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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950116-01-000546.txt : 20010409
<SEC-HEADER>0000950116-01-000546.hdr.sgml : 20010409
ACCESSION NUMBER: 0000950116-01-000546
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010402
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-K405
SEC ACT:
SEC FILE NUMBER: 001-11257
FILM NUMBER: 1589123
BUSINESS ADDRESS:
STREET 1: 101 WOLF DR
STREET 2: P O 188
CITY: THOROFARE
STATE: NJ
ZIP: 08086
BUSINESS PHONE: 6096481800
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
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<FILENAME>0001.txt
<TEXT>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 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)
856-848-1800
---------------------------------------------------
(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 6, 2001 the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $283,336,000.
As of March 6, 2001, there were 30,323,540 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 3, 2001.
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This report may include information that could constitute forward-looking
statements made pursuant to the safe harbor provision of the Private Securities
Litigation Reform Act of 1995. Any such forward-looking statements may involve
risk and uncertainties that could cause actual results to differ materially from
any future results encompassed within the forward-looking statements.
PART I
Item 1. BUSINESS
Checkpoint Systems, Inc. (Company) is a $691 million multinational manufacturer
and marketer of integrated system solutions for retail security, labeling, and
merchandising. The Company provides technology driven integrated supply chain
solutions to brand, track and secure goods for consumer product manufacturers
and retailers worldwide.
Retailers and manufacturers have become increasingly focused on identifying and
protecting assets that are moving through the supply chain. To address this
market opportunity, the Company has become a one source provider for
identification and protection worldwide.
The Company is a leading provider of radio frequency (RF) and electromagnetic
(EM) electronic article surveillance (EAS) systems and tags, security source
tagging, retail merchandising systems (RMS), hand-held labeling systems (HLS),
and barcode labeling systems (BCS). The Company's labeling systems and services
are designed to improve efficiency, reduce costs and furnish value-added
solutions for customers across many markets and industries. Applications for
barcode labeling systems include automatic identification (auto-ID), retail
security, and pricing and promotional labels. The Company holds or licenses over
1,000 patents and proprietary technologies. The Company has achieved substantial
growth since 1993, primarily through internal expansion and acquisitions, new
product introductions, broadened and more direct distribution (particularly in
international markets) and increased and more efficient manufacturing
capabilities.
The Company's products and services can be categorized into three groups:
Security
The Company's historical business is retail security. Its diversified security
product lines are designed to help retailers prevent inventory losses caused by
theft (both by customers and employees) and reduce selling costs through lower
staff requirements. The Company's products facilitate the open display of
consumer goods, which allows retailers to maximize sales opportunities with
impulse buying. Offering both its own proprietary RF-EAS and EM-EAS
technologies, the Company holds a 42% share of worldwide EAS installations.
Products and services of the Company's Security Systems Group and Electronic
Access Control Group also fall within the security business segment.
Checkpoint's broad and flexible product lines, marketed and serviced by its
extensive sales and service organization, have helped the Company emerge as the
preferred supplier to premier retailers around the world. Retail security
represents approximately 61% of the Company's business.
Labeling Services
Labeling services is another core business for the Company, and generated 20% of
the Company's revenue in the year 2000. All participants in the retail supply
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chain are concerned with maximizing efficiency. Reducing time-to-market requires
refined production and logistics systems to ensure just-in-time delivery as well
as shorter development, design and production cycles. Services range from full
color branding labels to tracking labels and ultimately, fully integrated labels
that include an RF circuit. This integration is based on the critical objective
of reducing the loss of goods moving through the supply chain, whether through
misdirection or tracking failure, theft or counterfeiting, and to reduce labor
costs by tagging and labeling products at the source. The Company supports these
objectives with its RF-EAS technology, radio frequency identification (RFID)
technology, as well as barcode labeling systems, tags and supplies, and a global
service bureau of e-commerce-enabled solutions.
Retail Merchandising
Retail merchandising includes hand-held label applicators and tags, promotional
displays and queuing systems. These traditional products broaden the Company's
reach among retailers and enable the Company to serve a segment of the retail
market that has not converted to the more advanced BCS and EAS technologies.
Many of the products in this business segment represent high-margin items with a
high level of recurring sales of associated consumables such as labels.
