SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission File No. 1-11257
CHECKPOINT SYSTEMS, INC.
(Exact name of Registrant as specified in its Articles of Incorporation)
Pennsylvania 22-1895850
(State of Incorporation) (IRS Employer Identification No.)
101 Wolf Drive, PO Box 188, Thorofare, New Jersey 08086
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(Address of principal executive offices) (Zip Code)
609-848-1800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, Par Value $.10 Per Share
Common Share Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or on any
amendment to this Form 10-K.
X
---
As of March 8, 1996 the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $614,000,000.
As of March 8, 1996, there were 29,142,264 shares of the Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - The Company's definitive proxy statement for its Annual Meeting
of Shareholders, presently scheduled to be held on April 23, 1996.
<PAGE>
PART I
Item 1. BUSINESS
Checkpoint is a designer, manufacturer and distributor of integrated
electronic security systems -- utilizing proprietary radio frequency ("RF")
technologies -- designed primarily to help retailers prevent losses caused by
theft of merchandise. The Company markets a wide range of these systems,
including electronic article surveillance ("EAS")systems, closed circuit
television ("CCTV") systems, point-of-sale ("POS") monitoring systems and
access control systems. Over the past five 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 32% of the Company's net revenues for
fiscal year 1995. The Company's business strategy 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 high volume, high 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 Target, Circuit City, Lucky's Grocery,
Ralph's, Rite-Aid, Ross, Eckerd Drugs, and Walgreens in the U.S., and Dixons,
All Sport, British Shoe, Cortes Ingles, FNAC, and GB in the United Kingdom and
Western Europe. 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.
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. The Company'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 is focused on providing its customers
with a wide variety of fully integrated electronic security system solutions
characterized by superior quality, ease of use, good value and merchandising
opportunity for the retailer.
The Company has its principal executive offices at 101 Wolf Drive, Thorofare,
New Jersey 08086, (609-848-1800). Unless the context requires otherwise, the
<PAGE>
"Company" means Checkpoint Systems, Inc. and its subsidiaries on a
consolidated basis.
COMPANY HISTORY
In 1969, the Company was incorporated in Pennsylvania as a wholly-owned
subsidiary of Logistics Industries Corporation. In 1977, Logistics, pursuant
to the terms of its merger into Lydall, Inc., distributed the Company's Common
Stock to Logistics' shareholders as a dividend. In February, 1986, the Company
acquired Sielox Systems, Inc., which developed, produced and marketed access
control systems for use in commercial and institutional applications. In
August 1990, Sielox's operations were combined with the Company's.
The Company acquired its Canadian Distributor in November of 1992 and
Argentinean Distributor in March of 1993. In addition, the Company set up
direct operations in Mexico during March of 1993 and in Australia during June
of 1993. All of these subsidiaries market EAS systems for use in retail and
library applications.
In July 1993, the Company purchased all the outstanding capital stock of ID
Systems International B.V. and ID Systems Europe B.V., related Dutch Companies
("ID Systems Group") engaged in the manufacture, distribution and sale of EAS
systems. The acquisition gave the Company direct access to six Western
European countries which include The Netherlands, United Kingdom, Sweden,
Germany, France and Belgium.
In February 1995 the Company purchased Alarmex, Inc. which 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.
On November 1, 1995, the Company acquired Eagle Security, its distributor in
Oslo, Norway. The acquisition of Eagle increases the Company's EAS
penetration in Scandinavia and broadens its presence in Europe.
On November 30, 1995, the company purchased from ADT (UK) Limited ("ADT") all
of the capital stock of Actron Group Limited ("Actron"), a wholly-owned
subsidiary of ADT. Actron manufactures, sells and distributes radio frequency
electronic security systems to the retail industry throughout Western Europe.
Principle Product Categories
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Electronic Article Surveillance
EAS systems act as a deterrent to, and control the increasing problem of theft
in such establishments as retail stores and libraries. Over the past two
decades, retail establishments have recognized that the most effective
theft-prevention method is to monitor articles. Other means of theft
prevention, (special mirrors, security guards, closed-circuit television
systems and surveillance cameras) monitor people, not the articles to be
protected, and this limitation among others is addressed by EAS systems.
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. Sophisticated data collection
systems (primarily bar-code scanners) available to retailers have highlighted
the shrinkage problem and, consequently, retailers now realize that the
<PAGE>
implementation of an effective electronic security system can significantly
increase profitability. Accordingly, the retail industry is becoming
increasingly focused on theft prevention.
EAS systems are generally comprised of three components: detectable and
deactivatable security circuits (embedded in tags or labels), referred to as
"targets", which are attached to or placed in the articles to be protected;
electronic detection equipment, referred to as "sensors", which recognize the
targets when they enter a detection area, usually located in the exit path;
and deactivation equipment that disarms the target when patrons follow proper
check-out procedures.
Access Control Systems
Electronic access control systems restrict access to areas requiring
protection from intrusion by unauthorized personnel by granting access only to
selected individuals at specified times. Recent developments in Electronic
Signatures(R) processing and other technologies have enhanced the
sophistication of electronic access control systems at a low cost.
Electronic access control systems use an "electronic key", such as a plastic
card with a magnetic strip or embedded magnetic code that is interpreted by an
"electronic reader". The most advanced access control systems utilize plastic
cards containing an encoded digital integrated circuit as electronic keys.
These can be coded with a personal identification number ("PIN"). Once the
cardholder presents the card containing a PIN, an intelligent controller,
which is also part of the access control system, determines security
clearance/access levels. This data, along with time of entrance and exit, can
be recorded for later analysis.
POS Monitoring Systems
- ----------------------
Point-of-sale systems sold by the Company through its Alarmex subsidiary
(acquired in early 1995) record and store videotape check-out transactions
which enable retailers to monitor check-out events for questionable
transactions.
Products
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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 applicable regulations. In
addition, the Company's present EAS products meet other regulatory
specifications for the countries in which they are sold.
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The symbol(R) represents a registered trademark of the Company.
<PAGE> 4
Pie Charts Showing Consolidated Net Revenues by Products:
1995 1994 1993
---- ---- ----
Net Revenues $204,741 $128,331 $93,034
Service and Other 11% 15% 12%
CCTV/POS Monitoring 16% 0% 0%
Access Control 3% 5% 5%
Deactivation 12% 12% 11%
Sensors 23% 27% 30%
Targets-Reusable 9% 12% 12%
Targets-Disposable 26% 29% 30%
--- --- ---
100% 100% 100%
==== ==== ====
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. Each sensor unit includes either one or two vertical posts
placed at preset distances (i.e. 3 to 6 feet) apart.
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 fourteen 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. For fiscal years 1995, 1994 and 1993 the percentage of the
Company's net revenues from sensors was 23%, 27%, and 30%, respectively.
Introduced in 1990, the QS2000(R) is the latest evolution in the Company's
proven Quicksilver(TM)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.
- -------------------------
The symbol(R) represents a registered trademark of the Company.
<PAGE>
Introduced in 1993, the Condor(R) 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 post. Utilizing a
microprocessor and two digital signal processors, the Condor has an aisle
width of 12 feet using two posts. 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(TM)and QS1600(TM)are value-priced,
reusable target systems designed primarily for providing wide aisle protection
for the apparel marketplace. The QS1500 has three feet of detection on either
side of a single post, or it can protect up to six feet between two posts.
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(R) sensors, featuring an earlier generation of components, the QS45
and QS55(R), wide aisle systems that can span up to five and one half 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.
In 1994, the Company introduced the QS4000(TM) sensor. With digital signal
processing, this advanced sensing system adjusts its detection to changing
environmental conditions. This new sensor model may be placed in close
proximity to deactivation units or near tagged merchandise so that stores can
maximize selling space. The QS4000 protects aisle widths up to 42 inches
using disposable targets, and up to 60 inches using reusable targets.
Deactivation Units
Deactivation units are used to eliminate the ability of the tag to be
identified by the RF field in the sensor and set off an alarm. Deactivation
usually occurs at the check-out point. In 1986, the Company introduced
Counterpoint(R), 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 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 retail personnel to focus on the customer and minimize errors at
check-out. During 1993, the Company developed an improved deactivation unit,
Counterpoint(R) IV, which increased deactivation height to twelve inches and
improves the rate of product deactivation. In 1994, the Company increased the
deactivation height beyond twelve inches with the introduction of Counterpoint
V. These product improvements significantly increased the reliability of
accurate deactivation. For 1995, 1994, and 1993, the percentage of the
Company's net revenues from deactivation units was 12%, 12%, and 11%,
respectively.
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.
<PAGE>
With the exception of the Counterpoint deactivation pad, all of the above
scanners read bar code information while deactivating hidden
Cheklink(R) 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.
Targets
All targets contain an electronic circuit that unless deactivated (disposable
targets) or removed (reusable targets), triggers an alarm when passed through
the sensors. 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.
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 price-marking/bar-coding printers.
Checkpoint's labels can be integrated with printers from Sato, Zebra, Monarch,
Printronix and Soabar. When used with electronic deactivation equipment, they
represent the Cheklink(R) 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(R) program tags can be embedded in products or
packaging at the point-of-manufacture or packaging. For fiscal years 1995,
1994, and 1993, the percentage of the Company's net revenues from disposable
targets was 26%, 29%, and 30%, respectively.
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.
A picture illustrating
the Company's sustainable
competitive advantage.
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.
<PAGE>
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.
On February 12, 1996, the Company announced that it has granted a
non-exclusive world-wide license to Tokai Electronics Co., Ltd. of Japan to
manufacture and distribute its radio frequency disposable tags. The Company
also announced a supply agreement with Knogo North America, Inc., whereby
Knogo will purchase 50 million disposable tags annually for resale to its
customers in the United States and Canada. These two agreements offer the
Company's customers alternate sources of disposable tags.
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 attached with a lanyard using
the magnetic fastener. An easy-to-use detacher unit removes reusable targets
from protected articles without damage. For 1995, 1994, and 1993, the
percentage of the Company's net revenues from reusable targets was 9%, 12%,
and 12%, respectively.
The Company also supplies the UFO hard target. The UFO hard target design
combined with a superior locking device makes the UFO, in the opinion of the
Company's management, a difficult hard target to defeat. The UFO tag, due to
its patented design, combines a unique conical shape with an interior antenna
which, due to its placement at an angle, provides a tag which can be detected
in the system better than tags in which the interior antenna is placed in a
flat position. 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 also introduced a line of fluid tags marketed under
the name ChekInk(R) 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.
A chart showing: Annual Disposable Targets Applied at Vendor Level,
Distribution Center, or In-Store (Units in Millions)
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- -----
Units 435 538 691 734 959 1,371
Access Control Systems
The electronic access control Threshold(R) product line consists of seven
systems, ranging from small, relatively simple systems, to large,
<PAGE>
sophisticated systems which provide a maximum degree of control, monitoring
and reporting. For fiscal years 1995, 1994, and 1993, the percentage of the
Company's net revenues from access control systems was 3%, 5%, and 5%,
respectively.
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 500 doors for access control and up
to 50,000 cardholders. The incorporation of alarm monitoring and point
control (i.e. turning lights on or off) are also integral features of all
seven 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(R) allows these
readers to be directly mounted on metal without degradation in performance.
The Mirage SG 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 controller 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
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 costs. Viewpoint can be linked to Checkpoint EAS systems
in order to record incidents that have caused the EAS system to register an
alarm. For fiscal years 1995, 1994, and 1993, the percentage of the Company's
net revenues from both Viewpoint and CCTV sales was 16%, 2% and 0%.
<PAGE>
Principal Markets, Distribution, and Marketing Strategy
- -------------------------------------------------------
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 Target, Lucky's Grocery, Ralph's, Rite-Aid, Eckerd Drugs and
Walgreens.
In early 1995, the Company acquired Alarmex which designs and provides CCTV,
POS monitoring and fire alarm systems to over 9,000 retail sites in the U.S.
The Company believes the acquisition of Alarmex complements the Company's
current CCTV and POS monitoring products. With the acquisition of Alarmex, the
Company is able to offer its customers a broader and more sophisticated range
of CCTV and POS monitoring products. In addition, the acquisition of Alarmex
enables the Company to enter the burglar and fire alarm market with related
central station alarm monitoring capabilities.
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 bar-code 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 interest in moving the insertion or application of
the targets to the point of manufacture ('source tagging'). Manufacturers have
been receptive to source tagging in light of the potential increase in product
volume (that is, more sales at the retail level due to easier customer access
to products). 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 consumers made to wait in line
or search for a salesperson to buy batteries or camera film are likely to
forego the purchase. 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.
<PAGE>
The Company is focused on providing its customers with a wide variety of fully
integrated electronic security system solutions characterized by superior
quality, ease of use, good value and merchandising opportunity for the
retailer. More specifically, the Company's strategy includes the following:
- 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 by the EAS
industry);
- Continuing to promote source tagging;
- Continuing to improve the Company's highly integrated and state-of-
the-art manufacturing processes and technologies;
- Continuing to explore strategic acquisitions or start-up
opportunities in the following areas: international direct
distribution, a second source of manufacturing capacity and product
line diversification within the Company's core businesses; and
- Structuring programs for national account prospects involving a
variety of leasing options which promote sales of disposable tags.
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).
Pie Charting Showing 1995 Domestic EAS Retail Revenues:
1995
----
Net Revenues-Retail $81,767,000
Mass Merchandise 17%
Drug 31%
Supermarket 13%
Apparel 6%
Music 8%
Video 5%
Shoe 2%
Book Stores 5%
Other Retail 13%
-----
100%
The Company 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. Studies conducted by retail trade associations
and major universities indicate that source tagging provides four major
benefits to retailers. First, source tagging greatly enhances security,
creating a package-integrated theft deterrent that is virtually tamper-proof.
