 66,700(5) 91,038
Retained earnings.................. 44,261 3,156 (3,156)(2) 44,261 -- 44,261
Common stock in treasury........... (5,664) -- -- (5,664) -- (5,664)
Shareholder loan, interest at 5%,
due on demand.................... -- (343) 343(2) -- -- --
Foreign currency adjustment........ (852) -- -- (852) -- (852)
----------- ----------- ------------- ----------- ------------- -----------
Total shareholders' equity......... 59,726 2,822 676 63,224 67,000 130,224
----------- ----------- ------------- ----------- ------------- -----------
Total liabilities and shareholders'
equity............................. $ 120,659 $ 10,826 $ 12,774 $ 144,259 $ 52,881 $ 197,140
----------- ----------- ------------- ----------- ------------- -----------
----------- ----------- ------------- ----------- ------------- -----------
</TABLE>
- ------------------
(1) Reflects the issuance of a $15.0 million eight-year note at an interest rate
of 9.35% (the '9.35% Note') less (i) payment of $10.0 million as the cash
portion of the purchase price for Alarmex and (ii) repayment of $2.9 million
of Alarmex debt.
(2) Reflects purchase accounting adjustments as a result of the Alarmex
Acquisition as follows:
Step-up in basis of Alarmex inventories....................... $1.2 million
Increase in goodwill in connection with the purchase
of Alarmex.................................................. $9.5 million
Elimination of the retained earnings of Alarmex............... $3.2 million
Elimination of shareholder loan............................... $ .3 million
(3) Reflects (i) the issue of the 9.35% Note ($15.0 million), (ii) repayment of
$1.7 million of Alarmex current portion of long-term debt and (iii)
repayment of $1.2 million of Alarmex long-term debt.
(4) Reflects the (i) issuance of 200,717 shares of Common Stock as the stock
portion of the purchase price (valued at a price of $17.43 per share) and
(ii) elimination of the stated value of Alarmex common stock.
(5) Reflects the issuance and sale of 3,000,000 shares of the Common Stock
offered hereby (assuming an offering price of $24.00) less underwriting
discounts and offering expenses less (i) repayment of $2.3 million of the
Company's short-term borrowings and (ii) repayment of $11.8 million of the
Company's long-term debt.
15
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA
FISCAL YEAR 1993
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA PRO FORMA
FOR THE FOR THE ADJUSTMENTS FOR THE ALARMEX
CHECKPOINT ALARMEX ALARMEX ALARMEX FOR THE ACQUISITION AND
ACTUAL ACTUAL ACQUISITION ACQUISITION OFFERING THE OFFERING
----------- ----------- ------------- ----------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues..................... $ 93,034 $ 18,218 $ -- $ 111,252 $ -- $ 111,252
Cost of revenues................. 54,421 12,804 573(1) 67,798 -- 67,798
----------- ----------- ------------- ----------- ----- ---------------
Gross profit................... 38,613 5,414 (573) 43,454 -- 43,454
Selling, general and
administrative expenses........ 39,238 4,629 520(2) 44,387 -- 44,387
----------- ----------- ------------- ----------- ----- ---------------
Operating income (loss)........ (625) 785 (1,093) (933) -- (933)
Contract settlement income....... 3,500 -- -- 3,500 -- 3,500
Interest expense (income), net... 477 137 1,231(3) 1,845 (610)(6) 1,235
Other expense.................... 327 55 -- 382 -- 382
----------- ----------- ------------- ----------- ----- ---------------
Income before income taxes..... 2,071 593 (2,324) 340 610 950
Income taxes..................... 456 138 (443)(4) (151) 220(4) (370)
----------- ----------- ------------- ----------- ----- ---------------
Net earnings................... $ 1,615 $ 455 $ (1,881) $ 189 $ 390 $ 580
----------- ----------- ------------- ----------- ----- ---------------
----------- ----------- ------------- ----------- ----- ---------------
Net earnings per share........... $ .16 $ .02 $ .04
Weighted average number of common
and common equivalent shares... 10,386 10,587(5) 13,587(7)
</TABLE>
FIRST NINE MONTHS OF 1994
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA PRO FORMA
FOR THE FOR THE ADJUSTMENTS FOR THE ALARMEX
CHECKPOINT ALARMEX ALARMEX ALARMEX FOR THE ACQUISITION AND
ACTUAL ACTUAL ACQUISITION ACQUISITION OFFERING THE OFFERING
----------- ----------- ------------- ----------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues..................... $ 88,807 $ 16,179 $ -- $ 104,986 $ -- $ 104,986
Cost of revenues................. 45,969 10,827 -- 56,796 -- 56,796
----------- ----------- ------------- ----------- ----- ---------------
Gross profit................... 42,838 5,352 -- 48,190 -- 48,190
Selling, general and
administrative expenses........ 35,946 3,756 390(2) 40,092 -- 40,092
----------- ----------- ------------- ----------- ----- ---------------
Operating income (loss)........ 6,892 1,596 (390) 8,098 -- 8,098
Contract settlement income....... -- -- -- -- -- --
Interest expense (income), net... 1,642 135 892(3) 2,669 (741)(6) 1,928
Other expense.................... 243 1 -- 244 -- 244
----------- ----------- ------------- ----------- ----- ---------------
Income before income taxes..... 5,007 1,460 (1,282) 5,185 741 5,926
Income taxes..................... 1,252 474 (321)(4) 1,405 267(4) 1,672
----------- ----------- ------------- ----------- ----- ---------------
Net earnings................... $ 3,755 $ 986 $ (961) $ 3,780 $ 474 $ 4,254
----------- ----------- ------------- ----------- ----- ---------------
----------- ----------- ------------- ----------- ----- ---------------
Net earnings per share........... $ .35 $ .35 $ .31
Weighted average number of common
and common equivalent shares... 10,721 10,922(5) 13,922(7)
</TABLE>
- ------------------
(1) Represents the step-up basis in value of Alarmex inventories.
(2) Reflects the increase in amortization of goodwill (over a 20-year period) in
connection with the Alarmex Acquisition as if the acquisition had occurred
on January 1, 1993.
(3) Reflects the increase in interest expense due to the issue of the 9.35%
Notes offset by the reduction in interest expense due to the repayment of
Alarmex debt.
<TABLE>
<CAPTION>
FISCAL YEAR FIRST NINE
1993 MONTHS OF 1994
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Interest on 9.35% Notes.................................................. $ 1,403 $ 1,052
Interest on Alarmex debt................................................. (172) (160)
------ ------
Total.................................................................... $ 1,231 $ 892
------ ------
------ ------
</TABLE>
(4) Reflects the change in the provision for income taxes as a result of the pro
forma adjustments. Such adjustments were based on the combined effective
federal and state tax rate of 36%, however, no deduction was taken for the
amortization of the goodwill acquired and step-up basis in value of Alarmex
inventories as these amounts are not deductible.
(5) Reflects the issuance of 200,717 shares of Common Stock as the stock portion
of the purchase price of Alarmex.
(6) Reflects the reduction in interest expense due to the repayment of $2.3
million of the Company's short-term borrowing and $11.8 million of the
Company's long-term debt with a portion of the net proceeds of the Offering.
(7) Reflects the issuance and sale of 3,000,000 shares of the Common Stock
offered hereby.
16
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial information presented below has been
derived from the consolidated financial statements of the Company. The
consolidated financial statements of the Company as of December 27, 1992 and
December 26, 1993, and for each of the three prior fiscal years are included
elsewhere in this Prospectus and have been audited by Coopers & Lybrand L.L.P.,
independent certified public accountants, whose report thereon is also included
herein.
The selected historical financial information presented below as of
September 25, 1994 and for the nine-month periods ended September 26, 1993 and
September 25, 1994, has been derived from the unaudited interim condensed
consolidated financial statements of the Company included elsewhere in this
Prospectus, which in the opinion of Checkpoint management includes all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the information set forth therein. The results of operations for
the first nine months of 1994 are not necessarily indicative of results that can
be expected for the full year.
The information presented below should be read in conjunction with, and is
qualified by, 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and the Company's consolidated financial statements and
related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR FIRST NINE MONTHS
----------------------------------------------------- --------------------
1989 1990 1991 1992 1993 1993 1994
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, TOTAL DEACTIVATION SYSTEMS
AND TOTAL SENSORS INSTALLED) INSTALLED
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................. $ 50,750 $ 56,742 $ 52,943 $ 72,166 $ 93,034 $ 64,646 $ 88,807
Cost of revenues......................... 23,011 26,370 28,479 38,650 54,421 37,681 45,969
--------- --------- --------- --------- --------- --------- ---------
Gross profit........................... 27,739 30,372 24,464 33,516 38,613 26,965 42,838
Selling, general and administrative
expenses............................... 21,218 23,871 23,646 28,342 39,238 28,163 35,946
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss).................. 6,521 6,501 818 5,174 (625) (1,198) 6,892
Contract settlement income............... -- -- -- -- 3,500 3,500 --
Interest expense (income), net........... (376) (206) 183 283 477 375 1,642
Other expense............................ -- -- -- -- 327 -- 243
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes............. 6,897 6,707 635 4,891 2,071 1,927 5,007
Income taxes (benefit)................... 1,294 (225) 127 463 456 424 1,252
--------- --------- --------- --------- --------- --------- ---------
Net earnings........................... $ 5,603 $ 6,932 $ 508 $ 4,428 $ 1,615 $ 1,503 $ 3,755
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net earnings per share................... $ .61 $ .72 $ .05 $ .45 $ .16 $ .14 $ .35
Weighted average number of common and
common equivalent shares............... 9,258 9,579 9,591 9,951 10,386 10,386 10,721
SELECTED OPERATING DATA:
Disposable labels sold (during period)... 370,914 434,912 537,833 691,494 733,530 528,323 623,766
Total deactivation systems installed (at
period end)............................ 17,012 24,190 30,003 43,771 61,417 56,937 81,181
Total sensors installed (at period
end)................................... 44,490 52,237 58,859 70,256 91,648 88,649 102,349
BALANCE SHEET DATA (END OF PERIOD):
Working capital.......................... $ 18,742 $ 17,915 $ 14,245 $ 25,792 $ 27,984 $ 28,293 $ 38,581
Total assets............................. 44,371 53,129 57,675 74,333 104,999 95,506 120,659
Long-term debt........................... 1,200 -- 783 9,322 24,302 21,033 35,550
Total debt............................... 2,100 1,200 7,005 10,614 28,399 24,084 41,080
Shareholders' equity..................... 32,610 41,321 42,087 51,061 53,779 54,445 59,726
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the consolidated financial statements
of the Company included elsewhere in the Prospectus.
OVERVIEW
Checkpoint is a designer, manufacturer and distributor of integrated
electronic security systems -- utilizing proprietary RF technologies -- designed
primarily to help retailers prevent losses caused by theft of merchandise. In
fiscal year 1991, the Company's revenues declined 6.7% from the prior fiscal
year at a time of substantial growth in the industry. As a result, the Company's
current management adopted a new strategy which focused on introducing new
products to meet retailers' needs, moving to direct distribution internationally
through the acquisition of several of Checkpoint's independent distributors,
increasing the number of direct sales and service personnel and making
substantial investments in its manufacturing facility in Puerto Rico to increase
its manufacturing capacity and further integrate the manufacturing of its
disposable targets. The costs associated with the implementation of this
strategy have been significant and have exerted pressure on the Company's
profitability. In management's opinion, however, these investments have
positioned the Company for the future.
Net Revenues
The Company's unit volume is driven by product offerings, number of direct
sales personnel, recurring revenues and, to some extent, prices. Since 1991, the
Company's unit volume of sales has increased dramatically. During that time the
Company has introduced over 40 new products. Increases in the Company's U.S.
direct sales personnel and, through various acquisitions, the establishment of a
direct sales force in ten other countries, have resulted in the Company's total
sales force growing to approximately 180 as compared to approximately 47 as of
September 1991. In addition, sales of the Company's disposable targets and field
service of their associated sensors and deactivation units provide a significant
and growing source of recurring revenues. Checkpoint's increasing base of
installed systems also results in additional unit volume. For the first nine
months of 1994, approximately 36% of the Company's net revenues were
attributable to sales of targets and service to its installed base of customers.
The Company's unique and proprietary product line has enabled it to
increase its domestic prices over the past three years. These price increases,
however, have been substantially offset by volume discounts offered to national
retailers. Internationally, prices have been favorably impacted by moving to
direct sales in various countries.
Cost of Revenues
The principal elements comprising cost of revenues are product cost,
development cost and field and installation cost.
Across all of the Company's product lines, product costs average
approximately 40% of net revenues. The components of cost of revenues are as
follows: 74% -- material, 14% -- labor, and 12% -- manufacturing overhead. The
primary raw materials used in the manufacture of the Company's products include
electronic components for its systems, aluminum foil, resins, and paper used for
its disposable tags, ferric chloride solutions for the Company's etching
operation of disposable tags and printed circuit boards. Although aluminum,
resins and paper are subject to some commodity pricing, in recent years the
Company has generally been able to offset price increases through volume
purchasing and manufacturing efficiencies.
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. Checkpoint expects volume
18
<PAGE>
increases to result in a decrease of product cost as a percentage of net
revenues because of the Company's substantial available manufacturing capacity
and its ability to more broadly distribute its fixed manufacturing costs over
more units.
For the first nine months of 1994, field service and installation costs
approximated 10% of net revenues and include ongoing product service costs and
installation costs. The Company believes that it has and will continue to make
product design changes which improve product performance and result in easier
installation, thereby reducing these costs as a percentage of net revenues.
Selling, General and Administrative Expenses
Sales, marketing and customer service comprise approximately 75% of all
selling, general and administrative expenses. Selling, general and
administrative expenses have increased significantly due to an expansion of
Checkpoint's sales force both domestically and internationally (through
acquisitions) from a September 1991 sales force of approximately 47 people to a
September 1994 sales force of approximately 180. During this same period,
significant investment was also made in the establishment of a multifaceted
product management team and a professional customer service organization.
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 ('Section 936') and are substantially exempt from Puerto
Rican income taxes. As a result, the Company's effective tax rate for fiscal
1993 was 22%. Changes to Section 936 resulting from the Revenue Reconciliation
Act of 1993 are not expected to have an impact on the Company's tax status from
earnings generated by the operations in Puerto Rico as a result of substantial
investments made by the Company in property, plant and equipment combined with
the large workforce currently employed by the Company at the facility. The
Company anticipates that its effective tax rate may increase in fiscal year 1995
and beyond due to (i) increased net income due to the Alarmex Acquisition and
other possible acquisitions, (ii) a change in U.S. tax laws resulting in a
partial tax on Section 936 earnings, whether or not such earnings are
repatriated and (iii) additional taxable income attributable to foreign
jurisdictions where tax rates may be marginally higher than in the U.S.
Exposure to International Operations
Prior to fiscal year 1993, substantially all the Company's overseas sales
were made to distributors and were paid in U.S. dollars. As a result of the
Company's strategy to increase its distribution directly to customers (as
opposed to sales through independent distributors), approximately 79.7% of the
Company's international sales for the first nine months of 1994 were made in
local currencies. This increases the Company's exposure to foreign currency
fluctuations, which can adversely affect results. During the first nine months
of 1994, 'other expense' on the Company's statement of operations reflects a
loss of $243,000 for the impact of losses on foreign exchange forward contracts.
There was no impact in prior years. In addition, the Company does not engage in
any other financial hedging activities. The Company is evaluating various
strategies in order to minimize the impact of foreign currency fluctuations and
the Company's current policy is to purchase foreign exchange forward contracts
so that at any point in time approximately 50% of its foreign currency
receivables outstanding are covered by such contracts. These activities served
to minimize, but not eliminate, the risk from fluctuations in exchange rates.
Seasonality
The Company's business generally follows the retail cycle so that revenues
are weighted toward the last half of the calendar year as retailers prepare for
the holiday season.