Business Strategy
The Company's business strategy focuses on providing comprehensive,
single-source solutions that help manufacturers, distributors and retailers
identify, track and protect their assets throughout the entire supply chain.
Innovative new products and greatly expanded product offerings will provide
significant opportunities to enhance the value of legacy products while
expanding the product base in existing customer accounts. The Company will seek
to continue its leadership position in certain key hard goods markets, expand
its market share in the soft goods markets, and maximize its position in new
geographic markets as well. The Company will also continue to capitalize on its
installed base of large global retailers to aggressively promote source tagging.
Furthermore, the Company will seek to exploit the synergies of its RF technology
with labeling services capabilities within the burgeoning auto-ID industry. To
achieve these objectives, the Company will work to continually enhance and
expand its technologies and products, provide superior service to its customers
and expand its direct sales activities through acquisitions and start-up
operations. The Company is focused on providing its customers with a wide
variety of fully integrated security systems, labeling services, and retail
merchandising solutions characterized by superior quality, ease of use, and good
value and merchandising opportunities for the manufacturer, distributor and
retailer.
The Company has its principal executive offices at 101 Wolf Drive, Thorofare,
New Jersey 08086, (856-848-1800). Unless the context requires otherwise, the
"Company" means Checkpoint Systems, Inc. and its subsidiaries on a consolidated
basis.
COMPANY HISTORY
Founded in 1969, the Company was incorporated in Pennsylvania as a wholly-owned
subsidiary of Logistics Industries Corporation (Logistics). In 1977, Logistics,
pursuant to the terms of its merger into Lydall, Inc., distributed the Company's
Common Stock to Logistics' shareholders as a dividend.
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Historically, the Company has expanded its business both domestically and
internationally through acquisitions, internal growth using wholly owned
subsidiaries, and the utilization of independent distributors. In 1993 and 1995
the Company completed two key acquisitions which gave the Company direct access
into Western Europe. In 1993, the Company acquired ID Systems International BV
and ID Systems Europe BV, companies that engaged in the manufacture,
distribution and sale of EAS systems throughout Europe. In 1995, the Company
acquired Actron Group Limited, a company engaged in the manufacture,
distribution and sale of radio frequency electronic security systems to the
retail industry throughout Western Europe.
In December 1999, the Company acquired Meto AG, a German multinational
corporation and a leading provider of value-added labeling solutions for article
identification and security. The acquisition doubled the Company's revenues,
increased its breadth of product offerings, and vastly increased its global
reach.
In January 2001, the Company acquired A.W. Printing Inc., a Houston, Texas-based
printer of tags, labels and packaging material for the apparel industry.
PRODUCTS AND OFFERINGS
SECURITY
Electronic Article Surveillance (EAS)
EAS systems have been designed to act as a deterrent, and control the increasing
problem of merchandise theft in retail stores and libraries. The Company's
diversified product lines are designed to help reduce both customer and employee
theft, reduce inventory shrinkage, and enable retailers to capitalize on
consumer impulse buying by openly displaying high-margin and high-cost items.
The Company offers a wide variety of RF and EM EAS solutions to meet the varied
requirements of retail store configurations for multiple market segments
worldwide. The Company's EAS systems are primarily comprised of sensors and
deactivation units, which respond to or act upon the Company's tags and labels.
The Company's EAS products are designed and built to comply with applicable
Federal Communications Commissions (FCC) regulations governing radio frequencies
(RF), signal strengths and other factors. In addition, the Company's present EAS
products are designed to meet all regulatory specifications for the countries in
which they are sold.
The Company markets its family of RF and EM EAS systems under various brand
names including the Strata(R) family of products, the QS series and the EM
series.
The Strata(R) systems use the latest Digital Signal Processing(TM) (DSP)
technology, along with the Company's newly developed Advanced Digital
Discrimination(TM) (ADD/RF) digital filtering technology. The Strata(R) family
can protect aisle widths of twelve feet using only two sensors.
RF deactivation units disarm the disposable tag to prevent recognition by the
sensors located at the exits. Deactivation usually occurs at the point-of-sale.
The Company's patented integrated scan/deactivation products provide
simultaneous reading of the barcode information, while deactivating the tag in
one single step at the point-of-sale.