Second, source tagging has presented retailers with an array of merchandise
display options previously impractical because of the threat of theft. This
benefit has been found to have a positive impact on sales with reported
increases as much as 200 percent. Source tagging also eliminates the labor
costs associated with manual, in-store application of security labels, as well
as eliminating excessive packaging materials used solely to deter theft.
<PAGE>
Strategies to increase acceptability of source tagging are as follows: (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. During 1995, 150 million disposable tags were sold to 450
worldwide manufacturers participating in the Company's source tagging program.
Anticipating the future needs of its retail customers, the Company is taking
full advantage of the versatility of RF technology to answer those needs. The
results have been and will continue to be innovative. With the development of
RF intelligent tagging or RF-EAS/ID, the Company is reaching new heights of
innovation.
RF-EAS/ID combines an intelligent chip with the Company's RF circuit to
deliver a tag capable of storing, processing and communicating product
information while simultaneously protecting merchandise from theft. As the
rational progression of the Company's ongoing focus on RF technology,
RF-EAS/ID promises to revolutionize retail operations as well as provide
benefits to manufacturers and distributors in the retail supply chain.
A picture describing
the Company's Impulse
integrated security.
Distribution
- ------------
EAS Systems
The Company sells its EAS systems principally throughout North America and
Europe. During 1995, EAS revenues from outside the United States (principally
Europe and Scandinavia) represented approximately 38% of the Company's net
revenues.
In the United States, the Company markets its EAS products almost entirely
through its own sales personnel and independent representatives. The Company,
at December 31, 1995, employed 90 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 the end of
1995, the Company had four such independent representatives. Four members of
the Company's sales management staff are assigned to manage and assist these
independent representatives. Of total EAS domestic revenues during 1995, 95%
was generated by the Company's own sales personnel.
Internationally, the Company markets its EAS products principally through
various foreign subsidiaries which sell directly to the end user and through
independent distributors. The Company's foreign subsidiaries, as of December
31, 1995, employed a total of 152 salespeople who sell the Company's products
to the retail and library markets. The Company's international sales
operations are currently located in Western Europe, Canada, Mexico, Argentina
and Australia ("see Marketing Strategy").
Until 1993, the Company's sales in Western Europe were made principally
through distributors. In mid 1993, the Company acquired a competing EAS
company located in Western Europe. On November 30, 1995, the Company acquired
all of the share capital of Actron, another competing EAS company based in
Western Europe.
<PAGE>
Independent distributors accounted for 28% of the Company's international
revenues during 1995. Foreign distributors sell the Company's products to
both the retail and library markets. The Company's distribution agreements
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 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 151 independent dealers. The Company employs five
salespeople who are compensated by salary plus commissions. Under the
independent dealer program, the dealer takes title to the Company's products
and sells them to the end-user customer. The dealer installs the systems and
provides ongoing service to the end-user customer.
POS Monitoring Systems/CCTV
The Company markets the POS monitoring products throughout the world through
its own sales personnel. Sales of the POS monitoring products 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
- -----------
The Company presently employs approximately 267 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. The Company invests heavily in sales training
programs and experiences little turnover among its top performers.
Backlog
- -------
The Company's backlog of orders was approximately $8,000,000 at December 31,
1995, as compared with approximately $7,053,000 at December 25, 1994. The
Company anticipates that substantially all of the backlog at the end of 1995
will be delivered during 1996. In the opinion of management, the amount of
backlog is not indicative of intermediate or long-term trends in the Company's
business. The Company's business generally follows the retail cycle so that
revenues are weighted toward the last half of the calendar year as retailers
prepare for the holiday season.
Technology
- ----------
The Company believes that its patented and proprietary technologies are
important to its business and 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. Substantially all of the Company's revenues were derived from
products or technologies which are patented or licensed. The Company's
competitive position is supported by its extensive manufacturing experience
and know-how and, to a lesser degree, its technology and patents. There can
be no assurance, however, that a competitor could not develop a product
comparable to that of the Company.
<PAGE>
EAS
Until October 1995, the Company was the exclusive worldwide licensee of Arthur
D. Little, Inc. ("ADL") for certain patents and improvements thereon related
to EAS products and manufacturing processes. On October 1, 1995, the Company
acquired these patents for $1.9 million plus a certain percent of future EAS
RF products sold. Prior to October 1, 1995, the Company paid a royalty to ADL
of approximately 2% of net revenues generated by the sale and lease of the
licensed products, with the actual amount of the royalty depending upon
revenue volume.
Royalties amounted to approximately 1.5%, 1.8%, and 1.8% of EAS net revenues
for fiscal years 1995, 1994, and 1993, respectively. The Company licenses
certain sensors, magnetic labels and fluid tags. These license arrangements
have various expiration dates and royalty terms, but are not considered by the
Company to be material.
Electronic Access Control
The Company is the worldwide licensee of certain patents and technical
knowledge related to proximity card and card reader products. It pays a
royalty equal to 2% of the net revenues from the licensed products. Such
royalties are payable through January 29, 2000, or until all of the subject
patents have been adjudicated invalid.
Royalty expense for fiscal years 1995, 1994, and 1993 was approximately .5%,
.6%, and .5% of the Company's EAC net revenues, respectively.
POS Monitoring Systems/CCTV
The Company has a worldwide license to distribute a point-of-sale front-end
monitoring system being marketed under the name Viewpoint. Marketing of this
product began during 1992. The Company pays a one time site license fee for
each site installed.
Manufacturing, Raw Materials and Inventory
- ------------------------------------------
EAS
The Company 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. The Company's manufacturing strategy is to rely
primarily on in-house capability and to vertically integrate manufacturing
operations to the extent economically practical. This integration and
in-house capability provides significant control over costs, quality and
responsiveness to market demand which 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 over 1.3 billion disposable RF targets in 1995, it has the
current manufacturing capacity to produce as many as three billion disposable
RF targets per year at a low cost. During 1996 the Company is planning to
expand its current manufacturing capacity to five billion disposable RF labels
per year. The cost for this increased capacity is expected to approximate
<PAGE>
$12.0 million which includes $6.0 million for plant expansion and $6.0 million
for production equipment. Once this increased capacity is completed the
Company can then further increase capacity to eight billion with an additional
investment of $2.0 million.
On February 12, 1996, the Company announced that it has granted a
non-exclusive world-wide license to Tokai Electronics Co., Ltd. of Japan to
manufacture its radio frequency disposable tags. The Company also announced a
supply agreement with Knogo North America, Inc., whereby Knogo will purchase
50 million disposable tags for resale to its customers in the United States
and Canada. These two agreements offers the Company's customers alternate
sources of disposable tags.
The Company purchases raw materials from outside suppliers and assembles
electronic components for the majority of its sensor product lines at its
facilities in Puerto Rico. For its target production, the Company purchases
raw materials and components from outside sources and completes the
manufacturing process at its facilities in Puerto Rico (disposable targets)
and the Dominican Republic (reusable targets). Certain
components of sensors are manufactured at the Company's facilities in the
Dominican Republic and shipped to Puerto Rico for final assembly. The
principal raw materials and components used by 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. The
Company's general practice is to maintain a level of inventory sufficient to
meet anticipated demand for its products.
Access Control Systems
The Company purchases raw materials from outside suppliers and assembles the
electronic components for controllers, proximity cards and proximity readers
at its facilities in the Dominican Republic and Puerto Rico. For
non-proximity electronic access control components, the Company subcontracts
manufacturing activities. All electronic access control final system assembly
and testing is performed at the Company's facilities in Thorofare, New Jersey.
POS Monitoring Systems/CCTV
The Company does not manufacture any of the components for the Viewpoint
product line other than small interface circuit boards. The Company
purchases all the hardware components of the Viewpoint products from major
distributors. Limited inventory levels are maintained since the Company
places orders with these distributors as customer orders are received. The
software component of the system is added at the customer's site.
The acquisition of Alarmex provides the Company with facilities and expertise
dedicated to CCTV systems.
Competition
- -----------
EAS
Currently, EAS systems are sold to two principal markets: retail
establishments and libraries. The Company's principal global competitor in
the EAS industry is Sensormatic Electronics Corporation ("Sensormatic").
<PAGE>
Sensormatic is a fully integrated supplier of electronic security systems,
with an approximate 65% of the worldwide market share. Management estimates
that the Company's market share in the EAS industry is approximately 27%.
With revenues of approximately $889 million for its most recent fiscal year,
Sensormatic has economic and other resources substantially greater than those
of the Company.
Within the U.S. market additional competitors included Knogo North America,
Inc.("Knogo"), principally in the retail market, and Minnesota Mining and
Manufacturing Company, principally in the library market. Within the
Company's international markets, mainly Western Europe, Knogo (whose
international operations were purchased by Sensormatic on December 29,
1994)and Esselte Meto, along with Sensormatic, are the Company's most
significant competitors. On November 30, 1995, the Company acquired all of
the stock of Actron, which had been a principal competitor of the Company in
Western Europe.
The Company believes that its product line offers more diversity than its
competition in protecting different kinds of merchandise with soft disposable
targets and hard and flexible reusable targets, all of which operate with the
same RF system. As a result, the Company believes it appeals to a wider
segment of the market than does its competition and competes in marketing its
products primarily on the basis of their versatility, reliability,
affordability, accuracy and integration into operations. This combination
provides many system solutions which allow for protection of various kinds of
merchandise from theft.
Electronic Access Control
The Company's electronic access control products compete with other
manufacturers of electronic access control systems as well as with
conventional security systems.
Major competitors are Cardkey Systems, Inc., Software House, Inc. and
Westinghouse Security, Inc. All three competitors are subsidiaries of much
larger companies that have substantially greater resources than the Company.
The Company believes that its products offer higher reliability than those of
its competitors.
POS Monitoring Systems/CCTV
The Company's POS Monitoring products which are sold through its Alarmex
subsidiary compete primarily with similar products offered by Sensormatic and
Knogo. The Company believes that its products represent a technological
advancement over those of its
competitors, particularly with respect to recording and retrieval of
transaction information.
Research and Development
The Company has increased its research and development activities during
the past four years over the prior levels. The Company expended approximately
$6,862,000, $4,877,000, and $5,392,000 in research and development activities
during 1995, 1994, and 1993, respectively. The emphasis of these activities is
the continued broadening of the product lines offered by the Company and an
expansion of the markets and applications for the Company's products. The
Company's continued growth in revenue can be attributed, in part, to the
products and technologies resulting from these efforts.
<PAGE>
Another important source of new products and technologies has been
the Company's acquisitions of companies and products during the last few
years. The Company expects to continue to make acquisitions of related
businesses or products consistent with its overall product and marketing
strategies.
Since 1991, the Company has introduced approximately 60 new products. The
Company continues to expand its product line with improvement in disposable
tag performance and less intrusive wide aisle RF detection sensors. In
addition, the Company holds or licenses over 200 patents and proprietary
technologies relating to its products and their manufacture.
Employees
- ---------
As of December 31, 1995 (giving effect to the acquisition of Actron) the
Company had 2,540 employees, including 13 officers, 62 persons engaged in
research and development activities and 285 persons engaged in sales and
marketing activities. In the United States fewer than 15 of the Company's
employees are represented by a union.
Pie Chart Showing Employees By Function:
1995
----
Sales 11%
Service 18%
Manufacturing 56%
Administrative 13%
Research & Development 2%
----
Total 100%
Pie Chart Showing Employees By Location:
United States - EAS 18%
United States - CCTV 6%
Caribbean 54%
Europe 17%
Other (1) 5%
----
Total 100%
(1) Other includes Canada, Mexico, Argentina and Australia
<PAGE>
Financial Information About Domestic and Foreign Operations
- -----------------------------------------------------------
The following table sets forth certain information concerning the Company's
domestic and foreign operations for each of the last three fiscal years.
(1) Geographic Area 1995 1994 1993
=============== ==== ==== ====
(Thousands)
Net revenues from From United States $149,319 $88,211 $71,834
unaffiliated and Puerto Rico
customers
Net revenues from Western Europe, $ 55,422 $40,120 $21,200
foreign subsidiaries Canada, Mexico,
Argentina, and
Australia
Export net revenues Primarily Europe $ 21,785 $10,430 $12,163
and Scandinavia
Domestic earnings From United States, $ 17,626 $ 6,931 $ 1,720
before income taxes Puerto Rico, and
Dominican Republic
Foreign earnings Western Europe, $ (1,028) $ 1,446 $ 351
before income taxes Canada, Mexico,
Argentina and
Australia
Domestic identifiable In United States, $225,877 $92,285 $78,982
assets Puerto Rico, and
Dominican Republic
Foreign identifiable Western Europe, $136,274 $35,640 $26,017
assets Canada, Mexico,
Argentina, and
Australia
(1) Includes the effect of the acquisition of Actron which occurred on
November 30, 1995.
Pie Charts Showing Consolidated Net Revenues by Market:
1995 1994 1993
------ ------ ------
Net Revenues $204,741 $128,331 $93,034
Other(1) 13% 17% 20%
Europe and Scandinavia 25% 22% 16%
Access Control 3% 5% 5%
Library 3% 5% 7%
Retail 56% 51% 52%
------ ------ ------
100% 100% 100%
(1) Other includes Canada, Mexico, Argentina and Australia
<PAGE>
Item 2. PROPERTIES
The Company's headquarters and distribution center are in leased facilities
located in Thorofare, New Jersey. Of the total 104,000 square feet,
approximately 64,000 square feet are used for office space and approximately
40,000 square feet are used for storage facilities. The Company has entered
into a twelve year lease for the facilities starting in 1995. The annual rent
during each year of the first five years starting in 1995 is $692,000.
