-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KyMAUqFjhIm2Ac6Z86hFUgc17d78okiZ5roTsQc5882zQdrSMrr8yPYsOcmI25ps f7F//k4skgUEfrPEwtrtoA== 0000215419-99-000003.txt : 19990330 0000215419-99-000003.hdr.sgml : 19990330 ACCESSION NUMBER: 0000215419-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981227 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHECKPOINT SYSTEMS INC CENTRAL INDEX KEY: 0000215419 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 221895850 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11257 FILM NUMBER: 99576777 BUSINESS ADDRESS: STREET 1: 101 WOLF DR STREET 2: P O 188 CITY: THOROFARE STATE: NJ ZIP: 08086 BUSINESS PHONE: 6096481800 10-K 1 DECEMBER 27, 1998 FORM 10K 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 27, 1998 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 --------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) 609-848-1800 --------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, Par Value $.10 Per Share Common Share Purchase Rights Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or on any amendment to this Form 10-K. X --- As of March 1, 1999 the aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $254,000,000. As of March 1, 1999, there were 30,126,884 shares of the Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III - Certain portions of the Company's definitive proxy statement for its Annual Meeting of Shareholders, presently scheduled to be held on May 5, 1999. This report may include information that could constitute forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements may involve risk and uncertainties that could cause actual results to differ materially from any future results encompassed within the forward-looking statements. PART I Item 1. BUSINESS Checkpoint 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 electronic access control systems (EAC). Over the past five years, the Company has achieved substantial growth. This was accomplished through internal expansion and acquisitions, 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, RF tag which triggers an alarm when passed through the Company's sensors at the point of exit from the retail site. These disposable tags, which are manufactured using the Company's proprietary technology at its modern facilities in Puerto Rico and Japan can be easily applied, on products or within packaging, at the retail outlet or at the product manufacturing source. Disposable tags can be easily deactivated without locating the tag. Sales of these disposable tags and field service of their associated sensors and deactivation units provide a significant source of recurring revenues and accounted for approximately 32% of the Company's net revenues for fiscal year 1998. With the recent expansion of the Company's manufacturing facilities in Puerto Rico, combined with the Japanese facilities acquired in early 1998, the Company now has the capacity to produce up to approximately 5.4 billion disposable RF tags per year. The Company's diversified product lines are designed to help retailers prevent losses caused by theft (both by customers and employees) and reduce selling costs through lower staff requirements. The Company's products facilitate the open display of consumer goods, which allow the retailer to maximize sales opportunities. 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 retail chains as American Stores, Company, Circuit City Stores, Inc., Dayton Hudson Department Stores, Eckerd Corporation, H.E. Butt Stores, Mervyns, Rite Aid Corporation, Target Stores, Toys "R" Us, Walgreen Co., and Winn Dixie in the U.S.; Canadian Tire, Shoppers Drug Mart/Pharmaprix, and Toys "R" Us in Canada; Gigante in Mexico; B&Q, Dixons, Sainsbury, and Wickes in the UK; Continente and El Corte Ingles in Spain; Intermarche and FNAC in France; Carrefour in Italy; Norte in Argentina, and Big W, Coles Myer Ltd., and KMart in Australia. The Company's business strategy focuses on providing solutions to retailers' concerns regarding product shrinkage. Through new product innovations to the RF-based platform, the Company will seek to continue its leadership position in certain key hard goods markets, expand its market share in the soft goods market, and dominate in new geographic markets as well. The Company will also continue to capitalize on its installed base of large global retailers to aggressively promote Impulse(R) source tagging. Furthermore, the Company will seek to exploit the flexibility of RF-technology to develop RF-based auto-ID products for the library and retail marketplace, capitalizing on the increased attention to supply-chain management. To achieve these objectives, the Company will work to continually enhance and expand its RF technologies and products, provide superior service to its customers and expand its direct sales activities through acquisitions and start-up operations. The Company is focused on providing its customers with a wide variety of fully integrated electronic security system solutions characterized by superior quality, ease of use, good value and merchandising opportunities 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 "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 (Logistics). In 1977, Logistics, pursuant to the terms of its merger into Lydall, Inc., distributed the Company's Common Stock to Logistics' shareholders as a dividend. 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 its 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 BV and ID Systems Europe BV (ID Systems Group), related Dutch Companies engaged in the manufacture, distribution and sale of EAS systems throughout Europe. The acquisition gave the Company direct access to six Western European countries which included The Netherlands, United Kingdom,Sweden, Germany, France and Belgium. In February 1995, the Company purchased Alarmex, Inc. which designs and installs CCTV, POS monitoring, and burglar and fire alarm systems. The Company also provides related central station monitoring services to over 10,000 retail sites in the United States. On November 1, 1995, the Company acquired Eagle Security, its distributor in Oslo, Norway. The acquisition of Eagle increased the Company's EAS penetration in Scandinavia and broadened its presence in Europe. On November 30, 1995, the Company purchased all of the capital stock of Actron Group Limited (Actron), from ADT (UK) Limited (ADT), a wholly-owned subsidiary of ADT. Actron manufactured, sold and distributed radio frequency electronic security systems to the retail industry throughout Western Europe. During 1996, Actron's operations were combined into the Company's operations in Western Europe. On March 21, 1996, the Company purchased all of the capital stock of Mercatec Sistemas e Comercio de Equipamentos Eletronicos Ltda. (Mercatec). Mercatec is a supplier of EAS systems and CCTV systems to retailers in Brazil. This acquisition along with the Company's Argentinean operations, further increased the Company's direct presence in South America. On November 18, 1996, the Company purchased all of the capital stock of Vysions Systems, Inc. (Vysions) in Ontario, Canada. Vysions is a leading CCTV systems integrator and solutions provider for the Canadian market. This acquisition combined with the Company's existing EAS operations further increased the Company's direct presence and product offerings to the Canadian market. On December 27, 1996, the Company acquired Checkpoint Systems Japan Co. Ltd., its distributor for retail products throughout Japan. The acquisition provided the Company its first direct presence in the growing Asian market. In 1997, the Company completed the acquisition of three CCTV operations: Check Out Security Systems in Denmark, D & D Security in Belgium and Evagard PLC in the United Kingdom. These strategic acquisitions allow the Company to provide direct CCTV products, installation, and service to key markets within Scandinavia, the Benelux countries, and the United Kingdom. Also in 1997, the Company acquired 2M Security Systems ApS, its distributor of retail security products throughout Denmark. In March 1997, the Company's Board of Directors adopted a new shareholder's rights plan (1997 Plan) which replaced a prior plan that had been adopted in 1988. The Rights under the 1997 Plan attached to the common shares of the Company as of March 24, 1997. No separate certificate representing the Rights will be distributed until the occurrence of certain triggering events as defined in the 1997 Plan. The rights may be exercised by the holders at a price of $100.00 per share of common stock, subject to adjustment. The terms of the Rights are set forth in the 1997 Plan, a copy of which was attached as Exhibit 4.1 to the Company's Form 10-K for the year 1996. On February 2, 1998, the Company acquired the operating assets of Tokai Electronics Co., Ltd., (Tokai), a Japanese manufacturer of radio frequency disposable labels. The Company had held a one-third interest in Tokai since 1995. Principal Product Categories - ---------------------------- Electronic Article Surveillance (EAS) EAS systems have been designed to act as a deterrent, and control the increasing problem of merchandise theft in establishments such as retail stores and libraries. EAS systems have been recognized by retail establishments to be a significant part of the overall total loss prevention program which includes closed-circuit television, security personnel, and POS auditing programs. EAS systems, when combined with other systems, provide retail management with the ability to monitor consumer activity, impact merchandise shrinkage, and merchandise products more efficiently. 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 margin and high cost items. This directly improves product velocity and reduces employee costs. With the advent of more sophisticated point-of-sale data collection systems and more efficient inventory controls, retailers have become increasingly aware of the item shrinkage problem and its impact on revenue and profitability. EAS systems have become the preferred choice to control these losses. EAS systems are generally comprised of three components: detectable and deactivatable security circuits (embedded in tags or labels), referred to as "tags", which are attached to or placed in the articles to be protected; electronic detection equipment, referred to as sensors, which recognize the tags when they enter a detection area (usually located at store entrances and exits); and deactivation equipment that disarms the tag when customers follow proper check-out procedures. CCTV Systems and Monitoring Services A full line of closed-circuit television products is offered by the Company along with its EAS products, providing a total systems solution package for retail establishments. The product line consists of fixed and high-speed pan/tilt/zoom camera systems, programmable switcher controls, time-lapse recording, remote tele-surveillance, and point-of-sale (POS) monitoring systems. The Company's custom designed fire/intrusion alarm systems provide protection against internal and external theft, completing the full line of products that can be procured through the Company. All systems supplied can be included in the Company's 24-hour Central Station Monitoring services. Access Control Systems Electronic access control systems restrict access to areas requiring protection by granting access only to authorized personnel at specified times. Continued developments in processing and software technology have enhanced the sophistication of electronic access control systems by embedding these systems into the infrastructure of the business. Access control systems use an "electronic credential", that incorporates a unique identification number to be interpreted by a reading device. The most advanced systems utilize cards with embedded digital circuits as the credential. Each card possesses a personal identification number (PIN). Once the cardholder presents the card containing the PIN, an intelligent controller, which is also a part of the access control system, determines security clearance/access levels. This data along with the time and location are recorded by the system computer for later analysis. RFID - Intelligent Tagging The joint development of a new product undertaken by the Company and Mitsubishi Materials Corporation (Mitsubishi) for retail, library and commercial industrial applications is called RF-EAS/ID(TM). This joint project combines the Company's RF and manufacturing expertise with Mitsubishi's integrated circuit and materials expertise. The product line, a family of tags and readers, can effectively provide solutions to a variety of applications in the auto-ID marketplace. The Performa(TM) family of RFID products is expected to be released in early 1999. Products - -------- Product Descriptions EAS Systems The Company offers a wide variety of EAS solutions to meet the requirements of retail store configurations. The Company's EAS systems are primarily comprised of sensors and deactivation units, which respond to or act upon the Company's tags. The Company's EAS products are designed and built to comply with applicable Federal Communications Commissions (FCC) regulations governing radio frequencies (RF), signal strengths and other factors. The Company's present EAS products comply with applicable regulations. In addition, the Company's present EAS products meet all regulatory specifications for the countries in which they are sold. Sensors The Company's sensor product lines are used principally in retail establishments and libraries. In retail establishments, EAS sensors are usually positioned at the exits from areas in which protected articles are displayed. Each unit includes one or multiple vertical sensors placed at pre-set distances (i.e. three to eight feet apart). In libraries, sensors are positioned at the exit paths, and gates or turnstiles which control traffic. Tags are placed inside books and other materials to be protected. A tag passing through the sensor triggers an alarm, which locks the gate or turnstile. The tag can easily be deactivated (detuned) or passed around the sensor by library personnel. EAS system components include a wide range of sensor styles including chrome, wood, glass or custom designs. The Company also offers the customer a choice of patented disposable paper tags, reusable flexible tags and reusable hard plastic tags. The sensor's transmitter emits an RF signal and the receiver measures the change in that signal caused by an active tag, causing the system to activate the alarm. For fiscal years 1998, 1997, and 1996, the percentage of the Company's net revenues from sensors was 22%, 26%, and 27%, respectively. In 1998, the Company introduced the Strata(TM) family of sensors - Checkpoint's new family of wide aisle products. The Strata PX has been targeted at all applications where the retailer needs to protect large entry/exit ways with few antennas. During 1999, the Company plans to offer new package styles with enhanced functionality of the Strata line of products. A significant feature of these technically advanced EAS systems is the combination of a receiver and transmitter in a single sensor. Utilizing the latest Digital Signal Processing (DSP) technology along with the Company's newly developed Advanced Digital Discrimination(TM) (ADD/RF) digital filtering technology, the Strata family can protect aisle widths of 12 feet using only two sensors. One sensor is capable of three feet of detection on either side of the sensor. Additional features include merchandising panels, alarm counter, pager interface, people counter, and alarm sounding devices. The Pillar(TM) family of products was also introduced in 1998. The Pillar family offers flexibility in packaging and style with unobtrusive wide-aisle protection. The Pillar system also utilizes DSP technology along with the Company's newly developed ADD/RF digital filtering technology. This combination allows the retailer to protect wide-aisles while using the full range of tags and source tagged merchandise. The sensor can be customized to "blend" into the retail store, making EAS part of the retail space. With ADD/RF, the Pillar family offers the highest level of wide-aisle protection for the sophisticated retailer. The Company makes the QS4000(TM), QS4500(TM) and QS5500(TM) for mid-aisle (four to five feet) applications. All of these sensors use the Company's advanced sensor technology and are compatible with the full range of tags and scan/deactivation systems. Introduced in 1990, the QS2000(R) remains a popular narrow aisle product line, especially with smaller drug and supermarket stores because of its rugged, reliable design. Improvements to the QS2000 system electronics have kept the system current with state-of-the-art digital technology. The QS2000 has been re-engineered to provide excellent tag detection with enhanced tag- discrimination capabilities. Using digital filtering technology, the QS2000 analyzes RF signals in its detection zone and can discriminate between unique tag signals and environmental interference. This development greatly enhances system integrity while increasing tag detection. The QS2000 is also available in a weatherized version for outdoor use. Rounding out the narrow aisle product line, the Company also offers chrome-finished Quicksilver(R) sensors, and solid-oak Signature(R) sensors, featuring similar technology as offered in the QS2000. To satisfy the European and Pacific Rim preference for in-lane protection in supermarkets and hypermarkets, the Company offers in-lane EAS sensors that are compatible with the full range of EAS tags and deactivators. Marketed under the name Corvus(R), these systems utilize the same technology used in the QS2000 style products but are typically installed in-lane at the checkout counter and provide retailers an alternative to manage shrinkage caused by theft. The Company also offers a line of value-priced, reusable tag detection systems designed primarily for providing wide-aisle protection for the apparel marketplace. Marketed under the name QS1500(TM) and QS1600(TM), the system offers detection on either side of a single sensor, or it can protect up to six feet between two sensors. For wider detection, the QS1600 with two pedestals can detect tags at distances of up to twelve feet, which is ideal for mall environments. This system is an inexpensive solution for wide-aisle detection. Deactivation Units Deactivation units disarm the disposable tag to prevent recognition by the sensors located at the exits. Deactivation usually occurs at the point-of- sale. In 1986, the Company introduced Counterpoint(R) I, a non-contact deactivation unit which eliminated the need to search for and remove or manually detune disposable tags. In 1989, the Company patented and introduced integrated scan/deactivation. Integrated scan/deactivation provides simultaneous reading of the bar code information, while deactivating the tag in one single step at the point-of-sale. Counterpoint VII, the latest Counterpoint version, was introduced in 1997. With its non-contact deactivation and scan/deactivation technology, cashier training is virtually eliminated and through-put speed is maximized. This capability has helped establish the Company as the supplier with the preferred technology with retailers concerned about customer through-put at point-of-sale. Deactivation configurations include horizontal counter-mounted slot scanners, vertical mounted scanners, hand-held scanners and weigh scale scanners. The Company integrates the deactivation capability with more than 50 bar code scanners. These scanners are available from companies such as PSC (formerly SpectraPhysics), Symbol Technologies, Inc., Metrologic, Inc., NCR (National Cash Register,Inc.), ICL Systems, Inc./Fujitsu Ltd., IBM (International Business Machines), and ScanTech BV. These scanners have a deactivation range up to 15 inches. Most of these units can be configured to provide verification of a reusable tag if left on the merchandise accidentally, eliminating embarrassing cashier errors. Two types of deactivation pads are available for a variety of retail environments. The Company has also pioneered the development of interlock and post scanner verification. These tools, working with the Company's patented integrated scan/deactivation, allow the retailer to reduce the incidence of internal (cashier) theft due to sliding and sweethearting at the point-of-sale. For 1998, 1997, and 1996, the percentage of the Company's net revenues from deactivation was 11%, 12%, and 13%, respectively. Tags All tags contain an electronic RF circuit that, unless deactivated (disposable tags) or removed (reusable tags), triggers an alarm when passed through the sensors. Customers can choose from a wide variety of tags, depending on their merchandise mix. Tags can be applied at the store location, at the manufacturing site, or at a distribution center. Disposable Tags Disposable security tags are affixed to merchandise by pressure sensitive adhesive or other means. These tags range in size from 1.125" x 1.5" to 2.0" x 2.0" enabling retailers to protect frequently-pilfered items. Disposable tags must be deactivated electronically at the point-of-sale, or passed around the sensors. The Company provides tags compatible with a wide variety of standard price-marking/bar-coding printers. The Company's tags can be integrated into many commonly available printers offered by Sato, Zebra, Monarch, Printronix and Avery Dennison. This integration, referred to as Cheklink(R) was developed to combine pricing, merchandising, protection and data collection in a single step. Disposable tags can be applied at the manufacturing