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Disposable security tags are affixed to merchandise by pressure sensitive
adhesive or other means. The Company provides tags compatible with a wide
variety of standard price-marking and barcoding printers to combine pricing,
merchandising, protection and data collection in a single step.
Under the Company's source tagging program, tags can be embedded in products or
packaging at the point-of-manufacture. Approximately 2,700 suppliers worldwide
are participating in this program.
The Company markets a full line of reusable security tags, which protect apparel
items, as well as entertainment products such as music CDs, audio and video
cassettes, and video games. The reusable product line consists of plastic hard
tags, fluid ink tags, and SAFER(R) products.
CCTV Systems and Monitoring Services
The Company offers a full line of closed-circuit television products along with
its EAS products, providing a total systems solution package for retail
establishments. The Company's video surveillance solutions, including digital
video technology, address shoplifting and internal theft as well as customer and
employee safety and security needs. The product line consists of fixed and
high-speed pan/tilt/zoom camera systems, programmable switcher controls,
time-lapse recording, remote tele-surveillance, and point-of-sale (POS)
monitoring systems.
The Company's custom designed fire/intrusion alarm systems provide protection
against internal and external theft, completing the full line of loss prevention
solutions. All systems supplied can be included in the Company's 24-hour Central
Station Monitoring services.
Access Control Systems
Electronic access control systems protect restricted areas by granting access
only to authorized personnel at specified times. Continued developments in
processing and software technology have enhanced the sophistication of
electronic access control systems by integrating these systems into the
infrastructure of the customers' facilities.
The Company's access control products allow limitless coverage - from a single
door to a multi-building complex. The access control product offerings support
all market segments, from small systems to large multi-user, multi-site systems.
The Company's feature-rich access control products give users the flexibility to
restrict database access, track assets, support LAN/WAN connectivity and
integrate third party peripherals seamlessly.
LABELING SERVICES
Barcode Labeling Systems
A bar code is a linear or two-dimensional symbol that can be read by a laser
scanner and transmitted to a computer for auto ID applications. Bar codes can be
printed on hang tags and pressure-sensitive labels using laser or thermal
printers and applied to the product at any of several points in the supply
chain. The Company offers both turnkey in-house barcode printing systems (laser
and thermal printers) and a worldwide service bureau network that can supply
customers with barcoded labels. Barcoding is widely used in retail stores,
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supermarkets, warehouses, manufacturing, libraries and other environments where
inventory identification and tracking is critical.
The Company offers two thermal printing technologies, thermal direct printing
and thermal transfer printing.
The Company also offers high speed laser printers capable of generating thirty
to sixty pages per minute. These units are targeted to manufacturers as well as
retail distribution and logistic centers. Laser printers offer superior print
quality and high throughput for such applications as price marking and product
identification, integrated tags and labels, shelf mark labels, pick tickets,
tracking or inventory labeling, and shipping and compliance labels. The
Company's laser printers generate a significant recurring revenue stream from
service contracts, consumables and documents.
Service Bureau
A service bureau imprints variable pricing and article identification data and
barcoding information onto price and apparel branding tags. The Company has a
global service bureau network of 22 locations worldwide through which it can
supply customers with customized retail apparel price tags and labels at the
manufacturing source. Limited capital and skilled labor requirements allow the
service bureaus to be located near source manufacturing sites, enabling the
Company to provide timely and flexible service.
The Company's service bureau network is one of the most extensive in the
industry, and its ability to offer integrated barcoding and EAS tags places it
among just a handful of suppliers of this caliber in the world.
In addition to its own label integration and service bureau capabilities, the
Company has strategic working relationships with several other label
integrators.
RFID - Intelligent Tagging
Radio frequency identification is an auto ID technology. RFID tags, or
"intelligent tags", contain an integrated circuit powered by a radio frequency
circuit. Tags can be variably coded, and RFID readers can capture data from
multiple tags simultaneously, with no line-of-sight requirements. Through a
joint development project with Mitsubishi Materials Corporation (Mitsubishi),
the Company has developed RFID intelligent tags that are a fraction of the cost
of those RFID tags currently in use for tracking livestock and automating toll
lanes. This development puts the benefits of RFID in reach of the retail and
library markets for the first time.