The Company's principal manufacturing facility for the production of most of
its products is located in Ponce, Puerto Rico. This two-story building, which
was completed in 1990, is owned by the Company and contains approximately
95,000 square feet. Included in the 95,000 square feet is approximately
11,000 square feet of office space and approximately 14,000 square feet of
warehouse space. In addition, the Company leases a manufacturing and
development facility in Puerto Rico near the manufacturing facility containing
approximately 9,000 square feet. The lease expires in 1997 with an annual
rent of $31,000.
During 1996 the Company is planning to expand its current manufacturing
capacity to five billion disposable RF labels per year. The cost for this
increased capacity is expected to approximate $12.0 million which includes
$6.0 million for plant expansion and $6.0 million for production equipment.
Once this increased capacity is completed the Company can then further
increase capacity to eight billion with an additional investment of $2.0
million.
The Company also leases two manufacturing facilities in the Dominican
Republic. One facility, located in La Vega, contains approximately 34,000
square feet. It includes approximately 3,900 square feet of office space and
approximately 3,000 feet of warehouse space. Certain components of the
Company's sensors, hard targets and proximity cards are assembled at this
site. The lease for this property expires in December 2005 with an annual
rent of $17,550. The other facility, located in Los Alcarrizos, contains
approximately 63,000 square feet. It includes approximately 1,800 square feet
of office space and approximately 10,000 square feet of warehouse space. This
facility performs the bending, chroming and wiring of antenna loops used in
the Company's Quicksilver sensor products. This facility also performs
certain injection molding production used in the assembly of the Company's
reusable security targets. The lease for the Los Alcarrizos property expires
in December 2001 with an annual rent of $30,000. The leases for both
locations have been prepaid for their entire terms.
The Company's Alarmex subsidiary leases two facilities in Eden Prairie,
Minnesota. One facility contains approximately 24,000 square feet of office
and warehouse space. Assembly and distribution functions are performed at
this site. The lease on this facility expires in March 2000 with an annual
rent of approximately $120,000. The other facility contains approximately
16,000 square feet of office space. Customer service, sales support and
administrative functions are performed at this site. The lease on this
facility expires in March 1997 with an annual rent of approximately $172,000.
The Company's foreign subsidiaries maintain various sales and distribution
locations in Australia, Argentina, Belgium, Canada, France, Germany, Mexico,
The Netherlands, Sweden, Norway, Spain, Switzerland, and United Kingdom. The
<PAGE>
locations have an average of 3,600 square feet of office space and an average
of 1,800 square feet of warehouse space. The lease terms of these foreign
subsidiaries range from one to five years with an average lease payment of
$34,500 in 1996. In connection with the Actron acquisition, the Company
acquired similar sales and distribution locations in Western Europe. The
Company is consolidating the redundant sales and distribution locations and
plans to set up a central distribution site in Western Europe in 1996.
Item 3. LEGAL PROCEEDINGS
The Company, along with several officers and a director, has been named as a
defendant in two actions entitled Milton Cohen and Aron and Lisa Derman et al
v. Checkpoint Systems, Inc., et al USDC Case No. 95CV1046 (JEI) filed March
10, 1995, both of which were filed in the United States District Court in New
Jersey. The complaints, which are substantially identical, seek class
certification and alleged generally that the defendants participated in a
course of conduct to conceal adverse material information about the operating
results and future business prospects of the Company as a result of which the
Company's stock price was artificially inflated during the period October 21,
1994 through March 7, 1995. Plaintiff alleges that the conduct set forth in
the preceding sentence was in violation of certain federal securities laws.
The Company believes that the plaintiffs' allegations are entirely without
merit and intends to defend itself vigorously.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1995 to a vote of
security holders.
Item A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain current information concerning the
executive officers of the Company, including their ages, position and tenure
as of the date hereof:
OFFICER
NAME AGE SINCE POSITIONS WITH THE COMPANY
Kevin P. Dowd 47 1988 President and Chief Executive Officer
Steven G. Selfridge 40 1988 Executive Vice President
Luis A. Aguilera 47 1982 Senior Vice President - Manufacturing
Mitchell T. Codkind 36 1992 Vice President - Corporate Controller
and Chief Accounting Officer
Muns A. Farestad 47 1990 Vice President - Research and
Development
William J. Reilly, Jr. 47 1989 Senior Vice President
Michael E. Smith 40 1990 Senior Vice President
<PAGE>
Neil D. Austin 49 1989 Vice President - General Counsel and
Secretary
Lukas A. Geiges 57 1995 Senior Vice President - International
Development of Checkpoint Systems
International B.V.
Jeffrey A. Reinhold 38 1995 Vice President - Chief Financial
Officer and Treasurer
David K. Shoemaker 39 1995 Vice President - Business Development
Nicholas W. Martino 40 1996 Vice President - Marketing
Dennis O'Malley 41 1996 Vice President - Worldwide Customer
Service
Mr. Dowd has been President and Chief Operating Officer of the Company since
August 1993 and Chief Executive Officer and Director of the Company since
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. Selfridge has been Executive Vice President since January 1996. He was
Senior Vice President - Operations and Chief Financial Officer and Treasurer
from August 1993 to January 1996. 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. 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. Codkind has been a Vice President since April 1995 and Corporate
Controller since January 1992. He 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 January 1989 to October 1990 he was Director of Process
Engineering and Shared Resources and from July 1987 to January 1989 Mr.
Farestad was Director of Manufacturing Engineering.
Mr. Reilly has been Senior Vice President 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.
<PAGE>
Mr. Smith has been Senior Vice President 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 1989.
Prior to joining the Company, Mr. Austin was a managing consultant with
Mercer, Meidinger, Hansen Inc. from 1987 to 1989.
Mr. Geiges has been Senior Vice President - International Development of
Checkpoint Systems International B.V. since April 1994 and is considered to be
a person who makes a significant contribution to the Company's business.
Prior to joining the Company, Mr. Geiges was a consultant to the Actron AG
Board of Directors from 1993 to March 1994 and Chairman of the Board of
Directors and President of Actron AG from 1988 to 1993.
Mr. Reinhold has been Chief Financial Officer since January 1996 and has been
Vice President and Treasurer of the Company since April 1995. Prior to
joining the Company, Mr. Reinhold spent thirteen years at First Fidelity Bank,
N.A. where he held a variety of management positions in various lending
departments and loan workout. Mr. Reinhold was Senior Vice President and
Division Manager - Middle Market Lending from 1994 to March 1995.
Mr. Shoemaker has been Vice President - Business Development since August 1995
and has been employed by the Company in various sales, marketing and
development positions since 1988.
Mr. Martino has been Vice President - Marketing since January 1996. Prior to
joining the Company, Mr. Martino was Vice President - North American Sales
with Metrologic Instruments, Inc. from 1992 to 1995, and General Manager with
Amacoil, Inc. from 1989 to 1992.
Mr. O'Malley has been Vice President - Worldwide Customer Service since
January 1996. Mr. O'Malley was Director of Customer Service from September
1993 to January 1996 and Manager of Credit and Collections from November 1991
to September 1993. Prior to joining Checkpoint, Mr. O'Malley was Manager of
Credit Management Services with Traveler's Express Company, Inc. from 1988 to
1991.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange
("NYSE")under the symbol CKP. 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 sale prices for the Company's
Common Stock as reported on the NYSE Composite Tape after giving retroactive
effect for the February 1996 Stock Split.
<PAGE>
High Low
---- ---
Closing Price
1994:
First Quarter ............................. $ 7 1/4 $ 5 3/16
Second Quarter ............................. 8 5/8 6 3/8
Third Quarter ............................. 9 7/16 7 7/16
Fourth Quarter ............................. 10 3/4 8 3/16
1995:
First Quarter............................. $12 1/2 $ 7 15/16
Second Quarter............................ 11 7/8 8 3/16
Third Quarter............................. 13 7/16 10 1/16
Fourth Quarter............................ 19 1/2 12
Graph Showing High/Low Price Per Share:
1994 High Low
- ---- ---- -----
1st Quarter 7-1/4 5-3/16
2nd Quarter 8-5/8 6-3/8
3rd Quarter 9-7/16 7-7/16
4th Quarter 10-3/4 8-3/16
1994 High Low
- ---- ---- -----
1st Quarter 12-1/2 7-15/16
2nd Quarter 11-7/8 8-3/16
3rd Quarter 13-7/16 10-1/16
4th Quarter 19-1/2 12
As of March 8, 1996, there were approximately 1,484 record holders of the
Company's Common Stock.
The Company has never paid a cash dividend on the Common Stock, does not
anticipate paying any cash dividend 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. The declaration and payment of dividends in the
future, and their amounts, will be determined by the Board of Directors in
light of conditions then existing, including the Company's earnings, its
financial condition and requirements (including working capital needs) and
other factors.
<PAGE>
Item 6. SELECTED ANNUAL FINANCIAL DATA
1995 1994 1993 1992 1991
======== ======== ======== ======== ========
(Thousands, except per share data)
FOR YEARS ENDED:
Net revenues $204,741 $128,331 $ 93,034 $ 72,166 $ 52,943
Earnings before
income taxes $ 16,598 $ 8,377 $ 2,071 $ 4,891 $ 635
Income taxes $ 5,189 $ 2,094 $ 456 $ 463 127
Net earnings $ 11,409 $ 6,283 $ 1,615 $ 4,428 $ 508
Earnings per
common share(1) $ .42 $ .29 $ .08 $ .23 $ .03
AT YEAR-END:
Working capital $148,074 $ 39,427 $ 27,984 $ 25,792 $ 14,245
Long-term debt $155,674 $ 35,556 $ 24,302 $ 9,322 $ 783
Shareholders'
equity $137,658 $ 61,303 $ 53,779 $ 51,061 $ 42,087
Total assets $362,151 $127,925 $104,999 $ 74,333 $ 57,675
SELECTED QUARTERLY FINANCIAL DATA
QUARTERS (unaudited)
--------------------------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
(Thousands, except per share data)
1995
- ----
Net revenues $37,360 $49,744 $52,802 $64,835 $204,741
Gross profit $16,091 $21,944 $24,769 $27,893 $ 90,697
Net earnings $ 204 $ 3,369 $ 4,529 $ 3,307(2) $ 11,409
Earnings per
common share(1)(3) $ .01 $ .13 $ .16 $ .11 $ .42
1994
- ----
Net revenues $26,223 $28,656 $33,928 $39,524 $128,331
Gross profit $12,262 $13,552 $17,023 $19,134 $ 61,971
Net earnings $ 526 $ 1,067 $ 2,162 $ 2,528 $ 6,283
Earnings per
common share(1)(3) $ .03 $ .05 $ .10 $ .12 $ .29
(1) After giving retroactive effect to the February 1996 Stock Split.
(2) Included in net earnings is a $1.3 million pre-tax restructuring
charge.
(3) Quarterly earnings per common share are computed independently;
therefore the sum of the quarters may not equal full year earnings
per share.
<PAGE>
Graph Showing Net Revenues/Gross Profits/Net Earnings
1994
- ----
Net revenues $26,223 $28,656 $33,928 $39,524 $128,331
Gross profit $12,262 $13,552 $17,023 $19,134 $ 61,971
Net earnings $ 526 $ 1,067 $ 2,162 $ 2,528 $ 6,283
Earnings per
common share $ .03 $ .05 $ .10 $ .12 $ .29
1995
- ----
Net Revenues $37,360 $49,744 $52,802 $64,835 $204,741
Gross Profit $16,091 $21,944 $24,769 $27,893 $90,697
Net Earnings $204 $3,369 $4,529 $3,307 $11,409
Earnings Per
Common Share $0.01 $0.13 $0.16 $0.11 $0.42
<PAGE>
CHECKPOINT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 7.
Overview
The Company 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. Beginning in September 1991, the Company's current management
adopted a strategy which focused on introducing new products to meet
retailers' needs, moving to direct distribution internationally through
strategic acquisitions increasing the number of direct sales and service
personnel and making substantial investments in its manufacturing facilities
in the Caribbean to increase its manufacturing capacity and further integrate
the manufacturing of its disposable targets. As a result of this strategy the
Company has experienced a compound annual revenue growth of 40% since 1991.
During 1995, two strategic acquisitions were made: (i) the acquisition of
Alarmex, Inc. on February 1, 1995 which allowed the Company to increase its
product offerings of CCTV equipment along with burglar and fire alarm systems
to retailers and (ii) the purchase of Actron Group Ltd. on November 30, 1995
which had been a principal competitor to the Company's EAS operations in
Western Europe over the last several years.
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
<PAGE>
time the Company has introduced approximately 60 new products. Increases in
the Company's U.S. direct sales personnel and, through various acquisitions,
the establishment of a direct sales force in thirteen other countries, have
resulted in the Company's total sales force growing to approximately 267 as of
December 1995 as compared to 47 as of September 1991. In addition, sales of
the Company's disposable targets and field service revenues related to sensors
and deactivation units provide a significant and growing source of recurring
revenues. The Company's increasing base of installed systems also results in
additional unit volume. For fiscal year 1995, approximately 32% of the
Company's net revenues were attributable to sales of disposable 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 four years. These price increases,
however, have been substantially offset by volume discounts offered to
national retailers. Internationally, in fiscal year 1993 prices were favorably
impacted by moving to direct sales in various countries. In fiscal years 1994
and 1995, however, intense price competition in Western Europe significantly
impacted selling prices as competitors moved to protect market shares. This
price sensitivity in Western Europe may be reduced as a result of the
Company's recent acquisition of Actron Group, Ltd, a major competitor to the
Company during the last several years.