The following table presents unaudited interim operating results of the
Company. The Company believes that the following information includes all
adjustments (consisting only of normal, recurring
19
<PAGE>
adjustments) that the Company considers necessary for a fair presentation, in
accordance with generally accepted accounting principles. The operating results
for any interim period are not necessarily indicative of results for any future
interim period or the entire fiscal year.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fiscal year 1994
Net revenues..................................................... $ 26,223 $ 28,656 $ 33,928
Gross profit..................................................... 12,263 13,552 17,023
Selling, general and administrative expenses..................... 11,011 11,934 13,001
Net earnings..................................................... $ 527 $ 1,067 $ 2,162
Fiscal year 1993
Net revenues..................................................... $ 20,016 $ 18,026 $ 26,604 $ 28,388
Gross profit..................................................... 8,700 6,880 11,385 11,648
Selling, general and administrative expenses..................... 8,002 9,069 11,092 11,075
Net earnings..................................................... $ 507 $ 884 $ 112 $ 112
Fiscal year 1992
Net revenues..................................................... $ 14,222 $ 16,567 $ 19,159 $ 22,218
Gross profit..................................................... 6,427 7,570 9,057 10,462
Selling, general and administrative expenses..................... 6,200 6,870 7,451 7,821
Net earnings..................................................... $ 150 $ 943 $ 1,272 $ 2,063
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net revenues of certain items included in the Company's
statements of operations:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------------------------------------
FISCAL YEAR FIRST NINE MONTHS
------------------------------- --------------------
1991 1992 1993 1993 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................................ 53.8 53.6 58.5 58.3 51.8
--------- --------- --------- --------- ---------
Gross profit.............................................. 46.2 46.4 41.5 41.7 48.2
Selling, general and administrative expenses................ 44.6 39.3 42.2 43.6 40.4
--------- --------- --------- --------- ---------
Operating income (loss)..................................... 1.6 7.1 (0.7) (1.9) 7.8
Other income (loss), net.................................... -- -- 3.4 5.5 (0.3)
Interest expense, net....................................... 0.4 0.4 0.5 0.6 1.9
--------- --------- --------- --------- ---------
Income before income taxes................................ 1.2 6.7 2.2 3.0 5.6
Income taxes................................................ 0.2 0.6 0.5 0.7 1.4
--------- --------- --------- --------- ---------
Net earnings.............................................. 1.0% 6.1% 1.7% 2.3% 4.2%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
FIRST NINE MONTHS OF 1994 COMPARED TO FIRST NINE MONTHS OF 1993
Overview
In the first nine months of 1994, the Company began to realize the full
impact of acquisitions completed and new products introduced in fiscal year
1993. Net revenues increased by approximately $24.2 million over the comparable
period in fiscal year 1993. Continued improvements in the cost of revenues as a
percentage of net revenues resulted in a significant increase in incremental
gross profit from that obtained in the comparable period in fiscal year 1993.
This improvement was driven primarily by increased efficiencies in manufacturing
(achieved through (i) closure of a high cost European manufacturing operation
and (ii) improvement in manufacturing efficiencies of existing as well as newer
generation products introduced in fiscal year 1993) and higher unit volumes in
Europe as
20
<PAGE>
Company-sponsored direct sales activities produced anticipated results. These
factors combined to produce operating income of approximately $6.9 million
during the period compared to an operating loss of $1.2 million in the same
period in fiscal year 1993.
Net Revenues
Net revenues increased $24.2 million (or 37.4%) over the same period in
fiscal year 1993 (from $64.6 million to $88.8 million). Domestic and foreign net
revenues accounted for approximately 60.8% and 39.2%, respectively, of total net
revenues compared to 67.7% and 32.3% for the same period in fiscal year 1993.
Domestic EAS net revenues increased $9.6 million (or 23.7%) primarily as a
result of increased unit sales. Higher prices and increases in recurring service
revenues also contributed to the increase. International EAS net revenues
increased $13.9 million (or 66.6%) primarily as a result of higher prices
generated by direct sales. Higher unit volumes and prices on reusable tags
together with higher prices across other major product lines accounted for most
of the increase. Selling prices were favorably impacted by direct sales as
opposed to selling through distributors.
Cost of Revenues
Cost of revenues increased $8.3 million (or 22.0%) over the same period in
fiscal year 1993 (from $37.7 million to $46.0 million). As a percent of net
revenues, however, cost of revenues decreased 6.5% (from 58.3% to 51.8%)
compared to the same period in fiscal year 1993 primarily due to (i) increased
production volumes combined with greater manufacturing efficiencies, (ii) the
relocation of European production into lower cost Caribbean based operations,
(iii) increased manufacturing efficiencies of existing as well as newer
generation products introduced in fiscal year 1993 and (iv) no increase in
development expense in dollars.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $7.8 million (or
27.6%) over the same period in fiscal year 1993 (from $28.2 million to $35.9
million). As a percentage of net revenues, however, selling, general and
administrative expenses, decreased by 3.2% (from 43.6% to 40.4%). The higher
expenses (in dollars) were due to (i) increases in variable selling expenses
resulting from greater domestic sales and (ii) increases in selling, general and
administrative expenses resulting from the acquisitions made in fiscal year
1993.
Net Earnings
Net earnings were $3.8 million or $.35 per share versus $1.5 million or
$.14 per share for the same period in fiscal year 1993. The results for the
first nine months in fiscal year 1993, however, include a one-time benefit of
$3.5 million ($2.7 million after tax) from a contract settlement with the
Company's former exclusive distributor for Western Europe. The Company's results
in the first nine months of fiscal year 1993 were adversely affected by a
difficult transition from distribution through independent distributors to
direct sales and introduction of new products with attendant start-up problems
and expenses, as described in more detail below.
FISCAL YEAR 1993 COMPARED TO FISCAL YEAR 1992
Overview
Fiscal year 1993 was characterized by a difficult transition from
distribution to direct sales and introduction of new products with attendant
start-up problems and expenses. Net revenues increased $20.9 million over fiscal
year 1992. These revenues, however, generated only approximately $5.1 million of
incremental gross profit. Factors adversely affecting gross margin were (i)
increased manufacturing costs attributable to a European factory acquired in
1993 (and since closed) as part of Western European distribution operations,
(ii) start-up manufacturing and installation inefficiencies related to the
introduction of certain new high unit volume products and (iii) reduced unit
sales in
21
<PAGE>
Europe (and consequently lower fixed cost absorption) attributable to the
reorganization from distribution through independent distributors to direct
sales in Europe. At the same time, due primarily to a change from distribution
sales and related service to Company-sponsored direct sales and service in
Europe, selling and related expenses (primarily direct and indirect sales and
related product installation and service) increased by approximately $10.9
million over fiscal year 1992. These factors resulted in an operating loss of
approximately $.6 million for the year.
Net Revenues
Net revenues increased $20.9 million (or 28.9%) over fiscal year 1992 (from
$72.2 million to $93.0 million). Domestic and foreign net revenues were 64.1%
and 35.9%, respectively, of total net revenues, compared to 68.7% and 31.3% for
fiscal year 1992. Domestic EAS net revenues increased $9.4 million (or 20.7%)
primarily as a result of unit volume increases across all major product lines
and increases in service revenues. Domestically, these positive effects were
somewhat offset by lower pricing from high volume national retailers.
International EAS net revenues increased $10.8 million (or 47.6%), primarily as
a result of higher unit volumes and price increases on reusable tags combined
with significantly higher prices across other major product lines attributable
to various acquisitions and start up operations made in late 1992 and throughout
the year in numerous countries where the Company previously sold through
distributors.
Cost of Revenues
Cost of revenues increased $15.8 million (or 40.8%) over fiscal year 1992
(from $38.7 million to $54.4 million). As a percent of net revenues, cost of
revenues increased 4.9% (from 53.6% to 58.5%) over fiscal year 1992 thereby
reducing gross margin from 46.4% in fiscal year 1992 to 41.5% in fiscal year
1993. This decrease in gross margin was primarily due to the factors set forth
in the first paragraph of this section.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $10.9 million (or
38.4%) over fiscal year 1992 (from $28.3 million to $39.2 million) and by 2.9%
as a percentage of revenues (from 39.3% to 42.2%). The higher expenses are
primarily due to (i) increases in variable selling and marketing expenses
resulting from higher domestic sales and (ii) sales, marketing, installation and
service costs borne by the Company which had been borne by independent
distributors.
Net Earnings
Net earnings were $1.6 million or $.16 per share versus net earnings of
$4.4 million or $.45 per share for fiscal year 1992. Included in the fiscal year
1993 results is a one-time benefit of $3.5 million ($2.7 million after tax) from
a contract settlement with the Company's former exclusive distributor for
Western Europe.
FISCAL YEAR 1992 COMPARED TO FISCAL YEAR 1991
Net Revenues
Net revenues increased $19.2 million (or 36.3%) over fiscal year 1991 (from
$52.9 million to $72.2 million). Domestic and foreign net revenues were 68.7%
and 31.3%, respectively, of total net revenues, compared to 71% and 29% for
fiscal year 1991. Domestic EAS net revenues increased $11.3 million (or 33.3%)
primarily as a result of significant unit volume increase within the Company's
major product lines and increases in service revenues. These positive effects
were offset in part by lower pricing from higher volume national retailers.
International EAS net revenues increased $7.3 million or 47.7% primarily as
a result of unit volume increases resulting in $3.6 million from sales to the
Company's exclusive Western European distributor over fiscal year 1991. An
additional $2.7 million of the increase in foreign revenues is
22
<PAGE>
attributable to unit volume increases of the Company's distributors located in
Finland, Argentina, Japan and Mexico with the balance of $1.0 million coming
from unit volume increases from other distributors located throughout the world.
These unit volume increases were offset in part by price reductions.
Cost of Revenues
Cost of revenues declined slightly (53.8% versus 53.6%) compared to fiscal
year 1991. This decline was primarily due to (i) lower product cost on increased
volumes and (ii) lower development activities as a percentage of sales offset by
higher service costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $4.7 million (or
19.9%) over fiscal year 1991 (from $23.6 million to $28.3 million). As a
percentage of revenues, however, selling, general and administrative expenses
decreased by 5.3% (from 44.6% to 39.3%) compared to the same period in fiscal
year 1991. The higher expenses are primarily due to (i) increases in variable
selling and marketing expenses resulting from greater domestic sales and (ii)
higher general and administrative costs in order to support the increased sales
volume.
Net Earnings
Net earnings were $4.4 million or $.45 per share versus net earnings of $.5
million or $.05 per share for fiscal year 1991.
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 operations and long-term borrowings. The
Company believes that cash provided from operating activities and funding
available under its current credit agreements, together with the net proceeds
from the sale of the shares of Common Stock offered hereby, will be adequate for
its working capital and capital expenditure requirements. Cash provided (used)
by operating activities for fiscal years 1991, 1992 and 1993, and the first nine
months of 1994 was $.2 million, $1.5 million, $(6.3) million and $(8.6) million,
respectively. In fiscal years 1993 and 1994, cash used by operating activities
was negatively impacted by increases in accounts receivables and inventories
relating to significant sales increases in those periods and increases in rental
equipment as a result of allowing retailers to test equipment before finalizing
a purchase decision.
The commitments of the lenders under the credit agreements expire on
various dates through May 1, 1996 and currently provide credit up to
approximately $14 million. At September 25, 1994, there was approximately $3.0
million available under the credit agreements and the weighted average effective
annual interest rate on borrowings made under the credit agreements was 6.9% and
7.1% in fiscal year 1993 and for the first nine months of 1994, respectively.
The Company intends to repay substantially all of the outstanding indebtedness
under the Company's long term credit facility with the net proceeds from the
sale of the shares of Common Stock offered hereby.
The Company's capital expenditures were $6.1 million in fiscal year 1991,
$6.1 million in fiscal year 1992 and $4.6 million in fiscal year 1993. The
Company expects that for the fiscal year 1994 and the next several years similar
levels of investments in property, plant and equipment will be made. These
capital expenditures will be used to expand, improve and maintain plant
efficiency at the Company's various production facilities located in the
Caribbean. As part of its continuing strategy, the Company is exploring
strategic acquisitions in the following areas: distribution, alternate source
manufacturing and product line diversification within the Company's core
businesses. In order to consummate a particular acquisition, the Company may
require additional debt or equity financing.
23
<PAGE>
BUSINESS
OVERVIEW
Checkpoint is a designer, manufacturer and distributor of integrated
electronic security systems -- utilizing proprietary RF technologies -- designed
primarily to help retailers prevent losses caused by theft of merchandise. The
Company markets a wide range of these systems, including EAS systems, CCTV
systems, POS monitoring systems and access control systems. Over the past three
years, the Company has achieved substantial growth, both through internal
expansion and acquisitions, as a result of the repositioning of the Company by
current management through the introduction of new products, broadened and more
direct distribution (particularly in its international markets) and increased
and more efficient manufacturing capability. The Company holds or licenses over
200 patents and proprietary technologies relating to its products and their
manufacture.
The Company's key product offerings use a low-cost disposable, paper-thin
target which triggers an alarm when passed through the Company's sensors at the
point of exit from the retail site. These disposable targets, which are
manufactured using the Company's proprietary technology at its state-of-the-art
facility in Puerto Rico, can be easily installed on products or within packaging
at the retail outlet or at the product manufacturing source and can be easily
deactivated without locating the tag. Sales of these disposable targets and
field service of their associated sensors and deactivation units provide a
significant and growing source of recurring revenues and accounted for
approximately 38% and 36% of the Company's net revenues for fiscal year 1993 and
the first nine months of 1994, respectively. The Company believes that the net
proceeds from the sale of the shares of Common Stock offered hereby will provide
it with the additional capital resources necessary to continue to implement the
Company's business strategy, which focuses on capitalizing on retailers'
increasing attention to theft prevention through use of the Company's
proprietary RF technology-based products.
The Company's diversified product lines are designed to help retailers
prevent losses caused by theft (both by customers and employees) while at the
same time enabling retailers to capitalize on consumer impulse buying by openly
displaying higher volume, higher margin merchandise, and to reduce associated
selling costs through lower staff requirements. The Company's broad and flexible
product lines, marketed and serviced by its extensive sales and service
organization, have helped the Company emerge as the preferred supplier to such
hard goods retail chains as Caldor, Circuit City, Kroger, Lucky's Grocery,
Payless, Ralph's, Rite-Aid, Ross, Target, and Walgreens. In addition, the
Company's manufacturing facilities have the current capacity to produce up to
three billion disposable RF targets per year at a low cost.
THE RETAIL OPPORTUNITY
The Company markets its products primarily to retailers in the following
market segments: hard goods (supermarkets, drug stores, mass merchandisers and
music/electronics) and soft goods (apparel). The U.S. Department of Commerce
estimates that over 15% of retail costs are attributable to inventory
'shrinkage' (the value of goods which are not paid for). Shrinkage is caused
primarily by shoplifting and employee theft. Industry sources estimate that
shrinkage is a $30 billion annual problem for the U.S. retail industry and a
concern of at least a comparable magnitude throughout the rest of the world.
Sophisticated data collection systems (primarily barcode scanners) available to
retailers have highlighted the shrinkage problem and, consequently, retailers
now realize that the implementation of an effective electronic security system
can significantly increase profitability. Accordingly, the retail industry is
becoming increasingly focused on theft prevention. An effective EAS program can
reduce the loss from shrinkage by over 50%. Since the U.S. Department of
Commerce estimates that over 15% of retail costs are a result of theft, a
significant decline in shrinkage can result in a substantial jump in profits for
retailers by (i) reducing the amount of merchandise that leaves stores without
being paid for, (ii) giving retailers price flexibility, and (iii) allowing
retailers to openly display higher priced, higher margin merchandise (i.e.
jewelry, electronics) with greater visibility resulting in an increase in higher
profit impulse sales at a lower sales cost.