The RFID product line, a family of tags and readers, can effectively provide
solutions for a variety of applications in the auto-ID marketplace. In 1999, the
Company introduced the Performa(TM) family of RFID products.
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RETAIL MERCHANDISING
Hand-held Labeling Systems
Hand-held labeling systems include a complete line of hand-held price marking
and label application solutions, primarily sold to retailers. A significant
percentage of sales are generated by repeat business, including service and the
sale of labels and consumables to customers with the Company's systems.
Retail Merchandising Systems
Retail merchandising systems include a wide range of products for customers in
certain retail sectors, such as supermarkets and do-it-yourself (DIY), where
in-store price promotion is an important factor. Product categories include
traditional retail promotional systems for in-store communication and electronic
graphics systems, as well as customer priority systems.
The Customer Priority System, or Customer Serving System, product line is
designed to ensure that customers will be served in a fair and orderly manner,
and it allows customers to continue shopping while they await their turn for
service. The Turn-O-Matic(R) queuing system comprises displays, dispensers and
tickets, and holds an estimated 80% market share and represents a significant
source of recurring revenue from ticket sales.
Principal Markets and Marketing Strategy
Through its Security business segment, the Company traditionally has marketed
its products primarily to retailers in the hard goods (supermarkets, drug
stores, mass merchandisers and music/electronics), soft goods (apparel) and
library market segments. The Company is a market leader in the supermarket, drug
store and mass merchandiser market segments with customers such as Target
Corporation (Dayton Hudson Department Stores, Mervyns, and Target Stores),
Albertsons/American Stores, Circuit City Stores, Inc., Eckerd Corporation, H.E.
Butt Stores, PETsMART Inc., Rite Aid Corporation, Toys "R" Us, Walgreen Co., and
Winn Dixie, Inc. in the USA; Canadian Tire, and Shoppers Drug Mart/Pharmaprix in
Canada; Gigante in Mexico; B&Q, Sainsbury, and Wickes in the United Kingdom;
Pryca/Carrefour, Continente and El Corte Ingles in Spain; Intermarche, FNAC,
Casino and Carrefour in France; El Norte in Argentina; Big W and Coles Myer Ltd.
in Australia; and Big C in Thailand.
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 barcode scanners), available to retailers,
have highlighted the shrinkage problem. As a result, retailers recognize that
implementation of an effective electronic security system can significantly
increase profitability.
With the acquisition of Meto AG in December 1999, the Company now offers supply
chain and value-added labeling solutions to manufacturers and retailers
worldwide. The Company has expanded its reach within the retail supply chain to
provide branding, tracking and asset protection solutions to the retail store,
to distribution centers and to consumer product and apparel manufacturers
worldwide.
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The Company is focused on providing its customers with a wide variety of fully
integrated loss prevention, labeling services, and retail merchandising
solutions. More specifically, the Company's strategy includes the following:
- Open new and expand existing retail accounts with new products that will
enhance its EAS offering and increase penetration with fully integrated
value-added solutions for labeling and merchandising.
- Expand supply-side market opportunities to manufacturers and distributors,
including source tagging, value-added labeling and authentication
solutions.
- Continue to promote source tagging around the world with extensive
integration and automation capabilities.
- Establish business-to-business web-based capabilities to enable retailers
and manufacturers to design custom tag and label solutions and initiate
orders.
- Provide retailers with the next generation of security and supply chain
management systems utilizing RFID and auto-ID technologies.
- Expand technology and integration alliances for source tagging and RFID
integration into packaging.
The Company promotes its products primarily through: (i) ease of integration
into the retail environment; (ii) emphasizing source tagging; (iii) serving as a
single point of contact for auto ID and EAS labeling and ticketing needs; (iv)
providing total loss prevention solutions to the retailer; (v) superior service
and support capabilities; and (vi) direct sales efforts and targeted trade show
participation.
During 2000, over one billion disposable tags were provided to approximately
2,700 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 and EM-EAS equipment on a chainwide basis
with leading retailers around the world; (ii) offer integrated tag solutions,
including custom tag conversion that address the needs of branding, tracking and
loss prevention; (iii) assist retailers in promoting source tagging with
vendors; (iv) broaden penetration of existing accounts by promoting the
Company's in-house printing, service bureau, and labeling solution capabilities;
(v) support manufacturers and suppliers to speed implementation; and (vi) expand
RF tag technologies and products to accommodate the needs of the packaging
industry.