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 45% of net revenues. The components of cost of revenues are as
follows: 71% -- material, 15% -- labor, and 14% -- 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. The Company expects volume 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 fiscal year 1995, field service and installation costs approximated 8% 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 over time.
Selling, General and Administrative Expenses
For fiscal year 1995, sales, marketing and customer service comprised
approximately 60% of all selling, general and administrative expenses.
Selling, general and administrative expenses have increased significantly due
to an expansion of the Company's sales force both domestically and
internationally (through acquisitions) from a September 1991 sales force of 47
people to a December 1995 sales force of approximately 267. During this same
period, significant investment was also made in the establishment of a
multidisciplined 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
1995 was 31%. The Revenue Reconciliation Bill of 1995, which has been proposed
in the U.S. House of Representatives, would repeal Section 936 over a 10-year
period. Likewise, the Senate Finance Committee is considering a bill which
would repeal Section 936 over a 7-year period. The Company anticipates that
its effective tax rate may increase in fiscal year 1996 and beyond due to (i)
increased charges of goodwill amortization which are not deductible for
federal tax purposes, (ii) a change in U.S. tax laws resulting in the repeal
of Section 936 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 international sales
were made to distributors and were paid in U.S. dollars. As a result of the
Company's strategy to increase its direct sales to customers (as opposed to
sales through independent distributors), approximately 72% of the Company's
international sales for fiscal year 1995 were made in local currencies. This
increase in sales denominated in currencies other than U.S. dollars increases
the Company's potential exposure to currency fluctuations which can adversely
affect results. During fiscal year 1995, currency exchange losses amounted to
$198,000 compared to losses of $762,000 for fiscal year 1994.
The Company sells product for international sales to its international
subsidiaries. The subsidiaries, in turn, sell these products to customers in
their respective geographic areas of operation in local currencies. This
method of sales and resale gives rise to the risk of gains or losses as a
result of currency exchange rate fluctuations.
In order to reduce the Company's exposure resulting from currency fluctuations
the Company has been purchasing currency exchange forward contracts on a
regular basis. These contracts guarantee a predetermined exchange rate at the
time the contract is purchased. This allows the Company to shift the risk,
whether positive or negative, of currency fluctuations from the date of the
contract to a third party. As of December 31, 1995 the Company had currency
exchange forward contracts totaling approximately $14 million. The contracts
are in the various local currencies covering the Company's Western European
operations and Canada. The Company's operations in Argentina, Mexico and
Australia were not covered by forward exchange contracts at December 31, 1995.
The Company is considering increasing the amount of currencies covered by
forward exchange contracts during fiscal year 1996. In addition, the Company
is evaluating the use of currency options in order to reduce the impact that
exchange rate fluctuations have on the Company's gross margins for sales made
by the Company's international operations. The combination of forward
exchange contracts and currency options should result in reducing the
Company's risks associated with significant exchange rate fluctuations.
<PAGE>
Seasonality
The Company's customers are substantially dependent on retail sales which are
seasonal and subject to significant fluctuations which are difficult to
predict. The Company's sales are impacted by such seasonality and
fluctuations. Historically, the Company has experienced lower sales in the
first and second quarters of each year.
Acquisition of Actron Group Limited
On November 30, 1995 the Company completed the purchase from ADT (UK) Limited
all capital stock of Actron Group Limited, a wholly owned subsidiary of ADT
from ADT. The purchase price was $54 million cash, subject to certain
possible downward adjustments. Actron manufactures, sells and distributes
radio frequency electronic security systems to the retail industry throughout
Western Europe. For the year ended December 31, 1994 Actron had revenues of
approximately $50 million. The Company believes that the acquisition of Actron
will result in (i) consolidation of critical mass in the Western European
market leading eventually to a more rational product offering and pricing,
(ii) possible cost savings as duplicative expenses are eliminated through
consolidation, (iii) additional patent protection and (iv) a lower cost
structure. Management expects that the acquisition of Actron will be dilutive
for the first six months of 1996 but should be accretive for 1996 as a whole.
In connection with the acquisition of Actron, an accrual was established to
integrate Actron's operations with the Company's existing sales and production
locations. Included in this accrual of $10,401,000 are: (i) costs associated
with the elimination of approximately 70 manufacturing and field service
positions from the Actron operation (approximately $7.7), (ii) costs related
to the elimination of redundant sales locations (approximately $1.8 million),
and (iii) ancillary costs (approximately $.9 million). This accrual is
included as part of the purchase price and is included in the "Other Current
Liabilities" section of the Company's 1995 consolidated balance sheet. The
integration of Actron's operations is estimated to be complete in the second
quarter of 1996. Actual charges to complete the integration may exceed the
estimates. Any additional charges in excess of the accrual will be charged to
excess of acquisition cost over net assets acquired.
RESULTS OF OPERATIONS
- ---------------------
Fiscal Year 1995 Compared to Fiscal Year 1994
- ---------------------------------------------
Overview
In fiscal year 1995 revenues increased by approximately $76.4 million (or
59.6%) over fiscal year 1994. For the year, cost of revenues in the Company's
operations (excluding Alarmex and Actron) were slightly lower than in 1994 as
a percentage of sales (from 51.7% to 50.8%). Including the Alarmex operations
and the one month of operations for Actron, cost of revenues increased by 4.0%
(from 51.7% to 55.7%). Selling, general and administrative ("SG&A") expenses
increased $21.4 million but declined as a percentage of revenues by 4.2% (from
39.2% to 35.0%). Income from operations increased $7.4 million (from $11.7
million to $19.1 million). Net earnings for fiscal year 1995 increased by
$5.1 million (from $6.3 million to $11.4 million) resulting in earnings per
share of $.42 for fiscal year 1995 versus $.29 achieved in fiscal year 1994.
<PAGE>
Net Revenues
Net revenues increased approximately $76.4 million (or 59.6%) over fiscal year
1994 (from $128.3 million to $204.7 million). Domestic and international net
revenues accounted for approximately 62.3% and 37.7%, respectively, of total
net revenues compared to 60.6% and 39.4% in fiscal year 1994. Domestic retail
EAS net revenues increased $16.2 million (or 24.6%) primarily as a result of
increased unit sales resulting from several chain wide installations.
International EAS net revenues increased $26.7 million (or 52.7%) primarily as
a result of: higher unit sales volume generated by the Company's operations in
Europe ($24.8 million) including sales to a major customer in Spain ($10.7
million) and one month of sales of Actron ($2.6 million). Sales by the
Company's Alarmex subsidiary, which was acquired during the first quarter of
1995, contributed $33.2 million in revenues. The Company's Access Control
product line had sales growth of 16% (from $6.1 million to $7.1 million)
compared to fiscal year 1994.
Cost of Revenues
Cost of revenues increased approximately $47.6 million (or 71.8%) over fiscal
year 1994 (from $66.4 million to $114.0 million). As a percentage of net
revenues, cost of revenues increased 4.0% (from 51.7% to 55.7%) compared to
fiscal year 1994. This increase was primarily due to lower gross margins
generally associated with the Alarmex operations and to a lesser extent the
one month of operating results from Actron. Cost of revenues related to the
Company's traditional EAS product lines decreased by almost 1% (from 51.7% to
50.8%) primarily resulting from increased production volumes and manufacturing
efficiencies offset partially by volume pricing to significant customers which
are implementing EAS systems chain wide combined with pricing pressure on the
Company's Western European operations.
Fiscal Year 1995 Compared to Fiscal Year 1994
- --------------------------------------------------
Pie Charts Showing Consolidated Earnings Summary
1995 1994 1993
------ ------ ------
Net Revenues $204,741 $128,331 $93,034
Costs of Revenues 56% 52% 59%
Selling, General and
Administrative, Net of Other
Income and Expense 38% 43% 39%
Net Earnings 6% 5% 2%
--------- -------- -------
100% 100% 100%
Selling, General and Administrative Expenses
SG&A expenses increased $21.4 million (or 42.6%) over fiscal year 1994 (from
$50.2 million to $71.6 million). As a percentage of net revenues, however,
SG&A expenses decreased by 4.2% (from 39.2% to 35.0%). The higher expenses (in
dollars) were due to: (i) approximately $13.3 million increase in expenditures
supporting the Company's EAS business, (ii) approximately $6.4 million of SG&A
expenses related to the Alarmex operations including amortization of goodwill
and (iii) approximately $1.7 million related to the one month of operations
and restructuring charges from the Actron acquisition.
<PAGE>
Interest Expense
Interest expense for fiscal year 1995 increased $2.0 million (from $3.1
million to $5.1 million) primarily as a result of interest on the issuance of
a $15 million note in connection with the Alarmex acquisition completed in
February of 1995 combined with interest expense generated from the issuance of
$120 million in convertible subordinated debentures completed in October of
1995.
Income Taxes
The effective tax rate of 31.3% is higher than the effective tax rate used in
fiscal year 1994 of 25.0%. This is primarily due to (i) higher taxable income
attributable to foreign jurisdictions where tax rates are marginally higher
than the U.S., (ii) a marginally higher tax rate on the earnings generated by
the Company's Alarmex subsidiary versus the Company's domestic EAS operations
and (iii) losses resulting from the one month operations of Actron which did
not generate any tax benefit.
Net Earnings
Net earnings were $11.4 million or $.42 per share versus $6.3 million or $.29
per share for fiscal year 1994. The number of weighted average number of
common and common equivalent shares used in the earnings per share computation
(adjusted for the two-for-one stock split of February 22, 1996) for fiscal
year 1995 has increased substantially compared to the prior year (from 21.6
million to 27.4 million) primarily from: Company shares issued as part of the
Alarmex acquisition (401,434); and shares issued during the second quarter in
connection with the Company's recent equity offering (6,173,200) which is
further discussed in "Liquidity and Capital Resources".
Exposure To International Operations
Approximately 72% of the Company's international sales during fiscal year 1995
were made in local currencies. Sales denominated in currencies other than
U.S. dollars increased the Company's potential exposure to currency
fluctuations which can affect results. For fiscal year 1995, currency
exchange losses amounted to approximately $.2 million compared to losses of
$.8 million for fiscal year 1994.
RESULTS OF OPERATIONS
- ---------------------
Fiscal Year 1994 Compared to Fiscal Year 1993
- --------------------------------------------------
Overview
In fiscal year 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 $35.3 million over 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 fiscal year 1993. This improvement was driven primarily by
increased efficiencies in manufacturing (achieved through (i) closure of a
high cost European manufacturing operation, (ii) improvement in manufacturing
efficiencies of existing as well as newer generation products introduced in
<PAGE>
1993 and (iii) higher unit volumes (contributing significantly to more
efficient overhead absorption)) in Western Europe as a result of
Company-sponsored direct sales activities (offset, however, by significant
price reductions as a result of intense price competition). These factors
combined to produce operating income of approximately $11.7 million during
fiscal year 1994 compared to an operating loss of $.6 million in fiscal year
1993.
Net Revenues
Net revenues increased $35.3 million (or 37.9%) over fiscal year 1993 (from
$93.0 million to $128.3 million). Domestic and international net revenues
accounted for approximately 60.6% and 39.4%, respectively, of total net
revenues compared to 64.1% and 35.9% in fiscal year 1993. Domestic EAS net
revenues increased $17.1 million (or 31.3%) primarily as a result of increased
unit sales. In addition, higher prices in certain product offerings and
increases in recurring service revenues also contributed to the increase.
International EAS net revenues increased $17.2 million (or 51.5%) primarily as
a result of higher prices received by the Company as a result of direct sales
as compared to selling through distributors. However, during fiscal year 1994
the Company's operations in Western Europe were significantly impacted by
severe price competition as a result of ongoing efforts by competitors in that
area to retain their respective market shares. These price reductions
negatively impacted the Company's earnings from its international operations
by approximately $3 million.
Cost of Revenues
Cost of revenues increased approximately $12.0 million (or 21.9%) over fiscal
year 1993 (from $54.4 million to $66.4 million). As a percentage of net
revenues, however, cost of revenues decreased 6.8% (from 58.5% to 51.7%)
compared to fiscal year 1993 primarily due to (i) increased production volumes
resulting in favorable overhead absorption combined with greater manufacturing
efficiencies, (ii) the relocation of European production into lower cost
Caribbean based facilities and (iii) increased manufacturing efficiencies of
existing as well as newer generation products introduced in fiscal year 1993.
Combined, these items resulted in lowering production cost as a percentage of
revenues by 1.8% (from 41.7% to 39.9%). Lower spending on research and
development from the prior year (from $5.4 million to $4.9 million) as a
result of the completion of new products during the past several years also
contributed to reducing costs as a percentage of revenues by 2.0%. In
addition, the Company's service costs were positively impacted by the
introduction of new deactivation products, Counterpoint IV and V, with their
increased deactivation heights thereby reducing the frequency of customers'
failure to deactivate disposable labels. Increased service revenues without
the cost for proportionately greater service personnel resulted in reducing
service costs as a percentage of revenues by 3.0%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $11.0 million
(or 28.1%) over fiscal year 1993 (from $39.2 million to $50.2 million).
As a percentage of net revenues, however, selling, general and
administrative expenses decreased by 3.0% (from 42.2% to 39.2%). The higher
expenses (in dollars) were due to (i) increases in variable selling expenses
resulting from higher domestic sales (an increase of approximately $1.0
<PAGE>
million versus fiscal year 1993) and (ii) increases in selling, general and
administrative expenses resulting from the acquisitions made in fiscal year
1993 (an increase of approximately $9.0 million versus fiscal year 1993).