24
<PAGE>
EAS products were first used by retailers to protect soft goods or apparel
merchandise. Due to advances in technology applications in recent years, hard
goods merchandise can also be economically and effectively protected by EAS
products. Traditionally, certain of the hard goods retail markets used bulky
packaging to prevent shrinkage. Due to environmental and cost concerns, these
markets are looking to EAS products as a less expensive, environmental friendly
alternative. Accordingly, hard goods retailers such as supermarkets and
hypermarkets, and drug, discount, eyeglass, music, hardware, 'do-it-yourself',
home improvement, book and video stores have increasingly become large users of
EAS products.
The hard goods retail markets, estimated to be substantially larger in the
aggregate than the EAS retail soft goods market, are relatively unpenetrated.
Further, the EAS hard goods retail markets primarily use disposable labels which
are affixed to merchandise. Use of the hard goods EAS systems creates a
continuing need on the part of retailers for additional disposable labels to be
affixed to new merchandise resulting in a major source of recurring revenues for
Checkpoint.
Industry sources estimate there are approximately 330,000 major retail
locations in the United States that would benefit from the installation of an
EAS system and the Company estimates that less than one-third of these locations
have installed systems. The Company believes, moreover, that in the hard goods
market less than 10% of such sites are EAS protected. While industry sources
expect the growth of EAS systems in the retail soft goods market to be about 5%
to 10% annually, the retail hard goods market is expected to grow at
approximately 20% per year over the next five years, thus providing an even more
significant growth opportunity.
Retailers generally apply the targets used in EAS systems at the retail
site. Retailers have expressed significant interest in source tagging.
Manufacturers have been very receptive to source tagging in light of the
potential increase in product volume provided by more sales due to easier
customer access. According to one fragrance manufacturer's study, self-service
fragrance sales are 60% greater than sales of products kept under lock and key.
In addition, a study, conducted for the Company by Management Horizons, a
division of Price Waterhouse, reported that if the consumer has to wait in line
or search for a salesperson to buy batteries or camera film, they are likely to
forego the purchase. Bausch & Lomb, Duracell, Eastman Kodak, Texas Instruments
and United Distillers are just some of the vendors currently participating in
source tagging programs. The Company believes that source tagging provides
retailers, manufacturers and retail customers with distinct benefits, principal
among which are: enhanced protection from theft, activation and deactivation
without the need for special training of store employees, more open display of
merchandise resulting in increased sales for manufacturers and reduced costs for
retail products.
Strategies to increase acceptability of source tagging are to (i) intensify
vertical market focus into key product segments where RF technology is the only
logical choice, such as liquors; (ii) expand source tagging activities into
international markets; (iii) increase staffing for source tagging efforts
supporting manufacturers and suppliers to speed implementation; and (iv) expand
RF target products to accommodate more packaging schemes.
Newer applications of the technologies used in retail hard goods markets
can also be used by non-retail businesses to protect assets such as personal
computers, facsimile and copy machines, telephones, artwork, laboratory
equipment and tools from loss by unauthorized removal. Other specialized
applications include protection of newborn infants in hospitals and patients in
nursing homes and other long-term care facilities. Further, non-retail
businesses make extensive use of CCTV and electronic access control products to
enhance security.
CHECKPOINT PRODUCTS AND TECHNOLOGY
The Company believes its single proprietary RF technology approach to the
EAS marketplace has certain product advantages, especially in the faster
growing, hard goods market. First, the Company can produce a high volume of
paper-thin targets at a low per unit cost. Second, the small size and
flexibility of the Company's RF targets enable them to be used in a broad array
of products and markets. Third, the Company's RF technology allows retailers to
simultaneously deactivate the target
25
<PAGE>
and scan barcodes. Finally, RF technology permits retailers to deactivate
targets without specifically locating or making contact with the targets.
The Company also believes that its RF technology is more conducive to usage
in source tagging because: (i) manufacturers can machine-insert the Company's
easily concealed flexible targets at high production speeds during the
manufacturing or packaging process (e.g., in boxes or other types of packaging)
at little or no additional cost, (ii) using RF technology, targets can be more
easily activated and deactivated and (iii) the retailer can deactivate the
target and scan the bar code simultaneously with readily available scanning
equipment.
Checkpoint developed the concept of source tagging more than ten years ago.
Since then, the Company has focused on developing all of the elements required
for successful source tagging. In 1993, Checkpoint implemented the concept of
bulk activation. The Company believes bulk label activation is essential to a
successful source tagging program because (i) not all retail stores are EAS-
equipped, (ii) sending activated tags to unprotected stores could create alarm
situations if customers take purchases to an EAS-protected store; (iii) it is
not cost-effective for manufacturers to create separate inventories
(EAS-protected versus non-EAS-protected) and (iv) RF technology does not damage
products.
Checkpoint's principal global competitor in the EAS industry is
Sensormatic. Sensormatic is a fully integrated supplier of electronic security
systems with an approximately 60% market share and revenues of approximately
$656.0 million in its most recent fiscal year. Unlike Checkpoint which utilizes
its compatible RF technologies across all market segments, Sensormatic employs
five separate, non-compatible technologies -- acousto-magnetic, magnetic, radio
frequency, microwave, and frequency division magnetic. Sensormatic's
recommendation of a technology depends on the market. Checkpoint'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, including Sensormatic, could not develop a product
comparable to that of Checkpoint.
STRATEGY
The Company is, and will continue to be, focused on providing its customers
with a wide variety of fully integrated electronic security system solutions
characterized by superior quality, ease of use, good value and merchandising
opportunity for the retailer. Beginning in September 1991, the Company's current
management started to reposition the Company through the introduction of new
products, broadened and more direct distribution (particularly in its
international markets) and increased and more efficient manufacturing
capability. Checkpoint's strategy is to continue to increase its sales
penetration in existing markets and develop a significant presence in new
geographic markets. These objectives will be attained by continually enhancing
and expanding its RF technologies and products, providing superior service to
its customers and expanding its direct sales activities through acquisitions and
start-up operations.
More specifically, the Company is pursuing the following strategies:
Expanding its direct sales and service capabilities in strategic geographic
areas.
In order to interact more closely with retailers and better understand and
respond to their needs, the Company will continue to expand its direct sales
and service capabilities. Checkpoint markets, distributes and services its
products in the United States, Canada and, as a result of acquisitions in 1993,
in Mexico, Argentina, Australia and throughout most of Western Europe, through
a direct sales force of approximately 180. Since September 1991, the Company
has expanded its direct sales force from approximately 47 to 180. The Company
intends to continue to expand its international sales force either through
acquisitions or by establishing start-up operations. In addition, the Company
intends to continue to invest in its domestic sales channel to achieve new
account penetrations and revenue growth.
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<PAGE>
Broadening its product lines.
In order to satisfy the needs of its customers (including reducing shrinkage
and providing the retailer with enhanced sales opportunities through more open
display of merchandise), the Company will continue to broaden its product
lines. Since 1991, the Company has introduced 43 new products. The Company
continues to expand its product line with performance improvement products such
as multifrequency tags and less intrusive wide aisle RF detection sensors.
Increasing its penetration of the hard goods retail market (currently estimated
to be less than 10% penetrated).
By highlighting the competitive advantages of Checkpoint's RF technologies
(including disposable targets), the Company seeks to increase its penetration
of the retail hard goods market. For the first nine months of 1994, sales of RF
disposable targets and field service of their associated sensors and
deactivation units accounted for approximately 36% of the Company's net
revenues and provide the Company with a major source of recurring revenues. As
the Company's installed base of systems increases, so will its recurring
disposable label and service revenues and, at some point, the Company believes
such products will constitute a majority of sales.
Continuing to promote source tagging.
Checkpoint will continue to promote source tagging by providing manufacturers
and retailers with a full range of equipment based on RF technologies. To help
manufacturers easily conceal Checkpoint's paper-thin disposable RF target in
products at the point of manufacture, the Company continues to work closely
with the manufacturers in selection of standard application equipment and
package design for target placement opportunities.
Continuing to improve the Company's highly integrated and state-of-the-art
manufacturing processes and technologies.
The Company recently built state-of-the-art facilities located in Puerto Rico
and the Dominican Republic which have allowed the Company to become a low cost
producer of high quality EAS products. In addition, the Company is currently
exploring alternate source manufacturing opportunities.
Continuing to explore strategic acquisitions or start-up opportunities.
The Company is exploring acquisitions or start-up opportunities in the
following areas: distribution, alternate source manufacturing and product line
diversification within the Company's core businesses. On October 20, 1994, the
Company entered into a letter of intent to purchase Alarmex for approximately
$13.5 million ($10 million in cash and the balance in 200,717 shares of
Checkpoint Common Stock). The Alarmex Acquisition is subject to the negotiation
of a definitive purchase agreement which is expected to contain conditions to
closing standard for a transaction of this nature.
PRODUCTS
Product Descriptions
EAS Systems
Checkpoint offers a wide variety of EAS solutions to meet the requirements
of different retail store configurations. A Checkpoint EAS system is primarily
comprised of sensors and deactivation units, which respond to or act upon the
Company's targets.
The Company's EAS products are designed and built to comply with applicable
Federal Communications Commissions ('FCC') regulations governing radio
frequencies, signal strengths and other factors. The Company's present EAS
products requiring FCC certification comply with
27
<PAGE>
applicable regulations. In addition, the Company's present EAS products meet
other regulatory specifications for the countries in which they are sold.
Sensors. The Company's sensor product lines are used principally in retail
establishments and libraries. In retail establishments, EAS system sensors are
usually positioned at the exits from the areas in which protected articles are
displayed.
In libraries, sensors are positioned at the exit paths, and gates or
turnstiles control traffic. Targets are placed inside books and other materials
to be protected. A target passing through the sensor triggers an alarm, which
locks the gate or turnstile. The target can easily be deactivated or passed
around the sensor by library personnel.
EAS system components include ten styles of sensors (each including
transmitter, receiver and alarm), and the customer's choice of patented
disposable paper targets, reusable flexible targets and reusable hard plastic
targets. The EAS system's transmitter emits an RF signal and the receiver
measures the change in that signal caused by an active target, causing the
system to alarm.
Introduced in 1990, the QS2000 is the latest evolution in the Company's
proven Quicksilver sensor product line. With the addition of
microprocessor-based radio frequency signal processing, the QS2000 has been
engineered to provide excellent target detection with enhanced
target-discrimination capabilities. The QS2000 analyzes RF signals in its
detection zone and can discriminate between unique target signals and
environmental interference. This development greatly reduces false and 'phantom'
alarms while increasing target detection. The QS2000 is also available in a
weatherized version for outdoor use. The QX2000 is a similar system to the
microprocessor based QS2000 system with the added flexibility of modular
electronics design. The modular design provides an improved service capability
in addition to permitting the system to operate at three different RF
frequencies.
Introduced in 1993, the Condor sensor, is the most technically advanced RF
system on the market today. A significant feature of this system is the
combination of a receiver and transmitter in a single pedestal. Utilizing a
microprocessor and two digital signal processors, the Condor has an aisle width
of 12 feet using two pedestals. One sensor is capable of three feet detection on
either side of the sensor. Additional features include the ability to mount
full-sized merchandising panels, a customer counter, an alarm counter and
variable alarm tone.
Also introduced in 1993, the QS1500 and QS1600 are value-priced, reusable
target systems designed primarily for providing wide aisle protection for the
apparel marketplace. The QS1500 and QS1600 product lines provide a high
detection rate. The QS1500 has three feet of detection on either side of a
single pedestal, or it can protect up to six feet between two pedestals. For
wider detection, the QS1600 with two pedestals can detect targets at distances
of up to twelve feet, which is ideal for shopping mall environments. This system
is an inexpensive answer to wide aisle detection.
The Company also offers chrome-finished Quicksilver sensors, solid-oak
Signature sensors, featuring an earlier generation of components, the QS3000, a
wide aisle system that can span up to five feet, and the In-Line Supermarket,
which is a narrow aisle system designed specifically for hypermarkets. Most of
the Company's sensors can be used with the various targets available.
Deactivation Units. In 1986, the Company introduced Counterpoint, a
noncontact deactivation unit which eliminated the need to search for and remove
or manually detune disposable targets. Since 1989, the Company has expanded its
deactivation products with electronic modules that can be installed into
numerous POS bar code scanners including those manufactured by SpectraPhysics
Retail Systems, Symbol Technologies, Inc., Metrologic, Inc., National Cash
Register, Inc., ICL Systems, Inc., IBM (International Business Machines) and
Fujitsu Ltd. These modules allow the reading of bar code information, while
deactivating targets in a single step. These deactivation units allow POS
personnel to focus on the customer and minimize errors at check-out. During
1993, the Company developed an improved deactivation unit, Counterpoint IV,
which provides increased deactivation height and improves the rate of production
deactivation. In 1994, the Company increased the deactivation height with the
introduction of Counterpoint V.
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Five convenient deactivation configurations -- horizontal counter-mounted
slot scanners, a vertical mounted scanner, hand-held scanners, a weigh scale
scanner and a deactivation pad -- are available for a variety of POS
environments. Most of these units transmit an audible tone that alerts the user
that a target has been detected. The tone stops when the target has been
deactivated.
With the exception of the Counterpoint deactivation pad, all of the above
scanners read bar code information while deactivating hidden ChekInk targets in
a single step. Ideal for high-volume environments, these scanners mount easily
at POS, and can deactivate multiple targets on a single item.
The Counterpoint deactivation pad is placed at the check-out counter, and
targets are deactivated automatically by simply passing protected items across
the low profile pad which audibly signals that targets have been deactivated.
There is no need to see the targets in order to deactivate them. Two sizes of
the pads are available, both of which have a very low profile on the counter top
of 3/4" or less.
Developed in 1993 and introduced in 1994, the Counterpoint IV provides
increased deactivation height and improves the rate of product deactivation.
Targets
Customers can choose from a wide variety of targets, depending on their
merchandise mix. Targets can be applied either in-store or at the point of
manufacture. All targets contain an electronic circuit that unless deactivated
(disposable targets) or removed (reusable targets), triggers an alarm when
passed through the sensors.
Disposable Targets. Disposable security targets are affixed to merchandise
by pressure sensitive adhesive or other means. These range in size from 1.125" x
1.5" to 2.0" x 3.0", enabling retailers to protect smaller, frequently-pilfered
items. Disposable targets must be deactivated at the point-of-sale, either
manually or electronically, or passed around the sensors. Checkpoint provides
labels compatible with a wide variety of standard pricemarking/barcoding
printers. Checkpoints labels can be integrated with printers from Sato, Zebra,
Monarch, Printronix and Sobar. When used with electronic deactivation equipment,
they represent the Cheklink concept, developed to combine pricing,
merchandising, data collection and protection in a single step. Targets can be
applied at the vendor level, in the distribution center or in-store. Under the
Company's Impulse program tags can be embedded in products or packaging at the
point-of-manufacture or packaging.
In 1992, the Company was licensed to sell and provide targets in roll form
for the Model 4021 label applicator (Pathfinder(R)) printer manufactured by
Monarch Marking Systems. This product is a sophisticated electronic portable
bar code label printer and applicator ideal for use in high volume mass
merchandise, drugstore and supermarket applications. In addition, Pathfinder
has a self-contained keyboard which allows for easy entry of various types of
label data including: bar code, price and size. The Pathfinder also has built-in
scanning capability that can scan existing package bar codes, then print
identical Checkpoint labels for application without obscuring important product
information.
The Company has entered into a business agreement with Hobart Corporation,
a manufacturer and distributor of weigh scales, label printers and meat wrappers
used in supermarket meat rooms. The Company's Hobart tag, 1315 Series, is
compatible with the Hobart weigh scales Model 5000 T/TE and Model 18VP. This
labor-saving tag is integrated with the Hobart Weigh Scale/Printer to display
the weight and price of the item.
In addition, the Company has an agreement with A&H Manufacturing, the
dominant U.S. supplier of costume jewelry cards, which grants A&H the right to
embed Checkpoint targets in cards during manufacturing.
Reusable Targets. Reusable security targets fall into two categories.