In anticipation of the needs of the Company's retail and supply chain 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.
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DISTRIBUTION
EAS Systems
The Company sells its EAS systems principally throughout North America, South
America, Europe, and the Asia Pacific region. In North America, the Company
markets its EAS products almost entirely through its own sales personnel and
independent representatives. Of total North American EAS revenues during 2000,
93% was generated by the Company's own sales personnel.
Internationally, the Company markets its EAS products principally through
foreign subsidiaries which sell directly to the end-user and through independent
distributors. The Company's international sales operations are currently located
in Western, Eastern and Southern Europe, Scandinavia, Finland, Mexico,
Argentina, Brazil, Australia, Malaysia, Hong Kong, Japan, and New Zealand.
Independent distributors accounted for 6% of the Company's EAS revenues outside
the United States during 2000. 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 CCTV systems and services throughout the world using its own
sales staff. These products and services are provided to both the Company's
existing EAS retail customers as well as non-EAS retailers.
Access Control Systems
The Company's Access Control Products Group sales personnel market electronic
access control products to approximately 210 independent dealers, primarily
located in the United States. The Company employs regional 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.
Labeling Services and Retail Merchandising
Through the acquisition of Meto, the Company gained approximately one hundred
thousand customers worldwide across all of the Meto product areas. These
customers are primarily found within the retail sector and retail supply chain.
Major customers include companies within industries such as food retailing, DIY
(Do-It-Yourself), department stores, textile retailing and garden centers.
Large national and international customers are handled centrally by Key Account
sales specialists supported by appropriate business specialists. Smaller
customers are served by either a general sales force capable of representing all
products, or if the complexity or size of the business demands, a dedicated
business specialist.
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Salespeople
The Company presently employs approximately 680 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 $38.8 million at December 31,
2000 compared to $34.1 million at December 26, 1999. The Company anticipates
that substantially all of the backlog at the end of 2000 will be delivered
during 2001. In the opinion of management, the amount of backlog is not
indicative of trends in the Company's business. The Company's RF EAS and EM EAS
business generally follows the retail cycle so that revenues are weighted toward
the last half of the calendar year as retailers prepare for the holiday season.
TECHNOLOGY
The Company believes that its patented and proprietary technologies are
important to its business and future growth opportunities, and provide it with
distinct competitive advantages. The Company holds or licenses over 1,000
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.
EAS
Until October 1995, the Company was the exclusive worldwide licensee of Arthur
D. Little, Inc. (ADL) for certain patents and improvements thereon related to
EAS products and manufacturing processes. On October 1, 1995, the Company
acquired these patents for $1.9 million plus a royalty of 1% to 1.5% of future
RF-EAS products sold through 2008. Prior to October 1, 1995, the Company paid a
royalty to ADL of approximately 2% of net revenues generated by the sale and
lease of the licensed products, with the actual amount of the royalty depending
upon revenue volume.
The Company, with its acquisition of Meto, has three principal license
agreements covering its EAS products, including Allied Signal, Inc. as licensor
for EM markers, Miyake as licensor for RF tags, and a group of former owners of
Intermodulation and Safety System AB as licensors of EM systems. These licenses
expire in 2004, 2005, and 2004, respectively.
The Company also licenses technologies relating to 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.
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Access Control Systems
The Company is the worldwide licensee of certain patents and technical knowledge
related to proximity cards, card reader products, and software products. It pays
a royalty equal to 2% of the net revenues from the licensed products. Such
royalties were payable through January 29, 2000. The Company pays royalties
relative to the feature set embedded within certain software products. These
agreements are renewed annually. In 1999, the Company also paid a royalty equal
to 3.5% on hardware revenue associated with the sale of certain software
products. This agreement expired at the end of 1999.
Labeling Services and Retail Merchandising
The Company focuses its in-house Meto brand product development efforts on
product areas where the Company believes it can achieve and sustain a
competitive cost and positioning advantage, and where delivery service is
critical. The Company also develops and maintains technological expertise in
areas that it believes to be important for new product development in its
principal business areas, and where it aims to exercise control over the
technology development process. Through its acquisition of the Meto brand, the
Company has a base of technology expertise in the label conversion, printing,
electronics, and software areas and is particularly focused on EAS and BCS
technology to support the development of higher value-added labels.