Net Earnings
Net earnings were $6.3 million or $.29 per share versus $1.6 million or
$.08 per share for fiscal year 1993. The results for fiscal year 1993,
however, include a one-time benefit of $3.5 million ($2.7 million after tax)
from a settlement of a contract dispute with the Company's former exclusive
distributor for Western Europe.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's liquidity needs have related to, and are expected to continue to
relate to, capital investments, acquisitions and working capital requirements.
The Company has met its liquidity needs over the last three years primarily
through funds provided by long-term borrowings and in fiscal 1995, through the
issuance of common stock in an underwritten public offering and the issuance
of convertible subordinated debt. The Company believes that cash provided from
operating activities and funding available under its current credit
agreements, together with the remaining net proceeds generated from the sale
of shares of the Company's Common Stock and the issuance of convertible
subordinated debt(discussed below), should be adequate for its presently
foreseeable working capital and capital investment requirements.
The Company's operating activities consumed approximately $14.8 million during
fiscal year 1995 compared to $7.6 million in fiscal year 1994. This use of
cash was primarily the result of (i) an increase in accounts receivable levels
related to greater sales volumes, and (ii) an increase in finished goods
inventories in order to place equipment at customer's locations under
operating lease agreements and to meet anticipated product demand.
During fiscal year 1995 the Company also completed a private placement of debt
totaling $15 million. A significant portion of the proceeds, approximately $13
million, was used for the acquisition of Alarmex (see Note 18 of the Notes to
Consolidated Financial Statements) and the repayment of existing debt owed by
Alarmex at the time of acquisition. The balance of the proceeds,
approximately $2 million, was used for general corporate purposes. During the
third quarter of 1995, the Company entered into an amended and restated $60
million revolving credit agreement with a group of banks to replace the
existing $25 million in revolving credit indebtedness which had been
established during the first quarter of 1995. This amended and restated
agreement is a three year agreement which expires on June 1, 1998 (see Note 5
of the Notes to Consolidated Financial Statements).
The Company also completed the sale of approximately 6.2 million shares of
Common Stock during the second quarter of fiscal year 1995 pursuant to an
underwritten public offering. The net proceeds received by the Company from
this offering approximated $54.7 million. Of these proceeds, $25 million was
used to reduce in its entirety the amount outstanding under the Company's
revolving credit line. The balance of the proceeds are being used for general
corporate purposes including (i) funding strategic acquisitions or start-up
opportunities, and (ii) funding the Company's leasing programs.
<PAGE>
The Company's capital expenditures during fiscal year 1995 totaled $9.4
million compared to $4.5 million during fiscal year 1994. The Company expects
to continue to make investments in property, plant and equipment at levels
higher (in absolute dollars) than the last several years. These capital
expenditures will generally be used for expanding, improving and maintaining
plant efficiency at the Company's various production facilities located in the
Caribbean. As part of this expansion the Company plans on increasing the
current production capacity of disposable labels from 3 billion to 5 billion
over the next several years. In addition, and as part of its continuing
strategy to expand international direct distribution, the Company intends to
establish its own centralized Western European distribution center during
1996.
Chart Showing Balance Sheet - 1995:
$362,151
Current Assets 59%
Property, Plant and Equipment 16%
Intangibles and Other Assets 25%
----
Assets 100%
Current Liabilities 18%
Long Term Debt and Deferred Taxes 44%
Shareholders' Equity 38%
----
Liabilities and Shareholders' Equity 100%
During fiscal year 1995 the Company generated approximately $116 million from
the issuance of convertible subordinated debt (see Note 6 of the Notes to
Consolidated Financial Statements). These proceeds are expected to be used by
the Company for the following: (i) approximately $55 million was used for the
completed acquisition of Actron and related transaction costs; (ii)
approximately $25 million for potential strategic acquisitions and related
start-up operations and capital expenditures in the following areas:
international direct distribution, expanded manufacturing capacity and product
line diversification within the Company's core business; and (iii) the balance
to provide the necessary capital to enable the Company to lease equipment to
retailers under long-term leases (in order to promote sales of disposable
tags) and for general corporate purposes.
The Company has never paid a cash dividend and has no plans to do so in the
foreseeable future. Certain covenants in the Company's debt instruments limit
the amounts available for cash dividends.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Accountants......................................33
Consolidated Balance Sheets as of December 31, 1995 and
December 25, 1994...................................................34
Consolidated Earnings Statements for each of the years
in the three-year period ended December 31, 1995....................35
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1995..............36
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1995....................37
Notes to Consolidated Financial Statements..........................38-55
Financial Schedule
Schedule II - Valuation and Qualifying Accounts.....................58
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Checkpoint Systems, Inc.
We have audited the consolidated financial statements and financial statement
schedule of Checkpoint Systems, Inc. and subsidiaries listed in item 14(a)of
this Form 10-K. These financial statements and financial
statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Checkpoint
Systems, Inc. and subsidiaries as of December 31, 1995 and December 25, 1994,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
As discussed in Note 1 to the financial statements, in 1993, the Company
changed its method of accounting for income taxes.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 11, 1996
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 25,
1995 1994
------------ -----------
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 77,456 $ 944
Accounts receivable, net of allowances
of $1,906,000 and $1,570,000 73,065 33,290
Inventories, net 54,941 29,486
Other current assets 7,479 4,385
Deferred income taxes 1,718 1,117
------- -------
Total current assets 214,659 69,222
PROPERTY, PLANT AND EQUIPMENT, net 56,025 36,799
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, net 61,456 10,120
INTANGIBLES, net 14,930 5,826
OTHER ASSETS 15,081 5,958
------- -------
TOTAL ASSETS $362,151 $127,925
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 16,643 $ 10,064
Accrued compensation and related taxes 5,762 2,635
Income taxes 4,921 2,223
Unearned revenues 8,155 3,357
Other current liabilities 27,102 4,810
Short-term borrowings and current portion
of long-term debt 4,002 6,706
------- -------
Total current liabilities 66,585 29,795
LONG-TERM DEBT, LESS CURRENT MATURITIES 35,674 35,556
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 -
DEFERRED INCOME TAXES 2,234 1,271
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized
500,000 shares, none issued - -
Common stock, par value $.10 per share,
authorized 100,000,000 shares, issued
30,019,758 and 22,557,022 3,002 2,256
Additional capital 83,126 21,592
Retained earnings 58,198 45,661
Common stock in treasury, at cost,
1,598,000 shares (5,664) (5,664)
Foreign currency adjustments (1,004) (2,542)
------- -------
TOTAL SHAREHOLDERS' EQUITY 137,658 61,303
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $362,151 $127,925
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED EARNINGS STATEMENTS
1995 1994 1993
------- ------- -------
(Thousands, except per share data)
Net Revenues $204,741 $128,331 $93,034
Cost of Revenues 114,044 66,360 54,421
------- ------- -------
Gross Profit 90,697 61,971 38,613
Selling, General and Administrative
Expenses 71,642 50,243 39,238
------- ------- -------
Operating Income (loss) 19,055 11,728 (625)
Contract Settlement Income - - 3,500
Interest Income 2,791 529 476
Interest Expense 5,050 3,118 953
Foreign Exchange Loss 198 762 327
------- ------- -------
Earnings Before Income Taxes 16,598 8,377 2,071
Income Taxes 5,189 2,094 456
------- ------- -------
Net Earnings $11,409 $ 6,283 $ 1,615
======= ======= =======
Net Earnings Per Share(1) $ .42 $ .29 $ .08
======= ======= =======
(1) After giving retroactive effect to the February 1996 Stock Split.
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Foreign
Common Additional Retained Treasury Currency
Stock Capital Earnings Stock Adjust. Total
------- ------- ------- ------- ------- ------
(Thousands)
Balance,
December 27, 1992 1,080 16,754 38,891 (5,664) - 51,061
Net Earnings 1,615 1,615
Exercise of Stock
Options 17 1,592 1,609
Foreign Currency
Adjustments (506) (506)
------- ------- ------ ------- ------- -------
Balance,
December 26, 1993 1,097 18,346 40,506 (5,664) (506) 53,779
Net Earnings 6,283 6,283
Exercise of Stock
Options 31 3,246 3,277
Foreign Currency
Adjustments (2,036) (2,036)
------- ------- ------- ------- ------- -------
Balance,
December 25, 1994 1,128 21,592 46,789 (5,664) (2,542) 61,303
Net Earnings 11,409 11,409
Exercise of Stock
options 44 5,200 5,244
Stock Issuances 329 57,835 58,164
Stock Split,
Effective
February 22,1996 1,501 (1,501) -
Foreign Currency
Adjustments 1,538 1,538
------ ------- ------- -------- -------- --------
Balance,
December 31, 1995 $3,002 $83,126 $58,198 $(5,664) $(1,004) $137,658
====== ======= ======= ======== ======== ========
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1995 1994 1993
---- ---- ----
(Thousands)
Cash inflow (outflow) from operating
activities:
Net earnings $11,409 $ 6,283 $ 1,615
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Net book value of rented equipment sold 1,502 1,652 1,268
Long-term customer contracts (2,017) (919) 421
Depreciation and amortization 12,178 8,023 6,476
Deferred Taxes 362 633 (479)
Provision for losses on accounts
receivable 1,188 1,221 520
Restructuring charge 1,254 - -
(Increase) decrease in current assets:
Accounts receivable (25,600) (11,289) (2,716)
Inventories (23,418) (13,095) (10,792)
Other current assets 1,706 828 (2,024)
Increase (decrease) in current
liabilities:
Accounts payable (1,820) (669) 2,062
Accrued compensation and related
taxes 2,460 728 (269)
Income taxes 2,256 1,431 (385)
Unearned revenues 1,612 712 (7)
Other current liabilities 2,175 (3,151) (2,007)
------- ------- -------
Net cash provided (used) by
operating activities (14,753) (7,612) (6,317)
Cash inflow (outflow) from investing -------- ------- -------
activities:
Acquisition of property, plant and
equipment (9,379) (4,532) (4,600)
Acquisitions, net of cash acquired (65,997) (1,786) (3,184)
Patent defense costs (136) - (1,998)
Other investing activities (4,140) (2,266) (1,662)
------- ------- -------
Net cash used by investing
activities (79,652) (8,584) (11,444)
Cash inflow (outflow) from financing -------- ------- --------
activities:
Proceeds from stock issuances 59,910 3,277 1,609
Proceeds of debt 157,281 28,306 14,774
Payment of debt (46,274) (14,443) (942)
-------- -------- --------
Net cash provided by financing
activities 170,917 17,140 15,441
Net increase (decrease) in cash and ------- ------- -------
cash equivalents 76,512 944 (2,320)
Cash and cash equivalents:
Beginning of year 944 - 2,320
------- ------- -------
End of Year $ 77,456 $ 944 $ -
-------- ------- -------
See accompanying notes to consolidated financial statements.
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
- --------------------
The Company is a multinational 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, primarily to retailers in the following market segments: hard goods
(supermarkets, drug stores, mass merchandising and music/electronics) and soft
goods (apparel).
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.
Use of Estimates
- -----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fiscal Year
- ----------
The Company's fiscal year is the 52 or 53 week period ending the last Sunday
of December. References to 1995, 1994, and 1993 are for: the 53 weeks ended
December 31, 1995, the 52 weeks ended December 25, 1994, and the 52 weeks
ended December 26, 1993.
Reclassifications
- -----------------
Certain reclassifications have been made to the 1994 and 1993 financial
statements and related footnotes to conform to the 1995 presentation.
Stock Split
- -----------
On January 4, 1996, the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a 100% tax-free stock dividend distributed
on February 22, 1996 to stockholders of record as of January 18, 1996.
Stockholders' equity at December 31, 1995 has been adjusted to give
retroactive effect to the stock split by reclassifying from additional capital
to common stock the par value of the additional shares arising from the split.
All share and per share amounts have been restated to retroactively reflect
the stock split.
<PAGE>
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.
Revenue from the sale of point-of-sale monitoring systems is recognized on a
percentage of completion basis. 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 on a straight-line basis over the contractual period or as services
are performed. Sales to third party leasing companies are recognized as the
equivalent of a sale. These sales were all made on a non-recourse basis.
Cash and Cash Equivalents
- -------------------------
Cash in excess of operating requirements is invested in short-term, income
producing instruments. Cash equivalents include commercial paper and other
securities with original maturities of 90 days or less. Book value
approximates fair value because of the short maturity of those instruments.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment 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. Buildings, equipment rented to customers,
leasehold improvements, and leased equipment under capitalized leases use the
following estimated useful lives of 27.5 years, 5 years, 7 years, and 5 years,
respectively. Machinery and equipment estimated useful life ranges from 5 to
10 years. Maintenance, repairs and minor renewals are expensed as incurred.
Additions, improvements and major renewals are capitalized. The cost and
accumulated depreciation applicable to assets retired 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 range between 20 and 30 years. The Company's policy is to
record an impairment loss against the net unamortized cost in excess of net
assets of businesses acquired in the period when it is determined that the
carrying amount of the asset may not be recoverable. An evaluation is made at
each balance sheet date (quarterly) and it is based on such factors as the
occurrence of a significant event, a significant change in the environment in
which the business operates or if the expected future net cash flows
(undiscounted and without interest) would become less than the carrying amount
of the asset. Accumulated amortization approximated $3,756,000 and $2,437,000
at December 31, 1995 and December 25, 1994, respectively.
<PAGE>
Research and Development Costs
- ------------------------------
Research and development costs are expensed as incurred, and approximated
$6,862,000, $4,877,000, and $5,392,000 in 1995, 1994, and 1993, respectively.