site, in the distribution center, or in-store. Under the Company's Impulse source tagging program, tags can be embedded in products or packaging at the point-of-manufacture. For 1998, 1997, and 1996, the percentage of the Company's net revenues from disposable tags was 24%, 22%, and 24%, respectively. The Company is licensed to sell and provide tags in roll form for the Model 4021(TM) label applicator printer (Pathfinder(R)) 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 environments. In addition, the Model 4021 applicator has a self-contained keyboard which allows for easy entry of various types of label data including bar code, price and size. The Model 4021 applicator also has built-in scanning capability that can scan existing product bar codes, then print identical labels for application without obscuring important product information. The Company has strategic working relationships with several label integrators including Avery Dennison, A&H Manufacturing, Paxar, J&J Cash, Ltd., RVL, and Shore to Shore. Avery Dennison offers customers a variety of labels and tickets that contain the Company's embedded RF security circuit, utilizing a fully automated proprietary process. Reusable Tags The Company markets a full line of reusable products, which provide security for apparel items, as well as for entertainment products such as music CDs, audio and video cassettes, and video games. Consisting of plastic hard tags, fluid ink tags, and SAFER(R) products, the reusable product line accounted for 8%, 10%, and 8% of the Company's net revenue in 1998, 1997, and 1996, respectively. The Company's most popular reusable products are its plastic hard tags which are attached via a pin to men's and women's apparel items. The Company's product line includes the UFO, Mini UFO, and Super UFO tags and consist of a plastic housing, a magnetic based lock, and an RF coil for detection in the Company's EAS sensors. The Mini hard tag combines solid detection and security performance with value pricing. Several new hard tags are currently in test for release in 1999 that will further enhance Checkpoint's apparel EAS portfolio. The Company also markets a line of fluid tags marketed under the name ChekInk(R)II that provides a cost-effective defense against shoplifters. Unauthorized removal of these tags will cause sealed vials of dye to break open, rendering the garment unusable. ChekInk II serves as a practical alternative to securing valuable merchandise. Ideal for use in stores such as department stores, mass merchandise, and sporting goods stores, ChekInk II can be removed quickly and easily at point-of-sale in the same manner as the reusable tags. In addition to the reusable tags described above, the Company manufactures a variety of other reusable hard tags. The Company markets a full range of plastic Safer products used to provide added security to such items as CDs, videos and electronic games. The Company has 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. CCTV Systems and Monitoring Services In early 1995, the Company acquired Alarmex, Inc. (Alarmex), a designer, distributor and installer of CCTV and fire/intrusion alarm systems for retail establishments. Alarmex, which was renamed Checkpoint Security Systems Group, Inc., provides a full line of camera, monitoring, perimeter protection and fire/intrusion alarm equipment and services. Prior to this, the Company acquired, in 1991, worldwide licensing rights for Viewpoint(R), a POS total transaction monitoring system designed to help control internal theft. CCTV products include fixed, high speed dome cameras in basic black & white and color, covert CCTV investigative kits, VCRs, digital storage components, and the Company's Clarity Concept(TM) dome CCTV product, which is a fully functional pan/tilt/zoom camera system. Monitoring products include the Company's Viewpoint and Possi(R) POS transaction monitoring systems. All systems can be remotely accessed and are capable of monitoring POS activities. To compliment the full line of CCTV and monitoring products, the Company also provides fire and intrusion alarm systems for its retail customers. Products such as Secure Point(TM), an RF-based burglar alarm system, and Keywriter(TM), a scheduled-access verification system that monitors employee activity, are just some of the user friendly products offered in the security arena. All of the customer's facilities can be monitored by the Company's UL/FM approved 24 hour central monitoring station. For fiscal 1998, 1997, and 1996, the percentage of the Company's net revenue from CCTV systems and monitoring services was 19%, 16%, and 13%, respectively. Access Control Systems Electronic access control systems restrict access to areas requiring protection by granting access only to authorized personnel at specified times. For fiscal years 1998, 1997, and 1996, the percentage of the Company's net revenue from access control systems remained at approximately 3% of total revenues. The Threshold(R) product line consists of eight systems, ranging from a small non-computer based system to large scale networked Microsoft Windows(R) based offerings. These sophisticated systems provide a maximum degree of control, monitoring and reporting for any size facility. The Threshold product line features a Distributed Network Architecture(R) which stipulates that no single point of failure will affect the entire system. These systems are capable of controlling over 500 doors for access control and up to 50,000 cardholders. The incorporation of alarm and control point monitoring (i.e. turning lights on or off), integrated ID Badging, and CCTV functionality, are also integral features of all eight Threshold offerings. The Company's remote software packages allow the connection of the controller, a microprocessor based device, from anywhere in the country via standard telephone lines. This functionality has opened the possibility of broadcasting controller information over corporate networks (i.e. LAN/WAN) allowing both increased speed and lower cost. The newest additions to the Threshold line incorporate the power of Microsoft's Windows operating systems. Threshold 95(R) and Threshold NT(R) make use of a Graphical User Interface (GUI) for easy to use operator intervention. These two systems allow the integration of third party software packages, like video imaging, CCTV, and paging systems, to enhance the basic access control offering. The video imaging feature attaches a video snap shot of card users in the systems. These images are stored in the users record and can be called to the monitor when a card is presented to any reader. 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 any environment. The Mirage(R) family of readers provides rapid card verification with the ability to mount to metal without signal degradation. The Mirage SG(R) provides the same reliable read performance in a smaller, more aesthetically pleasing package. The Mirage proximity cards are comprised of a custom-integrated circuit attached to an antenna and implanted in a plastic card or key tag. This circuit is powered by RF energy transmitted by the reader located near the entrance of a controlled door. Access is granted by the attached controller when a properly powered card transmits its code to the reader. The integrity of the internal card code is protected and cannot be copied or duplicated. In addition, a Mirage reader can be protected from environmental damage or vandalism by installing it inside a wall or behind glass. Mirage readers are used throughout the entire Threshold product line. Principal Markets and Marketing Strategy - ---------------------------------------- The Company markets its products primarily to retailers in the following market segments: hard goods (supermarkets, drug stores, mass merchandisers and music/electronics) and soft goods (department stores; mens, womens and childrens apparel; specialty stores, and sporting goods). The Company also markets its products and services to libraries. The Company is a market leader in the supermarket, drug store and mass merchandiser market segments with customers such as American Stores Company, Circuit City Stores, Inc., Dayton Hudson Department Stores, Eckerd Corporation, H.E. Butt Stores, Mervyns, Rite Aid Corporation, Target Stores, Toys "R" Us, Walgreen Co., and Winn Dixie in the U.S.; Canadian Tire, Shoppers Drug Mart/Pharmaprix, and Toys "R" Us in Canada; Gigante in Mexico; B&Q, Dixons, Sainsbury, and Wickes in the UK; Continente and El Corte Ingles in Spain; Intermarche and FNAC in France; Carrefour in Italy; Norte in Argentina; and Big W, Coles Myer Ltd., and Kmart in Australia. Industry sources estimate that "shrinkage" (the value of goods which are not paid for) is a $25-35 billion annual problem for the North American retail industry and a $30-45 billion annual problem throughout the rest of the world. Shrinkage is caused primarily by shoplifting and employee theft. Sophisticated data collection systems (primarily bar code scanners), available to retailers, have highlighted the shrinkage problem. As a result, retailers now recognize 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 360,000 major retail locations in the United States that would benefit from the installation of an EAS system. The Company estimates that approximately one-third of these locations have installed systems. In early 1995, the Company acquired Alarmex (now referred to as Checkpoint Security Systems Group), which designs and provides CCTV, POS monitoring and burglar and fire alarm systems to over 10,000 retail sites in the U.S. 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. 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: - - Continue to promote Impulse Source Tagging on a worldwide basis - - Provide retailers with the next generation of security and supply chain management systems utilizing RF-EAS/ID (RFID) technology - - Broaden the line of security products to serve under-penetrated markets - - Continue expansion of its CCTV program on a worldwide basis to bring a total solution offering to retail customers - - Expand the Company's presence in all EAS markets with specific focus on supermarket, apparel, department store, and hypermarkets - - Seek acquisitions and strategic alliances both domestically and internationally The Company promotes its products primarily through: (i) ease of integration into the retail environment; (ii) emphasizing Impulse Source Tagging; (iii) providing total loss prevention solutions to the retailer; (iv) superior service and support capabilities; (v) direct sales efforts and targeted trade show participation; and (vi) the offering of flexible financing options including various leasing options as well as the comprehensive tag program. The Impulse Source Tagging program was developed more than ten years ago to encourage retailers and manufacturers to work together to improve the protection of a retail establishments' merchandise and bring greater visibility to the manufacturer's products in the store. The Impulse program assists manufacturers in understanding how easily EAS tags can be embedded into product or packaging, and more importantly, the simplicity with which the tags can be integrated into the manufacturing process. Engineering support, product evaluations and on-site source tagging specialists have been added to the Impulse program since its inception. Studies conducted by retail trade associations and major universities indicate that source tagging provides major benefits to retailers. Source tagging greatly enhances security, creating a package-integrated theft deterrent that is virtually tamper-proof. Source tagging provides retailers with an array of merchandise display options previously impractical because of the threat of theft. This benefit has a positive impact on sales with reported increases as much as 200%. Source tagging also eliminates the labor costs associated with manual, in-store application of security tags, and eliminates excessive packaging materials required for theft deterrence. During 1998, over 600 million disposable tags were provided to over 1,700 worldwide manufacturers participating in the Company's source tagging program. Strategies to increase acceptance of source tagging are as follows: (i)increase installation of RF-EAS equipment on a chainwide basis with leading retailers around the world; (ii) assist retailers in promoting source tagging with vendors; (iii) increase staffing for source tagging efforts supporting manufacturers and suppliers to speed implementation; and (iv) expand RF tag products to accommodate more packaging schemes. In the anticipation of the needs of the Company's retail customers, the Company is utilizing the versatility of radio frequency (RF) technology by combining an integrated circuit with the Company's RF circuit to deliver a RFID tag capable of storing, processing and communicating product information while simultaneously protecting merchandise from theft. This product represents a rational progression of the Company's ongoing focus on RF technology. The Company believes RFID will revolutionize retail operations as well as provide benefits to manufacturers and distributors in the retail supply chain. To accelerate the development of the RFID technology, the Company entered into a joint research and development agreement, on February 12, 1997, with Mitsubishi Materials Corporation, a Japanese company based in Tokyo. Under this multi-year agreement, which creates a joint product research and development project, the parties are dedicated to developing radio frequency intelligent tagging solutions for retail, library, and commercial/industrial applications. The project combines funding, personnel, and other resources as well as the RFID technology portfolios of the two companies. Distribution - ------------ EAS Systems The Company sells its EAS systems principally throughout North America, South America, Europe, and Asia Pacific. During 1998, EAS revenues from outside of North America represented approximately 50% of the Company's EAS net revenues. In North America, the Company markets its EAS products almost entirely through its own sales personnel and independent representatives. The Company, at December 27, 1998, employed 113 salespeople who sell the Company's products to the North American retail market and who are compensated by salary plus commissions. Of total EAS domestic revenues during 1998, 98% was generated by the Company's own sales personnel. Internationally, the Company markets its EAS products principally through foreign subsidiaries which sell directly to the end-user and through independent distributors. The Company's international subsidiaries, as of December 27, 1998 employed a total of 177 salespeople who sell the Company's products to the retail and library markets. The Company's international sales operations are currently located in Western and Southern Europe, Scandinavia, Mexico, Argentina, Brazil, Australia, and Japan. Independent distributors accounted for 6.8% of the Company's EAS revenues outside the United States during 1998. Foreign distributors sell the Company's products to both the retail and library markets. The Company, pursuant to written distribution agreements, generally appoints an independent distributor as an exclusive distributor for a specified term and for a specified territory. The Company sells its products to independent distributors at prices below those charged to end-users because the distributors make volume purchases and assume marketing, installation, customer training, maintenance and financing responsibilities. CCTV Systems and Monitoring Services The Company markets its CCTV systems and services throughout the world using its own internal sales staff. These products and services are provided to both the Company's existing EAS retail customers as well as non-EAS retailers. Access Control Systems The Company's Access Control Products Group sales personnel market electronic access control products to approximately 153 independent dealers. The Company employs six 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. Salespeople - ----------- The Company presently employs approximately 309 salespeople worldwide. On average, these salespeople have over five years experience in the industry. The Company invests heavily in sales training programs and experiences little turnover among its top performers. Backlog - ------- The Company's backlog of orders was approximately $18.8 million at December 27, 1998, compared to approximately $24.2 million at December 28, 1997. The Company anticipates that substantially all of the backlog at the end of 1998 will be delivered during 1999. In the opinion of management, the amount of backlog is not indicative of 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 future growth opportunities, 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. The Company continually evaluates its domestic and international patent portfolio, and where the cost of maintaining the patent exceeds its value, such patent may not be renewed. The majority of the Company's revenue is derived from products or technologies which are patented or licensed. The Company's competitive position is supported by its extensive manufacturing experience and know-how and, to a lesser degree, its technology and patents. There can be no assurance, however, that a competitor could not develop products comparable to those of the Company. The Company also licenses certain sensors, magnetic labels and fluid tags. These license arrangements have various expiration dates and royalty terms, but are not considered by the Company to be material. Royalties amounted to approximately 1.5%, 1.2%, and 1.4% of EAS net revenues for fiscal years 1998, 1997, and 1996, respectively. 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 1% to 1.5% of future EAS RF product revenue. Prior to October 1, 1995, the Company paid a royalty to ADL of approximately 2% of net revenues generated by the sale and lease of the licensed products, with the actual amount of the royalty depending upon revenue volume. CCTV Systems and Monitoring Services The Company has a worldwide license to distribute a point-of-sale front-end monitoring system being marketed under the name Viewpoint. Marketing of this product began during 1992. The Company pays a one time site license fee for each site installed. Access Control Systems The Company is the worldwide licensee of certain patents and technical knowledge related to proximity card, card reader products, and software products. It pays a royalty equal to 2% of the net revenues from the licensed products. Such royalties are payable through January 29, 2000, or until all of the subject patents have been adjudicated invalid. The Company pays royalties relative to the feature set imbedded within certain software products. This agreement is renewed annually. The Company also pays a royalty equal to 3.5% on hardware revenue associated with the sale of certain software products. This agreement will remain in place through 1999. Royalty expense for fiscal years 1998, 1997, and 1996 was less than 2% of the Company's EAC net revenues. Manufacturing, Raw Materials and Inventory - ------------------------------------------ EAS The Company manufactures its products in modern facilities located in Puerto Rico, Japan, and the Dominican Republic and has a highly integrated manufacturing capability. The Company's manufacturing strategy is to rely primarily on in-house capability and to vertically integrate manufacturing operations to the extent economically practical. This integration and in- house capability provides significant control over costs, quality and responsiveness to market demand which, it believes, results in a distinct competitive advantage. As part of its total quality management program, the Company practices concurrent engineering techniques in the design and development of its products involving engineering, manufacturing, marketing and customers. The Company sold approximately 2.7 billion disposable RF tags in 1998. With the recent expansion of the manufacturing facility in Puerto Rico and the acquisition of the assets of Tokai Electronics Co., Ltd., the Company has the capacity to produce 5.4 billion disposable RF tags per year. The Company purchases raw materials from outside suppliers and assembles electronic components at its facilities in Puerto Rico for the majority of its sensor product lines. For its tag production, the Company purchases raw materials and components from suppliers and completes the manufacturing process at its facilities in Puerto Rico (disposable tags) and the Dominican Republic (reusable tags). Certain components of sensors are manufactured at the Company's facilities in the Dominican Republic and shipped to Puerto Rico for final assembly. The principal raw materials and components used by the Company in the manufacture of its products are electronic components and circuit boards for its systems; and aluminum foil, resins, paper, and ferric chloride solutions for the Company's disposable tags. While most of these materials are purchased from several suppliers, there are numerous alternative sources for all such materials. The Company's general practice is to maintain a level of inventory sufficient to meet anticipated demand for its products. CCTV Systems and Monitoring Services The Company does not manufacture any of the components for its CCTV product line other than small interface circuit boards. The Company purchases all the hardware components of its CCTV products from major distributors. Limited inventory levels are maintained since the Company places orders with these distributors as customer orders are