Manufacturing, Raw Materials and Inventory
EAS
The Company manufactures its EAS products in modern facilities located in Puerto
Rico, Japan, the Dominican Republic, Germany and the Netherlands 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 as well as its customers.
The Company sold approximately 4 billion disposable tags in 2000. The Company
has the capacity to produce 7 billion disposable tags per year.
For the RF sensor production, 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. Certain components of sensors are
manufactured at the Company's facilities in the Dominican Republic and shipped
to Puerto Rico for final assembly. For its EAS tag production, the Company
purchases raw materials and components from suppliers and completes the
manufacturing process at its facilities in Puerto Rico, Japan and the
Netherlands (disposable tags) and the Dominican Republic (reusable tags). 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
products that are not manufactured by the Company are sub-contracted to
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manufacturers selected for their manufacturing and assembly skills, quality and
price. Three EAS systems suppliers are considered as strategic partners. The
Company's general practice is to maintain a level of inventory sufficient to
meet anticipated demand for its products.
CCTV Systems and Monitoring Services
The Company does not manufacture any of the components for its CCTV product line
other than small interface circuit boards. The Company purchases all the
hardware components of its CCTV products from major distributors. Limited
inventory levels are maintained since the Company places orders with these
distributors as customer orders are received. The software component of the
system is added during product assembly at the Company's operational facilities.
Access Control Systems
The Company purchases raw materials from outside suppliers and assembles the
electronic components for controllers and proximity readers at its facilities in
the Dominican Republic and Puerto Rico. For non-proximity electronic access
control components, the Company subcontracts manufacturing activities. All
electronic access control final system assembly and testing is performed at the
Company's facilities in Thorofare, New Jersey.
Labeling Services and Retail Merchandising
The Company's Meto brand products' principal manufacturing focus is on the
production of labels, tags and hand-held tools. The Company's Meto products'
main production facilities are located in Germany, the Netherlands, the USA and
Malaysia. Local production facilities, primarily for the local markets, are also
situated in the UK, Spain, Sweden, Finland, Australia and New Zealand.
Manufacturing in Germany is focused on print heads for HLS tools and labels for
the HLS, EAS and BCS product areas. The Company's facility in the Netherlands
manufactures labels and tags for laser overprinting, thermal labels, EAS labels
and supports the service bureau network worldwide. The Malaysian facility
produces standard bodies for HLS tools for Europe, complete hand-held tools for
the rest of the world, and labels for the local market.
Three BCS printer suppliers are considered as strategic partners. Supplies from
other smaller suppliers are being combined where possible.
12
<PAGE>
Competition
EAS
Currently, EAS systems are sold to two principal markets: retail establishments
and libraries. The Company's principal global competitor in the EAS industry is
Sensormatic Electronics Corporation (Sensormatic). Sensormatic is a fully
integrated supplier of electronic security systems, with revenues of
approximately $1.0 billion for its most recent fiscal year and an approximate
45% share of the worldwide installation base. Management estimates that the
Company's market share of installed systems in the EAS industry is approximately
42%.
Within the US market, additional competitors include Sentry Technology
Corporation and Ketec, Inc., principally in the retail market, and Minnesota
Mining and Manufacturing Company, principally in the library market. Within the
Company's international markets, mainly Western Europe, NEDAP and Sensormatic
are the Company's most significant competitors.
The Company believes that its product line offers more diversity than its
competition in protecting different kinds of merchandise with disposable tags,
hard reusable tags and flexible reusable tags. As a result, the Company believes
it appeals to a wider segment of the market than does its competition and
competes in marketing its products primarily on the basis of their versatility,
reliability, affordability, accuracy and integration into operations. This
combination provides many system solutions and allows for the protection of a
variety of retail merchandise theft. Furthermore, the Company believes that its
manufacturing know-how and efficiencies relating to disposable and reusable tags
give it a significant cost advantage over its competitors.
CCTV Systems and Monitoring Services
The Company's CCTV and POS Monitoring products, which are sold domestically
through its Security Systems Group subsidiary and internationally through its
international sales subsidiaries, compete primarily with similar products
offered by Sensormatic, Ultrak, Pelco, and Sentry Technology. The Company
competes based on its superior service and believes that its product offerings
provide its retail customers with distinct system features.