Flexible targets are plastic-laminated tags used in a variety of markets that
are removed at the point-of-sale. Hard targets consist of a target and a locking
mechanism within a plastic case. They are used primarily in the apparel market
and present a visible psychological deterrent. Both flexible and hard targets
use a nickel-plated steel pin which is pushed through the protected item with a
magnetic fastener. These targets can also be
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<PAGE>
attached with a lanyard using the magnetic fastener. An easy-to-use detacher
unit removes reusable targets from protected articles without damage.
Also obtained with the acquisition of the ID Systems Group in 1993 was the
UFO hard target. The UFO hard target design combined with a superior locking
device distinguishes the UFO as the most difficult hard target to defeat. During
1993, the Company began manufacturing the Teardrop hard target, which is made to
function only with the QS1500 and QS1600 systems, primarily used in the apparel
market.
During 1993, the Company introduced a line of fluid tags marketed under the
name ChekInk which provides a cost-effective second line of defense against
shoplifters. Unauthorized removal of these targets will cause sealed vials of
dye to break open, rendering the garment unusable. ChekInk serves as a practical
alternative to chaining down valuable merchandise. Ideal for use in department
stores, mass merchandisers, and sporting goods stores, ChekInk can be removed
quickly and easily at check-out in the same manner as the reusable targets.
During 1994, the Company entered into a business agreement with MW Trading
ApS, a manufacturer and distributor of home entertainment security products, to
license and manufacture these products for the North and South American
marketplace.
Access Control Systems
The electronic access control Threshold(R) product line consists of six
systems, ranging from small, relatively simple systems, to large, sophisticated
systems which provide a maximum degree of control, monitoring and reporting.
The Threshold product line features a Distributed Network Architecture(TM)
which means no single point of failure can affect the entire system. These
systems are capable of controlling up to 250 doors for access control and up to
100,000 cardholders. The incorporation of alarm monitoring and point control
(i.e. turning lights on or off) are also integral features of all six Threshold
systems.
The use of Threshold Remote Software Package allows the connection of
controllers from anywhere in the country via telephone lines. This functionality
opens major markets for communications, utilities and large scale customers with
remote facilities to manage.
All electronic access control systems can also monitor other occurrences,
such as a change in the status of environmental systems, motors, safety devices
or any controller with a digital output. While monitoring these controllers, any
output can, by a pre-programmed decision, cause an alarm to sound or another
event to occur.
The Company has several proprietary proximity card/tag and reader systems
for all environments. The Mirage(R) family of readers provides the fastest card
verification in the industry and the release of the Mirage SG allows these
readers to be directly mounted on metal without degradation in performance. The
Mirage SG(R) provides the same read performance in a smaller more aesthetically
pleasing package.
The proximity cards are comprised of a custom-integrated circuit implanted
in a plastic card or key tag which is powered by RF energy transmitted from a
reader unit located at the entrance to a controlled door. Access is gained after
a reader unit verifies a code transmitted by the card. The proximity card cannot
be copied or duplicated due to the use of a programmed integrated circuit. In
addition, a Mirage reader unit can be protected from environmental damage or
vandalism by installing it inside a wall or behind a glass window. A Mirage
reader unit is usable throughout the Threshold product line.
POS Monitoring Systems
In December 1991, the Company licensed the worldwide rights to a POS
monitoring system that is marketed under the name Viewpoint(R). Viewpoint
records and stores on videotape every transaction at each check-out, both the
visual and the individual transaction data. Viewpoint connects directly to
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the point-of-sale network using a PC compatible computer and fixed CCTV cameras
usually mounted inside domes affixed to a retailer's ceiling. Because all
transaction data is stored in the computer's relational data base,
user-generated reports can match questionable transactions to events recorded on
the tape. The system also features a remote dial-in capability that allows users
to monitor multiple store locations from one site, significantly lowering
personnel cost. Viewpoint can be linked to Checkpoint EAS systems in order to
record incidents that have caused the EAS system to register an alarm.
Net Revenues by Product
The following table sets forth the percentage of net revenues derived from
each major product group for the last five fiscal years:
NET REVENUES BY PRODUCT
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------
1989 1990 1991 1992 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Electronic Article Surveillance Systems.......... 49% 46% 38% 45% 41%
Reusable tags used in EAS Systems................ 7 10 8 8 12
Disposable tags used in EAS Systems.............. 29 30 37 32 30
Access Control Systems........................... 6 6 7 6 5
Service and Installation......................... 7 6 8 6 8
CCTV/Viewpoint................................... -- -- -- -- 1
Other............................................ 2 2 2 3 3
--------- --------- --------- --------- ---------
100% 100% 100% 100% 100%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
MARKETS AND SALES
The Company markets its products primarily to retailers in the following
market segments: hard goods (supermarkets, drug stores, mass merchandiser and
music/electronics) and soft goods (apparel). The Company is a market leader in
the supermarkets, drugstores and mass merchandiser market segments with such
customers as Caldor, Kroger, Lucky's Grocery, Ralph's, Rite-Aid, Target and
Walgreens.
EAS Systems. The Company sells its EAS systems principally throughout
North America and Europe. During 1993, EAS revenues from outside the United
States (principally Europe and Scandinavia) represented approximately 35.9% of
the Company's net revenues.
In the United States, the Company markets its EAS products through its own
sales personnel, independent representatives and independent dealers.
Independent dealers accounted for less than 1% of the Company's net revenues in
the United States during 1993. The Company, at September 25, 1994, employed 79
salespeople who sell the Company's products to the domestic retail market and
who are compensated by salary plus commissions. The Company's independent
representatives sell the Company's products to the domestic library market on a
commission basis. At September 25, 1994, the Company had 38 such independent
representatives. Two members of the Company's sales management staff are
assigned to manage and assist these independent representatives. Of total EAS
domestic revenues during 1993, 88% was generated by the Company's own sales
personnel.
Internationally, the Company markets its EAS products through various
foreign subsidiaries and independent distributors. The Company's foreign
subsidiaries, as of October 1, 1994, employed a total of 96 salespeople who sell
the Company's products to the retail and library markets. The Company's direct
foreign sales operations are currently located in Western Europe, Canada,
Mexico, Argentina and Australia.
Independent distributors accounted for 36.5% and 20.3% of the Company's
foreign revenues during fiscal year 1993 and the first nine months of 1994,
respectively. Foreign distributors sell the Company's products to both the
retail and library markets. The Company's distribution agreements
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generally appoint an independent distributor for a specified term as an
exclusive distributor for a specified territory. The agreements require the
distributor to purchase a specified dollar amount of the Company's products over
the term of the agreement. The Company sells its products to independent
distributors at prices significantly below those charged to end-users because
the distributors make volume purchases and assume marketing, customer training,
maintenance and financing responsibilities.
Access Control Systems. The Company's electronic access control sales
personnel, together with manufacturers' representatives, market its electronic
access control products to approximately 210 independent dealers. The Company
employs four salespeople who are compensated by salary plus commissions. The
Company's three manufacturers' representatives are compensated solely by
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.
POS Monitoring Systems. The Company markets the POS monitoring products
throughout the world through its own EAS sales personnel which currently numbers
approximately 180. Sales of the POS monitoring produces are sold to the
Company's existing EAS retail customers along with those retailers that
currently do not have the Company's EAS products.
Salespeople. Checkpoint presently employs approximately 180 salespeople.
They are an experienced, effective sales force and one of the Company's most
important assets. On the average, the sales people have over four years
experience in the industry. Checkpoint invests heavily in sales training
programs and experiences little turnover among its top performers.
Marketing Strategies. The Company promotes its products primarily through
(i) comprehensive tag and equipment sales and product brochures, (ii)
emphasizing environmental benefits by promoting reduced packaging through source
tagging, (iii) extensive trade show participation and (iv) targeting specific
retail markets that offer substantial opportunity for growth (i.e.,
supermarkets).
MANUFACTURING
Checkpoint manufactures most of its products in state-of-the-art facilities
located in Puerto Rico and the Dominican Republic and has a highly integrated
manufacturing capability. Checkpoint'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 results in a distinct competitive advantage.
As part of its total quality management program, the Company practices
concurrent engineering techniques in the design and development of its products
involving engineering, manufacturing, marketing and customers early in the
development process.
Management of the Company believes that it has the manufacturing capability
to satisfy its projected production needs in the foreseeable future. While the
Company sold approximately 900 million disposable RF targets in 1994, it has the
current manufacturing capacity to produce as many as three billion disposable RF
targets per year at a low cost. In addition, with the expenditure of
approximately $2.5 million, the Company could increase its capacity to produce
as many as eight billion disposable RF targets annually.
Checkpoint has improved, and expects to continue to improve, its production
efficiencies through increased automation and improved cost reducing product
designs. The proposed Alarmex Acquisition would provide the Company with
manufacturing facilities and expertise in CCTV systems.
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RAW MATERIALS
The principal raw materials and components used by Checkpoint in the
manufacture of its targets are electronic components for its systems, aluminum
foil, resins, and paper used for its disposable tags, ferric chloride solutions
for the Company's etching operation of disposable tags and printed circuit
boards. While most of these materials are purchased from several suppliers,
there are numerous alternative sources for all such materials. In general, there
is an adequate supply of raw materials to satisfy the needs of the industry.
RESEARCH AND DEVELOPMENT
Checkpoint has increased its research and development expenditures during
the past three years. The Company expended approximately $3.3 million, $4.5
million, and $5.4 million in research and development activities during fiscal
years 1991, 1992 and 1993, respectively. The Company estimates that it will
expend approximately $5.0 million in fiscal year 1994. The emphasis of these
activities is the continued broadening of the product lines offered by
Checkpoint and an expansion of the markets and applications for Checkpoint's
products. Checkpoint'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
Checkpoint's acquisitions of companies and products during the last few years.
Checkpoint will continue to make acquisitions of related businesses or products
consistent with its overall product and marketing strategies.
Over the last three years, the Company has introduced 43 new products.
Currently, the Company has under development approximately 80 product
development or enhancement projects. In addition, the Company holds or licenses
over 200 patents and proprietary technologies relating to its products and their
manufacture.
EMPLOYEES
As of September 25, 1994, Checkpoint had 1,588 employees, including nine
officers, 63 persons engaged in research and development activities and 197
persons engaged in sales and marketing activities. None of the Company's
employees are represented by a union. Checkpoint believes its relations with its
employees are satisfactory.
As of September 25, 1994, Alarmex had approximately 120 employees,
including ten installers who belong to the International Brotherhood of
Electrical Workers.
LEGAL PROCEEDINGS
On March 10, 1993 the United States International Trade Commission
instituted an investigation of a complaint filed by the Company under Section
337 of the Tariff Act of 1930. 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 September 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 (approximately $1.9 million at September 25, 1994) will be written off as
a charge to earnings at the time of such resolution.
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MANAGEMENT
The following table sets forth certain information concerning the executive
officers of the Company, including their ages, position and tenure as of the
date hereof:
<TABLE>
<CAPTION>
OFFICER
NAME AGE SINCE POSITIONS WITH THE COMPANY
- ------------------------------------------------ --- ----------- ------------------------------------------------
<S> <C> <C> <C>
Kevin P. Dowd................................... 46 1988 President and Chief Executive Officer
Luis A. Aguilera................................ 46 1982 Senior Vice President -- Manufacturing
Steven G. Selfridge............................. 39 1988 Senior Vice President -- Operations, Chief
Financial Officer and Treasurer
Mitchell T. Codkind............................. 35 1992 Corporate Controller and Chief Accounting
Officer
Muns A. Farestad................................ 46 1990 Vice President -- Research and Development
William J. Reilly, Jr........................... 46 1989 Senior Vice President -- Americas' and Pacific
Rim
Michael E. Smith................................ 39 1990 Senior Vice President -- Marketing and Western
European Operations
Neil D. Austin.................................. 47 1989 Vice President -- General Counsel and Secretary
</TABLE>
Mr. Dowd has been President of the Company since August 1993 and Chief
Executive Officer and Director of the Company since January 1995. Mr. Dowd was
Chief Operating Officer of the Company from August 1993 to January 1995. He 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 August 1989. Prior to
joining the Company, Mr. Dowd was Director -- Industrial Products Group, Mars
Electronics from January 1987 to July 1988.
Mr. Aguilera has been Senior Vice President -- Manufacturing since August
1993. He was Vice President -- Manufacturing of the Company from April 1982 to
August 1993, and Vice President and General Manager of the Company's Puerto Rico
subsidiary since February 1979.
Mr. Selfridge has been Senior Vice President -- Operations and Chief
Financial Officer and Treasurer since August 1993. He was Chief Financial
Officer and Vice President -- Finance and Treasurer of the Company from December
1990 to August 1993; and Vice President -- Finance and Treasurer of the Company
since September 1989. Mr. Selfridge was Corporate Controller, Chief Accounting
Officer and Secretary from April 1988 to September 1989 and Controller of
Domestic Operations from July 1986 to April 1988. Mr. Selfridge is a Certified
Public Accountant.
Mr. Codkind has been Corporate Controller and Chief Accounting Officer
since January 1992. Mr. Codkind was Controller of Domestic Operations from
January 1990 to January 1992 and Accounting Manager of Domestic Operations from
June 1986 to January of 1990. Mr. Codkind is a Certified Public Accountant.
Mr. Farestad has been Vice President -- Research and Development since
October 1990. From July 1987 to January 1989 Mr. Farestad was Director of
Manufacturing Engineering and from January 1989 to October 1990 he was Director
of Process Engineering and Shared Resources.
Mr. Reilly has been Senior Vice President -- Americas' and Pacific Rim
since August 1993. 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. Prior to joining the Company, Mr. Reilly was U.S. Sales Manager for
Multitone Electronics PLC, London, U.K. from 1982 to 1989.
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<PAGE>
Mr. Smith has been Senior Vice President -- Marketing and Western European
Operations since August 1993. 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. Prior to joining the Company, Mr. Smith was Marketing Manager with
Mars Electronics International from June 1987 to November 1988.
Mr. Austin has been Vice President -- General Counsel and Secretary since
September 1990. Mr. Austin was General Counsel and Secretary from September 1989
to September 1990 and General Counsel from June 1989 to September 1989. Prior to
joining the Company, Mr. Austin was a managing consultant with Mercer,
Meidinger, Hansen Inc. from 1987 to 1989.
The Company anticipates that upon consummation of the Alarmex Acquisition,
Daniel J. Frederick (currently President of Alarmex) will become an officer of
the Company.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $.10 per share (Common Stock), and 500,000 shares of
Class A Preferred stock, without par value.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. There are no
cumulative voting rights. Unless otherwise required by law, the affirmative vote
of a majority of the votes cast is required to authorize stockholder actions,
except that a plurality of the votes cast determines the election of directors
and the affirmative vote of at least 80% of the voting stock of the Company is
required to authorize certain other actions as described below. The Common Stock
has no preemptive, conversion, redemption or other similar rights. Upon
liquidation of the Company, subject to any preferential liquidation rights of
any then outstanding shares of Preferred Stock, the holders of the Common Stock
would be entitled to share ratably in the net assets available for distribution
to stockholders. Subject to any preferential dividend rights of any outstanding
Preferred Stock, the holders of the Common Stock are entitled to such dividends
as may be declared by the Board of Directors of the Company out of funds legally
available therefor.
The Company's Board of Directors is classified into three classes of
directors, with Class I Directors consisting of three directors, Class II
Directors consisting of three directors, and Class III Directors consisting of
three directors. The term of office of one of the three classes terminates each
year, and each class is elected for a three-year term.
Under certain circumstances, the holders of at least 80% of the outstanding
voting stock of the Company must approve (a) any merger of the Company, unless
such transaction is approved by 80% of the Board of Directors, (b) any changes
in provisions of the Company's Articles of Incorporation or By-Laws regarding
the number, classification, term of office, qualifications, election and removal
of directors and the filling of vacancies and newly created directorship, or (c)
any amendment to the foregoing super majority voting requirements.
In addition, the Company has adopted a Shareholder Rights Agreement
intended to discourage attempts to acquire control of or adversely affect the
Company through an acquisition of Common Stock. Under the Agreement, in certain
situations shareholders other than those determined to be an 'Acquiring Person'
or an 'Adverse Person' under the provisions of the Agreement will have the right
to acquire a certain number of shares of Common Stock from the Company at a
substantial discount off the prevailing market price.