Royalty Expense
- ---------------
Royalty expenses incurred approximated $2,863,000, $2,227,000, and $1,619,000
in 1995, 1994, and 1993, 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 27,374,000
(1995), 21,612,000 (1994), and 20,772,000 (1993) after giving retroactive
effect to the February 1996 stock split.
Intangibles
- -----------
Intangibles consist of patents, rights, customer lists and software
development costs. The costs relating to the acquisition of patents, rights
and customer lists are amortized on a straight-line basis over their useful
lives which range between seven and ten years, or legal life, whichever is
shorter. Accumulated amortization approximated $1,806,000, $1,027,000, and
$473,000 at December 31, 1995, December 25, 1994, and December 26, 1993,
respectively.
The costs of internally developed software are expensed until the
technological feasibility of the software has been established. Thereafter,
all software development costs are capitalized and subsequently reported at
the lower of unamortized cost or net realizable value. The costs of
capitalized software are amortized over the products' estimated useful lives
or five years, whichever is shorter. Capitalized software development costs
were $2,842,000 and $1,957,000 at December 31, 1995 and December 25, 1994,
respectively, net of accumulated amortization costs of $1,323,000 and $965,000
at December 31, 1995 and December 25, 1994, respectively.
Taxes on Income
- ---------------
Income taxes for 1995, 1994 and 1993 are determined in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109. Under this
method, deferred tax liabilities and assets are determined based on the
difference between financial statement and tax basis of assets and liabilities
using enacted statutory tax rates in effect at the balance sheet date.
Changes in enacted tax rates are reflected in the tax provision as they occur.
A valuation allowance is recorded to reduce deferred tax assets when
realization of a tax benefit is unlikely. Prior to 1993, taxes on income were
determined under Accounting Principles Board Opinion 11 (APB 11) whereby the
income tax provision was calculated under the deferred method.
<PAGE>
Accounting for Foreign Currency Translation and Transactions
- ------------------------------------------------------------
The Company's balance sheet accounts of foreign subsidiaries are translated
into U.S. dollars at the rate of exchange in effect at the balance sheet
dates. Revenues, costs and expenses of the Company's foreign subsidiaries are
translated into U.S. dollars at the average rate of exchange in effect during
each reporting period. The resulting translation adjustment is recorded as a
separate component of stockholders' equity. In addition, gains or losses on
long-term intercompany transactions are excluded from the results of
operations and accumulated in the aforementioned separate component of
consolidated stockholders' equity. All other foreign transaction gains and
losses are included in the results of operations.
Aggregate foreign currency transaction losses in 1995, 1994, and 1993 were
$198,000, $762,000, and $327,000, respectively, and are included in "Foreign
Exchange Loss" in the Consolidated Earnings Statement.
Statements of Financial Accounting Standards Not Yet Adopted
- ------------------------------------------------------------
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," for fiscal years beginning after December 15, 1995. SFAS No.
123 allows companies to recognize compensation expense for grants of stock,
stock options, and other equity instruments to employees based upon fair value
or permits them to continue to apply the existing accounting rules contained
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25). Companies choosing to continue on APB No. 25 are
required to disclose pro forma net income and earnings per share data based on
fair value. The Company anticipates continuing to account for stock-based
compensation in accordance with APB No. 25 and therefore the adoption of SFAS
123 will not have an impact on the Company's financial position or results of
operations.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," for fiscal years beginning after December 15, 1995. The provisions of
SFAS No. 121 require the Company to review its long-lived assets for
impairment on an exception basis whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
future cash flows. Any loss will be recognized in the income statement and
certain disclosures regarding the impairment are to be made in the financial
statements. The company is evaluating the provisions of SFAS No. 121 and does
not anticipate adoption to have a material effect on its financial position or
results of operations.
2. INVENTORIES
Inventories consist of the following:
1995 1994
---- ----
(Thousands)
Raw materials $ 7,282 $ 6,078
Work-in-process 275 193
Finished goods 47,384 23,215
------ ------
Totals $54,941 $29,486
====== ======
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT
The major classes are:
1995 1994
---- ----
(Thousands)
Land $ 892 $ 892
Building 9,784 9,751
Equipment rented to customers 19,793 10,364
Machinery and equipment 51,610 35,162
Leasehold improvements 1,956 1,129
Leased equipment under capital
leases 15 15
------- -------
$84,050 $57,313
Accumulated depreciation
and amortization (28,025) (20,514)
------- -------
$56,025 $36,799
======= =======
4. SHORT-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT
The short-term debt and current portion of long-term debt at December 31, 1995
and at December 25, 1994 consisted of the following:
December 31, 1995 December 25, 1994
----------------- ------------------
(Thousands)
Current portion of Long-term Debt $3,310 $3,277
$2 million credit line held by
Puerto Rico subsidiary with
interest at 8.5% - 2,000
Line of credit held by Argentine
subsidiary with interest at 13.0% 692 1,429
------ ------
Total short-term debt and
current portion long-term debt $4,002 $6,706
======= ======
<PAGE>
5. LONG-TERM DEBT
The long-term debt at December 31, 1995 and December 25, 1994 consisted of the
following:
December 31, 1995 December 25, 1994
----------------- -----------------
(Thousands)
Revolving Credit Agreement with
interest at 8.5% $ - $12,880
Seven year $7 million term
note with interest at 4.9% 4,200 5,250
Six year $8 million term note
with interest at 6.5% 5,647 7,059
Eight year $12 million private
placement note with interest
at 8.27% 12,000 12,000
Eight year $15 million private
placement note with interest
at 9.35% 15,000 -
Other loans with interest rates
ranging from 6.5% to 7.87% and
maturity dates through
January 2000 2,137 1,644
------- -------
Total 38,984 38,833
Less current portion (3,310) (3,277)
------- -------
Total long-term portion $35,674 $35,556
======= =======
The Company has a Revolving Credit Agreement with its principal lending bank
which currently provides a line of credit of up to $60,000,000 with a floating
interest rate (which equaled 8.5% at December 31, 1995) through June 1, 1998.
At December 31, 1995, there were no outstanding borrowings under this credit
agreement.
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 31, 1995,
$4,200,000 was outstanding.
In February 1994, the Company entered into a $8,000,000 six year loan
agreement at a fixed rate of 6.5% with its principal lending bank. Three
equal installments of $470,588 are due during each year for a total of
$1,411,764 per year with interest due monthly. At December 31, 1995,
$5,647,000 was outstanding.
<PAGE>
In March 1994, the Company entered into a $12,000,000 private placement debt
funding agreement at a fixed rate of 8.27%. Principal payments of $4,000,000
annually are to be made starting in year 2000 with interest due semi-annually.
In February 1995, the Company issued and sold $15,000,000 aggregate principal
amount of 9.35% series B Notes (the notes) pursuant to a Note Agreement dated
as of January 15, 1995, among the Company and Principal Mutual Life Insurance
Company. The Notes are due January 30, 2003 and bear interest from the issue
date (computed on the basis of a 360 day year) payable semi-annually on
January 30 and July 30 of each year commencing July 30, 1995. Notes of
$3,000,000 are due on each January 30 commencing January 30, 1999 and ending
January 30, 2002, with the remaining principal payable on January 30, 2003.
The Notes are uncollateralized and rank pari passu with the Company's other
funded debt.
The above loan agreements contain certain restrictive covenants which, among
other things, requires maintenance of specified minimum financial ratios
including debt to capitalization, interest coverage and tangible net worth.
In addition, these agreements limit the Company's ability to pay cash
dividends.
The aggregate maturities on all long-term debt are:
(Thousands)
1996 $ 3,310
1997 2,562
1998 2,462
1999 5,462
2000 7,000
Thereafter 18,188
-------
Total $38,984
=======
6. SUBORDINATED DEBENTURES
In November 1995, the Company completed the private placement of $120,000,000
of Convertible Subordinated Debentures with an annual interest rate of 5.25%.
The debentures are uncollateralized, subordinated to all senior indebtedness
and convertible at any time into shares of the Company's stock at a conversion
price of $18.38 per share (equivalent to approximately 54.4 shares of Common
Stock for each $1,000 principal amount of Debentures). The debentures will
mature on November 1, 2005 and are redeemable, in whole or in part, at the
option of the Company on or after November 1, 1998. The net proceeds
generated to the Company from this transaction approximated $116,000,000. The
conversion price reflects the February 1996 Stock Split.
7. 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 4,000,000
shares of Common Stock (amended in 1990 from a previous level of 2,000,000)
after giving effect to the February 1996 stock split.
<PAGE>
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 6,000,000 shares of Common Stock (amended in 1992 from a
previous level of 4,000,000 shares) after giving effect to the February 1996
stock split. Under the 1992 Plan, only employees are eligible to receive ISOs
and both employees and non-employee directors of the Company are eligible to
receive non-incentive stock options. Non-incentive stock options issued under
the 1992 Plan through December 31, 1995 total 1,275,256 shares after giving
effect to the February 1996 stock split. At December 31, 1995, December 25,
1994 and December 26, 1993 a total of 1,592,152, 417,000, and 729,000 shares,
respectively, were available for grant after giving effect to the February
1996 stock split.
All ISO's under the 1992 Plan expire not more than 10 years (plus six months
in the case of non-incentive options) from the date of grant. Both ISO's and
non-incentive options require a purchase price of not less than 100% of the
fair market value of the stock at the date of grant.
The 1992 Plan is administered by the Compensation and Stock Option Committee
of the Company's Board of Directors. All of the options outstanding at
December 31, 1995 were issued pursuant to the 1987 Plan or the 1992 Plan.
Options that were fully vested and exercisable totaled 3,835,048 as of
December 31, 1995 after giving effect to the February 1996 stock split.
The following schedule summarizes stock option activity and status, after
giving retroactive effect to the February 1996 Stock Split:
1995 1994 1993
---- ---- ----
Outstanding at beginning of year 2,892,302 3,186,928 2,562,228
Granted 1,824,848 397,000 978,000
Exercised (882,102) (596,626) (337,300)
Canceled 0 (95,000) (16,000)
--------- --------- ---------
Outstanding at end of year 3,835,048 2,892,302 3,186,928
========= ========= =========
Price range of options outstanding $2.44 to $2.44 to $2.44 to
at end of year $17.75 $8.63 $8.25
Price range of options exercised $2.44 to $2.44 to $2.44 to
during the year $10.19 $8.25 $6.75
Weighted average exercise price of
currently exercisable options $6.98 $5.54 $5.44
Weighted average exercise price of
exercisable options outstanding(1) $6.98 $5.54 $5.44
(1) The Company does not provide any vesting privileges on stock options.
<PAGE>
8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in 1995, 1994, and 1993, respectively, included payments for
interest of $2,970,761, $2,410,000, and $860,000 and income taxes of
$1,806,000, $375,000, and $638,000.
Excluded from the 1994 Consolidated Statements of Cash Flows is a non-cash
activity of $100,000 relating to the purchase of a licensing agreement in
which the Company recorded the full cost of the agreement and the associated
liability. Also excluded from investing activities in the Consolidated
Statements of Cash Flows are net transfers from inventory to property, plant
and equipment of $11,680,000, $9,059,000, and $3,976,000 in 1995, 1994, and
1993 respectively, relating to equipment rented to customers.
In March 1993, the Company purchased all of the capital stock of its
Argentinean distributor for $2,103,000. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired ...................$3,690,000
Cash paid and direct costs
incurred for the capital stock.................$2,103,000
----------
Liabilities assumed..............................$1,587,000
==========
In July 1993, the Company purchased all of the capital stock of ID Systems
International B.V. and ID Systems Europe B.V. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired ...................$14,575,000
Cash paid and direct costs incurred
for the capital stock including advances ........$ 1,690,000
-----------
Liabilities assumed..............................$12,885,000
===========
In February 1995, the Company purchased all of the capital stock of Alarmex,
Inc. together with a related company, Bayport Controls, Inc. (collectively
"Alarmex"), for $13,498,000. In conjunction with the acquisition, liabilities
were assumed as follows:
Fair value of assets acquired ...................$21,595,000
Cash paid and direct costs incurred
for the capital stock............................$13,498,000
-----------
Liabilities assumed..............................$ 8,097,000
===========
In November 1995, the Company purchased all of the capital stock of Actron
Group Limited. In conjunction with the acquisition, liabilities were assumed
as follows:
Fair value of assets acquired...................$ 81,000,000
Cash paid and direct costs incurred
for the capital stock...........................$ 54,000,000
-----------
Liabilities assumed.............................$ 27,000,000
===========
<PAGE>
9. 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 $20, reflective of the February 1996
Stock Split), each Right will be exercisable for one share of Common Stock.
Upon the occurrence of certain events as specified in the Plan, each Right
will entitle its holder (other than an Acquiring Person or an Adverse Person)
to purchase a number of the Company's or Acquiring Person's common shares
having a market value of twice the Right's exercise price. The Rights expire
on December 28, 1998. Generally, within ten days after a person becomes an
Acquiring Person or is determined to be an Adverse Person, the Company can
redeem the Rights.
The Company completed the sale of approximately 6.2 million shares of Common
Stock during the second quarter of 1995 pursuant to an underwritten public
offering. The net proceeds received by the Company from this offering were
approximately $54.7 million. Of these proceeds, $25 million was used to
reduce the amount outstanding under the Company's revolving credit line. The
balance of the proceeds are expected to be used for general corporate purposes
including (i) funding strategic acquisitions or start-up opportunities, and
(ii) funding the Company's leasing program.
10. 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.
The Company has a local tax exemption agreement with Puerto Rico granting a
90% local tax exemption on both the target and sensor manufacturing operations
through 2008.