Electronic Access Control
The Company's electronic access control products compete with other
manufacturers of electronic access control systems as well as with conventional
security systems. Major competitors are Casi Rusco, Software House Inc. (a
subsidiary of Sensormatic), Northern Computers, and Lenel Systems.
Labeling Services
The worldwide barcode systems product market, including printers and labels, is
estimated to be approximately $7.0 billion, and Checkpoint's targeted retail and
retail-related markets account for about 40% of the total. Major competitors are
Paxar and Avery Dennison, who are also customers for Checkpoint's RF-EAS
circuitry. The Company also competes with a number of barcode printer
manufacturers, including Zebra Technologies and Intermec Technologies.
13
<PAGE>
Retail Merchandising
The Company faces no single competitor across its entire retail merchandising
product range or across all international markets. However, HL Display is its
strongest competitor in the in-store promotional display market. In the
Hand-held Labeling Systems segment, the Company competes with Paxar, Garvey,
Sato, Hallo, Contact and Prix.
OTHER MATTERS
Research and Development
The Company expended approximately $9,494,000, $7,278,000, and $8,018,000, in
research and development activities during 2000, 1999, and 1998, 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 improvements in disposable tag
performance and wide-aisle RF-EAS detection sensors. In addition, the Company
holds or licenses over 1,000 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, in February
1997, with Mitsubishi Materials Corporation, a Japanese company based in Tokyo,
to develop RFID 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 31, 2000, the Company had 4,984 employees, including 6 executive
officers, 72 employees engaged in research and development activities and 784
employees engaged in sales and marketing activities. In the United States, 13 of
the Company's employees are represented by a union. In Europe, approximately 750
of the Company's employees are represented by various unions or work councils.
Financial Information About Geographic and Business Segment
The Company operates both domestically and internationally in three distinct
business segments. The financial information regarding the Company's geographic
and business segments, which includes net revenues and gross profit for each of
the three years in the period ended December 31, 2000, and total assets as of
December 31, 2000, December 26, 1999, and December 27, 1998, is provided in Note
19 to the Consolidated Financial Statements.
14
<PAGE>
Item 2. PROPERTIES
The Company's principal corporate offices are located at 101 Wolf Drive,
Thorofare, New Jersey. As of December 31, 2000, the Company owned or leased a
total of approximately 2,436,000 square feet of space worldwide which is used
primarily for sales, distribution, manufacturing and general administration.
These facilities include 30 sales/distribution offices located throughout North
and South America, Western Europe, Asia, Australia and New Zealand.
Additionally, the Company's principal manufacturing facilities are located in
the United States, Puerto Rico, the Dominican Republic, Germany, Japan,
Malaysia, and the Netherlands. The Company believes its current manufacturing
capacity will support its needs for the foreseeable future.
Item 3. LEGAL PROCEEDINGS
The Company is involved in certain legal and regulatory actions all of which
have arisen in the ordinary course of business, except for the matter described
in the following paragraph. While the Company is unable to predict the outcome
of these matters, it does not believe that the ultimate resolution of such
matters will have a material adverse effect on its consolidated financial
position or results of operations.
The Company is a defendant in a Civil Action No. 99-CV-577, served February 10,
1999, in the United States District Court for the Eastern District of
Pennsylvania filed by Plaintiff, ID Security Systems Canada Inc. The suit
alleges a variety of antitrust claims; claims related to unfair competition and
related matters. Plaintiff alleges damages in excess of $20 million. Management
is of the opinion that the claims are baseless both in fact and in law, and
intends to vigorously defend the suit.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
No matter was submitted during the fourth quarter of 2000 to a vote of
shareholders.