These foregoing provisions may make more difficult, and therefore
discourage, attempts to acquire control of the Company through acquisitions of
shares of Common Stock or otherwise, in transactions not approved by the
Company's Board of Directors. As a result of these provisions,
35
<PAGE>
transactions or proposed transactions which might have the short-term effect of
increasing the market price of the Company's common stock may be discouraged,
and management of the Company may be able to resist changes which the
stockholders might otherwise have the power to impose. The division of the
Company's Board of Directors into three classes could discourage third parties
from seeking to acquire control of the Board of Directors and could impede proxy
contests or other attempts to change the Company's management.
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company, 40 Wall Street, 46th Floor, New York, New York
10005.
PREFERRED STOCK
The Board of Directors of the Company is authorized, without further action
by the stockholders, to provide for the issuance of shares of Preferred Stock
from time to time, in different series, and to fix before issuance the powers,
designation, preferences and relative rights of each series, the qualifications,
limitations or restrictions thereof, and the number of shares included in each
series. There presently are no outstanding shares of Preferred Stock nor has the
Board of Directors fixed the terms of any series of Preferred Stock to be issued
in the future.
PRINCIPAL SHAREHOLDERS
As of September 1, 1994 there were no shareholders, other than Albert E.
Wolf (Chairman of the Board of Directors of the Company), who owned more than
five percent of the Company's Common Stock. As of September 1, 1994, Mr. Wolf
owned 731,873 shares or 7.04 percent (including currently exercisable options to
purchase 225,000 shares of Common Stock) of the Company's Common Stock.
UNDERWRITERS
Under the terms and subject to the conditions set forth in the Underwriting
Agreement dated the date hereof, the Underwriters named below have severally and
not jointly agreed to purchase, and the Company has agreed to sell to them, the
respective number of shares of Common Stock set forth opposite the names of such
Underwriters below.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------------------------- -----------
<S> <C>
Morgan, Stanley & Co. Incorporated..................................................................
NatWest Securities Limited..........................................................................
PaineWebber Incorporated............................................................................
-----------
Total.................................................................................... 3,000,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
taken.
The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price which
represents a concession not in excess of $_________ a share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $_________ a share to other Underwriters and to
certain dealers. After the initial offering of the shares
36
<PAGE>
of Common Stock, the offering price and other selling terms may from time to
time be varied by the representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an additional 450,000
shares of Common Stock at the price to public set forth on the cover page
hereof, less underwriting discounts and commissions. The Underwriters may
exercise such option solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the shares of Common Stock. To the
extent such option is exercised, each Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares offered hereby.
The Company, its directors and certain of its executive officers have
agreed with the Underwriters not (i) to offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, or register or announce the sale or offering
of any shares of Common Stock, or, in the case of the Company, any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) to
enter into any agreement that transfers, in whole or in part, the economic
consequences of ownership of the Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities in cash or otherwise, for a period of _________
days after the date of this Prospectus without the prior written consent of
Morgan Stanley & Co. Incorporated, provided that the Company may (a) issue the
shares of Common Stock offered hereby, (b) issue shares of Common Stock upon the
exercise of options or warrants and upon the conversion of any outstanding
security, (c) grant options to purchase Common Stock under its Stock Option Plan
(1992) and Employee Stock Purchase Plan in amounts and on terms consistent with
past practices and (iv) issue shares of Common Stock pursuant to its Shareholder
Rights Agreement.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act of
1933, as amended (the 'Securities Act').
NatWest Securities Limited ('NatWest'), a United Kingdom broker-dealer and
a member of the Securities and Futures Authority Limited, has agreed that, as
part of the distribution of the shares of Common Stock offered hereby and
subject to certain exceptions, it will not offer or sell any shares of Common
Stock within the United States, its territories or possessions or to persons who
are citizens or residents therein. The Underwriting Agreement does not limit the
sale of the Common Stock offered hereby outside the United States.
NatWest has further represented and agreed that (a) it has not offered or
sold and will not offer or sell in the United Kingdom by means of any document,
any Common Stock other than to persons whose ordinary business it is to buy or
sell shares or debentures (whether as principal or agent) or in circumstances
which do not constitute an offer to the public within the meaning of the
Companies Act of 1985; (b) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the Common Stock in, from or otherwise involving the United
Kingdom; and (c) it has issued or passed on and will issue or pass on to any
person in the United Kingdom any document received by it in connection with the
issue of the Common Stock only if that person is of a kind described in Article
9(3) of the Financial Services Act of 1986 (Investment Advertisements)
(Exemptions) Order 1988, as amended.
LEGAL MATTERS
Stradley, Ronon, Stevens & Young, Philadelphia, Pennsylvania, will pass
upon certain legal matters with respect to the shares offered hereby for the
Company. Davis Polk & Wardwell, New York, New York will pass upon certain legal
matters for the Underwriters.
37
<PAGE>
EXPERTS
The consolidated balance sheets as of December 26, 1993 and December 27,
1992 and the consolidated earnings statements, statements of shareholders'
equity and cash flows for each of the three years in the period ended December
26, 1993, included in this Prospectus, have been included herein in reliance on
the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports and other information with the
Commission. Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the following Regional
Offices of the Commission: Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington D.C. 20549 at prescribed rates.
In addition, reports, proxy statements and other information concerning the
Company may be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the 'Registration Statement') under the Securities Act, with respect to the
shares of the Common Stock offered hereby. The Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto (certain parts of which have been omitted in accordance with
the rules and regulations of the Commission). For further information with
respect to the Company and the shares of Common Stock offered hereby, reference
is made with respect to the Company and the shares of Common Stock offered
hereby, reference is made to the Registration Statement and to the financial
statements, schedules and exhibits filed as a part thereof. Statements contained
in this Prospectus as to the contents of any contract, agreement or any other
document are not necessarily complete, and, in each instance, reference is made
to the copy of such document filed as an exhibit to the Registration Statement
or otherwise with the Commission, each such statement being qualified in all
respects by such reference, schedules and exhibits. The Registration Statement
including, all exhibits, thereby may be inspected without charge at the
Commission's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from such office after payment of the fees presented by
the Commissioner.
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR END FINANCIAL INFORMATION PAGE
-------------
<S> <C>
Report of Independent Accountants.................................................................. F-2
Consolidated Balance Sheets as of December 26, 1993 and December 27, 1992.......................... F-3
Consolidated Earning Statements for each of the years in the three-year period ended December 26,
1993............................................................................................. F-4
Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended
December 26, 1993................................................................................ F-4
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December
26, 1993......................................................................................... F-5
Notes to Consolidated Financial Statements......................................................... F-6 - F-15
INTERIM FINANCIAL INFORMATION
Consolidated Balance Sheets, September 25, 1994 (unaudited) and
December 26, 1993................................................................................ F-16
Consolidated Statements of Operations for the Nine Months Ended September 25, 1994 and September
26, 1993......................................................................................... F-17
Consolidated Statements of Shareholders' Equity for the Nine Months Ended
September 25, 1994............................................................................... F-17
Consolidated Statements of Cash Flows for the Nine Months Ended September 25, 1994 and September
26, 1993......................................................................................... F-18
Notes to Consolidated Financial Statements......................................................... F-19 - F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Checkpoint Systems, Inc.
We have audited the consolidated balance sheets of Checkpoint Systems, Inc. and
subsidiaries as of December 26, 1993 and December 27, 1992, and the related
consolidated earnings statements, statements of shareholders' equity and cash
flows for each of the years in the three-year period ended December 26, 1993. We
have also audited the financial statement schedules for the years ended December
26, 1993 and December 27, 1992 listed in Item 14(a)2 of this Form 10-K. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules 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 26, 1993 and December 27, 1992,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 26, 1993 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
As discussed in Footnote 1, in 1993, the Company changed its method of
accounting for income taxes.
COOPERS & LYBRAND
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 22, 1994
F-2
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 27,
1993 1992
------------ ------------
(THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................................... $ -- $ 2,320
Accounts receivable, net of allowances of $2,237,000 and $357,000.................. 24,239 18,562
Inventories........................................................................ 25,450 16,757
Other current assets............................................................... 5,213 2,103
------------ ------------
Total current assets............................................................ 54,902 39,742
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and amortization...... 30,862 26,982
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSETS ACQUIRED...................... 8,919 3,430
INTANGIBLES.......................................................................... 5,098 2,257
DEFERRED TAXES, net of valuation allowance........................................... 479 --
OTHER ASSETS......................................................................... 4,739 1,922
------------ ------------
TOTAL ASSETS......................................................................... $ 104,999 $ 74,333
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................................... $ 9,716 $ 4,784
Accrued compensation and related taxes............................................. 1,907 1,771
Income taxes....................................................................... 792 1,177
Unearned revenues.................................................................. 2,645 2,652
Other current liabilities.......................................................... 7,761 2,274
Short-term borrowings and current portion of long-term debt........................ 4,097 1,292
------------ ------------
Total current liabilities....................................................... 26,918 13,950
LONG-TERM DEBT, LESS CURRENT MATURITIES.............................................. 24,302 9,322
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 10,979,198 and
10,802,548...................................................................... 1,097 1,080
Additional capital................................................................. 18,346 16,754
Retained earnings.................................................................. 40,506 38,891
Common stock in treasury, at cost, 799,000 shares.................................. (5,664) (5,664)
Foreign currency adjustments....................................................... (506) --
------------ ------------
TOTAL SHAREHOLDERS' EQUITY........................................................... 53,779 51,061
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................... $ 104,999 $ 74,333
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED EARNINGS STATEMENTS
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net Revenues................................................................... $ 93,034 $ 72,166 $ 52,943
Cost of Revenues............................................................... 54,421 38,650 28,479
--------- --------- ---------
Gross Profit................................................................. 38,613 33,516 24,464
Selling, General and Administrative Expenses................................... 39,238 28,342 23,646
--------- --------- ---------
Operating Income (loss)........................................................ (625) 5,174 818
Contract Settlement Income..................................................... 3,500 -- --
Interest Income................................................................ 476 140 171
Interest Expense............................................................... 953 423 354
Other Expense.................................................................. 327 -- --
--------- --------- ---------
Earnings Before Income Taxes................................................... 2,071 4,891 635
Income Taxes................................................................... 456 463 127
--------- --------- ---------
Net Earnings................................................................... $ 1,615 $ 4,428 $ 508
--------- --------- ---------
--------- --------- ---------
Net Earnings Per Share......................................................... $ .16 $ .45 $ .05
--------- --------- ---------
--------- --------- ---------
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN
COMMON ADDITIONAL RETAINED TREASURY CURRENCY
STOCK CAPITAL EARNINGS STOCK ADJUST. TOTAL
----------- ----------- ----------- --------- ----------- ---------
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 30, 1990................... $ 1,022 $ 12,008 $ 33,955 $ (5,664) $ -- $ 41,321
Net Earnings............................... 508 508
Exercise of Stock Options.................. 4 254 258
----------- ----------- ----------- --------- ----------- ---------
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 31, 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
----------- ----------- ----------- --------- ----------- ---------
----------- ----------- ----------- --------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
Cash inflow (outflow) from operating activities:
Net earnings.................................................................. $ 1,615 $ 4,428 $ 508
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Net book value of rented equipment sold less than cost of rented
equipment............................................................... (2,708) (736) (482)
Long-term customer contracts............................................... 421 (1,111) --
Depreciation and amortization.............................................. 6,476 3,993 3,058
Deferred Taxes............................................................. (479) -- --
Provision for losses on accounts receivable................................ 520 88 236
(Increase) decrease in current assets:
Accounts receivable..................................................... (2,716) (1,445) (1,194)
Inventories............................................................. (6,816) (5,981) (359)
Other current assets.................................................... (2,024) (833) 462
Increase (decrease) in current liabilities:
Accounts payable........................................................ 2,062 1,284 (1,163)
Accrued compensation and related taxes.................................. (269) 727 (1,018)
Income taxes............................................................ (385) 819 56
Unearned revenues....................................................... (7) 220 268
Other current liabilities............................................... (2,007) 79 (168)
--------- --------- ---------
Net cash provided (used) by operating activities........................ (6,317) 1,532 204
--------- --------- ---------
Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment.................................. (4,600) (6,143) (6,121)
Proceeds of investment securities............................................. -- 825 650
Acquisitions, net of cash acquired............................................ (3,184) (1,030) --
Other investing activities.................................................... (3,660) (1,147) (765)
--------- --------- ---------
Net cash used by investing activities................................... (11,444) (7,495) (6,236)
--------- --------- ---------
Cash inflow (outflow) from financing activities:
Proceeds from stock options................................................... 1,609 4,546 258
Proceeds of debt.............................................................. 14,774 3,830 6,000
Payment of debt............................................................... (942) (609) (1,200)
--------- --------- ---------
Net cash provided by financing activities............................... 15,441 7,767 5,058
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................ (2,320) 1,804 (974)
Cash and cash equivalents:
Beginning of year............................................................. 2,320 516 1,490
--------- --------- ---------
End of Year................................................................... $ -- $ 2,320 $ 516
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<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 1993, 1992 and 1991 are for: the 52 weeks
ended December 26, 1993, the 52 weeks ended December 27, 1992, and the 52 weeks
ended December 29, 1991.
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.
Cash Equivalents
Cash equivalents include certificates of deposit and money market
instruments with a maturity of three months or less.
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.
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 $1,852,000 and
$1,431,000 at December 26, 1993 and December 27, 1992, respectively.
F-6
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Research and Development Costs
Research and development costs are expensed as incurred, and approximated
$5,392,000, $4,498,000, and $3,313,000 in 1993, 1992 and 1991, 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 10,386,000 (1993), 9,951,000
(1992), 9,591,000 (1991).
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 economic useful
lives, which is considered to be ten years. Accumulated amortization
approximated $473,000 and $207,000 at December 26, 1993 and December 27, 1992.
The cost of internally developed software are expensed until the
technological feasibility of the software has been established. Thereafter, all
software development cost 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 1993 and 1992, $575,000 and $638,000 of software development
costs were capitalized. Accumulated amortization of these costs approximated
$444,000 and $8,000 at December 26, 1993 and December 27, 1992.
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 and
1991, 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
The Company has purchased certain foreign currency forward contracts in
order to hedge anticipated rate fluctuations in Europe. Transaction gains or
losses resulting from these contracts are recognized over the contract period.
F-7
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Aggregate foreign currency transaction losses in 1993 were $327,000 and are
included in 'Other Expenses' in the Consolidated Earnings Statement.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
(THOUSANDS)
<S> <C> <C>
Raw materials...................................................... $ 8,256 $ 6,340
Work-in-process.................................................... 705 684
Finished goods..................................................... 16,489 9,733
---------- ----------
Totals $ 25,450 $ 16,757
---------- ----------
---------- ----------
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
The major classes are:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
(THOUSANDS)
<S> <C> <C>
Land............................................................... $ 892 $ 892
Building........................................................... 9,733 9,644
Equipment rented to customers...................................... 3,736 1,380
Machinery and equipment............................................ 31,434 26,541
Leasehold improvements............................................. 1,949 1,764
Leased equipment under capital leases.............................. 15 15
---------- ----------
$ 47,759 $ 40,236
Accumulated depreciation and amortization.......................... (16,897) (13,254)
---------- ----------
$ 30,862 $ 26,982
---------- ----------
---------- ----------
</TABLE>
4. SHORT-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT
The current portion of long-term debt at December 26, 1993 includes the
following: the current portion of a $7,000,000 seven year term note, $1,050,000;
the current portion of payments related to the acquisition of rights in a
point-of-sale monitoring system, $261,000; the current portion of a subsidiary's
three year term note, $422,000; and, various short-term loans obtained by the
Company's subsidiaries totaling $2,364,000.