received. The software component of the system is added during product assembly at the Company's operation facilities. Access Control Systems The Company purchases raw materials from outside suppliers and assembles the electronic components for controllers and proximity readers at its facilities in the Dominican Republic and Puerto Rico. For non-proximity electronic access control components, the Company subcontracts manufacturing activities. All electronic access control final system assembly and testing is performed at the Company's facilities in Thorofare, New Jersey. Competition - ----------- EAS Currently, EAS systems are sold to two principal markets: retail establishments and libraries. The Company's principal global competitor in the EAS industry is Sensormatic Electronics Corporation (Sensormatic). Sensormatic is a fully integrated supplier of electronic security systems, with revenues of approximately $1.0 billion for its most recent fiscal year and an approximate 45% share of the worldwide installation base. Management estimates that the Company's market share of installed systems in the EAS industry is approximately 36%. Within the U.S. market, additional competitors include Sentry Technology Corporation and Ketec, Inc., principally in the retail market, and Minnesota Mining and Manufacturing Company, principally in the library market. Within the Company's international markets, mainly Western Europe, Esselte Meto, NEDAP, along with Sensormatic, are the Company's most significant competitors. The Company believes that its product line offers more diversity than its competition in protecting different kinds of merchandise with disposable tags, hard reusable tags and flexible reusable tags, 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 and allows for the protection of a variety of retail merchandise theft. Furthermore, the Company believes that its manufacturing know-how and efficiencies relating to disposable and reusable tags give it a significant cost advantage over its competitors. CCTV Systems and Monitoring Services The Company's CCTV and POS Monitoring products, which are sold domestically through its Security Systems Group subsidiary and internationally through its international sales subsidiaries, compete primarily with similar products offered by Sensormatic, Ultrak, Pelco, and Sentry Technology. The Company competes based on its superior service and believes that its product offerings provide its retail customers with distinct system features. Electronic Access Control The Company's electronic access control products compete with other manufacturers of electronic access control systems as well as with conventional security systems. Major competitors are Casi Rusco, Software House Inc. (a subsidiary of Sensormatic), Northern Computers, and Lenel Systems. Research and Development - ------------------------ The Company expended approximately $8,018,000, $7,604,000, and $6,408,000 in research and development activities during 1998, 1997, and 1996, respectively. The emphasis of these activities is the continued broadening of the product lines offered by the Company and an expansion of the markets and applications for the Company's products. The Company's continued growth in revenue can be attributed, in part, to the products and technologies resulting from these efforts. Another important source of new products and technologies has been the acquisition of companies and products during the last few years. The Company expects to continue to make acquisitions of related businesses or products consistent with its overall product and marketing strategies. The Company continues to expand its product line with improvement in disposable tag performance and wide-aisle RF detection sensors. In addition, the Company holds or licenses over 200 patents and proprietary technologies relating to its products and their manufacture. The Company continually evaluates its domestic and international patent portfolio, and where the cost of maintaining a patent exceeds its value, such patent may not be renewed. The Company entered into a joint research and development agreement, on February 12, 1997, with Mitsubishi Materials Corporation, a Japanese company based in Tokyo, to develop RF-EAS/ID technology. Under this multi-year agreement, which creates a joint product research and development project, the parties are dedicated to developing radio frequency intelligent tagging solutions for retail and library applications. The project combines funding, personnel, and other resources as well as the RFID technology portfolios of the two companies. Employees - --------- As of December 27, 1998, the Company had 3,044 employees, including 7 executive officers, 60 employees engaged in research and development activities and 353 employees engaged in sales and marketing activities. In the United States, 19 of the Company's employees are represented by a union. Financial Information About Geographic and Business Segment - ------------------------------------------------------------ The Company operates both domestically and internationally as well as in four distinct business segments. The financial information regarding the Company's geographic and business segments, which includes net sales and profit from operations for each of the three years in the period ended December 27, 1998, and identifiable assets as of December 27, 1998, December 28, 1997, and December 29, 1996, is provided in Note 19 to the Consolidated Financial Statements. Item 2. PROPERTIES The Company's headquarters and distribution center are located in leased facilities in Thorofare, New Jersey. Of the total 104,000 square feet, approximately 64,000 square feet are used for office space and approximately 40,000 square feet are used for storage facilities. The Company has entered into a twelve year lease for the facilities starting in 1995. The rent for the first five years is $692,000 annually. In 1998, the Company leased two additional facilities located in Thorofare, New Jersey. The first is a warehouse facility consisting of 10,000 square feet. The lease term is currently month-to-month with a monthly payment of $4,575. The second is a training/research facility consisting of 18,240 square feet. This facility has a ten year lease through September 2007 and has an average annual rent of $129,000. The Company's principal manufacturing facilities, for the production of most of its products, are located in Ponce, Puerto Rico. These facilities consist of two buildings, the first being a two-story building, which was completed in 1990, is owned by the Company and contains approximately 90,000 square feet. Included in the 90,000 square feet is approximately 11,000 square feet of office space and approximately 14,000 square feet of warehouse space. The second manufacturing facility, also owned by the Company, became operational in the fourth quarter of 1997, and is approximately 54,000 square feet. The Company leases an additional warehouse facility in Puerto Rico containing approximately 32,000 square feet. The lease expires in 2006 with an average annual rent over the term of the lease of approximately $80,000. The Company leases two manufacturing facilities in the Dominican Republic. One facility, located in La Vega, contains approximately 63,000 square feet. It includes approximately 8,000 square feet of office space and approximately 25,000 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 2007 with an annual rent of approximately $32,000. The other facility, located in Los Alcarrizos, contains approximately 56,000 square feet. It includes approximately 6,000 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 tags. The lease for the Los Alcarrizos property expires in December 2002 with an annual rent of approximately $64,000. The leases for both locations have been prepaid for their entire terms. In 1998, the Company acquired the assets of Tokai Electronics Co. located in Japan. Included as a part of this acquisition were two locations consisting of 70,000 square feet of building space comprised of 3,200 square feet of office space and 66,800 square feet of manufacturing and warehouse space located on approximately 12 acres of land. The Company's Security Systems Group subsidiary leases two facilities in Eden Prairie, Minnesota. One facility contains approximately 29,000 square feet of office and warehouse space. Assembly and distribution functions are performed at this site. The lease on this facility expires in June 2001 with an annual rent of approximately $157,000. The other facility contains approximately 19,000 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 2000 with an annual rent of approximately $197,000. The Company's foreign subsidiaries maintain various sales and distribution locations principally in Australia, Argentina, Brazil, Canada, Denmark, France, Germany, Italy, Japan, Mexico, The Netherlands, Sweden, Norway, Portugal, Spain, Switzerland, and the United Kingdom. The locations have an average of 5,500 square feet of office space and an average of 3,800 square feet of warehouse space. The lease terms of these foreign subsidiaries range from one to eighteen years with an aggregate average annual lease expense per location of $89,000 in 1998. In November 1996, the Company's European Distribution Center became operational. The facility, located in Mechelen, Belgium, has approximately 13,000 square feet of office space and 33,000 square feet of warehouse space. The Company's Belgium sales subsidiary occupies approximately 3,000 square feet of office space. The lease for this facility expires in 2004 with an annual rent of approximately $232,000. Item 3. LEGAL PROCEEDINGS The Company is involved in certain legal and regulatory actions all of which have arisen in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe that the ultimate resolution of such matters will have a material adverse effect on its consolidated financial position or results of operations. The Company is a defendant in a Civil Action No. 99-CV-577, served February 10, 1999, in the United States District Court for the Eastern District of Pennsylvania filed by Plaintiff, ID Security Systems Canada Inc. The suit alleges a variety of antitrust claims; claims related to unfair competition and related matters. Plaintiff alleges damages in excess of $20 million. Management is of the opinion that the claims are baseless both in fact and in law, and intends to vigorously defend the suit. Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of 1998 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 Positions with the Name Age Since Company - ----------------------------- -- ------- -------------------- Kevin P. Dowd 50 1988 President and Chief Executive Officer William J. Reilly, Jr. 50 1989 Executive Vice President Michael E. Smith 43 1990 Executive Vice President Luis A. Aguilera 50 1982 Senior Vice President - Manufacturing Jeffrey A. Reinhold 41 1995 Senior Vice President - Finance, Chief Financial Officer and Treasurer Neil D. Austin 52 1989 Vice President, General Counsel and Secretary W. Craig Burns 39 1997 Vice President - Corporate Controller and Chief Accounting Officer Mr. Dowd has been President of the Company since August 1993, and was named Chief Executive Officer and a Director of the Company in January 1995. Mr. Dowd was also Chief Operating Officer from August 1993 to April 1997. Mr. Dowd was Executive Vice President of the Company from May 1992 to August 1993. Mr. Dowd was Executive Vice President - Marketing, Sales and Service from April 1989 to May 1992 and Vice President of Sales from August 1988 to April 1989. Mr. Reilly has been Executive Vice President since April 1997. Mr. Reilly was Senior Vice President from August 1993 to April 1997. He was Vice President - Sales of the Company from April 1989 to August 1993. Mr. Reilly was Eastern Regional Sales Manager from March 1989 to April 1989. Mr. Smith has been Executive Vice President since April 1997. Mr. Smith was Senior Vice President from August 1993 to April 1997. He was Vice President - Marketing from August 1990 to August 1993. Mr. Smith was Director of Marketing from April 1989 to August 1990 and Program Manager - National/Major Accounts from December 1988 to April 1989. 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. Reinhold has been Senior Vice President - Finance, Chief Financial Officer and Treasurer since February 1999. Mr. Reinhold was Vice President - Finance, Chief Financial Officer and Treasurer from January 1996 until February 1999. Mr. Reinhold was Vice President and Treasurer of the Company from April 1995 until January 1996. Prior to joining the Company, Mr. Reinhold spent thirteen years at First Fidelity Bank, N.A. where he held a variety of management positions in various lending departments and loan workout. Mr. Reinhold was Senior Vice President and Division Manager - Middle Market Lending from 1992 to March 1995. Mr. Austin has been Vice President - General Counsel and Secretary since joining the Company in 1989. Mr. Burns has been Vice President - Corporate Controller and Chief Accounting Officer since December 1997. He was Director of Tax from February 1996 to December 1997. Prior to joining the Company, Mr. Burns was a Senior Tax Manager with Coopers & Lybrand, L.L.P. from June 1989 to February 1996. Mr. Burns is a Certified Public Accountant. PART II Item 5. MARKET for the REGISTRANT'S COMMON STOCK and RELATED SECURITY HOLDER MATTERS The Company's common stock is listed on the New York Stock Exchange (NYSE)under the symbol CKP. The following table sets forth, for the periods indicated, the high and low sale prices for the Company's Common Stock as reported on the NYSE Composite Tape. High Low ------ ------ Closing Price 1997: First Quarter.............................$24 1/8 $17 3/4 Second Quarter......................... 17 3/8 10 Third Quarter............................. 16 3/16 13 7/16 Fourth Quarter........................ 17 14 1/4 1998: First Quarter............................ $21 7/8 16 3/16 Second Quarter....................... 21 1/4 14 5/8 Third Quarter.......................... 14 3/8 8 7/16 Fourth Quarter........................ 14 7 1/16 As of March 1, 1999, there were 1,481 record holders of the Company's Common Stock. The Company has never paid a cash dividend on the Common Stock (except for a nominal cash distribution in April, 1997 to redeem the rights outstanding under the Company's 1988 Shareholders' Rights Plan). The Company does not anticipate paying any cash dividend in the near future and is limited by existing covenants in the Company's debt instruments with regard to paying dividends. The Company has retained, and expects to continue to retain, its earnings for reinvestment in its business. The declaration and payment of dividends in the future, and their amounts, will be determined by the Board of Directors in light of conditions then existing, including the Company's earnings, its financial condition and requirements (including working capital needs) and other factors. Item 6. SELECTED FINANCIAL DATA SELECTED ANNUAL FINANCIAL DATA -------------------------------- 1998 1997 1996 1995 1994 1993 ====== ====== ====== ===== ===== ====== (Thousands, except per share data) FOR YEARS ENDED: Net revenues $362,407 $335,964 $291,769 $204,741 $128,331 $93,034 Earnings before income taxes $ 26,184(1)$ 13,565(2) $ 29,877 $ 16,598 $ 8,377 $ 2,071 Income taxes $ 8,509 $ 5,445 $ 9,430 $ 5,189 $ 2,094 $ 456 Net earnings $ 17,685 $ 8,228 $ 20,447 $ 11,409 $ 6,283 $ 1,651 Earnings per common share Basic $ .55 $ .24 $ .64 $ .43 $ .30 $ .08 Diluted $ .53 $ .23 $ .60 $ .42 $ .29 $ .08 Depreciation & amortization $ 25,676 $ 23,762 $ 18,322 $ 12,178 $ 8,023 $ 6,476 (1) Includes a $0.6 million pre-tax reversal of the restructuring charge recorded in the fourth quarter of 1997. (2) Includes a $9.0 million pre-tax restructuring charge and non-recurring pre-tax charges of $8.1 million. AT YEAR-END: Working capital $186,261 $211,570 $285,753 $148,074 $ 39,427 $ 27,984 Long-term debt $165,976 $150,855 $153,356 $155,674 $ 35,556 $ 24,302 Shareholders' equity $261,936 $277,550 $300,794 $137,658 $ 61,303 $ 53,779 Total assets $507,663 $516,434 $521,653 $362,151 $127,925 $104,999 Capital expenditures $ 12,301 $ 26,714 $ 10,454 $ 9,379 $ 4,532 $ 4,600 Cash provided (used) by operating activities $ 29,157 $(59,559) $(17,212)$(14,753)$ (7,612)$ (6,317) Cash used by investing activities $(39,460) $(36,548) $(19,882)$(79,652)$ (8,584)$(11,444) Cash provided (used) by financing activities $(18,386) $(24,508) $145,738 $170,917 $ 17,140 $ 15,441 Ratios - ------ Return on net sales(a) 4.88% 2.45% 7.01% 5.57% 4.90% 1.74% Return on average equity(b) 6.56% 2.85% 9.33% 11.47% 10.92% 3.08% Return on average assets(c) 3.45% 1.59% 4.63% 4.66% 5.39% 1.80% Current ratio(d) 3.37 3.46 5.58 3.22 2.32 2.04 Percent of total debt to capital(e) 48.40% 46.26% 42.34% 61.99% 52.08% 48.78% (a) "Return on net sales" is calculated by dividing net earnings by net sales. (b) "Return on average equity" is calculated by dividing net earnings by weighted average equity. (c) "Return on average assets" is calculated by dividing net earnings by average assets. (d) "Current ratio" is calculated by dividing current assets by current liabilities. (e) "Percent of total debt to capital" is calculated by dividing total debt by total debt and equity. 1998 1997 1996 1995 1994 1993 ====== ====== ====== ====== ====== ====== (Thousands, except per share and employee data) Other Information - ----------------- Average number of diluted shares outstanding 33,272 35,184 34,087 27,375 21,612 20,772 Number of Employees 3,044 3,605 2,628 2,540 1,804 1,366 Backlog $18,800 $24,200 $ 8,400 $ 8,000 $ 7,053 $6,673 SELECTED QUARTERLY FINANCIAL DATA QUARTERS (unaudited) -------------------------------------------- First Second Third Fourth Year ----- ------ ----- ------ ---- (Thousands, except per share data) 1998 - ---- Net revenues $79,857 $90,578 $94,042 $97,930 $362,407 Gross profit $31,555 $35,660 $39,440 $40,442 $147,097 Net earnings $ 1,273 $ 3,692 $ 6,720 $ 6,000(1) $ 17,685 Earnings per common share:(4), Basic $ .04 $ .11 $ .21 $ .20 $ .55 Diluted $ .04 $ .11 $ .20 $ .19 $ .53 1997 - ---- Net revenues $68,178 $81,036 $87,959 $98,791 $335,964 Gross profit $28,037 $34,539 $37,586 $34,078(2) $134,240(2) Net earnings (loss) $ 2,435 $ 4,866 $ 6,050 $(5,123)(3) $ 8,228(3) Earnings (loss) per common share:(4) Basic $ .07 $ .14 $ .18 $ (.15) $ .24 Diluted $ .07 $ .14 $ .17 $ (.15) $ .23 (1) Includes a $0.6 million pre-tax reversal of the 1997 restructuring charge. (2) Included in gross profit is a $1.1 million pre-tax restructuring charge and non-recurring pre-tax charges of $6.6 million. (3) Includes a $9.0 million pre-tax restructuring charge and non-recurring pre-tax charges of $8.1 million. (4) Quarterly earnings per common share are computed independently; therefore the sum of the quarters may not equal full year earnings per share. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary should be read in conjunction with the Consolidated Financial statements and the Notes to the Consolidated Financial Statements. Results of Operations (All comparisons are with the previous year, unless otherwise stated.) Management's discussion and analysis of results of operations has been presented on an as reported basis except for the exclusion in "Cost of revenues" and "Selling general and administrative expense" (SG&A), of the non-recurring and restructuring charges recorded in 1997 and 1998. The 1997 charges which totaled $17.1 million, represented (i) pre-tax restructuring charges of $9.0 million of which $1.1 million was includable in the cost of revenues and $7.9 million in SG&A; and (ii) pre-tax non-recurring charges of $8.1 million of which $6.6 million was includable in the cost of revenues and $1.5 million in SG&A. The 1998 amount represents a $0.6 million reversal of the restructuring charge recorded in 1997. The table below reflects the income from operations before restructuring and non-recurring charges. Accordingly, the discussion that follows speaks to the comparisons in the table through income from operations before restructuring and non-recurring items. 