Repatriation of the Puerto Rico subsidiary's unremitted earnings could result
in the assessment of Puerto Rico "tollgate" taxes at a maximum rate of 3.5% of
the amount repatriated. During 1995, 1994 and 1993, a provision was made for
tollgate taxes. The Company has not provided for tollgate taxes on
$20,882,000 of its subsidiary's unremitted earnings since they are expected to
be reinvested indefinitely.
<PAGE>
The domestic and foreign components of earnings before income taxes are:
1995 1994 1993
---- ---- ----
Domestic $17,626 $ 6,931 $ 1,720
Foreign (1,028) 1,446 351
------- ------- -------
Total $16,598 $ 8,377 $ 2,071
======= ======= =======
The related provision for income taxes consist of:
1995 1994 1993
---- ---- ----
Currently Payable (Thousands)
Federal $ 4,003 $ 914 $ 369
State 335 - 5
Puerto Rico 319 444 186
Foreign 170 103 375
Deferred
Federal (81) 176 (509)
State (71) (33) 30
Puerto Rico 136 - -
Foreign 378 490 -
------- ------- -------
Total Provision $ 5,189 $ 2,094 $ 456
======= ======= =======
Deferred tax liabilities (assets) at December 31, 1995 and
December 25, 1994 and consist of:
1995 1994
---- ----
(Thousands)
Depreciation $ 1,398 $ 856
Deferred maintenance 220 260
Other 616 155
------- -------
Gross deferred tax liabilities 2,234 1,271
------- -------
Inventory (1,104) (332)
Alternative minimum tax - (513)
Accounts receivable (245) (117)
Net operating loss carryforwards (15,788) (4,668)
Warranty (35) (52)
Other (334) (103)
------- -------
Gross deferred tax assets (17,506) (5,785)
------- -------
Valuation allowance 15,788 4,668
------- -------
Net deferred tax liability (asset) $ 516 $ 154
======= ========
<PAGE>
Included in net operating loss carryforwards of $80,038,000 is $11,369,000
that were acquired in connection with the acquisition of the ID Systems Group
and $66,700,000 that were acquired in connection with the acquisition of
Actron. If realization of the benefit of such carryforwards occur, the
Company will apply such benefit to goodwill in connection with the
acquisition.
Of the total foreign net operating loss carryforwards available, $60,800,000
expire beginning January 1997 through December 2002 and the remaining portion
may be carried forward indefinitely.
The valuation allowance of $15,788,000 in 1995 relate primarily to the net
operating losses acquired in connection with the Actron and the ID Systems
Group acquisitions, and subsequent losses.
A reconciliation of the statutory U.S. Federal income tax rate with the
effective income tax rate follows:
1995 1994 1993
---- ---- ----
Statutory federal income tax rate 35.0% 34.0% 34.0%
Tax exempt earnings of subsidiary in
Puerto Rico (18.0) (13.3) (14.0)
Non-deductible goodwill 2.1 2.1 3.4
Research and Experimentation tax credit - (0.8) (17.2)
Foreign losses with no benefit 7.4 - 8.4
State and local income taxes, net
of federal benefit 4.3 3.5 9.1
Other .5 (.5) (1.7)
------ ------ ------
Effective tax rate 31.3% 25.0% 22.0%
====== ====== ======
11. 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 $626,000, $628,000, and $478,000,
in 1995, 1994, and 1993, respectively.
<PAGE>
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 $107,891, $110,000, and $94,000 in
1995, 1994, and 1993, respectively.
Under the Company's Profit Incentive Plan, bonuses are provided for certain
executives based on a percentage of the amount by which consolidated net
earnings exceed a specified portion of shareholders'
equity at the beginning of the year. During 1995, bonuses were provided for
certain executives in the amount of $614,000. In 1994 and 1993, net earnings
did not exceed this criteria and, accordingly, no bonuses were provided.
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company operates internationally, giving rise to significant exposure to
market risks from changes in foreign exchange rates. Derivative financial
instruments are utilized by the Company to reduce the risk, as explained in
this note. The Company does not hold or issue financial instruments for
trading purposes.
Notional Amounts of Derivatives
- -------------------------------
The notional amounts of derivatives are not a complete measure of the
Company's exposure to foreign exchange fluctuation. The amounts exchanged are
calculated on the basis of the notional amounts and the other terms of the
derivatives, which relate to exchange rates.
Foreign Exchange Risk Management
- --------------------------------
The Company enters into currency exchange forward contracts to hedge certain
firm sale commitments denominated in currencies other than the U.S. dollar
(principally pound sterling, Dutch guilder, Belgian franc, French franc,
German mark, and Canadian dollar). The term of the currency exchange forward
contracts is rarely more than one year. Unrealized and realized gains and
losses on these contracts are included in net income. Notional amounts of
currency exchange forward contracts outstanding were $14,040,000 at December
31, 1995, with various maturity dates ranging through the end of 1996. At
December 25, 1994, the notional amounts of currency exchange forward contracts
outstanding were $8,805,000. Counterparties to these contracts are major
financial institutions, and credit loss from counterparty nonperformance is
not anticipated.
<PAGE>
Additionally, there were no deferrals of gains or losses on currency exchange
forward contracts at December 31, 1995.
Fair Values
- -----------
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1995.
1995 1994
----------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(amounts in thousands)
Long-term debt (including*
current maturities) ($39,676) ($43,188) ($42,262) ($42,959)
Subordinated debentures* (120,000) (142,200) - -
Currency exchange
forward contracts** (33) (33) 136 136
*The carrying amounts are reported on the balance sheet under the
indicated captions.
**The carrying amounts represent the net unrealized gain (loss) associated
with the contracts at the end of the period. Such amounts are included in
"Other Current Liabilities."
Long-term debt is carried at the original offering price, less any payments of
principal. The Company entered into its outstanding loan agreements at a
fixed rate of interest. Rates currently available to the Company for long-term
borrowings with similar terms and remaining maturities are used to estimate
the fair value of existing borrowings as the present value of expected cash
flows. The long-term debt agreements have various due dates with none of the
agreements extending beyond the year 2003.
Convertible subordinated debentures are carried at the original offering
price, less any payments of principal. The debentures are unsecured,
subordinated to all senior indebtedness and convertible at any time into
shares of the Company's stock. The debentures will mature on November 1, 2005
and are redeemable, in whole or in part, at the option of the Company on or
after November 1, 1998. In order to estimate the fair value of these
debentures, the Company used currently quoted market prices.
13. RESTRUCTURING PLAN
In December 1995, as a result of the Actron acquisition, the Company announced
a restructuring plan to reorganize its workplace on an international basis to
eliminate redundancies. In connection with the restructuring, approximately
28 manufacturing and field service positions in the Company's international
operations were eliminated. The Company accrued approximately $1.3 million
before tax in the fourth quarter of 1995, consisting of employment severance
costs of $697,000, lease termination costs of $359,000, and ancillary and
miscellaneous costs of $244,000. The plan is anticipated to be completed
in the second quarter of 1996.
<PAGE>
14. COMMITMENTS AND CONTINGENCIES
The Company leases its offices, distribution center and certain production
facilities. Rental expense for all operating leases approximated $4,211,000,
$2,307,000, and $1,424,000 in 1995, 1994, and 1993, respectively. Future
minimum payments for operating leases having non-cancelable terms in excess of
one year at December 31 1995 are: $4,237,000 (1996), $3,146,000 (1997),
$2,492,000 (1998), $1,677,000 (1999) and $5,566,000 thereafter.
The Company entered into a twelve year lease agreement for a newly constructed
facility in 1994 for the Company's worldwide headquarters including
administrative offices, research and development activities and warehouse
distribution. These lease payments have been included in the future minimum
payments for operating leases above.
Until October, 1995, the Company was the exclusive worldwide licensee of
Arthur D. Little, Inc. ("ADL") for certain patents and improvements thereon
related to EAS products and manufacturing processes. On October 1, 1995, the
Company acquired these patents for $1.9 million plus a percent ranging from 1%
to 1.5% of future EAS RF products sold through 2008. Prior to October 1,
1995, the Company paid a royalty to ADL of approximately 2% of net revenues
generated by the sale and lease of the licensed products, with the actual
amount of the royalty depending upon revenue volume.
The Company is the worldwide licensee of certain patents and technical
knowledge related to proximity card and card reader products. It pays a
royalty equal to 2% of the net revenues from the licensed products. Such
royalties are payable through January 29, 2000, or until all of the subject
patents have been adjudicated invalid.
The Company has a worldwide license to distribute a point-of-sale front-end
monitoring system being marketed under the name Viewpoint. Marketing of this
product began during 1992. The Company pays a one time site license fee for
each site installed.
Effective January 1, 1995, A.E. Wolf, former Chief Executive Officer, and
current Chairman of the Board of Directors entered into an agreement with the
Company to provide consulting services on an as-needed basis. As
compensation, Mr. Wolf will receive $530,014 per year for five years, of which
$255,014 will be deferred annually. In addition, the Company will pay the sum
of $125,000 in five equal installments of $25,000 each commencing January 1,
1995 to Mr. Wolf for his agreement not to compete.
15. EXPORT SALES
The Company's export sales to foreign distributors which are principally in
Europe and Scandinavia approximated $21,785,000, $10,430,000, and $12,163,000
in 1995, 1994, and 1993, respectively. Sales by the Company's foreign
subsidiaries in Argentina, Australia, Canada, Western Europe and Mexico
totaled $55,422,000 in 1995 and $40,120,000 in 1994. Sales to one foreign
distributor of the Company's products amounted to $10,721,000, $287,000, and
$0 in 1995, 1994, and 1993 respectively.
<PAGE>
16. CONCENTRATION OF CREDIT RISK
The Company's foreign subsidiaries, along with many foreign distributors,
provide diversified international sales thus minimizing credit risk to one or
a few distributors. In addition, the Company maintains foreign credit
insurance to provide coverage for potential foreign political or economic
risks. Domestically, the Company's sales are well diversified among numerous
retailers in the apparel, 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.
17. ACQUISITIONS
On March 3, 1993, the Company purchased all of the capital stock of its
Argentinean distributor for $2,103,000 (which includes $103,000 of direct
acquisition costs) 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, subject to a maximum purchase price of
$5,000,000. The Company paid $564,000 and $2,436,000 pursuant to this
contingent purchase price arrangement during 1994 and 1995, respectively. No
further contingent payments are required under this purchase arrangement. The
total purchase price including direct acquisition costs was $5,103,000. 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 $4,844,000 which is
being amortized over twenty years.
On March 8, 1993, the Company purchased a customers list from the Company's
former Mexican distributor for $560,000 in connection with the Company
establishing direct operations in Mexico. The cost related to this customers
list is included in "Intangibles" and is being amortized on a straight line
basis over ten years.
On July 8, 1993, the Company purchased all of the capital stock of ID Systems
International B.V. and ID Systems Europe B.V. ("The ID Systems Group"),
related Dutch companies engaged in the manufacture, distribution and sale of
security products and services. The Company advanced the ID Systems Group
$1,290,000 during the period in which the Company held an option to purchase
all the outstanding capital stock. The purchase price of the capital stock,
exclusive of such advances, was $60 plus direct acquisition cost of
approximately $400,000. This acquisition was accounted for under the purchase
method and, accordingly, the results of operations of this business have been
included with those of the Company since the date of acquisition. The
purchase price resulted in an excess of acquisition cost over net assets
acquired of approximately $5,510,000 which is being amortized over twenty
years.
The Company acquired three production units in connection with the purchase of
the capital stock of the ID Systems Group. The Company shut down all three of
these facilities during 1994. Accordingly, the estimated operating losses and
shut down costs of these facilities amounting to $3,434,000 were accrued for
in the purchase price allocation. As a part of the purchase price allocation,
the values assigned to these assets were based upon estimated residual values
upon ultimate disposition which represents a nominal amount.
<PAGE>
On February 1, 1995 the Company purchased Alarmex, Inc. for approximately
$13.5 million ($10 million in cash and the balance in 401,434 shares of
restricted Common Stock of the Company). Alarmex designs and provides CCTV,
POS monitoring, burglar and fire alarm systems and also provides related
central station monitoring services to over 9,000 retail sites in the United
States. Acquired research and development costs of approximately $92,000 were
expensed as a result of the acquisition. The purchase price resulted in an
excess of acquisition cost over net assets acquired of approximately
$10,400,000, which is being amortized over twenty years.
On November 30, 1995, the Company purchased all of the capital stock of Actron
Group Limited ("Actron") which is engaged in the manufacture, distribution and
sale of security products and services. The purchase price of the capital
stock was approximately $54,000,000. 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 approximately $40,600,000 which is being amortized
over thirty years.
In connection with the acquisition of Actron, accruals were established to
integrate Actron's operations with the Company's existing sales and production
locations. Included in this accrual of $10,401,000 are: (i) costs associated
with the elimination of approximately 70 manufacturing and field service
positions from the Actron operation (approximately $7.7 million), (ii) costs
related to the closure of redundant sales locations (approximately $1.8
million), and (iii) ancillary costs (approximately $.9 million). This accrual
is included as part of the purchase price and is included in the "Other
Current Liabilities" section of the Company's 1995 consolidated balance sheet.
The integration of Actron's operations is estimated to be complete in the
second quarter of 1996. Actual charges to complete the integration may differ
from the above estimates. Such differences will increase (decrease) the
excess of acquisition cost over net assets acquired.
The following unaudited summary of operations presents the consolidated
results of operations as if the acquisition of Alarmex, Inc. and the Actron
Group had occurred at the beginning of the years 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. The
earnings (loss) per share reflect the retroactive effect of the February 1996
Stock Split.