5. LONG-TERM DEBT
The Company has a Revolving Credit Agreement with its principal lending
bank which currently provides a line of credit of up to $18,000,000 through May
1, 1995 with the option to convert $8,000,000 of the outstanding borrowings to a
six year term loan. At December 26, 1993 borrowings of $17,830,000 under this
credit agreement were outstanding with an average interest rate of 4.11%.
Subsequent to year end, the Company exercised its option to convert $8,000,000
of the outstanding borrowings to a six year term loan at a fixed rate of 6.5%.
Three equal payments of $470,600 are due per year beginning July 1, 1994 with
interest due monthly. The payment stream of this six year term loan is included
in the aggregate maturities on long-term debt listed below. Also, subsequent to
year end the Company received an increase in its line of credit to $19,000,000
through the earlier of March 31, 1994 or the completion of a $12,000,000 private
placement debt funding currently being
F-8
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT--(CONTINUED)
negotiated. Upon occurrence of one of these events, the Company's credit
facility will be reduced to $13,000,000 through May 1, 1995.
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 26, 1993, $6,300,000 was
outstanding. The loan agreement contains certain restrictive covenants which,
among other things, requires maintenance of specified minimum financial ratios.
Long-term debt also relates to the acquisition of rights in a point-of-sale
monitoring system being marketed under the name Viewpoint. Remaining payments
under this note are due each December 24 as follows: $261,000 (1994), and
$280,500 (1995). Interest has been imputed using a 6.5% annual rate. The amount
due on December 24, 1994 is classified as a current portion of long-term debt.
In October 1993, the Company's Canadian subsidiary entered into a three
year term note to finance certain sales-type leases. Payments are due monthly
with a fixed interest rate of 8.00%. At December 26, 1993, $1,289,000 was
outstanding, of which $422,000 was classified as current. In addition, one of
the Company's European subsidiaries had $75,000 in debt outstanding.
The aggregate maturities on all long-term debt are:
<TABLE>
<CAPTION>
(THOUSANDS)
<S> <C>
1994................................................................ $ 2,674
1995................................................................ 12,994
1996................................................................ 2,884
1997................................................................ 2,485
1998................................................................ 2,462
Thereafter.......................................................... 2,536
Less Current Maturities............................................. (1,733)
-----------
Total.......................................................... $ 24,302
-----------
-----------
</TABLE>
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 26, 1993 total 844,250
shares. At December 26, 1993, December 27, 1992 and December 29, 1991 a total of
364,500, 845,500 and 91,000 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 and 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 26, 1993, options for 48,364 shares
F-9
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCK OPTIONS--(CONTINUED)
were not part of any plans and did not qualify as ISOs. Options that were fully
vested and exercisable totaled 1,566,464 as of December 26, 1993.
The following schedule summarizes stock option activity and status:
<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Outstanding at beginning of year............................. 1,281,114 1,639,500 1,648,850
Granted...................................................... 489,000 299,000 155,000
Exercised.................................................... (168,650) (548,334) (34,500)
Cancelled.................................................... (8,000) (109,052) (129,850)
----------- ----------- -----------
Outstanding at end of year................................... 1,593,464 1,281,114 1,639,500
----------- ----------- -----------
----------- ----------- -----------
Price range of options outstanding at end of year............ $4.88 to $4.88 to $4.88 to
$16.50 $13.50 $13.50
Price range of options exercised during the year............. $4.88 to $4.88 to $4.88 to
$13.50 $13.50 $9.63
</TABLE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in 1993, 1992 and 1991, respectively, included payments for
interest of $860,000 $423,000 and $354,000 and income taxes of $638,000,
$123,000 and $262,000.
In March 1993, the Company purchased all of the capital stock of its
Argentinean distributor for $2,000,000. Direct costs associated with this
acquisition totalled $103,000. In conjunction with the acquisition, liabilities
were assumed as follows:
<TABLE>
<S> <C>
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
--------------
--------------
</TABLE>
In July 1993, the Company purchased all of the capital stock of ID Systems
International B.V. and ID Systems Europe B.V. Direct costs associated with this
acquisition totalled $400,000. In conjunction with the acquisition, liabilities
were assumed as follows:
<TABLE>
<S> <C>
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
--------------
--------------
</TABLE>
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
F-10
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. SHAREHOLDERS' EQUITY--(CONTINUED)
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.
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.
Since 1980, this subsidiary has operated under a fifteen year 100% local tax
exemption on income earned from its target manufacturing operation. Under a 1983
fifteen year local tax exemption on income earned from its sensor manufacturing
operation, this subsidiary had a 90% exemption through 1987, and 75% and 65%
exemptions during the succeeding two five-year periods.
In 1991, the Company was granted a new local tax exemption agreement which
replaces the current grants of 1980 and 1983 with a twenty year 90% local tax
exemption retroactive to 1988 on both the target and sensor manufacturing
operations. This change did not have a material impact on prior year taxes but
will extend the Company's favorable local tax status in Puerto Rico.
Repatriation of the Puerto Rico subsidiary's unremitted earnings could
result in the assessment of Puerto Rico 'tollgate' taxes at a maximum rate of
10% of the amount repatriated. During 1993, a provision was made for tollgate
taxes. During 1992 and 1991, 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:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
$ 1,720 $ 4,891 $ 635
Foreign...................................................... 351 -- --
--------- --------- ---------
Total........................................................ $ 2,071 $ 4,891 $ 635
--------- --------- ---------
--------- --------- ---------
</TABLE>
The related provision for income taxes consists of:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
Currently Payable
Federal................................................. $ 369 $ 632 $ 30
State................................................... 5 94 72
Puerto Rico............................................. 186 (263) 25
Foreign................................................. 375 -- --
Deferred
Federal................................................. (509) -- --
State................................................... 30 -- --
Puerto Rico............................................. -- -- --
Foreign................................................. -- -- --
--------- --------- ---------
Total Provision.............................................. $ 456 $ 463 $ 127
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-11
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
Deferred tax liabilities (assets) at December 26, 1993 consist of:
<TABLE>
<CAPTION>
(THOUSANDS)
<S> <C>
Depreciation........................................................ $ 805
Deferred maintenance................................................ 318
Unbilled receivable................................................. 138
-----------
Gross deferred tax liabilities...................................... 1,261
-----------
R & E credit carryforward........................................... (982)
Inventory........................................................... (277)
Alternative minimum tax............................................. (258)
Accounts receivable................................................. (100)
Foreign net operating loss carryforwards............................ (4,494)
Warranty............................................................ (41)
Other............................................................... (82)
-----------
Gross deferred tax assets........................................... (6,234)
-----------
Valuation allowance................................................. 4,494
-----------
Net deferred tax asset.............................................. $ (479)
-----------
-----------
</TABLE>
Included in foreign net operating loss carryforwards of $15,005,000 is
$12,860,000 of foreign net operating loss carryforwards 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.
The research and experimentation credit carryforwards expire beginning in
January 2006 through January 2008. Of the total foreign net operating loss
carryforwards available, $500,000 expire beginning January 1999 whereas the
remaining portion may be carried forward indefinitely.
A reconciliation of the statutory U.S. Federal income tax rate with the
effective income tax rate follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate........................................... 34.0% 34.0% 34.0%
Tax exempt earnings of subsidiary in Puerto Rico............................ (14.0) (23.8) (29.3)
Change in tax exempt earnings of subsidiary in Puerto Rico.................. -- (8.5) --
Research and Experimentation tax credit..................................... (17.2) -- --
Foreign losses with no benefit.............................................. 8.4 -- --
State and local income taxes, net of federal benefit........................ 9.1 5.7 11.4
Other....................................................................... 1.7 2.1 3.9
--------- --------- ---------
Effective tax rate.......................................................... 22.0% 9.5% 20.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 $478,000, $323,000, and $285,000 in 1993, 1992 and
1991, respectively.
F-12
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $94,000, $76,000 and $67,000 in 1993, 1992 and 1991,
respectively.
Under the Company's Management 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 $1,424,000,
$811,000 and $798,000 in 1993, 1992 and 1991, respectively. Future minimum
payments for operating leases having non-cancellable terms in excess of one year
at December 26 1993 are:$1,733,000 (1994), $1,174,000 (1995), $843,000 (1996),
$722,000 (1997), and $6,823,000 thereafter.
The Company has entered into a twelve year lease agreement for a facility
to be constructed in close proximity to the Company's current leased facility in
Thorofare, New Jersey. When completed in 1994, this 104,000 square foot facility
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.
12. EXPORT SALES
The Company's export sales which are principally in Europe and Scandinavia
approximated $12,163,000, $22,732,000, and $15,427,000 in 1993, 1992, and 1991,
respectively. Sales of the Company's foreign subsidiaries in Argentina,
Australia, Canada, Europe and Mexico totalled $21,200,000 in 1993. Sales to one
foreign distributor of the Company's products amounted to $5,000,000,
$13,147,000 and $9,523,000 in 1993, 1992 and 1991 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 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.
F-13
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
$1,798,000. Such excess, (which will increase for any contingent cash payment)
is being amortized over twenty years.
In 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 customer 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 $4,300,000 which is being amortized over twenty years.
The Company acquired three production units in connection with the purchase
of the capital stock of the ID Systems Group. The Company intends to shut down
all three of these facilities by the end of second quarter of 1994. Accordingly,
the estimated operating losses and shut down costs of these facilities amounting
to $3,434,000 were accrued in the purchase price allocation. At December 26,
1993, $1,306,000 remains accrued for such losses and shut down costs for the
first half of 1994. This amount is included in 'other current liabilities.' 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 pro forma 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.
<TABLE>
<CAPTION>
1993 1992
---------------- ----------------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
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)
</TABLE>
15. GEOGRAPHIC SEGMENTS
The following tables shows sales, operating earnings and other financial
information by geographic area for the year 1993.
F-14
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. GEOGRAPHIC SEGMENTS--(CONTINUED)
<TABLE>
<CAPTION>
UNITED STATES
AND PUERTO RICO EUROPE OTHER
--------------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
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
</TABLE>
16. SUBSEQUENT EVENT
On March 10, 1993, the United States International Trade Commission
instituted an investigation of a complaint filed by the Company under Section
337 of the Tariff Act of 1930. 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 $2,027,000 in patent defense costs, which is
included in 'Intangibles' as of December 26, 1993. The ultimate resolution is
undetermined at this time due to the various courses of action available to
management, including the right of appeal which the Company currently intends to
exercise. Although the Company's management ultimately expects a favorable
outcome, should resolution of this matter result in less than a successful
defense of the patents in question the deferred patent costs noted above will be
written off as a charge to earnings at the time of such resolution.
F-15
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 26,
1994 1993
------------- -------------
(UNAUDITED) (THOUSANDS)
<S> <C> <C>
ASSETS
- ----------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents.................................................... $ 280 $ --
Accounts receivable, net of allowances of $1,451,000 and $2,237,000.......... 29,790 24,239
Inventories.................................................................. 28,499 25,450
Other current assets......................................................... 5,395 5,213
------------- -------------
Total current assets...................................................... 63,964 54,902
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and amortization... 35,118 30,862
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSETS ACQUIRED................... 9,617 8,919
INTANGIBLES....................................................................... 5,707 5,098
DEFERRED TAXES, net of valuation allowance........................................ 479 479
OTHER ASSETS...................................................................... 5,774 4,739
------------- -------------
TOTAL ASSETS...................................................................... $ 120,659 $ 104,999
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable............................................................. $ 5,504 $ 9,716
Accrued compensation and related taxes....................................... 3,243 1,907
Income taxes................................................................. 1,734 792
Unearned revenues............................................................ 3,370 2,645
Other current liabilities.................................................... 6,002 7,761
Short-term borrowings and current portion of long-term debt.................. 5,530 4,097
------------- -------------
Total current liabilities................................................. 25,383 26,918
LONG-TERM DEBT, LESS CURRENT MATURITIES........................................... 35,550 24,302
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
11,211,311 and 10,979,198.................................................. 1,121 1,097
Additional capital........................................................... 20,860 18,346
Retained earnings............................................................ 44,261 40,506
Common stock in treasury, at cost, 799,000 shares............................ (5,664) (5,664)
Cumulative foreign currency translation adjustments.......................... (852) (506)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY........................................................ 59,726 53,779
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................ $ 120,659 $ 104,999
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER (13 WEEKS) ENDED NINE MONTHS (39 WEEKS) ENDED
---------------------------- ------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1994 1993 1994 1993
------------- ------------- -------------- --------------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Revenues...................................... $ 33,928 $ 26,604 $ 88,807 $ 64,646
Cost of Revenues.................................. 16,905 15,219 45,969 37,681
------------- ------------- -------------- --------------
Gross Profit...................................... 17,023 11,385 42,838 26,965
Selling, General & Administrative Expenses........ 13,001 11,092 35,946 28,163
------------- ------------- -------------- --------------
Operating Income (Loss)........................... 4,022 293 6,892 (1,198)
Contract settlement income........................ -- -- -- 3,500
Interest Income................................... 137 51 421 114
Interest Expense.................................. 1,040 199 2,063 489
Other Expense..................................... 236 -- 243 --
------------- ------------- -------------- --------------
Earnings Before Income Taxes...................... 2,883 145 5,007 1,927
Income Taxes...................................... 721 33 1,252 424
------------- ------------- -------------- --------------
Net Earnings...................................... $ 2,162 $ 112 $ 3,755 $ 1,503
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Net Earnings Per Share............................ $ .20 $ .01 $ .35 $ .14
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS (39 WEEKS) ENDED SEPTEMBER 25, 1994
--------------------------------------------------------------------------
ACCUMULATED
COMMON ADDITIONAL RETAINED TREASURY TRANSLATION
STOCK CAPITAL EARNINGS STOCK ADJUSTMENTS TOTAL
----------- ----------- --------- ----------- ------------- ---------
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at Dec. 26, 1993................ $ 1,097 $ 18,346 $ 40,506 $ (5,664) $ (506) $ 53,779
Net Earnings............................ 3,755 3,755
Exercise of Stock Options............... 24 2,514 2,538
Translation Adjustments................. (346) (346)
----------- ----------- --------- ----------- ------------- ---------
Balance at Sept. 25, 1994............... $ 1,121 $ 20,860 $ 44,261 $ (5,664) $ (852) $ 59,726
----------- ----------- --------- ----------- ------------- ---------
----------- ----------- --------- ----------- ------------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS (39 WEEKS) ENDED
------------------------------
SEPTEMBER 25, SEPTEMBER 26,
1994 1993
-------------- --------------
(THOUSANDS)
<S> <C> <C>
Cash inflow (outflow) from operating activities:
Net earnings................................................................... $ 3,755 $ 1,503
Adjustments to reconcile net earnings to net cash used by operating activities:
Net book value of equipment rented in excess
of equipment sold........................................................ (4,955) (983)
Long-term customer contracts..................................................... (942) 773
Depreciation and amortization.................................................... 5,926 4,045
Provision for losses on accounts receivable...................................... 341 109
(Increase) decrease in current assets:
Accounts receivable............................................................ (6,060) (1,321)
Inventories.................................................................... (3,049) 250
Other current assets........................................................... (182) (2,891)
Increase (decrease) in current liabilities:
Accounts payable............................................................... (4,387) (3,074)
Accrued compensation and related taxes......................................... 1,337 (1,058)
Income taxes................................................................... 942 (200)
Unearned revenues.............................................................. 724 101
Other current liabilities...................................................... (2,059) (1,500)
-------------- --------------
Net cash used by operating activities.......................................... (8,609) (4,246)
-------------- --------------
Cash inflow (outflow) from investing activities:
Acquisition of property, plant and equipment................................... (3,686) (3,237)
Acquisitions, net of cash acquired............................................. -- (2,669)
Purchase of customer list...................................................... -- (560)
Other investing activities..................................................... (2,644) (4,084)
-------------- --------------
Net cash used by investing activities.......................................... (6,330) (10,550)
-------------- --------------
Cash inflow (outflow) from financing activities:
Proceeds from stock options.................................................... 2,538 1,567
Proceeds of debt............................................................... 16,307 11,259
Payment of debt................................................................ (3,626) (350)
-------------- --------------
Net cash provided by financing activities...................................... 15,219 12,476
-------------- --------------
Net increase (decrease) in cash and cash equivalents............................. 280 (2,320)
Cash and cash equivalents:
Beginning of period............................................................ -- 2,320
-------------- --------------
End of period.................................................................. $ 280 $ --
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF ACCOUNTING
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. The consolidated
financial statements and related notes are unaudited and do not contain all
disclosures required by generally accepted accounting principles. Refer to the
Company's Annual Report Form 10-K for the fiscal year ended December 26, 1993
for the most recent disclosure of the Company's accounting policies.