1998 1997 1996 ---- ---- ---- (Thousands) Net Revenues $ 362,407 $ 335,964 $ 291,769 Cost of revenues 215,310 194,024 168,024 --------- --------- --------- Gross Profit 147,097 141,940 123,745 Selling, general and administrative expenses 117,034 113,091 93,676 --------- --------- --------- Income from operations before restructuring and non-recurring charges 30,063 28,849 30,069 Restructuring and non-recurring charges (600) 17,145 - --------- --------- --------- Income from operations after restructuring and non-recurring charges $ 30,663 $ 11,704 $ 30,069 ========= ========= ========= Net revenues by product segment Electronic Article Surveillance(1) $ 297,200 $ 278,635 $ 248,009 Domestic CCTV, Fire, and Burglary 53,745 45,834 35,232 Access Control 11,462 11,495 8,528 --------- --------- --------- $ 362,407 $ 335,964 $ 291,769 ========= ========= ========= (1) Included in the EAS amounts are the Company's foreign CCTV, Fire, and Burglary which represents approximately 4%, 3%, and 1% of the Company's total consolidated revenue for 1998, 1997, and 1996, respectively. Net Revenues The Company's unit volume is driven by product offerings, number of direct sales personnel, recurring revenues and, to some extent, pricing. The Company's increasing base of installed systems provides a growing source of recurring revenues from the sale of disposable tags and service revenues. For fiscal 1998 and 1997 approximately 32% and 28%, respectively of the Company's net revenues were attributable to sales of disposable tags and service to its installed base of customers. The Company's customers are substantially dependent on retail sales which are seasonal and subject to significant fluctuations which are difficult to predict. The Company's sales are impacted by such seasonality and fluctuations. Historically, the Company has experienced lower sales in the first and second quarters of each year. Furthermore, as major contracts have become a more significant component of revenue, quarterly revenue recognition and earnings will be volatile and susceptible to the timing of the receipt of orders. During 1998, revenues increased by approximately $26.4 million or 7.9% from $336.0 million to $362.4 million. This increase in revenues was due primarily to (i) increased sales of the Company's Electronic Article Surveillance (EAS) product line in North America (United States and Canada), and to a lesser extent in the Company's International retail markets (excluding Canada); and (ii) increased sales of the Company's CCTV/Fire and Burglar products in both the North American and International markets. In 1997, revenues increased by approximately $44.2 million or 15.1% from $291.8 million to $336.0 million. This increase in revenues was due primarily to increased sales of the Company's Electronic Article Surveillance (EAS) product line in North America; and (ii) increased sales of the Company's CCTV/Fire and Burglar products in both the North American and International markets. North American net revenues accounted for 58.7%, 57.5%, and 55.4% in 1998, 1997, and 1996, respectively. North American EAS net revenues increased by $11.6 million or 8.5% and $18.3 million or 15.5%, in 1998 and 1997, respectively. Sales of the Company's Domestic CCTV/Fire and Burglar products increased by $7.9 million or 17.3% and $10.6 million or 30.1%, in 1998 and 1997, respectively. In 1998, net revenues of the Company's Access Control product line, primarily in the United States, were consistent with the prior year, while in 1997, net revenues increased $3.0 million or 34.8%. International net revenues accounted for 41.3%, 42.5%, and 44.6% in 1998, 1997, and 1996, respectively. International net revenues, consisting of EAS and CCTV/Fire and Burglar, increased by $6.9 million or 4.9% and $12.4 million or 9.5% in 1998, and 1997, respectively. Cost of Revenues During 1998, cost of revenues increased $21.3 million or 11.0% from $194.0 million to $215.3 million. As a percentage of net revenues, cost of revenues increased 1.6% (from 57.8% to 59.4%). The increase in the Company's cost of sales is primarily attributable to: (i) product mix i.e. higher growth rate in revenue of lower margin products such as CCTV/Fire and Burglar systems, partially offset by the growth rate in revenue from high margin disposable tags (during 1998, CCTV/Fire and Burglar revenue increased by 26.2% while disposable label revenue increased by 16.3%);(ii) the costs associated with excess capacity in the Puerto Rico manufacturing facilities resulting from the recent expansion; (iii) an increase in field service costs to support existing and future revenues; (iv) higher costs of disposable tags manufactured in Japan; and (v) an increase in Research and Development activities associated with the development of RFID products. During 1997, cost of revenues increased $26.0 million or 15.5% from $168.0 million to $194.0 million. As a percentage of net revenues, cost of revenues increased 0.2% (57.6% to 57.8%). The principal elements comprising cost of revenues are product cost, research and development cost, and field service and installation cost. The components of product cost are as follows: 72% material, 14% labor, and 14% manufacturing overhead. The principal raw materials and components used by the Company in the manufacture of its products are electronic components and circuit boards for its systems; and aluminum foil, resins, paper, and ferric chloride solutions for the Company's disposable tags. While most of these materials are purchased from several suppliers, there are numerous alternative sources for all such materials. The Company's general practice is to maintain a level of inventory sufficient to meet anticipated demand for its products. As a result of the Company's expansion of its manufacturing facilities in Puerto Rico (1997) and the acquisition of the assets of Tokai Electronics Co., Ltd. (1998), capacity is expected to exceed product demand in the near term and negatively impact production costs. For fiscal year 1998 and 1997, field service and installation costs approximated 10% of net revenues. The Company believes that it has and will continue to make product design changes that improve product performance and result in easier installation, thereby reducing these costs as a percentage of net revenues over time. Selling, General and Administrative Expenses During 1998, SG&A expenses increased $3.9 million or 3.5% from $113.1 million to $117.0 million. As a percentage of net revenues, SG&A expenses decreased by 1.4% (from 33.7% to 32.3%). The higher expenses (in dollars) were due to: $1.5 million in variable costs (selling, commissions, and royalties) and sales support costs (marketing and customer service) and $2.4 million in support costs (finance, administration, legal, MIS, and operations). During 1997, SG&A expenses increased $19.4 million or 20.7% from $93.7 million to $113.1 million. As a percentage of net revenues, SG&A expenses increased by 1.6% (from 32.1% to 33.7%). The higher expenses (in dollars) were due to: $13.5 million in variable costs (selling, commissions, and royalties) and sales support cost, $4.4 million in support costs (finance, administration, legal, MIS, and operations), and $1.5 million in costs associated with the terminated Ultrak merger. Other Income, net Other income, net was $0.3 million, $2.8 million, and $1.0 million for 1998, 1997, and 1996, respectively. Other income, net of $0.3 million in 1998 included $1.3 million of proceeds from the final settlement of the insurance claim relating to the loss of business income caused by a fire at the Company's warehouse facility in France offset by a net foreign exchange loss of $1.0 million. Other income, net of $2.8 million in 1997 includes: (i) a payment of $1.3 million from Mitsubishi Materials Corporation in connection with the establishment of a joint product research and development project; (ii) an insurance claim of $1.0 million relating to the loss of business income caused by a fire at the Company's warehouse facility in France; and (iii) a net foreign exchange gain of $0.5 million. Other income, net of $1.0 million in 1996 resulted from net foreign exchange gains. Interest Expense and Interest Income Interest expense for 1998 remained flat when compared to 1997 and 1996 at $9.6 million. The majority of the interest expense is attributable to the $120 million 5.25% convertible subordinated debentures issued in October of 1995. Interest income for fiscal year 1998, 1997, and 1996 was $4.7 million, $8.7 million, and $8.3 million, respectively. The decrease in 1998 was a result of a direct reduction in cash and cash investments primarily related to: (i) cash used to purchase the Company's common stock in 1998 and 1997; (ii) cash used to support operations in 1997; (iii) the costs related to the expansion of the Company's manufacturing facility in Ponce, Puerto Rico during the second half of 1997; and (iv) the acquisition of the assets of Tokai Electronics Co., in February 1998. Income Taxes The Company's effective tax rate for fiscal 1998, 1997, and 1996 was 32.5%, 40.1%, and 31.5%, respectively. The higher tax rate in 1997 was primarily due to certain foreign losses (resulting from the restructuring charges) for which tax benefits were not expected to be realized, as it was not more than likely that certain tax loss carryforwards would be utilized. The Company anticipates that its effective tax rate will decrease in 1999 as restructuring and cost savings programs decrease the impact of foreign losses on the effective tax rate. The Company's net earnings generated by the operations of its Puerto Rico subsidiary are substantially exempt from Federal income taxes under Section 936 of the Internal Revenue Code (Section 936) and are substantially exempt from Puerto Rico income taxes. Net Earnings Net earnings were $17.7 million or $.53 per share, $8.2 million or $.23 per share, and $20.4 million or $.60 per share for fiscal years 1998, 1997, and 1996, respectively. The weighted average number of shares used in the diluted earnings per share computation were 33.3 million, 35.2 million, and 34.1 million for fiscal years 1998, 1997, and 1996, respectively. The decrease in the weighted average number of shares from 1997 to 1998 was primarily due to the repurchase of common stock in 1998. The increase in the weighted average number of shares from 1996 to 1997 was primarily due to the exercise of stock options and an increase in stock options outstanding, offset by the repurchase of common shares in 1997. Financial Condition Liquidity and Capital Resources The Company's liquidity needs have related to, and are expected to continue to relate to, capital investments, acquisitions and working capital requirements. The Company has met its liquidity needs over the last three years primarily through funds provided by long-term borrowings, issuance of convertible subordinated debt, and through two separate issuances of common stock in underwritten public offerings. The Company believes that cash provided from operating activities and funding available under its current credit agreements, should be adequate for its presently foreseeable working capital and capital investment requirements. The Company's operating activities during fiscal 1998 generated approximately $29.2 million compared to approximately $60.0 million consumed during 1997. This change from the prior year was primarily the result of a decreased investment in working capital and long-term customer contracts partially offset by approximately $5.1 million in cash utilized in 1998 associated with the restructuring. The Company's Comprehensive Tag Program (Comp Tag) is a financial marketing/sales program designed to remove capital investment costs as an obstacle to the potential customer's decision to purchase an EAS system. This program is offered to large potential customers in strategic vertical markets who are considering chainwide EAS installations. Through the Comp Tag program, the Company internally finances the leasing of equipment to retailers under long-term non-cancelable contracts, usually three to five years. Customers pay a premium price for an agreed-upon minimum number of tags shipped on a quarterly or other periodic basis. The comprehensive tag price reflects the cost of hardware, disposable RF labels, installation and interest. Comp Tag agreements that meet all the necessary requirements for sales-type leasing as defined under SFAS No. 13, are recognized as a sale upon shipment of the EAS hardware. If the terms and conditions specified in the Comp Tag agreement do not meet all the necessary requirements for sales-type lease accounting, then the accounting requires operating lease treatment. The cash flow impact is independent of the accounting used for the Consolidated Earnings Statement. In the majority of cases, the Company is able to recover equipment and installation costs between 18-24 months under the five-year contract and within a shorter period of time for contracts which run three or four years. The impact of the Comp Tag agreement is reflected on the statement of cash flows under two captions: (i) long-term customer contracts for those meeting sales-type lease accounting; or (ii) revenue equipment placed under operating lease. Comp Tag contracts under the sales-type lease accounting method are included in Other Assets on the Consolidated Balance Sheets. Comp Tag contracts under the operating lease accounting method are included in Revenue Equipment on Operating Lease on the Consolidated Balance Sheets. The Company's management has determined that the risks of the Comp Tag Program (i.e. cash outlay, credit risk, equipment, and tag monitoring costs) are far outweighed by the acceleration of chain-wide installations, which drive market share and faster acceptance of source tagging by manufacturers. This in turn, reduces the retailers' costs of hand applying labels, thereby further increasing the favorable impact to the retailers' bottom line. The Company has an existing $100 million multi-currency unsecured revolving credit facility. At December 27, 1998, 2.43 billion Japanese Yen (approximately $20.9 million) was outstanding under this credit agreement. These borrowings, along with approximately $8 million from cash on hand, were utilized in February 1998, to acquire the assets of Tokai Electronics Co., Ltd., a Japanese manufacturer of radio frequency tags, for approximately $28 million. The Company has never paid a cash dividend (except for a nominal cash distribution in April 1997, to redeem the rights outstanding under the Company's 1988 Shareholders' Rights Plan). The Company does not anticipate paying any cash dividend in the near future and is limited by existing covenants in the Company's debt instruments with regard to paying dividends. Management believes that its anticipated cash needs for the foreseeable future can be funded from cash and cash equivalents on hand and the availability under the $100 million unsecured revolving credit facility. Capital Expenditures The Company's capital expenditures during fiscal 1998 totaled $12.3 million compared to $26.7 million during fiscal 1997. This decrease when compared to 1997 is primarily due to the 1997 plant expansion at the Company's main manufacturing facility located in Ponce, Puerto Rico which became operational at the end of the fourth quarter 1997. The Company anticipates its capital expenditures to approximate $10.0 million in 1999. Stock Repurchase During 1997, the Board of Directors approved the purchase of up to 10% or approximately 3.5 million shares of the Company's common stock at an average cost not to exceed $14.00 per share. On October 23, 1998, the Board of Directors authorized the additional purchase of up to $20 million of the Company's outstanding common stock at an average cost not to exceed $14.00 per share. As of December 27, 1998, the Company has purchased under the 1997 program, 3,441,300 shares of common stock for an average price of $12.02 per share, and 1,319,900 shares of common stock for an average price of $13.02 per share under the 1998 program. Exposure to International Operations The Company exports products for international sales to its foreign subsidiaries. The subsidiaries, in turn, sell these products to customers in their respective geographic area of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations. In order to reduce the Company's exposure resulting from currency fluctuations, the Company has been selectively purchasing currency exchange forward contracts on a regular basis. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows the Company to shift the risk, whether positive or negative, of currency fluctuations from the date of the contract to a third party. As of December 27, 1998, the Company had currency exchange forward contracts totaling approximately $41.9 million. The contracts are in the various local currencies covering primarily the Company's Western European operations along with the Company's Canadian, and Australian operations. The Company's operations in Japan, Argentina, Mexico and Brazil were not covered by currency exchange forward contracts at December 27, 1998. During 1998, the Company also purchased a series of put options denominated in Canadian dollars which gave the Company the right, but not the obligation, to convert Canadian dollars at a specified exchange rate into U.S. dollars. These options expire in 1999. The Company will continue to evaluate the use of currency options in order to reduce the impact that exchange rate fluctuations have on the Company's net earnings from sales made by the Company's international operations. The combination of forward exchange contracts and currency options should reduce the Company's risks associated with significant exchange rate fluctuations. Other Matters Statements of Financial Accounting Standards Not Yet Adopted In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes new standards for accounting for derivatives and hedging activities and amends a number of existing standards. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. Although the Company has not fully completed its evaluation of the impact of this new standard, we do not anticipate the adoption of this standard to have a material effect on the Company's consolidated financial statements. Year 2000 Year 2000 Readiness The Company's year 2000 readiness plan is primarily directed towards ensuring business continuity by mitigating any year 2000 computer failures that could interrupt business processes, damage customer service, and/or cause financial loss. The plan addresses the year 2000 effect on the following areas: (i) information systems; (ii) the Company's product offerings; and (iii) internal and external supply chain readiness which includes the Company's internal manufacturing processes. The Company is involved in an ongoing assessment of year 2000 readiness and is undergoing a company-wide program of adapting its computer systems and applications for the year 2000. This assessment is expected to be substantially complete by April 1999. The Company's primary applications software has been procured through third party vendors, and the Company has begun to address potential year 2000 deficiencies through updates provided by the vendors. The Company's other non-mission critical information systems and applications software, some of which are not year 2000 compliant, are also in the process of being evaluated. As a result of an evaluation of the Company's product lines for year 2000 compliance, the Company's primary products, comprised of EAS products, are not date dependant and therefore, will not require modifications. The Company's current Access Control products are determined to be compliant. Certain of the Company's Access Control Products, which are no longer offered for sale, were determined as not being year 2000 compliant. The Company has offered, through its web site at http://www.checkpointacpg.com/y2kinfo.htm, an upgrade path for such non-compliant products. The Company's CCTV and Fire and Burglar alarm products are generally purchased from outside vendors and the Company is currently working with such vendors to determine compliance. The Company has begun an assessment of year 2000 issues associated with its various business partners, including vendors and service providers, and is working with these third parties to identify and mitigate common risks. The Company also recognizes the potential for year 2000 issues in external areas such as telephone and communication systems, utilities, banks and alarm systems and is contacting all mission critical business partners to obtain year 2000 readiness certifications. Initial responses from mission critical business partners are expected back to the Company by April 1999. Costs Costs associated with the year 2000 compliance have not been material to date, and the total costs to achieve year 2000 compliance are being evaluated. Currently, management estimates the cost to test and remedy the Company's information systems to be approximately $2.4 million. This estimate includes the acceleration of hardware purchases of approximately $1.2 million and other expenses consisting primarily of outside year 2000 consulting services of $1.2 million. However, there can be no assurance that costs will not exceed this level. The Company has begun to determine the potential cost associated with the Company's product offerings and supply chain readiness. The Company does not expect these costs to be material. Risks The variety, nature and complexity of year 2000 issues, the dependence on technical skills and expertise of Company employees and independent contractors and issues associated with the readiness of third parties are factors which could result in the Company's efforts toward year 2000 compliance being less than fully effective. The failure to correct a material year 2000 problem could result in an interruption in, or failure of, certain normal business activities or operations. As of the date of this filing, the Company has not received any information from its vendors or suppliers, or developed any information internally, indicating that a material adverse impact on its business, results of operations, liquidity, or financial condition is considered likely due to year 2000 matters. While the Company believes that it is unlikely to experience a material adverse effect, the Company is unable to provide assurances at this time that the consequences of year 2000 failures will not have a material impact on the Company's results of operations, liquidity or financial condition. The execution of the Company's year 2000 plan is expected to significantly reduce the Company's level of uncertainty associated with the year 2000 problem. Contingency Plans The Company believes that its program of assessment, correction and testing, along with selected system upgrades will enable it to successfully meet the year 2000 challenge. After completion of the assessment and remediation process, estimated to be June 1999, the Company will formalize a contingency plan to address potential failures associated with year 2000 compliance. Forward Looking Statement The foregoing year 2000 discussion includes forward-looking