1995 1994
---- ----
(Thousands, except per share data)
Net revenues $251,136 $201,108
Earnings (loss) before
income taxes $ 726 $ 1,251
Net earnings (loss) $ (4,341) $ (715)
Earnings (loss) per share $ (.16) $ (.03)
<PAGE>
18. GEOGRAPHIC SEGMENTS
The following tables shows sales, operating earnings and other financial
information by geographic area for the years 1995 and 1994.
United States
and Puerto Rico Europe Other (1)
1995 --------------- ---------- ---------
- ---- (Thousands)
Net Revenues from Unaffiliated
Customers $149,319 $ 36,669 $18,753
Operating Income $ 20,024 $ (1,877) $ 908
Identifiable Assets $225,877 $118,076 $18,198
United States
and Puerto Rico Europe Other (1)
1994 --------------- ---------- ---------
- ---- (Thousands)
Net Revenues from Unaffiliated
Customers $88,211 $23,009 $17,111
Operating Income $ 9,930 $ 587 $ 1,211
Identifiable Assets $92,285 $18,987 $16,653
(1) Other includes the Company's operations in Canada, Mexico, Argentina and
Australia.
19. SUBSEQUENT EVENTS
On January 11, 1996, the Company signed a letter of intent to acquire Mercatec
Sistemas e Comercio de Equipamentos Electronicos Ltds. ("Mercatec"). Mercatec
is a leading privately-held Brazilian supplier of EAS systems and CCTV systems
to retailers with approximately $3,000,000 in annual sales.
On February 12, 1996, the Company announced that it has granted a
non-exclusive world-wide license to Tokai Electronics Co., Ltd. of Japan to
manufacture and distribute its radio frequency disposable tags. The Company
also announced a supply agreement with Knogo North America, Inc., whereby
Knogo will purchase 50 million disposable tags annually for resale to its
customers in the United States and Canada. These two agreements offer the
Company's customers alternate sources of disposable tags.
On February 14, 1996, the United States Federal Trade Commission ("FTC") began
an investigation of the retail security industry. The probe was launched
under the premise of anticompetitive practices within the industry whereby
certain retail-trade groups limited the autonomy of smaller retailers by
supporting specific security systems. The Company, along with Sensormatic
Electronics Corporation, Minnesota Mining and Manufacturing, and other
industry participants, received subpoenas requesting certain documents and
communications necessary for the investigation. The Company does not believe
that any legal or regulatory infraction will be found on its part.
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
The information called for by Item 10, Directors and Executive Officers of the
Registrant (except for the information regarding executive officers called for
by Item 401 of Regulation S-K which is included in Part I hereof as Item A in
accordance with General Instruction G(3)): Item 11, Executive Compensation:
Item 12, Security Ownership of Certain Beneficial Owners and Management: Item
13, Certain Relationships and Related Transactions, is hereby incorporated by
reference to the Registrant's definitive proxy statement for its Annual
Meeting of Shareholders presently scheduled to be held on April 23, 1996,
which management expects to file with the Securities and Exchange Commission
within 90 days of the end of the Registrant's fiscal year.
PART IV
Item 14. EXHIBITS, FINANCIAL SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements PAGE
----------------------------
The following consolidated financial statements are
included in Part II, Item 8:
Report of Independent Accountants......................... 33
Consolidated Balance Sheets as of December 31,1995 and
December 25, 1994..........................................34
Consolidated Earnings Statements for each of the years
in the three-year period ended December 31, 1995...........35
Consolidated Statements of Shareholders' Equity for each
of the years in the three-year period ended
December 31, 1995..........................................36
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1995...........37
Notes to Consolidated Financial Statements................38-55
(a) 2. Financial Schedule
---------------------------
The following consolidated schedule is required to be filed
by Part IV, Item, 14(a)2:
Schedule II - Valuation and Qualifying Accounts..........58
All other schedules are omitted either because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto:
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K
- --------------------------------------------------------------------
Exhibit 3(a) Articles of Incorporation are hereby
incorporated by reference to Item 14(a), and
3(i) of the Registrant's Form 10-K, filed with
the SEC on March 14, 1991.
Exhibit 4 Instruments defining the rights of security
holders, including indentures, are incorporated
by reference to Item 6(a) of the Registrants's
Form 10-Q/A, filed with the SEC on December 13,
1995.
<PAGE>
Exhibit 10 Material Contracts, are hereby incorporated by
reference to Items 14(a)(3)(v), (vi) and (viii)
of the Registrant's Form 10-K, filed with the
SEC on March 6, 1984; Item 14(a)(3)(iv) of the
Registrant's Form 10-K, filed with the SEC on
February 13, 1985; Item 14(a)(3)(iv) of the
Registrant's Form 10-K, filed with the SEC on
March 11, 1987; Item 20(4.9) of Registrant's
Post-Effective Amendment Number 1 to Form S-8
filed with the SEC on January 20, 1988; Item
2(1) of th Registrant's Form 8-A filed with
the SEC on December 31, 1988; Appendix A to the
Company's Definitive Proxy Statement, filed
March 23, 1992; Items 10 of the Registrant's
Form 8-K, filed on August 25, 1992; and Item
10(a) of the Registrant's Form 8-K, filed on
July 12, 1993. Item 14(a) 3 (Exhibits 10(a)
(c), (e) and (f) of the Registrant's Form 10-K/A
filed with the SEC on March 14, 1995, amending
Annual Report on Form 10-K for the fiscal year
ended December 25, 1994; Item 13 of the Registrant's
Form S-3, filed with the SEC on February 20, 1996;
and Item 6(a) of the Registrant's Form 10-Q, filed
with the SEC on August 8, 1995.
Exhibit 10(a) Amended and Restated Profit Incentive Plan
Exhibit 11 Computation of per share data
Exhibit 21 Subsidiaries of the Registrant
Exhibit 23 Consent of Independent Accountants
Exhibit 24 Power of Attorney, contained in signature page
Exhibit 27 Financial Date Schedule
CHECKPOINT SYSTEMS, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance at
Beginning Costs and Deductions End of
Year Classification of Year Expenses(1) (2) Year
- ---- -------------- --------- --------- ---------- ---------
1995 Allowance for
doubtful accounts $ 1,570 $ 1,801 $ 1,465 $ 1,906
------- ------- ------- -------
1994 Allowance for
doubtful accounts $ 2,237 $ 1,221 $ 1,888 $ 1,570
------- ------- ------- -------
1993 Allowance for
doubtful accounts $ 357 $ 2,166 $ 286 $ 2,237
------- ------- ------- -------
<PAGE>
(1) The addition of $2,166,000 charged to costs and expenses in 1993
includes a provision of $1,646,000 set up by companies acquired.
(2) The deduction of $1,888,000 in 1994 includes a significant portion of
uncollectable accounts associated with the 1993 acquisition of the ID Systems
Group.
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
EXHIBIT 10(a) Amended and Restated Profit Incentive
Plan
EXHIBIT 11 Computation of Per Share Data
EXHIBIT 21 Subsidiaries
EXHIBIT 23 Consent of Independent Accountants
EXHIBIT 24 Power of Attorney, Contained in Signature
EXHIBIT 27 Financial Data Schedule
EXHIBIT 10(a)
CHECKPOINT SYSTEMS, INC.
AMENDED AND RESTATED PROFIT INCENTIVE PLAN
RESOLVED, that the Management Incentive Plan ("MIP") is amended and restated
in its entirety to provide that the revised plan shall be named the Profit
Incentive Plan ("PIP"). The Chief Executive Officer, President and Chief
Operating Officer and all Vice Presidents will participant in the PIP. Under
the PIP, no bonus pool will be created unless pre-tax, pre bonus earnings
exceed 18% of the adjusted beginning balance of Shareholders Equity for the
relevant year. If such earnings are attained, a bonus pool will be created and
will be equal to (i) 3% of all pre-tax, pre-bonus earnings in excess of 18% of
the adjusted beginning balance of Shareholders Equity, plus (ii) 6% of
pre-tax, pre-bonus earnings in excess of 27% of the beginning balance of
Shareholders Equity for the relevant year. Distribution of the pool, if any,
will be as follows: 20% Mr. Dowd, the Company's President, Chief Executive
Officer and Chief Operating Officer; 10% to Mr. Aguilera, the Company's Senior
Vice President - Manufacturing; 10% to Mr. Selfridge, the Company's Executive
Vice President; 10% to Mr. Smith, the Company's Senior Vice President; 10% to
Mr. Reilly, the Company's Senior Vice President, 5% to Mr. Austin, the
Company's Vice President - General Counsel and Secretary, 5% to Mr. Farestad,
the Company's Vice President, Research and Development; and 4% to Mr.
Reinhold, the Company's Vice President - Finance, Chief Financial Officer and
Treasurer. The 26% shall be divided among the foregoing at the discretion of
the Committee.
<PAGE>
EXHIBIT 11
CHECKPOINT SYSTEMS, INC.
COMPUTATION OF PER SHARE DATA
Years Ended
----------------------------------------
December 31, December 25, December 26,
1995 1994 1993
----------- ------------ ---------
(Thousands, except per share data)
Net Earnings $11,409 $ 6,283 $ 1,615
======= ======= =======
Weighted average number of
common and common equivalent
shares outstanding:(1)
Common shares
Shares outstanding at
beginning of year 22,556 21,956 21,606
Shares held in treasury (1,598) (1,598) (1,598)
Shares issued from exercise of
common stock options 888 266 306
Share issued from Alarmex
acquisition 336 - -
Shares issued from equity
offering 4,616 - -
Common equivalent shares, based on
assumed exercise of common stock
options 576 988 458
------- ------- -------
27,374 21,612 20,772
======= ======= =======
Net Earnings Per Share $ .42 $ .29 $ .08
======= ======= =======
(1) After giving retroactive effect to the February 1996 Stock Split.
<PAGE>
EXHIBIT 21
CHECKPOINT SYSTEMS, INC.
SUBSIDIARIES
Checkpoint Systems, Inc. of Puerto Rico, Inc. - Delaware
Checkpoint Caribbean, Inc. - Delaware
Checkpoint FSC, Inc. - Virgin Islands
Electronic Signatures, Inc. - Delaware
Checkpoint International, Inc. - Delaware
Checkpoint Newco Limited - Canada
Checkpoint Canada, Inc. - Canada
Checkpoint Systems, S.A. - Argentina
Neil Acquisition, S.A. - Argentina
Checkpoint de Mexico, S.A. de C.V. - Mexico
Checkpoint Systems Belgium N.V. - Belgium
Checkpoint Systems France SARL - France
Checkpoint Systems Deutschland - Germany
Checkpoint Systems Nederland B.V. - The Netherlands
Checkpoint Holland Holding B.V. - The Netherlands
Checkpoint Holland Trading B.V. - The Netherlands
Checkpoint Systems Europe B.V. - The Netherlands
Checkpoint Systems International B.V. - The Netherlands
Checkpoint Systems Productie B.V. - The Netherlands
Checkpoint Systems Scandinavia A.B. - Sweden
Checkpoint Systems U.K. Limited - United Kingdom
Checkpoint Systems Australia PTY LTD - Australia
Punto De Control Checkpoint, S.A. - Spain
Checkpoint AG Switzerland - Switzerland
Actron Group Limited and related subsidiaries- United Kingdom
Alarmex, Inc. - Minnesota
Checkpoint Systems Norge - Norway
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Checkpoint Systems, Inc. on Forms S-8, Numbers 33-16721,
29-00025, 33-10211, 29-03376, 33-37996 and 33-49191 of our report dated March
11, 1996, on our audits of the consolidated financial statements and financial
statement schedule of Checkpoint Systems, Inc. as of December 31, 1995 and
December 25, 1994, and for each of the three years in the period ended
December 31, 1995, which report is included in this Annual Report on Form
10-K.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, PA
March 21, 1996
EXHIBIT 24
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized in Thorofare, New
Jersey, on March 22, 1996.
CHECKPOINT SYSTEMS, INC.
/s/ Kevin P. Dowd
President, Chief Executive Officer, Chief Operating Officer and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kevin P. Dowd, Steven G. Selfridge, and
Jeffrey A. Reinhold and each of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution in their place and stead, in any
and all capacities, to sign any and all documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Kevin P. Dowd President, Chief Executive
Officer, Chief Operating March 22, 1996
Officer and Director
/s/ Steven G. Selfridge Executive Vice President March 22, 1996
<PAGE>
/s/ Jeffrey A. Reinhold Vice President, Chief March 22, 1996
Financial Officer, and
Treasurer
/s/ Mitchell T. Codkind Vice President, Corporate March 22, 1996
Corporate Controller and
Chief Accounting Officer
/s/ Robert O. Aders Director March 22, 1996
/s/ Roger D. Blackwell Director March 22, 1996
/s/ Richard J. Censits Director March 22, 1996
/s/ David W. Clark Director March 22, 1996
/s/ Allan S. Kalish Director March 22, 1996
/s/ Jermain B. Porter Director March 22, 1996
/s/ Albert Soffa Director March 22, 1996
/s/ Albert E. Wolf Director March 22, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000215419
<NAME> CHECKPOINT SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 7,708
<SECURITIES> 69,748
<RECEIVABLES> 74,971
<ALLOWANCES> 1,906
<INVENTORY> 54,941
<CURRENT-ASSETS> 214,659
<PP&E> 84,050
<DEPRECIATION> 28,025
<TOTAL-ASSETS> 362,151
<CURRENT-LIABILITIES> 66,585
<BONDS> 0
<COMMON> 3,002
0
0
<OTHER-SE> 134,656
<TOTAL-LIABILITY-AND-EQUITY> 362,151
<SALES> 204,741
<TOTAL-REVENUES> 204,741
<CGS> 114,044
<TOTAL-COSTS> 71,642
<OTHER-EXPENSES> (2,593)
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