The consolidated financial statements include all adjustments necessary to
present fairly the Company's financial position at September 25, 1994 and
December 26, 1993 and its results of operations and changes in cash flows for
the thirteen and thirty-nine week periods ended September 25, 1994 and September
26, 1993.
2. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 26,
1994 1993
------------- ------------
(THOUSANDS)
<S> <C> <C>
Raw materials................................................. $ 5,891 $ 8,256
Work in process............................................... 1,064 705
Finished goods................................................ 21,544 16,489
------------- ------------
$ 28,499 $ 25,450
------------- ------------
------------- ------------
</TABLE>
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes material, labor and applicable overhead.
3. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated effective
annual tax rate on the Company's earnings. Earnings generated by the operations
of the Company's Puerto Rico subsidiary are substantially exempt from U.S.
Federal income taxes under Section 936 of the Internal Revenue Code and
substantially exempt from Puerto Rico income taxes.
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.
4. PER SHARE DATA
Per share data is based on the weighted average number of common and common
equivalent shares (stock options) outstanding during the periods. The number of
shares used in the per share computations for the thirteen and thirty-nine week
periods ended September 25, 1994 and September 26, 1993 were 10,937,000 and
10,721,000 (1994) and 10,286,000 and 10,386,000 (1993), respectively.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the thirteen and thirty-nine week periods ended September
25, 1994 and September 26, 1993, respectively, included interest payments of
$492,000 and $1,388,000 (1994), and $234,000 and $446,000 (1993), and income
taxes paid of $1,000 and $125,000 (1994), and $155,000 and $295,000 (1993).
F-19
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
5. SUPPLEMENTAL CASH FLOW INFORMATION--(CONTINUED)
Excluded from the 1994 Consolidated Statements of Cash Flows is a non-cash
activity of $300,000 relating to the acquisition of a licensing agreement in
which the Company recorded the full cost of the agreement and the associated
liability.
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:
<TABLE>
<S> <C>
Fair value of assets acquired............................................... $ 3,690,000
Cash paid for the capital stock............................................. $ 2,103,000
--------------
Liabilities assumed......................................................... $ 1,587,000
--------------
--------------
</TABLE>
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:
<TABLE>
<S> <C>
Fair value of assets acquired............................................... $ 12,316,000
Cash advanced during option period.......................................... $ 1,290,000
--------------
Liabilities assumed......................................................... $ 11,026,000
--------------
--------------
</TABLE>
6. INTANGIBLES
Intangibles consist of patents, licenses, customer lists and software
development costs. The costs relating to the acquisition of patents and licenses
are amortized on a straight-line basis over their economic useful lives, which
is considered to be ten years. Accumulated amortization of these costs
approximated $1,560,000 and $473,000 at September 25, 1994 and December 26,
1993, respectively.
The cost of internally developed software is expensed until the
technological feasibility of the software has been established. Thereafter, all
additional software development costs are capitalized and subsequently reported
at the lower of unamortized cost or net realizable value. The cost of
capitalized software is amortized over the products' estimated useful lives or
five years, whichever is shorter. For the thirteen and thirty-nine week periods
ended September 25, 1994, $162,000 and $553,000 of software development costs
were capitalized, respectively. Accumulated amortization of these costs
approximated $843,000 and $444,000 at September 25, 1994 and December 26, 1993,
respectively.
7. ACQUISITION
On July 8, 1993, the Company purchased all the outstanding capital stock of
ID Systems International B.V. and ID Systems Europe B.V., related Dutch
companies engaged in the manufacture, distribution and sale of security products
and services ('ID Systems Group'). In connection with this acquisition, the
Company filed a Form 8-K with the Securities and Exchange Commission on July 22,
1993.
The following table represents unaudited pro forma combined results of
operations for the first nine months of 1994 and 1993, as if the acquisition of
the ID Systems Group had occurred at the beginning of 1993. Other acquisitions
made during 1993 were not material to the 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:
F-20
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
7. ACQUISITION--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
(39 WEEKS)
ENDED
----------------------------------
SEPTEMBER 25, SEPTEMBER 26,
1994 1993
---------------- ----------------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net revenues............................................ $ 88,807 $ 71,038
Net earnings (loss)..................................... $ 3,755 $ (4,522)
Earnings (loss) per common share........................ $ .35 $ (.43)
</TABLE>
8. ACCOUNTING FOR FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The 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 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.
9. SUBSEQUENT EVENT
On October 20, 1994, the Company signed a letter of intent to acquire all
of the issued and outstanding capital stock of Alarmex, Inc. and its related
company Bayport Controls, Inc, (together 'Alarmex'), a privately-held CCTV
manufacturer based in Eden Prairie, Minnesota for $12.5 million ($10 million in
cash and the balance in shares of the Company's common stock). The acquisition
is subject to fulfillment of a number of terms and conditions including
execution of a definitive legally binding agreement containing representations,
warranties and covenants and conditions as are normal and customary in
transactions of this type. Alarmex designs, manufactures, installs and services
a broad line of closed circuit television (CCTV) and point-of-sale exception
monitoring systems for customized applications. The Company anticipates
consummating the transaction in the first quarter of 1995.
10. CONTINGENCIES
On March 10, 1993, the United States International Trade Commission
instituted an investigation of a complaint filed by the Company under Section
337 of the Tariff Act of 1930. 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 $2,000,000 in
patent defense costs, which is included in 'Intangibles'. The Company filed a
Notice of Appeal with the United States Court of Appeals for the Federal Circuit
on May 6, 1994. Although the Company's management ultimately expects a favorable
outcome, should resolution of this matter result in less than a successful
defense of the patents in question the deferred patent costs noted above will be
written off as a charge to earnings at the time of such resolution. Such an
event could impact the Company's ability to meet its financial covenant relating
to net earnings under several loan agreements.
F-21
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of the expenses the Registrant expects to pay in
connection with the issuance and distribution of the Shares registered hereby.
<TABLE>
<S> <C>
Filing and Registration Fees................................................ $ 28,998.05
Legal Fees and Expenses*.................................................... $ (1)
Cost of Printing*........................................................... $ 110,000.00
Accounting Fees and Expenses*............................................... $ 70,000.00
New York Stock Exchange Listing Fees*....................................... $ (1)
Blue Sky Fees and Expenses*................................................. $ 20,000.00
NASD Fees................................................................... $ 8,909.38
Miscellaneous Expenses*..................................................... $ (1)
--------------
TOTAL............................................................ $
--------------
--------------
</TABLE>
- ------------------
<TABLE>
<S> <C>
* Estimated
(1) To be filed by amendment
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 7.2 of the Registrant's By-laws permits the indemnification of
officers and directors under certain circumstances to the full extent that such
indemnification may be permitted by law.
Such rights of indemnification are in addition to, and not in limitation
of, any rights to indemnification to which any officer or director of the
Registrant is entitled under the Business Corporation Law of the Commonwealth of
Pennsylvania (Sections 1741 through 1750), which provides for indemnification by
a corporation of its officers and directors under certain circumstances as
stated in the Business Corporation Law and subject to specified limitations set
forth in the Business Corporation Law.
The Registrant also maintains directors' and officers' liability insurance
coverage which insures directors and officers of the Registrant against certain
losses arising from claims made, and for which the Registrant has not provided
reimbursement, by reason of their being directors and officers of the Registrant
or its subsidiaries.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement
5* Opinion of Stradley, Ronon, Stevens & Young
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Stradley, Ronon, Stevens & Young (see Exhibit 5 above)
</TABLE>
- ------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to
II-1
<PAGE>
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement,
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant, pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in Thorofare, New Jersey, on January 25, 1995.
CHECKPOINT SYSTEMS, INC.
By: /S/ KEVIN P. DOWD
Kevin P. Dowd
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kevin P. Dowd and Steven G. Selfridge and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------------ ------------------------------------------ --------------------
<S> <C> <C>
/S/ALBERT E. WOLF Chairman of the Board, Chairman of the January 24, 1995
Albert E. Wolf Executive Committee and Director
/S/KEVIN P. DOWD President, Chief Executive Officer and January 24, 1995
Kevin P. Dowd Director (Principal Executive Officer)
/S/STEVEN G. SELFRIDGE Senior Vice President -- Operations Chief January 24, 1995
Steven G. Selfridge Financial Officer & Treasurer
/S/MITCHELL T. CODKIND Corporate Controller and Chief Accounting January 24, 1995
Mitchell T. Codkind Officer
/S/ROBERT O. ADERS Director January 24, 1995
Robert O. Aders
/S/ROGER D. BLACKWELL Director January 24, 1995
Roger D. Blackwell
/S/RICHARD J. CENSITS Director January 24, 1995
Richard J. Censits
/S/DAVID W. CLARK, JR. Director January 24, 1995
David W. Clark, Jr.
/S/ALLAN S. KALISH Director January 24, 1995
Allan S. Kalish
/S/JERMAIN B. PORTER Director January 24, 1995
Jermain B. Porter
/S/ALBERT SOFFA Director January 24, 1995
Albert Soffa
</TABLE>
II-3
<PAGE>
FORM S-3 EXHIBITS
CHECKPOINT SYSTEMS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. EXHIBITS PAGES
- ------------- -------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
1 Form of Underwriting Agreement
5 Opinion of Stradley, Ronon, Stevens & Young (1)
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Stradley, Ronon, Stevens & Young (1)
</TABLE>
- ------------------
(1) To be filed by Amendment.
<PAGE>
3,450,000 SHARES
CHECKPOINT SYSTEMS, INC.
COMMON STOCK, $.10 PAR VALUE
UNDERWRITING AGREEMENT
________________________, 1995
<PAGE>
________________________, 1995
Morgan Stanley & Co.
Incorporated
NatWest Securities Limited
PaineWebber Incorporated
c/o Morgan Stanley & Co.
Incorporated
1251 Avenue of the Americas
New York, New York 10020
Dear Sirs and Mesdames:
Checkpoint Systems, Inc., a Pennsylvania corporation (the 'Company'),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the 'Underwriters') 3,000,000 shares of its common stock, $.10 par value
(the 'Firm Shares'). The Company also proposes to issue and sell to the several
Underwriters not more than an additional 450,000 shares of its common stock,
$.10 par value (the 'Additional Shares') if and to the extent that you, as
Managers of the offering, shall have determined to exercise, on behalf of the
Underwriters, the right to purchase such shares of common stock granted to the
Underwriters in Section 2 hereof. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the 'Shares.' The shares of common
stock, $.10 par value of the Company to be outstanding after giving effect to
the sales contemplated hereby are hereinafter referred to as the 'Common Stock.'
The Company has filed with the Securities and Exchange Commission (the
'Commission') a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the 'Securities Act'), is hereinafter
referred to as the 'Registration Statement;' the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the 'Prospectus'
(including, in all references to the Registration Statement and the Prospectus,
documents incorporated therein by reference).
1. Representations and Warranties. The Company represents and warrants to
and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b)(i) Each document, if any, filed or to be filed pursuant to the
Securities Exchange Act of 1934, as amended (the 'Exchange Act') and
incorporated by reference in the Prospectus complied or will comply when so
filed in all material respects with the Exchange Act and the applicable
rules and regulations of the Commission thereunder, (ii) each part of the
Registration Statement, when such part became effective, did not contain
and each such part, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (iii) the Registration Statement and the Prospectus
comply and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iv) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations
and warranties set forth in this paragraph 1(b) do not apply to statements
or omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
1
<PAGE>
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(e) This Agreement has been duly authorized, executed and delivered by
the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene
any provision of applicable law or the certificate of incorporation or
by-laws of the Company or any agreement or other instrument binding upon
the Company or any of its subsidiaries that is material to the Company and
its subsidiaries, taken as a whole, or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or
any subsidiary, and no consent, approval, authorization or order of or
qualification with any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except
such as may be required by the securities or Blue Sky laws of the various
states in connection with the offer and sale of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement).
(k) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
(l) Each of the Company and its subsidiaries has obtained all
necessary consents, authorizations, approvals, orders, certificates and
permits of and from, and has made all declarations and filings with, all
federal, state, local and other governmental authorities, all self-
regulatory organizations and all courts and other tribunals, to own, lease,
license and use its properties and assets and to conduct its business in
the manner described in the Prospectus, except
2
<PAGE>
to the extent that the failure to obtain or file would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(m) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names currently
employed by them in connection with the business now operated by them, and,
except as disclosed, neither the Company nor any of its subsidiaries has
received any notice of infringement of or conflict with asserted rights of
others with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in any material adverse change in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and
its subsidiaries, taken as a whole.
(n) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied or will comply when
so filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
(o) The Company is not an 'investment company' or an entity
'controlled' by an 'investment company' as such terms are defined in the
Investment Company Act of 1940, as amended.
(p) The pro forma financial information and other financial
information included in the Registration Statement present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and regulations with respect to pro forma financial
information, have been properly compiled on the pro forma basis described
therein, and, in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein.
(q) The Company and its subsidiaries are (i) in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
('Environmental Laws'), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(r) In the ordinary course of its business, the Company identifies and
evaluates costs and liabilities associated with compliance with applicable
Environmental Laws (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance
with Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties). The Company has reasonably concluded that such associated costs
and liabilities would not, singly or in the aggregate, have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(s) Except a certain Registration Rights Agreement dated September 6,
1994 (a copy of which is attached hereto), there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities of the
Company or to require the Company to include such securities with the
Shares registered pursuant to the Registration Statement.
3
<PAGE>
(t) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or
with any person or affiliate located in Cuba.
2. Agreements to Sell and Purchase. The Company hereby agrees to sell to
the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I hereto
opposite its name at $______ a share (the 'Purchase Price').
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to 450,000 Additional
Shares at the Purchase Price. Additional Shares may be purchased as provided in
Section 4 hereof solely for the purpose of covering over-allotments made in
connection with the offering of the Firm Shares. If any Additional Shares are to
be purchased, each Underwriter agrees, severally and not jointly, to purchase
the number of Additional Shares (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
total number of Additional Shares to be purchased as the number of Firm Shares
set forth in Schedule I hereto opposite the name of such Underwriter bears to
the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during
the period ending __ days after the date of the Prospectus, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or other agreement that transfers, in
whole or in part, the economic consequence of ownership of the Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold
hereunder, [(B) any shares of such common stock sold by the Company upon the
exercise of an option or warrant or the conversion of a security outstanding on
the date hereof, (C) options to purchase common stock under the Company's
Incentive Stock Option Plan and Employee Stock Purchase Plan in amounts and on
terms generally consistent with past practices and (D) issue shares of common
stock pursuant to the Company's Shareholder Rights Agreement.]
3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$______ a share (the 'Public Offering Price') and to certain dealers selected by
you at a price that represents a concession not in excess of $______ a share
under the Public Offering Price, and that any Underwriter may allow, and such
dealers may reallow, a concession, not in excess of $______ a share, to any
Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made by
certified or official bank check or checks payable to the order of the Company
in New York Clearing House funds at the office of Morgan Stanley & Co.
Incorporated, 1251 Avenue of the Americas, New York, New York, at 10:00 A.M.,
local time, on _________, 1995, or at such other time on the same or such other
date, not later than _________, 1995, as shall be designated in writing by you.
The time and date of such payment are hereinafter referred to as the 'Closing
Date.'