statements of the Company's efforts and management's expectations relating to year 2000 readiness. The Company's ability to achieve year 2000 compliance and the level of incremental costs associated therewith, could be adversely affected as a result of the numerous factors described in the above discussion. Conversion to Euro Currency On January 1, 1999, certain member nations of the European Economic and Monetary Union ("EMU") adopted a common currency, the Euro. For the three- year transition period, both the Euro and individual participant's currencies will remain in circulation. After January 1, 2002, the Euro will be the sole legal tender for EMU countries. The adoption of the Euro affects a multitude of financial systems and business applications as the commerce of these nations will be transacted in the Euro and the existing national currency. For the year ended December 27, 1998, approximately 16.6% of the Company's revenues were derived from EMU countries. The Company is currently addressing Euro related issues and its impact on information systems, currency exchange rate risk, taxation, contracts, competition and pricing. Action plans currently being implemented are expected to result in compliance with all laws and regulations. While the Company does not expect the Euro conversion will have a material impact on its operations, financial condition or liquidity, there can be no certainty that action plans will be successfully implemented or that external factors will not have an adverse effect on the Company's operations. Market Risk Factors Fluctuations in interest and foreign currency exchange rates affect the Company's financial position and results of operations. The Company enters into exchange forward contracts and purchases options denominated in foreign currency to hedge foreign currency exposure and minimize the effect of such fluctuations on reported earnings and cash flow. (See "Accounting for Foreign Currency Translation and Transactions" and "Financial Instruments and Risk Management" in the Summary of Significant Accounting Policies and Note 14.) Sensitivity of the Company's financial instruments to selected changes in market rates and prices, which are reasonably possible over a one-year period, are described below. Market values are the present value of projected future cash flows based on the market rates and prices. The Company's financial instruments subject to interest rate risk consist of debt instruments. Net fair value of these instruments, which include the Company's $120 million Subordinated Debentures at December 27, 1998 and December 28, 1997 was a liability of $157.2 million and $164.2 million, respectively. The sensitivity analysis assumes an instantaneous 100-basis point move in interest rates from their levels, with all other variables held constant. A 100-basis point increase in interest rates at December 27, 1998 would result in a $4.8 million decrease in the net market value of the liability. Conversely, a 100-basis point decrease in interest rates at December 27, 1998, would result in a $6.2 million increase in the net market value of the liability. The Company's $120 million Subordinated Debentures are also subject to equity price risk. The fair value of these debentures was a liability of $99.7 million and $125.1 million at December 27, 1998 and December 28, 1997, respectively. The sensitivity analysis assumes an instantaneous 10% change in the year-end closing price of the Company's common stock, with all other variables held constant. At December 27, 1998, a 10% strengthening in the Company's common stock would result in a net increase in the fair value liability of $3.1 million, while a 10% weakening in the Company's common stock would result in a net decrease in the fair value liability of $2.6 million. The Company's financial instruments subject to foreign currency exchange risk consist of foreign currency forwards and options and represent a net asset position of $0.5 million and $0.8 million at December 27,1998 and December 28, 1997, respectively. The sensitivity analysis assumes an instantaneous 10% change in foreign currency exchange rates from year-end levels, with all other variables held constant. At December 27, 1998, a 10% strengthening of the U.S. dollar versus other currencies would result in an increase of $3.4 million in the net asset position, while a 10% weakening of the dollar versus all other currencies would result in a decrease of $4.0 million. Also subject to foreign currency exchange risk, is the Company's $100 million multi-currency revolving credit facility. At December 27, 1998, 2.43 billion Japanese Yen (approximately $20.9 million) was outstanding under this agreement. The sensitivity analysis assumes an instantaneous 10% change in foreign currency exchange rates from year-end levels, with all other variables held constant. At December 27, 1998, a 10% strengthening of the U.S. dollar versus the Japanese Yen would result in a $1.9 million decrease in the liability, while a 10% weakening of the U.S. dollar versus the Japanese Yen would result in a $2.3 million increase in the liability. Foreign exchange forward and option contracts are used to hedge the Company's firm and anticipated foreign currency cash flows. Thus, there is either an asset or cash flow exposure related to all the financial instruments in the above sensitivity analysis for which the impact of a movement in exchange rates would be in the opposite direction and substantially equal to the impact on the instruments in the analysis. There are presently no significant restrictions on the remittance of funds generated by the Company's operations outside the United States. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Report of Independent Accountants......................................34 Consolidated Balance Sheets as of December 27, 1998 and December 28, 1997...................................................35 Consolidated Earnings Statements for each of the years in the three-year period ended December 27, 1998....................36 Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 27, 1998..............37 Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 27,1998...............38 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 27, 1998....................38 Notes to Consolidated Financial Statements..........................39-59 Financial Schedule Schedule II -Valuation and Qualifying Accounts......................62 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Checkpoint Systems, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated earnings statements, and consolidated statements of shareholders' equity, comprehensive income and cash flows present fairly, in all material respects, the financial position of Checkpoint Systems, Inc. and Subsidiaries at December 27, 1998 and December 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion expressed above. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 12, 1999 CHECKPOINT SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS December 27, December 28, 1998 1997 ------------ ------------ ASSETS (Thousands) CURRENT ASSETS Cash and cash equivalents $ 35,934 $ 64,138 Accounts receivable, net of allowances of $5,556,000 and $5,703,000 135,078 136,748 Inventories, net 78,625 77,631 Other current assets 10,748 13,570 Deferred income taxes 4,464 5,593 ------- ------- Total current assets 264,849 297,680 REVENUE EQUIPMENT ON OPERATING LEASE, net 24,188 24,718 PROPERTY, PLANT AND EQUIPMENT, net 85,762 58,674 EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSETS ACQUIRED, net 72,388 72,304 INTANGIBLES, net 10,917 14,003 OTHER ASSETS 49,559 49,055 ------- ------- TOTAL ASSETS $507,663 $516,434 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings and current portion of long-term debt $ 10,453 $ 6,957 Accounts payable 17,346 13,200 Accrued compensation and related taxes 8,295 7,745 Income taxes 11,784 13,687 Unearned revenues 11,288 11,413 Other current liabilities 19,422 33,108 ------ ------ Total current liabilities 78,588 86,110 LONG-TERM DEBT, LESS CURRENT MATURITIES 45,976 30,855 CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000 DEFERRED INCOME TAXES 712 1,458 MINORITY INTEREST 451 461 COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' EQUITY Preferred stock, no par value, authorized 500,000 shares, none issued - - Common stock, par value $.10 per share, authorized 100,000,000 shares, issued 36,471,584 and 36,338,228 3,647 3,633 Additional capital 233,180 232,079 Retained earnings 104,558 86,873 Common stock in treasury, at cost, 6,359,200 shares and 3,188,700 shares (64,410) (27,986) Foreign currency translation adjustment (15,039) (17,049) ------- ------- TOTAL SHAREHOLDERS' EQUITY 261,936 277,550 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $507,663 $516,434 ======= ======= See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. CONSOLIDATED EARNINGS STATEMENTS 1998 1997 1996 -------- -------- -------- (Thousands, except per share data) Net Revenues $362,407 $335,964 $291,769 Cost of Revenues 215,310 201,724 168,024 ------- ------- ------- Gross Profit 147,097 134,240 123,745 Selling, General and Administrative Expenses 117,034 114,591 93,676 Restructuring Charge (600) 7,945 - ------- ------- ------- Operating Income 30,663 11,704 30,069 Interest Income 4,746 8,676 8,339 Interest Expense 9,568 9,573 9,557 Other Income, net 343 2,758 1,026 ------- ------- ------ Earnings Before Income Taxes 26,184 13,565 29,877 Income Taxes 8,509 5,445 9,430 Minority Interest 10 108 - ------- ------- ------- Net Earnings $ 17,685 $ 8,228 $ 20,447 ======= ======= ======= Earnings Per Share (note 11) Basic $ .55 $ .24 $ .64 ======= ======= ======= Diluted $ .53 $ .23 $ .60 ======= ======= ======= See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Foreign Currency Common Additional Retained Trans. Treasury Stock Capital Earnings Adjust. Stock Total ------ ------- ------- ------- ------- ------ (Thousands) Balance, December 31, 1995 $3,002 $ 83,126 $ 58,198 $(1,004) $(5,664) $137,658 (Common shares: issued 30,019,758; reacquired, 1,598,000) Net Earnings 20,447 20,447 Exercise of Stock Options 151 11,984 12,135 Stock Issuances 460 135,470 135,930 Foreign Currency Translation Adjustment (5,376) (5,376) ------ ------- ------- -------- -------- ------- Balance, December 29, 1996 3,613 230,580 78,645 (6,380) (5,664) 300,794 (Common shares: issued 36,134,622; reacquired, 1,598,000) Net Earnings 8,228 8,228 Exercise of Stock Options 20 1,499 1,519 Foreign Currency Translation Adjustment (10,669) (10,669) Purchase of Common Stock (22,322) (22,322) ------ ------- ------- -------- -------- ------- Balance, December 28, 1997 3,633 232,079 86,873 (17,049) (27,986) 277,550 (Common shares: issued 36,338,228; reacquired, 3,188,700) Net Earnings 17,685 17,685 Exercise of Stock Options 14 1,101 1,115 Foreign Currency Translation Adjustment 2,010 2,010 Purchase of Common Stock (36,424) (36,424) ------ ------- ------- -------- ------- ------- Balance December 27,1998 $3,647 $233,180 $104,558 $(15,039) $(64,410) $261,936 (Common shares: ====== ======== ======== ========= ========= ======== issued 36,471,584 reacquired, 6,359,200) See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 1998 1997 1996 ---- ---- ---- (Thousands) Net Earnings $17,685 $ 8,228 $20,447 Foreign Currency Translation Adjustment, net of tax 2,010 (10,669) (5,376) ------ ------ ------ Comprehensive Income(Loss) $19,695 $(2,441) $15,071 ====== ====== ====== See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS 1998 1997 1996 ---- ---- ---- Cash inflow (outflow) from operating (Thousands) activities: Net earnings $ 17,685 $ 8,228 $ 20,447 Adjustments to reconcile net earnings to net cash provided by operating activities: Net book value of rented equipment sold 1,682 811 4,391 Revenue Equipment placed under operating lease (9,989) (15,579) (13,987) Long-term customer contracts (1,433) (20,735) (10,804) Depreciation and amortization 25,676 23,762 18,322 Deferred Taxes 383 (6,511) 363 Provision for losses on accounts receivable 1,672 1,822 2,219 Restructuring charge (6,692) 8,500 - (Increase) decrease in current assets: Accounts receivable 1,310 (46,063) (25,016) Inventories 1,313 (27,479) 3,164 Other current assets 3,046 (4,694) (3,046) Increase (decrease) in current liabilities: Accounts payable 3,999 626 (5,246) Accrued compensation and related taxes 498 (656) 935 Income taxes (1,365) 5,570 2,847 Unearned revenues (703) 1,496 1,848 Other current liabilities (7,925) 11,343 (13,649) ------- ------- ------- Net cash generated/(used) by operating activities 29,157 (59,559) (17,212) Cash outflow from investing ------- ------- ------- activities: Acquisition of property, plant and equipment (12,301) (26,714) (10,454) Acquisitions, net of cash acquired (27,584) (4,396) (5,898) Other investing activities 425 (5,438) (3,530) ------- ------- ------- Net cash used by investing activities (39,460) (36,548) (19,882) Cash inflow (outflow) from financing ------- ------- ------- activities: Proceeds from stock issuances 1,115 1,519 148,065 Proceeds of debt 19,548 - 1,653 Payment of debt (2,625) (3,705) (3,980) Purchase of treasury stock (36,424) (22,322) - Net cash provided by (used by) ------- ------- ------- financing activities (18,386) (24,508) 145,738 Effect of Foreign currency rate ------- ------- ------- fluctuations on cash and cash equivalents 485 (1,083) (264) Net increase (decrease) in cash and ------- ------- ------- cash equivalents (28,204) (121,698) 108,380 Cash and cash equivalents: Beginning of year 64,138 185,836 77,456 ------- ------- ------- End of year $ 35,934 $ 64,138 $185,836 ======= ======= ======= See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations - -------------------- The Company is a multi-national designer, manufacturer and distributor of integrated electronic security systems, utilizing proprietary RF technologies, designed primarily to help retailers prevent losses caused by theft of merchandise. The Company markets a wide range of these systems, including EAS systems, CCTV systems, POS monitoring systems, fire and burglar alarm systems and access control systems, primarily to retailers in the following market segments: hard goods (supermarkets, drug stores, mass merchandisers and music/electronics stores) and soft goods (apparel). The Company also markets its products and services to libraries. Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of Checkpoint Systems, Inc. and its majority 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 week period ending the last Sunday of December. References to 1998, 1997, and 1996 are for the 52 weeks ended December 27, 1998, December 28, 1997, and December 29, 1996, respectively. New Accounting Standards - ------------------------ In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information (see note 19). Effective December 29, 1997, the Company adopted SFAS No. 130 Reporting Comprehensive Income. The provisions of SFAS No. 130 established standards for reporting and display of comprehensive income and its components in the financial statements. Reclassifications - ----------------- Certain reclassifications have been made to the 1997 and 1996 financial statements and related footnotes to conform to the 1998 presentation. Revenue Recognition - ------------------- Revenue from the sale of equipment is recognized upon shipment of equipment or the acceptance of a customer order to purchase equipment currently rented. Equipment leased to customers under sales-type leases is accounted for as the equivalent of a sale. The present value of such lease revenues is recorded as net revenues, and the related cost of the equipment is charged to cost of revenues. The deferred finance charges applicable to these leases are recognized over the terms of the leases using the straight-line method which approximates the effective interest method. Rental revenue from equipment under operating leases is recognized over the term of the lease. Installation revenue from EAS equipment is recognized when the systems are installed. Service revenue is recognized on a straight-line basis over the contractual period or as services are performed. Sales to third party leasing companies are recognized as the equivalent of a sale. Revenue from the sale of CCTV and monitoring systems is recognized on a percentage of completion basis. All sales are 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 is carried at cost. Depreciation and amortization generally is provided on a straight-line basis over the estimated useful lives of the assets; for certain manufacturing equipment, the units-of-production method is used. Buildings, equipment rented to customers, leasehold improvements, and leased equipment under capitalized leases use the following estimated useful lives of 27.5 years, three to five years, seven years, and five years, respectively. Machinery and equipment estimated useful life ranges from five to ten years. Maintenance, repairs, and minor renewals are expensed as incurred. Additions, improvements and major renewals are capitalized. The cost, and accumulated depreciation, applicable to assets retired is removed from the accounts and the gain or loss on disposition is included in income. Excess of Purchase Price Over Fair Value of Net Assets Acquired - --------------------------------------------------------------- The excess of purchase price over the fair value of net assets acquired is amortized over the estimated future periods to be benefited, ranging from 20 to 30 years. Accumulated amortization approximated $14,077,000 and $9,921,000 at December 27, 1998 and December 28, 1997, respectively. Long-Lived Assets - ----------------- The Company reviews its long-lived assets, including the excess of purchase price over fair value of net assets acquired and intangibles, for impairment on an exception basis whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through future cash flows. If it is determined that an impairment loss has occurred based on expected future cash flows, then the loss is recognized on the Consolidated Earnings Statement. Long-Term Customer Contracts - ---------------------------- Included in Other Assets are unbilled receivables and other assets relating to long-term customer contracts generated primarily from the leasing of the Company's EAS equipment to retailers under long-term sales-type leasing arrangements (referred to by management as the "Comprehensive Tag Program"). The duration of these programs typically range from three to five years. The receivables approximated $44,083,000 and $42,278,000 at December 27,1998 and December 28, 1997, respectively. Research and Development Costs - ------------------------------ Research and development costs are expensed as incurred, and approximated $8,018,000, $7,604,000, and $6,408,000, in 1998, 1997, and 1996, respectively. Royalty Expense - --------------- Royalty expenses incurred approximated $4,354,000, $4,134,000, and $3,951,000 in 1998, 1997, and 1996, respectively. 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 thirteen years, or legal life, whichever is shorter. Accumulated amortization approximated $9,730,000 and $6,918,000 at December 27, 1998 and December 28, 1997, respectively. Capitalized Software - -------------------- The costs of internally developed software are expensed until the technological feasibility of the software has been established. Thereafter, all software development costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. The costs of capitalized software are amortized over the products' estimated useful lives or five years, whichever is shorter and are included in "Intangibles". Capitalized software development costs were $5,768,000 and $5,334,000 at December 27, 1998 and December 28, 1997, respectively, net of accumulated amortization costs of $2,708,000 and $2,048,000 at December 27, 1998 and December 28, 1997, respectively. Taxes on Income - --------------- Income taxes are determined in accordance with SFAS No. 109. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statement and tax basis of assets and liabilities using enacted statutory tax rates in effect at the balance sheet date. Changes in enacted tax rates are reflected in the tax provision as they occur. A valuation allowance is recorded to reduce deferred tax assets when realization of a tax benefit is less likely than not. Accounting for Foreign Currency Translation and Transactions - ------------------------------------------------------------ The Company's balance sheet accounts of foreign subsidiaries are translated into U.S. dollars at the rate of exchange in effect at the balance sheet dates. The resulting translation adjustment is recorded as a separate component of shareholders' equity. Revenues, costs and expenses of the Company's foreign subsidiaries are translated into U.S. dollars at the average rate of exchange in effect during each reporting period. In addition, gains or losses on long-term intercompany transactions are excluded from the results of operations and accumulated in the aforementioned separate component of consolidated shareholders' equity. All other foreign transaction gains and losses are included in the results of operations. The Company enters into certain foreign exchange forward and option contracts in order to hedge anticipated rate fluctuations in Europe, Canada, and Australia. Transaction gains or losses resulting from these contracts are recognized over the contract period. The Company uses the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in Other Income, net on the Company's Consolidated Earnings Statements. Note 2. INVENTORIES Inventories consist of the following: 1998 1997 ---- ---- (Thousands) Raw materials $ 6,661 $ 10,329 Work-in-process 1,821 2,312 Finished goods 70,143 64,990 ------- ------- Totals $ 78,625 $ 77,631 ======= ======= Note 3. REVENUE EQUIPMENT ON OPERATING LEASE AND PROPERTY, PLANT, AND EQUIPMENT The major classes are: 1998 1997 ---- ---- (Thousands) Revenue equipment on operating lease Equipment rented to customers $ 48,404 $ 42,357 Accumulated depreciation (24,216) (17,639) ------- ------- $ 24,188 $ 24,718 ======= ======= Property, plant and equipment Land $ 8,064 $ 2,063 Building 27,728 17,156 Machinery & equipment 91,423 73,727 Leasehold improvements 3,952 3,424 ------- ------- 131,167 96,370 Accumulated depreciation (45,405) (37,696) ------- ------- $ 85,762 $ 58,674 ======= ======= Depreciation expense on the Company's revenue equipment on operating lease and property, plant and equipment, was $18,191,000, $16,307,000, and $13,319,000 for 1998, 1997, and 1996, respectively. Note 4. SHORT-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT The short-term debt and current portion of long-term debt at December 27, 1998 and at December 28, 1997 consisted of the following: 1998 1997 ------ ------ (Thousands) Current portion of long-term debt $ 5,462 $ 2,537 Line of credit held by Japanese Subsidiary with interest at 1.625% 4,991 4,420 ------ ------ Total short-term debt and current portion long-term debt $10,453 $ 6,957 ======= ======= Note 5. LONG-TERM DEBT The long-term debt at December 27, 1998 and December 28, 1997 consisted of the following: 1998 1997 ------ ------ (Thousands) Seven year $7 million term note with interest at 4.9% $ 1,050 $ 2,100 Six year $8 million term note with interest at 6.5% 1,412 2,824 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 15,000 Five year $100 million multi currency variable interest rate unsecured revolving credit facility 20,934 - Other loans with interest rates ranging from 1.75% to 7.87% and maturity dates through January 2000 1,042 1,468 ------- ------- Total 51,438 33,392 Less current portion (5,462) (2,537) ------- ------- Total long-term portion $45,976 $30,855 ======= ======= The Company has an existing $100 million unsecured multi-currency revolving credit facility with a consortium of five banks led by the Company's principal lending bank. Interest under this line is determined at the time of borrowing and varies based on the banks base rate or LIBOR rate. The agreement requires payment of a fee that varies between .125 to .15 percent of the unused portion of the facility. Additionally, the agreement requires the company to make principal payments when the aggregate translated outstanding balance on alternative currency loans exceeds $20 million. At December 27, 1998, 2.43 billion Japanese Yen (approximately $20.9 million) was outstanding under this credit agreement. These borrowings, along with approximately $8.0 million from cash on hand, were utilized in February 1998, to acquire the assets of Tokai Electronics, Ltd., a Japanese manufacturer of radio frequency tags. 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 27, 1998, $1,050,000 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 27, 1998, $1,411,764 was outstanding. In March 1994, the Company entered into a $12,000,000 private placement debt funding agreement at a fixed rate of 8.27%. Principal payments of $4,000,000 annually are to be made starting in year 2000 with interest due semi-annually. 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 interest is payable semi- annually. 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. The above loan agreements contain certain restrictive covenants which, among other things, require maintenance of specified minimum financial ratios including debt to capitalization, interest coverage and tangible net worth. In addition, these agreements limit the Company's ability to pay cash dividends. The aggregate maturities on all long-term debt are: (Thousands) 1999 $ 5,462 2000 7,158 2001 7,158 2002 28,092 2003 3,158 Thereafter 410 ------- Total $51,438 ======= Note 6. SUBORDINATED DEBENTURES In November 1995, the Company completed the private placement of $120,000,000 of Convertible Subordinated Debentures (Debentures) with an annual interest rate of 5.25%. The Debentures are uncollateralized and subordinated to all senior indebtedness. The Debentures will be convertible into Common Stock, at a conversion price of $18.38 per share (equivalent to approximately 54.4 shares of Common Stock for each $1,000 principal amount of Debentures), at any time on and after the Exchange Date (as defined in the Debentures) and prior to redemption or maturity. The Debentures will mature on November 1, 2005 and are redeemable, in whole or in part, at the option of the Company on or after November 1, 1998. The net proceeds generated to the Company from this transaction approximated $116,000,000. On April 19, 1996, the Company completed its Shelf Registration Statement on Form S-3 covering the resale of $47,250,000 5.25% Convertible Subordinated Debentures due 2005 and 2,571,428 shares of the Company's common stock, $.10 par value per share, issuable upon conversion of the Debentures. The Registration Statement also covered the registration of 350,000 shares of the Company's Common Stock presently issuable upon exercise of certain options granted by the Company. Note 7. STOCK OPTIONS The Company's Stock Option Plan 1992 (1992 Plan) allows the Company to grant either Incentive Stock Options (ISOs) or Non-Incentive Stock Options (NSOs) to purchase up to 12,000,000 shares of Common Stock after giving effect to the February 1996 stock split. Under the 1992 Plan, only employees are eligible to receive ISOs and both employees and non-employee directors of the Company are eligible to receive NSOs. NSOs and ISOs issued under the 1992 Plan through December 27, 1998 total 10,218,019 shares. At December 27, 1998, December 28, 1997, and December 29, 1996 a total of 1,781,981; 2,192,114; and 690,114 shares, respectively, were available for grant after giving effect to the February 1996 stock split. All ISOs under the 1992 Plan expire not more than 10 years (plus six months in the case of NSOs) from the date of grant. Both ISOs and NSOs 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 27, 1998 were issued pursuant to the 1992 Plan. In July 1997, the Compensation and Stock Option Committee modified the vesting provisions contained in the 1992 Plan so that all options issued on or after July 23, 1997, to persons other than non-employee directors under the Plan shall vest as set forth below: Incentive Stock Options and Non-Incentive Stock Options issued to all employees whose title is less than Vice President shall vest as follows: (i) 34% on or after the first anniversary date of option grant; (ii) an additional 33% on or after 18 months of the date of option grant; and (iii) the remaining 33% on or after the second anniversary date of the option grant. Incentive Stock Options and Non-Incentive Stock Options issued to all employees whose title is Vice President and above shall vest as follows: (i) 34% on or after the first anniversary date of option grant; (ii) 33% on or after the second anniversary date of option grant; and (iii) 33% on or after the third anniversary date of option grant. Options that were fully vested and exercisable totaled 3,428,990 as of December 27, 1998. Options that were outstanding but not yet vested or exercisable totaled 1,353,775 as of December 27, 1998. The following schedules summarize stock option activity and status: NUMBER OF SHARES -------------------------------- 1998 1997 1996 -------------------------------- Outstanding at beginning of year 4,521,616 3,222,222 3,835,048 Granted 800,100 1,574,600 923,538 Exercised (138,356) (198,606) (1,514,864) Canceled (400,595) (76,600) (21,500) --------- --------- --------- Outstanding at end of year 4,782,765 4,521,616 3,222,222 ========= ========= ========= WEIGHTED-AVERAGE PRICE --------------------------- 1998 1997 1996 --------------------------- Outstanding at beginning of year $14.78 $13.94 $ 8.12 Granted $12.09 $16.85 $27.31 Exercised $ 8.07 $ 7.65 $ 7.16 Canceled $18.24 $17.17 $27.87 ------ ------ ------ Outstanding at end of year $14.27 $14.78 $13.94 ====== ====== ====== Following is a summary of stock options outstanding as of December 27, 1998: OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------------------------------- Weighted Number Average Weighted Number Weighted Outstanding Remaining Average Exercisable Average Range of As of Contractual Exercise As of Exercise Exercise Price 12/27/98 Life Price 12/27/98 Price - ----------------------------------------------------------------------------- $ 3.88--$ 9.78 1,111,442 4.28 $ 6.68 1,051,442 $ 6.59 $ 9.81--$12.44 1,374,280 8.13 $11.31 793,780 $11.54 $12.63--$21.75 1,545,505 8.64 $17.01 832,230 $17.96 $21.94--$30.81 751,538 7.82 $27.83 751,538 $27.83 - ----------------------------------------------------------------------------- $ 3.88--$30.81 4,782,765 7.27 $14.27 3,428,990 $14.56 Stock options granted prior to July 1, 1997, were vested upon grant. Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of grant over the amount an employee must pay to acquire the stock. Since all options were granted at market value, there is no compensation cost to be recognized. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date using the Black Scholes option pricing model prescribed under SFAS No. 123, the Company's net income and earnings per share would approximate the pro forma amounts as follows: 1998 1997 1996 ---- ---- ---- (Thousands) Net Income As reported $17,685 $ 8,228 $20,447 Pro forma $15,252 $ 4,380 $12,647 Diluted earnings per share As reported $ 0.53 $ 0.23 $ 0.60 Pro forma $ 0.46 $ 0.11 $ 0.37 The following assumptions were used in estimating fair value of stock options: 1998 1997 1996 ---- ---- ---- Dividend yields None None None Expected volatility .485 .555 .474 Risk-free interest rates 6.1% 6.25% 6.05% Expected life (in years) 3.1 3.2 3.1 Note 8. SUPPLEMENTAL CASH FLOW INFORMATION Cash payments in 1998, 1997, and 1996, respectively, included payments for interest of $9,569,000, $9,571,000, and $9,458,000 and income taxes of $9,555,000, $8,143,000, and $5,978,000. In 1996, the Company acquired all of the capital stock of: (i) Mercatec Sistemas e Comercio de Equipmentos Eletronicos Ltda.; (ii) Vysion Systems, Inc.; and (iii) Checkpoint Systems Japan Co. Ltd. In conjunction with these acquisitions, the aggregate fair value of assets acquired, cash paid and direct costs incurred, and liabilities assumed were as follows: Fair value of assets acquired...................$ 15,376,000 Cash paid and direct costs incurred for the capital stock......................... 6,724,000 ----------- Liabilities assumed.............................$ 8,652,000 =========== In 1997, the Company acquired all of the capital stock of: (i) 2M Holding ApS; (ii) D&D Security; and (iii) Evagard PLC. In 1997, the Company purchased all the assets of Check Out Security Systems. In conjunction with these acquisitions, the aggregate fair value of assets acquired, cash paid and direct costs incurred, and liabilities assumed were as follows: Fair value of assets acquired...................$ 9,590,000 Cash paid and direct costs incurred for the capital stock.......................... 5,988,000 ----------- Liabilities assumed.............................$ 3,602,000 =========== On February 2, 1998, the Company acquired the assets of Tokai Electronics Co., Ltd., a Japanese manufacturer of radio frequency tags. The Company had held a one-third interest in Tokai since 1995. In conjunction with the acquisition, the aggregate fair value of assets acquired, cash paid and direct costs incurred, and liabilities assumed were as follows: Fair value of assets acquired...................$ 28,560,000 Cash paid and direct costs incurred for the capital stock.......................... 28,285,000 ----------- Liabilities assumed.............................$ 275,000 =========== Note 9. SHAREHOLDERS' EQUITY In March 1997, the Company's Board of Directors adopted a new Shareholder's Rights Plan (1997 Plan) which replaced a prior plan which had been adopted in 1988. The Rights under the 1997 Plan attached to the common shares of the Company as of March 24, 1997. No separate certificate representing the Rights will be distributed until the occurrence of certain triggering events as defined in the 1997 Plan. The Rights are designed to ensure all Company shareholders fair and equal treatment in the event of a proposed takeover of the Company, and to guard against partial tender offers and other abusive tactics to gain control of the Company without paying all shareholders a fair price. The Rights are exercisable only as a result of certain actions (defined by the Plan) of an Acquiring Person, as defined. Initially, upon payment of the exercise price (currently $100.00), each Right will be exercisable for one share of Common Stock. Upon the occurrence of certain events as specified in the Plan, each Right will entitle its holder (other than the Acquiring Person) to purchase a number of the Company's or Acquiring Person's common shares having a market value of twice the Right's exercise price. The Rights expire on March 10, 2007. Note 10. STOCK REPURCHASE During 1997, the Board of Directors approved the purchase of up to 10% or approximately 3.5 million shares of the Company's common stock at an average cost not to exceed $14.00 per share. On October 23, 1998, the Board of Directors authorized the additional purchase of up to $20 million of the Company's outstanding common stock at an average cost not to exceed $14.00 per share. As of December 27, 1998, the Company has purchased under the 1997 program, 3,441,300 shares of common stock for an average price of $12.02 per share, and 1,319,900 shares of common stock for an average price of $13.02 per share under the 1998 program. Note 11. EARNINGS PER SHARE Earnings per share are calculated under the provisions of Statement of Financial Accounting Standards SFAS No. 128, Earnings per share, adopted in the fourth quarter of 1997. Earnings per share amounts for 1996 have been restated to give effect to the application of SFAS No. 128. The following data shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock: ------------------------------------- 1998 1997 1996 ------------------------------------- (In thousands, except per share amounts) Basic earnings per share: Net income $17,685 $ 8,228 $20,447 ======= ======= ======= Average Common Stock outstanding 32,302 34,020 32,097 Basic earnings per share $ 0.55 $ .24 $ .64 ======= ======= ======= Diluted earnings per share: Net income available for Common Stock and dilutive securities (1) $17,685 $ 8,228 $20,447 ======= ======= ======= Average Common Stock outstanding 32,302 34,020 32,097 Additional common shares Resulting from Stock Options 970 1,164 1,990 ------- ------- ------- Average Common Stock and dilutive stock outstanding (1) 33,272 35,184 34,087 ======= ======= ======= Diluted earnings per share $ .53 $ .23 $ .60 ======= ======= ======= (1) Conversion of the subordinated debentures for 1998, 1997, and 1996 are not included in the above calculation as they are anti-dilutive. Note 12. INCOME TAXES The Company's net earnings generated by the operations of its Puerto Rico subsidiary are exempt from Federal income taxes under Section 936 of the Internal Revenue Code and substantially exempt from Puerto Rico income taxes. The Company has a local tax exemption agreement with Puerto Rico granting a 90% local tax exemption on both the tag and sensor manufacturing operations through the year 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 1998, 1997, and 1996, a provision was made for tollgate taxes. The Company has not provided for tollgate taxes on $31,662,000 of its subsidiary's unremitted earnings since they are expected to be reinvested indefinitely. The domestic and foreign components of earnings (losses) before income taxes are: 1998 1997 1996 ---- ---- ---- (Thousands) Domestic $27,864 $35,496 $29,487 Foreign (1,680) (21,931) 390 ------- ------- ------- Total $26,184 $13,565 $29,877 ======= ======= ======= The related provision for income taxes consist of: 1998 1997 1996 ---- ---- ---- Currently Payable (Thousands) Federal $ 5,970 $10,739 $ 6,691 State 300 391 350 Puerto Rico 572 513 354 Foreign 1,284 313 1,672 Deferred Federal 2,935 (2,857) (898) State - (81) (50) Puerto Rico 192 193 399 Foreign (2,744) (3,766) 912 ------- ------- ------ Total Provision $ 8,509 $ 5,445 $ 9,430 ======= ======= ======= Deferred tax liabilities (assets) at December 27, 1998 and December 28, 1997 consist of: 1998 1997 ---- ---- (Thousands) Depreciation $ 2,414 $ 1,727 Intangibles 1,669 2,066 Other 1,198 440 ------- ------- Gross deferred tax liabilities 5,281 4,233 ------- ------- Inventory (2,878) (2,486) Accounts receivable (1,123) (885) Net operating loss carryforwards (22,224) (20,259) Warranty (436) (371) Restructuring (640) (2,097) Other (822) (2,401) ------- ------- Gross deferred tax assets (28,123) (28,499) ------- ------- Valuation allowance 19,090 20,131 ------- ------- Net deferred tax (asset) liability $(3,752) $(4,135) ======= ======= The net operating loss carryforwards as of December 27, 1998 in the amount of $80,372,000 includes $38,052,000 of loss carryforwards that were acquired in connection with the acquisition of the ID Systems Group and Actron Group Limited. If the benefit of the pre-acquisition loss carryforwards is realized, the Company will apply such benefit to goodwill in connection with the acquisition. In 1998, $10,657,000 of foreign tax losses expired. A full valuation allowance had been recorded in 1997 against these losses. In 1998, a valuation allowance was recorded due to certain foreign losses where it is more than likely that tax loss carryforwards will not be utilized. Of the total foreign net operating loss carryforwards available, $42,636,000 expire beginning January 1999 through December 2008, and the remaining portion may be carried forward indefinitely. A reconciliation of the statutory U.S. Federal income tax rate with the effective income tax rate follows: 1998 1997 1996 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% Tax exempt earnings of subsidiary in Puerto Rico (13.8) (35.5) (12.4) Non-deductible goodwill 5.1 8.0 3.5 Foreign losses with no benefit 9.1 30.3 6.1 State and local income taxes, net of federal benefit 2.2 5.2 2.0 Benefit of foreign sales corporation (2.7) (2.6) (2.4) Foreign loss carryforwards utilized (2.4) - - Other - (0.3) (0.3) ------ ------ ------ Effective tax rate 32.5% 40.1% 31.5% ====== ====== ====== Note 13. EMPLOYEE BENEFIT PLANS Under the Company's defined contribution savings plans, eligible employees (see below) may make basic (up to 6% of an employee's earnings) and supplemental contributions to a trust. The Company matches 50% of the participant's basic contributions. Company contributions vest to participants in increasing percentages over three to six years of service. The Company's contributions under the plans approximated $690,000, $579,000, and $577,000, in 1998, 1997, and 1996, respectively. Generally, any full-time, non-union employee of the Company who has completed one month of service, and any part-time non-union employee of the Company who has completed one year of service, other than employees of the Company's foreign subsidiaries, may participate in the Company's United States Savings Plan. All full-time employees of the Puerto Rico subsidiary who have completed three months of service may participate in the Company's Puerto Rico Savings Plan. Part-time employees are not entitled to participate in the Company's Puerto Rico Savings Plan. Under the Company's non-qualified Employee Stock Purchase Plan, employees, other than employees of the Company's subsidiaries in Australia, Argentina, Brazil, Europe, Japan and Mexico may contribute up to $80 per week to a trust for the purchase of the Company's Common Stock at fair market value. The Company matches employee contributions up to a maximum of $20.75 per week. The Company's contributions under this plan approximated $220,000, $238,000, and $231,000, in 1998, 1997, and 1996, respectively. Under the Company's 1998 Bonus Plan, employees of the Company are divided into four groups, with each group having a targeted bonus percentage which is adjusted depending on earnings per share growth. In 1998, 1997 and 1996, net earnings did not exceed the required criteria and, accordingly, no bonuses were provided. Note 14. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Company operates internationally, giving rise to significant exposure to market risks from changes in foreign exchange rates. Derivative financial instruments are utilized by the Company to reduce the risk, as explained in this note. The Company does not hold or issue financial instruments for trading purposes. Notional Amounts of Derivatives - ------------------------------- The notional amounts of derivatives are not a complete measure of the Company's exposure to foreign exchange fluctuation. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives, which relate to exchange rates. Foreign Exchange Risk Management - -------------------------------- The Company enters into currency exchange forward contracts to hedge short-term receivables denominated in currencies other than the U.S. dollar from its foreign sales subsidiaries. The term of the currency exchange forward contracts is rarely more than one year. During 1998, the Company also purchased a series of put options denominated in Canadian dollars which gave the Company the right but not the obligation to convert Canadian dollars at a specified exchange rate into U.S. dollars. Unrealized and realized gains and losses on these contracts and options are included in Other Income net. Notional amounts of currency exchange forward contracts outstanding at December 27, 1998 were $41,898,000, with various maturity dates ranging through the end of 1999. At December 28, 1997, the notional amounts of currency exchange forward contracts outstanding were $42,013,000. Counterparties to these contracts are major financial institutions, and credit loss from counterparty non-performance is not anticipated. Aggregate foreign currency transaction gains/(losses) in 1998, 1997, and 1996 were ($981,000), $458,000, and $1,026,000, respectively, and are included in Other Income, net in the Consolidated Earnings Statement. Additionally, there were no deferrals of gains or losses on currency exchange forward contracts at December 27, 1998. Fair Values - ----------- The following table presents the carrying amounts and fair values of the Company's financial instruments at December 27, 1998 and December 28, 1997: 1998 1997 ------------------- ------------------ Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- (Thousands) Long-term debt (including current maturities) (1) $( 56,429) $( 57,498) $( 37,812) $( 39,112) Subordinated debentures (1) (120,000) ( 99,750) (120,000) (125,100) Currency exchange forward contracts and options (2) 554 554 811 811 (1) The carrying amounts are reported on the balance sheet under the indicated captions. (2) The carrying amounts represent the net unrealized gain(loss) associated with the contracts and options at the end of the period. Such amounts are included in "Other Current Liabilities." Long-term debt is carried at the original offering price, less any payments of principal. Rates currently available to the Company for long-term borrowings with similar terms and remaining maturities are used to estimate the fair value of existing borrowings as the present value of expected cash flows. The long-term debt agreements have various due dates with none of the agreements extending beyond the year 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 common stock. The debentures will mature on November 1, 2005 and are redeemable, in whole or in part, at the option of the Company on or after November 1, 1998. In order to estimate the fair value of these debentures, the Company used currently quoted market prices. Note 15. RESTRUCTURING CHARGE In December 1997, the Company recorded a pre-tax restructuring charge of $9,000,000 of which $600,000 was reversed in the fourth quarter of 1998. The net charge, relating directly to the Company's international operations, includes:(i) the elimination of approximately 60 positions ($4,850,000); (ii) the lease terminations of six of the Company's sales facilities and the consolidation of the Company's European research and development center to the corporate headquarters ($1,500,000); (iii) the costs associated with the termination of two master re-seller agreements in Asia and Southern Europe ($1,550,000); and (iv) costs associated with the consolidation of inventory to the European distribution center ($500,000). The 1998 reversal related to the expedited settlement of the employee termination costs in France, which was less than originally anticipated. At December 27, 1998, $1,807,000 of restructuring remains in Other Current Liabilities. This amount is primarily related to future obligations under employee severance agreements ($800,000) and lease termination costs ($1,007,000). The restructuring activity is expected to be substantially completed by mid 1999. Note 16. COMMITMENTS AND CONTINGENCIES The Company leases its offices, distribution centers and certain production facilities. Rental expense for all operating leases approximated $7,613,000, $7,055,000, and $6,408,000 in 1998, 1997, and 1996, respectively. Future minimum payments for operating leases having non-cancelable terms in excess of one year at December 27, 1998 are: $5,554,000 (1999); $4,337,000 (2000); $3,241,000 (2001); $2,596,000 (2002); and $9,680,000 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. The lease payments related to this facility 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 the year 2008. Prior to October 1, 1995, the Company paid a royalty to ADL of approximately 2% of net revenues generated by the sale and lease of the licensed products, with the actual amount of the royalty depending upon revenue volume. The Company has exclusive distribution rights for the USA, Canada and the Dominican Republic, and the non-exclusive distribution rights in Middle and South America for the sale of Safer products for which an annual minimum payment of $125,000 is required. This agreement runs through the year 2001. The Company is the worldwide licensee of certain patents and technical knowledge related to proximity cards and card reader products. It pays a royalty equal to 2% of the net revenues from the licensed products. Such royalties are payable through January 29, 2000, or until all of the subject patents have been adjudicated invalid. 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 in 1992. The Company pays a one-time site license fee for each site installed. Note 17. CONCENTRATION OF CREDIT RISK The Company's foreign subsidiaries, along with many foreign distributors, provide diversified international sales thus minimizing credit risk to one or a few distributors. In addition, the Company maintains foreign credit insurance to provide coverage for potential foreign political or economic risks. Domestically, the Company's sales are well diversified among numerous retailers in the apparel, drug, home entertainment, mass merchandise, music, shoe, supermarket, and video markets. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. Note 18. ACQUISITIONS All acquisitions have been accounted for under the purchase method. The results of the operations of the acquired businesses are included in the consolidated financial statements from the date of acquisition. On March 21, 1996, the Company purchased all of the capital stock of Mercatec Sistemas e Comercio de Equipamentos Eletronicos Ltda (Mercatec). Mercatec is a supplier of EAS systems and CCTV systems to retailers in Brazil. On November 18, 1996, the Company purchased all of the capital stock of Vysions Systems, Inc. (Vysions) in Ontario, Canada. Vysions is a leading CCTV systems integrator and solutions provider for the Canadian market. On December 27, 1996, the Company acquired Checkpoint Systems Japan, Co. Ltd., its exclusive distributor for retail products throughout Japan. This acquisition provided the Company its first direct presence in the growing Asian market. On January 31, 1997, the Company completed the acquisition of 2M Holding ApS (2M) for approximately $2.3 million. 2M had been the Company's exclusive distributor for retail security products throughout Denmark since 1992. On July 2, 1997, the Company acquired the assets of Check Out Security Systems for approximately $1.2 million. Check Out Security, located in Denmark, is a provider of CCTV products, installation and service. On August 21, 1997, the Company acquired all of the outstanding shares of D&D Security for approximately $1.0 million. D&D Security, located in Belgium, is a provider of CCTV products and fire/burglar alarm systems. On December 18, 1997, the Company acquired all of the outstanding shares of Evagard PLC for approximately $1.6 million. Evagard, located in the United Kingdom, is a provider of CCTV products, installation and service. On February 2, 1998, the Company acquired the assets of Tokai Electronics Co., Ltd., a Japanese manufacturer of radio frequency tags, for approximately $28.0 million, which resulted in an excess of purchase price over the fair value of net assets acquired of approximately $2.4 million. The Company had held a one-third interest in Tokai since 1995. Note 19. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION Checkpoint is a designer, manufacturer and distributor of integrated electronic security systems - utilizing proprietary radio frequency (RF) technologies - designed primarily to help retailers prevent losses caused by the theft of merchandise. The Company operates in four business segments consisting of (i) electronic article surveillance (EAS) systems; (ii) domestic closed circuit television (CCTV) systems, fire and burglary, and point-of-sale (POS) monitoring systems; (iii) electronic access control systems (EAC); and (iv) RFID, the joint development of a new product undertaken by the Company and Mitsubishi Materials Corporation (Mitsubishi) for retail, library and commercial industrial applications in the auto-ID marketplace. The initial release of RFID products is expected to occur in early 1999. Information by business segment is set forth below: (A) Business Segments 1998 1997 1996 -------- -------- -------- (Thousands) Business segment net revenue: Electronic Article Surveillance(1) $297,200 $278,635 $248,009 Domestic CCTV, Fire, Burglary 53,745 45,834 35,232 Access Control 11,462 11,495 8,528 RFID - - - -------- -------- -------- Total $362,407 $335,964 $291,769 -------- -------- -------- Business segment operating income (loss): Electronic Article Surveillance(1)(2) $ 25,637 $ 8,221 $ 25,338 Domestic CCTV, Fire, Burglary 4,190 2,039 2,947 Access Control 2,877 2,544 1,784 RFID (2,041) (1,100) - -------- -------- -------- Total $ 30,663 $ 11,704 $ 30,069 -------- -------- -------- Business segment assets (net): Electronic Article Surveillance(1) $464,119 $470,507 $491,006 Domestic CCTV, Fire, Burglary 34,672 37,499 23,643 Access Control 7,745 8,419 7,004 RFID 1,127 9 - -------- -------- -------- Total $507,663 $516,434 $521,653 -------- -------- -------- 1998 1997 1996 -------- -------- -------- (Thousands) Business segment property, plant and equipment: Depreciation Electronic Article Surveillance(1) $ 17,303 $ 15,822 $ 13,012 Domestic CCTV, Fire, Burglary 688 452 279 Access Control 33 32 28 RFID 167 1 - -------- -------- -------- Total $ 18,191 $ 16,307 $ 13,319 -------- -------- -------- Net Additions Electronic Article Surveillance(1) $ 42,741 $ 38,073 $ 16,094 Domestic CCTV, Fire, Burglary 694 2,400 347 Access Control 20 5 62 RFID 1,294 10 - -------- -------- -------- Total $ 44,749 $ 40,488 $ 16,503 -------- -------- -------- (1) Electronic Article Surveillance (EAS) segment numbers include the Company's manufacturing and corporate activity. Additionally, included in the EAS amounts are the Company's foreign CCTV, Fire, and Burglary which represents approximately 4%, 3%, and 1% of the Company's total consolidated revenue for 1998, 1997, and 1996, respectively. (2) EAS operating income (loss) includes: (i) a restructuring charge reversal of $0.6 million in 1998; and (ii) a restructuring charge of $9.0 million and non-recurring charges of $8.1 million in 1997. (B) Geographic Information Operating results are prepared on a "customer basis", meaning that net sales and profit (loss) from operations are included in the geographic area where the customer is located. Assets are included in the geographic area in which the producing entities are located. A direct sale from the United States to an unaffiliated customer in Europe is reported as a European sale. Interarea sales between the Company's locations are made at transfer prices that approximate market price and have been eliminated from consolidated net sales. Operating profit for the individual area includes the profitability on a transfer price basis, generated by sales of the Company's products imported from other geographic areas. The following tables show sales, operating earnings and other financial information by geographic area for the years 1998, 1997, and 1996. North America and Puerto Rico Europe Other(1) --------------- --------- ---------- (Thousands) 1998 Net Sales from Unaffiliated Customers $211,780 $100,391 $ 50,236 Operating Income(Loss) $ 29,668 $ 1,585(2) $ (590) Long-lived Assets $ 80,921 $ 67,316 $ 45,018 1997 Net Sales from Unaffiliated Customers $192,727 $100,500 $ 42,737 Operating Income(Loss) $ 29,372(3) $(12,121)(4) $ (5,547)(5) Long-lived Assets $ 85,396 $ 66,238 $ 18,065 1996 Net Sales from Unaffiliated Customers $161,507 $101,671 $ 28,591 Operating Income(Loss) $ 30,161 $ (1,058) $ 966 Long-lived Assets $ 66,861 $ 62,003 $ 17,541 (1) Other includes the Company's operations in Mexico, Argentina, Australia, Brazil, and Japan. (2) Operating income(loss) includes a pre-tax restructuring charge reversal of $0.6 million. (3) Includes a pre-tax restructuring charge of $1.6 million. (4) Includes a pre-tax restructuring charge of $6.6 million. (5) Includes a pre-tax restructuring charge of $0.8 million. The Company's export sales to foreign distributors approximated $10,897,000, $13,539,000, and $24,505,000, in 1998, 1997, and 1996, respectively. Sales by the Company's foreign subsidiaries in Argentina, Australia, Canada, Western and Southern Europe, Scandinavia, Brazil, Japan, and Mexico totaled $156,384,000 in 1998, $144,994,000 in 1997, and $121,388,000 in 1996. Note 20. MINORITY INTEREST On July 1, 1997, Checkpoint Systems Japan Co. Ltd., a wholly-owned subsidiary of the Company (Checkpoint Japan) issued newly authorized shares to Mitsubishi Materials Corporation (Mitsubishi) in exchange for cash. These shares represented 20% of the adjusted outstanding shares of Checkpoint Japan. The Company's Consolidated Balance Sheet includes 100% of the assets and liabilities of Checkpoint Japan. Mitsubishi's 20% interest in Checkpoint Japan and the earnings/losses therefrom have been reflected as minority interest on the Company's Consolidated Balance Sheet and Consolidated Earnings Statement, respectively. Note 21. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes new standards for accounting for derivatives and hedging activities and amends a number of existing standards. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. Although the Company has not fully completed its evaluation of the impact of this new standard, we do not anticipate the adoption of this standard to have a material effect on the Company's consolidated financial statements. Item 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no changes or disagreements to report under this item. PART III The information called for by Item 10, Directors and Executive Officers of the Registrant (except for the information regarding executive officers called for by Item 401 of Regulation S-K which is included in Part I hereof as Item A in accordance with General Instruction G(3)); Item 11, Executive Compensation; Item 12, Security Ownership of Certain Beneficial Owners and Management: Item 13, Certain Relationships and Related Transactions, is hereby incorporated by reference to the Registrant's Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on May 5, 1999, which management expects to file with the Securities and Exchange Commission within 120 days of the end of the Registrant's fiscal year. Note that the sections of the Company's Definitive Proxy Statement entitled "Compensation and Stock Option Committee Report on Executive Compensation" and "Stock Price Performance Graph", pursuant to Regulation S-K Item 402 (a)(9) are not deemed "soliciting material" or "filed" as part of this report. 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.............................. 34 Consolidated Balance Sheets as of December 27, 1998 and December 28, 1997 and ......................................... 35 Consolidated Earnings Statements for each of the years in the three-year period ended December 27, 1998............. 36 Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 27, 1998............................................ 37 Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 27,1998........ 38 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 27, 1998............. 38 Notes to Consolidated Financial Statements..................... 39-59 (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............... 62 All other schedules are omitted either because they are not applicable, not required, or because the required information is included in the financial statements or notes thereto: (a) 3. Exhibits required to be filed by Item 601 of Regulation S-K ---------------------------------------------------------------- Exhibit 3.1 Articles of Incorporation, as amended, are hereby incorporated by reference to Item 14(a), Exhibit 3(i) of the Registrant's 1990 Form 10-K, filed with the SEC on March 14, 1991. Exhibit 3.2 By-Laws, as Amended and Restated, are hereby incorporated by Reference to the Registrants 1992 Form 10-K, filed with the SEC on March 25, 1993. Exhibit 4.1 Rights Agreement by and between Registrant and American Stock and Transfer and Trust Company dated as of March 10, 1997, is hereby incorporated by reference to Item 14(a), Exhibit 4.1 of the Registrant's 1996 Form 10-K filed with the SEC on March 17, 1997. Exhibit 4.2 Indenture dated as of October 24, 1995 by and between Registrant and The Chase Manhattan Bank, as Trustee, is hereby incorporated herein by reference to Exhibit 4.3 to Registrant's Form 10-Q/A filed with the SEC on December 13, 1995. Exhibit 4.3 First Supplemental Indenture dated as of February 27, 1998 (amending Indenture dated as of October 24, 1995) is hereby incorporated herein by reference to Exhibit 4.4 to Registrant's Form 10-K for 1997 filed with the SEC on March 23, 1998. Exhibit 10.1 1998 Bonus Plan Exhibit 10.2 Amended and Restated Stock Option Plan (1992) is hereby incorporated by reference to Registrants Form 10-K for 1997 filed with the SEC on March 23, 1998 Exhibit 10.3 Consulting and Deferred Compensation Agreement with Albert E. Wolf, are incorporated by reference to Item (a), Exhibit 10(c) of the Registrant's 1994 Form 10-K. Exhibit 10.4 Terms and Agreement between Registrant and Principal Mutual Life Insurance Company is incorporated by reference to Item 14(a), Exhibit 10(e) of the Registrant's 1994 Form 10-K. Exhibit 10.5 First Amendment to Note Agreement between Registrant, Principal Mutual Life Insurance Company and The Mutual Group Insurance Company, is incorporated herein by reference to Item 14(a), Exhibit 10(f) of the Registrant's 1994 Form 10-K. Exhibit 10.6 Amended and Restated Employee Stock Purchase Plan as Appendix A to the Company's Definitive Proxy Statement, filed March 22, 1996, is hereby incorporated by reference. Exhibit 10.7 Asset Purchase Agreement by and among Tokai Aluminum Foil Co. Ltd., Tokai Electronics Co. Ltd., Checkpoint Production Japan K.K. and the Registrant, is incorporated herein by reference to Item 7(c), Exhibit 2 of the Registrant's Form 8-K filed with the SEC on February 18, 1998. Exhibit 10.8 Credit Agreement, dated as of December 24, 1997, by and among Registrant, First Union National Bank, as Administrative Agent, and the lenders named herein, is incorporated herein by reference to Item 7(c), Exhibit 10.1 of the Registrant's Form 8-K filed with the SEC on February 18, 1998. Exhibit 10.9 Employment Agreement with Kevin P. Dowd Exhibit 21 Subsidiaries of the Registrant. Exhibit 23 Consent of Independent Accountants Exhibit 24 Power of Attorney, contained in signature page. Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K On February 18, 1998, the Registrant filed a Current Report on Form 8-K reporting under: Item 2 thereof that (i) on February 3, 1998, the Registrant consummated an Agreement to purchase the operating assets and business of Tokai Electronics Co. Ltd; and (ii) on February 10, 1998 the Registrant issued a press release announcing the completion of aforesaid agreement; and Item 5 thereof that (i) on January 29, 1998, the Registrant issued a press release announcing its preliminary fourth quarter and year-end results, new contracts and a new $100 million unsecured credit facility; and (ii) the Company issued a press release on February 10, 1998 announcing its Fourth Quarter and year-end results. On November 4, 1998, the Registrant filed a Current Report on Form 8-K reporting under: Item 5 thereof that on October 26, 1998, the Registrant issued a press release announcing that its Board of Directors authorized up to $20 million to repurchase additional outstanding common Stock. CHECKPOINT SYSTEMS, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Balance at Charged to Balance at Beginning Costs and Deductions End of Year Classification of Year Expenses Year - ---- -------------- ---------- ---------- ---------- ---------- 1998 Allowance for doubtful accounts $5,703 $2,276 $2,423 $5,556 ------ ------ ------ ------ 1997 Allowance for doubtful accounts $4,282 $3,809 $2,388 $5,703 ------ ------ ------ ------ 1996 Allowance for doubtful accounts $1,906 $2,980 $ 604 $4,282 ------ ------ ------ ------ INDEX TO EXHIBITS EXHIBIT DESCRIPTION - ------- ----------- EXHIBIT 10.1 1998 Bonus Plan EXHIBIT 10.9 Employment Agreement with Kevin P. Dowd EXHIBIT 21 Subsidiaries of Registrant EXHIBIT 23 Consent of Independent Accountants EXHIBIT 24 Power of Attorney, Contained in Signature EXHIBIT 27 Financial Data Schedule 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 29, 1999. CHECKPOINT SYSTEMS, INC. /s/Kevin P. Dowd - ----------------- President, Chief Executive Officer, and Director KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kevin P. Dowd and Jeffrey A. Reinhold and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution in their place and stead, in any and all capacities, to sign any and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - --------- ----- ---- /s/Kevin P. Dowd President, Chief March 29, 1999 - ---------------------- Executive Officer and Director /s/Jeffrey A. Reinhold Senior Vice President - Finance, March 29, 1999 - ---------------------- Chief Financial Officer, and Treasurer /s/W. Craig Burns Vice President - March 29, 1999 - ---------------------- Corporate Controller and Chief Accounting Officer /s/Robert O. Aders Director March 29, 1999 - ---------------------- /s/Roger D. Blackwell Director March 29, 1999 - ---------------------- /s/Richard J. Censits Director March 29, 1999 - ---------------------- /s/David W. Clark, Jr. Director March 29, 1999 - ---------------------- /s/Alan R. Hirsig Director March 29, 1999 - ---------------------- /s/William P. Lyons, Jr. Director March 29, 1999 - ------------------------ /s/Elisa Margaona Director March 29, 1999 - ---------------------- /s/Raymond R. Martino Director March 29, 1999 - ---------------------- /s/Albert E. Wolf Director March 29, 1999 - ---------------------- EX-10 2 EXHIBIT 10.1 CHECKPOINT SYSTEMS, INC. 1998 BONUS PLAN For 1998 the Board of Directors approved the 1998 Bonus Plan. The 1998 Bonus Plan provides for a Bonus Pool to be formed when earnings per share ("EPS") increases over a defined target. The Bonus Pool is then apportioned among four (4) groups of employees; corporate officers; vice presidents, middle management and front line employees. Each group has a targeted bonus percentage assigned which is adjusted, depending on the percentage increase or decrease over the targeted EPS growth. Other than for Messrs. Dowd, Aguilera, Reilly and Smith, who's bonuses are determined solely on the basis of financial performance of the Company, all participants will have a percentage of their bonuses determined by individual performance. No Bonus Pool will be formed unless 1998 EPS attains a specified level. The specified minimum target for EPS was not attained for the fiscal year 1998 and therefore no bonuses were paid. No discretionary bonuses were paid for the fiscal year 1998. EX-10 3 EXHIBIT 10.9 EMPLOYMENT AGREEMENT BETWEEN KEVIN P. DOWD AND CHECKPOINT SYSTEMS, INC. THIS AGREEMENT is made as of the 1st day of July, 1998, by and between CHECKPOINT SYSTEMS, INC. a Pennsylvania corporation ("CSI"), and KEVIN P. DOWD ("Executive"). BACKGROUND CSI is involved in providing integrated security and safety solutions for retail, industrial and institutional applications worldwide, both directly and through its affiliates. Executive has agreed to accept employment with CSI as its President and Chief Executive Officer and as a Director has agreed to furnish his skills to CSI and fulfill the duties of the aforementioned position as outlined in Exhibit "A", attached hereto and made a part hereof, on the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment and Term. CSI hereby employs Executive as its President and Chief Executive Officer. Executive agrees to serve CSI in such capacity, subject to the terms and conditions of this Agreement, for a term of three (3) calendar years, commencing on the date hereof (the "Term"). 2. Duties. A. During the Term, Executive shall use his best efforts to perform all duties required in furtherance of his position as outlined in Exhibit "A" or as are assigned to him from time to time by the Board of Directors of CSI. B. Executive shall diligently and faithfully devote his entire time, energy, skill, and best efforts to perform his duties under this Agreement. Executive shall conduct himself at all times so as to advance the best interests of CSI, and shall not undertake or engage in any other business activity or continue or assume any other business affiliations which conflict or interfere with the performance of his services hereunder without the prior written consent of the Chairman of the Board of CSI. 3. Compensation. CSI shall pay Executive and Executive shall accept, as his base compensation for all services rendered to CSI pursuant hereto: A. During the Term, an annual base salary of $377,520(the "Base Salary"), payable at regular intervals in accordance with CSI's normal payroll practice, which Base Salary shall be adjusted as of January 1st during the Term hereof, effective as of the aforesaid date. The amount of such adjustment, while in the discretion of the Board of Directors, shall reflect Executive's performance; and B. In addition to the Base Salary payable to Executive under Subsection 3A above, upon achieving the certain goals and objectives as defined in CSI's 1998 Bonus Plan, attached hereto as Exhibit B, an incentive bonus ("Bonus") shall be paid for each year of the Term in accordance with the terms of said 1998 Bonus Plan, which 1998 Bonus Plan may be amended or revoked by CSI at any time during the term hereof. 4. Fringe Benefits and Other Compensation. A. During the Term, Executive shall be entitled to participate in and receive the executive benefits program, subject only to Executive's meeting or satisfying the eligibility requirements and standards therefor with regard to health, life and disability insurance benefits. Said executive benefits program may be amended or revoked by CSI at any time during the term hereof. 5. Termination. A. Executive's employment and rights to compensation hereunder shall terminate immediately if Executive voluntarily leaves the employment of CSI, except that CSI shall have the obligation to pay Executive such portion of his Base Salary provided for in Subsection 3A hereof as may be accrued but unpaid on the date Executive voluntarily leaves the employment of CSI. Executive shall have no right to receive any Bonus payments that have accrued and are payable if Executive voluntarily leaves the employment of CSI, it being the understanding of the parties that in this event, the amount and payment of any accrued Bonus shall be in the sole discretion of the Board of Directors of CSI. In the event that Executive voluntarily leaves the employment of CSI, he shall provide at least thirty (30) days written notice. B. CSI may upon written notice to Executive giving the reasons therefor terminate Executive's employment and his rights to compensation hereunder for cause. As used herein, the term "cause" shall include and be limited to, the following: conviction of Executive for any felony, fraud or embezzlement or crime of moral turpitude; being held liable by a court of competent jurisdiction for sexual harrassment in violation of applicable federal, state or local laws; controlled substance abuse, alcoholism or drug addiction which interferes with or affects Executive's responsibilities to CSI or which reflects negatively upon the integrity or reputation of CSI; or Executive's breach of any of the material covenants contained in this Agreement which breach is not cured within ten (10) days of the receipt of written notice thereof by Executive. If Executive is terminated for cause as provided above, Executive's employment and rights to compensation hereunder shall terminate immediately upon receipt of written notice except that CSI shall have the obligation to pay Executive such portion of his Base Salary as may be accrued but unpaid on the date his employment is terminated. Executive shall have no right to receive any Bonus payments that have accrued and are payable if Executive is terminated for cause as provided above. C. If Executive is terminated by CSI during the Term hereof, for reasons other than those provided in Subsections 5A or 5B above, and provided that Executive is not in violation of the provisions of Section 6 hereof, Executive shall be entitled to receive severance pay for a period of twenty four (24) months thereafter (or such earlier date as Executive shall obtain other employment, but in no event less than twelve (12) months after termination) consisting of payment of one hundred percent (100%) of Executive's monthly Base Salary payable at regular intervals in accordance with CSI's normal payroll practices, as well as any Bonus payments that are accrued and payable through the date of such termination, and continuation of health insurance benefits, life and disability insurance benefits and 401(k) benefits contemporaneous with the severance pay. If, as a result in a Change in Control as set forth in Section D(ii), Executive leaves the employ of the Company, the severance payment set forth in this Section C shall be increased to thirty six months from twenty four months. D. Executive shall not be considered to have voluntarily left his employment within the meaning of Section 5A if he leaves for any of the following reasons: (i) The assignment of the Executive to any duties substantially inconsistent with his position, duties, responsibilities or status with CSI as defined herein or a substantial reduction of the aforesaid duties or responsibilities; (ii) In the event of a "Change in Control" as defined herein, any failure of CSI to obtain the assumption of the obligation to perform this Agreement as contemplated. For purposes of this Agreement, a "Change in Control" of CSI shall be deemed to have occurred if (a) any person or entity or group thereof acting in concert (an "Acquiror") acquires from the shareholders of CSI (whether through a merger, a consolidation, or otherwise) and possesses, directly or indirectly, the power to elect or appoint or approve the appointment of a majority of the Board of Directors and does, in fact, elect or appoint or approve the appointment of the majority of the Board; or (b) such Acquiror obtains the right or power to elect a substitute or replacement Board, and does, in fact, exercise such right; or (c) the shareholders of CSI approve an agreement for the sale or disposition by CSI of all or substantially all of CSI's assets to an Acquiror; (iii) The election, appointment or designation of any individual as an operating officer or agent of the Board of Directors (excluding the Chairman of the Board or any members thereof) to act as the superior of or with authority exceeding that of Executive with respect to the powers, authority and duties of Executive described in Exhibit A. E. No later than six (6) months prior to the end of the Term of this Agreement, CSI and Executive shall commence negotiations for either an extension of Term or the entering into of a new agreement. In the event that the parties are unable to agree upon an extension or new agreement, and Executive leaves the employ of CSI, Executive shall be entitled to receive severance pay equal to his Base Salary at the end of the Term, for a period of twenty four (24) months (or such earlier date as Executive shall obtain other employment, but in no event less than twelve (12) months after termination) from the date he leaves the employ of CSI. During such severance period Executive shall have health insurance benefits, life and disability insurance benefits and 401(k) benefits continued. If Executive is employed for the full calendar year, and employment is terminated for any reason, other than cause as defined in Section 5B, Executive shall be entitled to receive payment from the Bonus Plan, even if such payment is payable after Executive's employment has ceased. F. If Executive is terminated by CSI during the Term hereof, for reasons other than those provided in Subsections 5A or 5B above, or if this Agreement is not renewed, CSI shall provide Executive outplacement consulting services comparable to those received by senior officials of similar organizations. G. If Executive becomes unable to perform his duties hereunder due to partial or total disability or incapacity resulting from a mental or physical illness, injury or any similar cause, CSI will continue the payment of Executive's total compensation at his then current rate for a period of six (6) months following the date Executive is first unable to perform his duties due to such disability or incapacity. Thereafter, CSI shall have no obligation for the Base Salary or other compensation payments to Executive during the continuance of such disability or incapacity, except that CSI shall pay to Executive, based upon the portion of the calendar year that Executive was able to perform his duties prior to the disability, the pro rata portion of the Bonus that Executive would have earned if he had remained in the employ of CSI for the full calendar year (payable at such time that Executive would have received such Bonus). Executive shall receive CSI's standard disability coverage as set forth in Exhibit C. H. If Executive dies, all payments hereunder shall continue for a period of two (2) months after the end of the week in which Executive's death shall occur, at which point such payments shall cease and CSI shall have no further obligations or liabilities hereunder to Executive's estate or legal representative or otherwise, except that CSI shall pay to Executive's estate or legal representation, based upon the portion of the calendar year that Executive was employed by CSI prior to his death, the prorated portion of the Bonus Executive would have earned if he had remained in the employ of CSI for the full calendar year (payable at such time that Executive would have received such Bonus). I. CSI's obligation to make payments hereunder is purely contractual and a general obligation of CSI and the amounts payable hereunder shall not be held by CSI in a trust or segregated fund for Employee nor shall Employee have any right against CSI or any director, officer or employee of CSI, in respect of any payment hereunder other than as a general creditor of CSI. J. Upon termination of employment, vested stock options granted under CSI Stock Option Plan (1992) will be treated in accordance with the terms of the CSI Stock Option Plan (1992). 6. Confidentiality and Covenant Not to Compete. A. Executive covenants and agrees that he will at all times keep confidential and will not at any time, except with the prior written consent of CSI, directly or indirectly, communicate or disclose or use for his benefit or the benefit of any Person (as defined in subsection 9E hereof) except CSI, any trade secrets or confidential or proprietary information of CSI or any of its affiliates including, but not limited to, strategic planning documents, data, reports, records, plans, policies, applications, and other documents, and Executive will also use his best efforts to prevent unauthorized disclosure by others. B. Executive agrees not to compete with CSI in any manner whatsoever, as an employee, shareholder, director, creditor, joint venturer, consultant, or otherwise, or any currently existing or hereinafter created subsidiary, joint venture, or business line of CSI, at any time during this Agreement, and for a period of two years following the date of termination of employment in the area constituting the United States, Puerto Rico and Europe. C. The parties agree that any breach by Executive of the covenants contained in this Section 6 will result in irreparable injury to CSI for which money damages could not adequately compensate CSI, and therefore, in the event of any such breach, CSI shall be entitled (in addition to any other rights and remedies which it may have at law or in equity) to have an injunction issued by any competent court of equity enjoining and restraining Executive and/or any other Person involved therein from continuing such breach. The covenants contained in this Section 6 are independent of all other covenants between Executive and CSI. D. If any portion of the covenants or agreements contained herein, or the application thereof, is construed to be invalid or unenforceable, then the other portions of such covenant(s) or agreement(s) or the application thereof shall not be affected and shall be given full force and effect without regard to the invalid or unenforceable portions. E. All information, lists, data, reports, records, plans, policies, applications, and other papers, articles, and materials of any kind relating to CSI's business and obtained by Executive in the course of his association with CSI, whether developed by him or not, shall be and remain CSI's property and will be returned to CSI along with any and all copies thereof, at such time as Executive ceases to be an employee of CSI. 7. Conflict of Interest. A. Executive represents and warrants that he is not subject to any restrictions or prohibitions whatsoever, and has no interest whatsoever, contractual or otherwise, which would in any way prevent, restrict or interfere with his right and/or ability to enter into this Agreement and perform hereunder, or which would create a conflict of interest for him or for CSI. B. Executive covenants that, during the Term, he will disclose to CSI, in writing, any and all interests he may have, whether for profit or compensation or not, in any venture or activity which could interfere with his ability to perform under this Agreement or create a conflict of interest for him or for CSI. 8. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, at the following addresses or to such other address as either party may designate by like notice: A. If to Executive, to: Kevin P. Dowd 1573 Franklin Lane Wayne, PA 19087 B. If to CSI, to: Checkpoint Systems, Inc. 101 Wolf Drive Thorofare, NJ 08086 Attn: Chairman of the Board of Directors C. In all cases, copies to: Stradley, Ronon, Stevens & Young 2600 One Commerce Square Philadelphia, Pennsylvania 19103 Attn: William R. Sasso, Esquire 9. Additional Provisions. A. This Agreement shall inure to the benefit of and be binding upon CSI and its successors and assigns and Executive, his heirs, executors, administrators and legal representatives. B. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and cannot be changed or terminated orally. This Agreement supersedes all prior and contemporaneous written or oral agreements between the parties relating to the subject matter hereof. No modification or waiver of any of the provisions hereof shall be effective unless in writing and signed by the party against whom it is sought to be enforced. C. If any provision of this Agreement shall be or shall become illegal or unenforceable in whole or in part, for any reason whatsoever, the remaining provisions shall nevertheless be deemed valid, binding and subsisting. D. No failure on the part of any party hereto to exercise and no delay in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. E. "Person" as used herein shall mean a natural person, joint venture, corporation, partnership, trust, estate, sole proprietorship, governmental agency or authority or other juridical entity. F. This is a personal service contract and may not be assigned by Executive. This Agreement may not be assigned by CSI to any affiliate of CSI which accedes to or otherwise carries on the business of CSI, whether by merger, liquidation, consolidation or otherwise,unless the duties and responsibilities of Executive remain substantially unchanged after such assignment. G. The headings of the several sections of this Agreement have been inserted for convenience of reference only and shall in no way restrict or modify any of the terms or provisions hereof. H. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New Jersey, without regard to its conflicts of laws principles. Subject to the provisions of Subsection 6C hereof, all unresolved claims, demands or disputes between Executive and CSI arising out of or relating to this Agreement, or the parties' respective performances hereunder, shall be subject to binding arbitration in the local Chapter in Philadelphia, Pennsylvania pursuant to the Rules of the American Arbitration Association. The prevailing party shall be entitled to reimbursement for all costs, including reasonable attorneys' fees, associated with such arbitration. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the date first above written. ATTEST: CHECKPOINT SYSTEMS, INC. _________________________ By:________________________________ WITNESS: _________________________ ___________________________________ Kevin P. Dowd EX-21 4 EXHIBIT 21 CHECKPOINT SYSTEMS, INC. SUBSIDIARIES Checkpoint Systems, Inc. of Puerto Rico, Inc. - Delaware Checkpoint Caribbean, Inc. - Delaware Checkpoint FSC, Inc. - Barbados Electronic Signatures, Inc. - Delaware Checkpoint International, Inc. - Delaware Checkpoint Security Systems Group, Inc. - Minnesota Checkpoint Canada, Inc. - Canada Checkpoint Systems, 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 Checkpoint Systems Espana, S.A.- Spain Actron Sistemas De Seguidad S.A. - Spain Checkpoint Actron AG - Switzerland Checkpoint Export AG - Switzerland Checkpoint Exports Systems AG Actron Entwicklungs AG - Switzerland Actron Group Limited - United Kingdom Actron UK Limited u United Kingdom Checkpoint Systems Norge - Norway Checkpoint Systems Italia s.r.l. - Italy Checkpoint Portugal Sistemas Anti-Furto, S.A. - Portugal Checkpoint Portugal II - Sistemas De Seguranca Integrados, S.A.- Portugal Checkpoint Systems Brazil - Brazil Checkpoint Systems Japan Co., Ltd. - Japan Checkpoint Security Systems u Denmark D&D Security - Belgium Checkpoint Manufacturing Japan Checkpoint Europe N.V. EX-27 5
5 0000215419 CHECKPOINT SYSTEMS, INC. 1,000 12-MOS DEC-27-1998 DEC-27-1998 35,934 0 135,078 5,556 78,625 264,849 179,571 69,621 507,663 78,588 0 0 0 3,647 258,289 507,663 362,407 362,407 215,310 116,434 0 0 9,568 26,184 8,509 17,685 0 0 0 17,685 .55 .53
EX-23 6 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Checkpoint Systems, Inc. (the "Company") on Forms S-8 [Registration No. 333-70213 and No. 33-49191] and Form S-3 [Registration No. 333-01085] of our report, dated February 12, 1999, on our audits of the consolidated financial statements and financial statement schedule of the Company as of December 27, 1998 and December 28, 1997, and for each of the three years in the period ended December 27, 1998, which report is included in the Company's Annual Report on Form 10-K. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 25, 1999 -----END PRIVACY-ENHANCED MESSAGE-----