Payment for any Additional Shares shall be made by certified or official
bank check or checks payable to the order of the Company in New York Clearing
House funds at the office of Morgan Stanley & Co. Incorporated, 1251 Avenue of
the Americas, New York, New York, at 10:00 A.M., local time, on such date (which
may be the same as the Closing Date but shall in no event be earlier than the
Closing Date nor later than ten business days after the giving of the notice
hereinafter referred
4
<PAGE>
to) as shall be designated in a written notice from you to the Company of your
determination, on behalf of the Underwriters, to purchase a number, specified in
said notice, of Additional Shares, or on such other date, in any event not later
than _________, 1995, as shall be designated in writing by you. The time and
date of such payment are hereinafter referred to as the 'Option Closing Date.'
The notice of the determination to exercise the option to purchase Additional
Shares and of the Option Closing Date may be given at any time within 30 days
after the date of this Agreement.
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than two full business days prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of the
Company and the several obligations of the Underwriters hereunder are subject to
the condition that the Registration Statement shall have become effective not
later than the date hereof.
The several obligations of the Underwriters hereunder are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, there shall not have occurred any change, or any
development involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and
its subsidiaries, taken as a whole, from that set forth in the Registration
Statement (exclusive of any amendments or supplements thereto subsequent to
the date of this Agreement), that, in your judgment, is material and
adverse and that makes it, in your judgment, impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect that the representations and warranties of the
Company contained in this Agreement are true and correct as of the Closing
Date and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied
hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon his
or her actual knowledge, after due inquiry, as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Stradley Ronon Stevens & Young, counsel for the Company, dated
the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and has
obtained all necessary consents, authorizations, approvals, orders,
certificates and permits of and from, and has made all declarations and
filings with, all federal, state, local and other governmental
authorities, all self-regulatory organizations and all courts and other
tribunals, to own, lease, license and use its properties and assets and
to conduct its business in the manner described in the Prospectus,
except to the extent that the failure to be so qualified or be in good
standing or to obtain or file would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority
to own its property and to conduct its business as described in the
Prospectus and has obtained all necessary consents, authorizations,
approvals, orders, certificates and permits of and from, and has made
all declarations and filings with, all
5
<PAGE>
federal, state, local and other governmental authorities, all
self-regulatory organizations and all courts and other tribunals, to
own, lease, license and use its properties and assets and to conduct its
business in the manner described in the Prospectus, except to the extent
that the failure to be so qualified or be in good standing or to obtain
or file would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(iii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iv) the shares of Common Stock outstanding prior to the issuance
of the Shares have been duly authorized and are validly issued, fully
paid and non-assessable;
(v) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company;
(vii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the certificate of
incorporation or by-laws of the Company or, to such counsel's actual
knowledge, after due inquiry, any agreement or other instrument binding
upon the Company or any of its subsidiaries that is material to the
Company and its subsidiaries, taken as a whole, or, to such counsel's
actual knowledge, after due inquiry, any judgment, order or decree of
any governmental body, agency or court having jurisdiction over the
Company or any subsidiary, and no consent, approval, authorization or
order of or qualification with any governmental body or agency is
required for the performance by the Company of its obligations under
this Agreement, except such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale of
the Shares;
(viii) the statements (A) in the Prospectus under the captions
'_________,' '_________,' 'Description of Capital Stock,' and
'Underwriters' and (B) in the Registration Statement in Item 15, in each
case insofar as such statements constitute summaries of the legal
matters, documents or proceedings referred to therein, fairly present
the information called for with respect to such legal matters, documents
and proceedings and fairly summarize the matters referred to therein;
(ix) after due inquiry, such counsel does not have actual knowledge
of any legal or governmental proceedings pending or threatened to which
the Company or any of its subsidiaries is a party or to which any of the
properties of the Company or any of its subsidiaries is subject that are
required to be described in the Registration Statement or the Prospectus
and are not so described or of any statutes, regulations, contracts or
other documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required;
(x) the Company is not an 'investment company' or an entity
'controlled' by an 'investment company,' as such terms are defined in
the Investment Company Act of 1940, as amended;
(xi) such counsel is of the opinion that the Company is (A) in
compliance with any and all applicable Environmental Laws, (B) has
received all permits, license or other approvals required of it under
applicable Environmental Laws to conduct its business and (C) is in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such
6
<PAGE>
permits, licenses or approvals would not, singly or in the aggregate,
have a material adverse effect on the Company; and
(xii) such counsel (A) is of the opinion that each document filed
pursuant to the Exchange Act and incorporated by reference in the
Registration Statement and the Prospectus (except for financial
statements and schedules as to which such counsel need not express any
opinion) complied when so filed as to form in all material respects with
the Exchange Act and the applicable rules and regulations of the
Commission thereunder, (B) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and schedules
included therein as to which such counsel need not express any opinion)
comply as to form in all material respects with the Securities Act and
the applicable rules and regulations of the Commission thereunder, (C)
has no reason to believe that (except for financial statements and
schedules as to which such counsel need not express any belief) the
Registration Statement and the prospectus included therein at the time
the Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading and (D) has no reason to believe that (except for
financial statements and schedules as to which such counsel need not
express any belief) the Prospectus contains any untrue statement of a
material fact or omits to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of Davis Polk & Wardwell, special counsel for the Underwriters,
dated the Closing Date, covering the matters referred to in subparagraphs
(v), (vi), (viii) (but only as to the statements in the Prospectus under
'Description of Capital Stock' and 'Underwriters'), (x), and clauses (B),
(C) and (D) of subparagraph (xii) of paragraph (c) above.
With respect to subparagraph (xii) of paragraph (c) above, Stradley
Ronon Stevens & Young may state that their opinion and belief are based
upon their participation in the preparation of the Registration Statement
and Prospectus and any amendments or supplements thereto and documents
incorporated therein by reference and review and discussion of the contents
thereof, but is without independent check or verification except as
specified. With respect to clauses (B), (C) and (D) of subparagraph (xii)
of paragraph (c) above, Davis Polk & Wardwell may state that their opinion
and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements
thereto (other than the documents incorporated by reference) and review and
discussion of the contents thereof (including documents incorporated by
reference), but are without independent check or verification except as
specified.
The opinion of Stradley Ronon Stevens & Young described in paragraph
(c) above shall be rendered to the Underwriters at the request of the
Company and shall so state therein.
(e) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the Underwriters,
containing statements and information of the type ordinarily included in
accountants' 'comfort letters' to underwriters with respect to the
financial statements and certain financial information contained in or
incorporated by reference into the Registration Statement and the
Prospectus
(i) from Coopers & Lybrand, independent public accountants,
regarding the Company;
(ii) from Deloitte & Touche, independent public accountants,
regarding Alarmex, Inc.; and
(iii) from Blanski Peter Kronlage & Koch, P.A., independent public
accounts, regarding Bayport Controls, Inc.
7
<PAGE>
(f) The 'lock-up' agreements between you and certain shareholders,
officers and directors of the Company named in Schedule II attached hereto
relating to sales and certain other dispositions of shares of Common Stock
or certain other securities, delivered to you on or before the date hereof,
shall be in full force and effect on the Closing Date.
(g) The Shares shall have been authorized for listing upon official
notice of issuance by the New York Stock Exchange Inc.
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the delivery to you on the Option Closing Date of such
documents as you may reasonably request with respect to the good standing of the
Company, the due authorization and issuance of the Additional Shares and other
matters related to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the agreements of
the Underwriters herein contained, the Company covenants with each Underwriter
as follows:
(a) To furnish you, without charge, four signed copies of the
Registration Statement (including exhibits thereto and documents
incorporated by reference) and to each other Underwriter a copy of the
Registration Statement (without exhibits thereto but including documents
incorporated by reference) and, during the period mentioned in paragraph
(c) below, as many copies of the Prospectus, any documents incorporated
therein by reference, and any supplements and amendments thereto as you may
reasonably request. The terms 'supplement' and 'amendment' or 'amend' as
used in this Agreement shall include all documents subsequently filed by
the Company with the Commission pursuant to the Exchange Act that are
deemed to be incorporated by reference in the Prospectus.
(b) Before amending or supplementing the Registration Statement or the
Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object.
(c) If, during such period after the first date of the public offering
of the Shares as in the opinion of counsel for the Underwriters the
Prospectus is required by law to be delivered in connection with sales by
an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will furnish
to the Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders and
to you as soon as practicable, generally consistent with past practices, an
earning statement covering the twelve-month period ending December 26, 1994
that satisfies the provisions of Section 11(a) of the Securities Act and
the rules and regulations of the Commission thereunder.
(f) to pay all when-due expenses incident to the performance of its
obligations under this Agreement, including: (i) the preparation and filing
of the Registration Statement and the Prospectus and all amendments and
supplements thereto, (ii) the preparation, issuance and delivery of the
Shares, including any transfer taxes payable in connection with the
transfer of the Shares to the Underwriters, (iii) the fees and
disbursements of the Company's counsel and
8
<PAGE>
accountants, (iv) the qualification of the Shares under state securities or
Blue Sky laws in accordance with the provisions of paragraph 6(d),
including filing fees and the fees and disbursements of counsel for the
Underwriters in connection therewith and in connection with the preparation
of any Blue Sky or Legal Investment Memoranda, (v) the printing and
delivery to the Underwriters, in quantities as hereinabove stated, of
copies of the Registration Statement and all amendments thereto and of each
preliminary prospectus and the Prospectus and any amendments or supplements
thereto, (vi) the printing and delivery to the Underwriters of copies of
any Blue Sky or Legal Investment Memoranda, (vii) the filing fees and
expenses, if any, incurred with respect to any filing with the National
Association of Securities Dealers, Inc., made in connection with the
offering of the Shares, (viii) any expenses incurred by the Company in
connection with a 'road Show' presentation to potential investors and (ix)
any expenses incurred in connection with the listing of the Common Stock on
the New York Stock Exchange Inc.
7. Indemnity and Contribution. The Company agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act, from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are caused by any
such untrue statement or omission or alleged untrue statement or omission based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein; provided, however,
that the foregoing indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any such losses, claims, damages or liabilities purchased
Shares, or any person controlling such Underwriter, if a copy of the Prospectus
(as then amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered, at or
prior to the written confirmation of the sale of the Shares to such person, and
if the Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such losses, claims, damages or liabilities.
Each Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Company to such Underwriter,
but only with reference to information relating to such Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
In case any proceeding (including any governmental investigation) shall be
instituted involving any person in respect of which indemnity may be sought
pursuant to either of the two preceding paragraphs, such person (the
'indemnified party') shall promptly notify the person against whom such
indemnity may be sought (the 'indemnifying party') in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be
9
<PAGE>
inappropriate due to actual or potential differing interests between them. It is
understood that the indemnifying party shall not, in respect of the legal
expenses of any indemnified party in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the fees and expenses of
more than one separate firm (in addition to any local counsel) for all such
indemnified parties and that all such fees and expenses shall be reimbursed as
they are incurred. Such firm shall be designated in writing by Morgan Stanley &
Co. Incorporated, in the case of parties indemnified pursuant to the second
preceding paragraph, and by the Company, in the case of parties indemnified
pursuant to the first preceding paragraph. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
To the extent the indemnification provided for in the first or second
paragraph of this Section 7 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other hand from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and of the Underwriters on the other hand in connection with the statements
or omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other hand
in connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate Public
Offering Price of the Shares. The relative fault of the Company on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters' respective obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
The Company and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7,
10
<PAGE>
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages that such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The remedies provided
for in this Section 7 are not exclusive and shall not limit any rights or
remedies which may otherwise be available to any indemnified party at law or in
equity.
The indemnity and contribution provisions contained in this Section 7 and
the representations, warranties and other statements of the Company contained in
this Agreement shall remain operative and in full force and effect regardless of
(i) any termination of this Agreement, (ii) any investigation made by or on
behalf of any Underwriter or any person controlling any Underwriter or by or on
behalf of the Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Shares.
8. Termination. This Agreement shall be subject to termination by notice
given by you to the Company, if (a) after the execution and delivery of this
Agreement and prior to the Closing Date (i) trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the National Association of
Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a)(i) through (iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
9. Effectiveness; Defaulting Underwriters. This Agreement shall become
effective upon the later of (i) execution and delivery hereof by the parties
hereto and (ii) release of notification of the effectiveness of the Registration
Statement by the Commission.
If, on the Closing Date or the Option Closing Date, as the case may be, any
one or more of the Underwriters shall fail or refuse to purchase Shares that it
has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule I bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 9 by an amount in excess of one-ninth of such
number of Shares without the written consent of such Underwriter. If, on the
Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase
Firm Shares and the aggregate number of Firm Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Firm Shares to
be purchased, and arrangements satisfactory to you and the Company for the
purchase of such Firm Shares are not made within 36 hours after such default,
this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter or the Company. In any such case either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-
11
<PAGE>
tenth of the aggregate number of Additional Shares to be purchased, the
non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase Additional Shares or (ii) purchase not less
than the number of Additional Shares that such nondefaulting Underwriters would
have been obligated to purchase in the absence of such default. Any action taken
under this paragraph shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of the Company to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
reasonable out-of-pocket expenses (including the reasonable fees and
disbursements of their counsel) incurred by such Underwriters in connection with
this Agreement or the offering contemplated hereunder.
10. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. Applicable Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
12. Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
CHECKPOINT SYSTEMS, INC.
By ___________________________________
Name: ______________________________
Title: _____________________________
Accepted as of the date hereof.
MORGAN STANLEY & CO.
INCORPORATED
NATWEST SECURITIES LIMITED
PAINEWEBBER INCORPORATED
Acting severally on behalf
of themselves and the
several Underwriters named
herein.
By MORGAN STANLEY & CO.
INCORPORATED
By ___________________________________
Name: ____________________________
Title: ___________________________
12
<PAGE>
SCHEDULE I
<TABLE>
<S> <C>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
- ------------------------------------------------------------------------------------------------- ---------------
Morgan Stanley & Co. Incorporated................................................................
NatWest Securities Limited.......................................................................
PaineWebber Incorporated.........................................................................
---------------
Total.................................................................................
---------------
---------------
</TABLE>
13
<PAGE>
SCHEDULE II
LOCK-UP AGREEMENT SIGNATORIES
14
<PAGE>
January __, 1995
Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
Dear Sirs:
The undersigned understands that you, as Representative of the several
Underwriters, propose to enter into an Underwriting Agreement with Checkpoint
Systems, Inc. (the 'Company') providing for the public offering (the 'Public
Offering') by the several Underwriters, including yourselves, of Common Stock,
$.10 par value (the 'Common Stock'), of the Company.
In consideration of the Underwriters' agreement to purchase and make the
Public Offering of the Common Stock and for other good and valuable
consideration receipt of which is hereby acknowledged, the undersigned hereby
agrees that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters, it will not, during the period
ending ______ days after the date of the Prospectus, (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (2) enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the Common Stock whether any
such transaction described in clause (1) or (2) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
[Insert in letter for holder with registration rights] [In addition, the
undersigned agrees that, without the prior written consent of Morgan Stanley &
Co. Incorporated on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of the Prospectus, make any demand for or
exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.]
[Insert in letter for Company] [Notwithstanding the foregoing, the Company
may, without the prior written consent of Morgan Stanley & Co. Incorporated, (i)
issue shares of Common Stock upon the exercise of options warrants and upon the
conversion of any outstanding security], (ii) grant options to purchase Common
Stock under its incentive stock option plan and employee stock purchase plan in
amounts and on terms consistent with past practices and (iii) issue shares of
Common Stock pursuant to its Shareholder Rights Agreement.]
[Exceptions for gifting of shares to be discussed.]
Very truly yours,
______________________________________
(Name)
______________________________________
(Address)
Accepted as of the date
first set forth above:
MORGAN STANLEY & CO. INCORPORATED
By: __________________________________
15
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3
(file no. X-XXX) of our report dated March 22, 1994, on our audits of
the financial statements and financial statement schedules of Checkpoint
Systems, Inc. We also consent to the reference to our firm under the caption
'Experts'.
_____/s_/__Coopers & Lybrand L.L.P.____
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
January 24, 1995