15
<PAGE>
Item A. EXECUTIVE OFFICERS OF THE COMPANY
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
- ------------------------- --- ------- --------------------
Michael E. Smith 45 1990 President and Chief
Executive Officer
William J. Reilly, Jr. 52 1989 Chief Operating Officer
W. Craig Burns 41 1997 Executive Vice President,
Chief Financial
Officer and Treasurer
Neil D. Austin 54 1989 Vice President, General
Counsel and Secretary
Arthur W. Todd 35 2000 Vice President,
Corporate Controller
and Chief Accounting
Officer
Mr. Smith was appointed President and Chief Executive Officer of the Company on
March 20, 2001. Mr. Smith was Executive Vice President from April 1997 to March
2001. 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. Reilly was appointed Chief Operating Officer on March 20, 2001. Mr. Reilly
was Executive Vice President from April 1997 to March 2001. 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. Burns was appointed Executive Vice President, Chief Financial Officer and
Treasurer on March 20, 2001. Mr. Burns was Vice President, Finance, Chief
Financial Officer and Treasurer from April 2000 to March 2001. Mr. Burns was
Vice President, Corporate Controller and Chief Accounting Officer from December
1997 until April 2000. 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, LLP from June 1989 to February 1996. Mr. Burns is a Certified
Public Accountant.
Mr. Austin has been Vice President, General Counsel and Secretary since
joining the Company in 1989.
Mr. Todd has been Vice President, Corporate Controller and Chief Accounting
Officer since August 2000. Mr. Todd was Corporate Controller for Meto AG from
December 1998 until July 2000. From 1986 to November 1998, Mr. Todd held various
financial positions within international subsidiaries of the Meto group. Mr.
Todd is a Fellow of the Chartered Institute of Management Accountants(UK).
16
<PAGE>
PART II
Item 5. MARKET for the REGISTRANT'S COMMON STOCK and RELATED SHAREHOLDER 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
2000:
First Quarter............................ $11.8750 $7.5625
Second Quarter........................... 9.7500 7.1250
Third Quarter............................ 9.1250 7.0000
Fourth Quarter........................... 9.1875 6.1875
1999:
First Quarter............................ $12.3750 $ 8.2500
Second Quarter........................... 10.4375 7.2500
Third Quarter............................ 10.1875 8.4375
Fourth Quarter........................... 9.5625 7.1875
As of March 6, 2001, there were 1,240 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.
17
<PAGE>
Item 6. SELECTED FINANCIAL DATA
SELECTED ANNUAL FINANCIAL DATA
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Thousands, except per share data)
FOR YEARS ENDED:
Net revenues(7) $690,811 $373,062 $364,572 $338,604 $293,609
Earnings before
income taxes $ 5,447(1) $ 10,207(3) $ 26,184(4) $ 13,565(5) $ 29,877
Income taxes $ 3,115 $ 2,655(6) $ 8,509 $ 5,445 $ 9,430
Earnings before
cumulative effect
of change in
accounting
principle $ 2,254 $ 7,258 $ 17,685 $ 8,228 $ 20,447
(Loss)/earnings
before
extraordinary
item $ (2,766)(2) $ 7,258 $ 17,685 $ 8,228 $ 20,447
Net (loss)/
earnings $ (2,766)(2) $ 6,666 $ 17,685 $ 8,228 $ 20,447
Earnings per
share before
cumulative effect
of change in
accounting
principle
Basic $ .07 $ .24 $ .55 $ .24 $ .64
Diluted $ .07 $ .24 $ .53 $ .23 $ .60
(Loss)/earnings
per common
share before
extraordinary
item
Basic $ (.09) $ .24 $ .55 $ .24 $ .64
Diluted $ (.09) $ .24 $ .53 $ .23 $ .60
Net (loss)/
earnings per
common share
Basic $ (.09) $ .22 $ .55 $ .24 $ .64
Diluted $ (.09) $ .22 $ .53 $ .23 $ .60
Depreciation &
amortization $ 47,883 $ 28,028 $ 25,676 $ 23,762 $ 18,322
(1) Includes a $2.2 million pre-tax restructuring charge, a $10.2 million pre-
tax integration charge, a $7.2 million pre-tax asset impairment, a pre-tax
inventory write-off of $3.7 million and a $5.1 million pre-tax customer-
based receivables write-off.
(2) Includes a non-cash reduction in net earnings of $5.0 million resulting
from the implementation of the SEC Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements.
(3) Includes a $10.9 million pre-tax restructuring charge and a $0.9 pre-tax
integration charge.
(4) Includes a $0.6 million pre-tax reversal of the restructuring charge
recorded in the fourth quarter of 1997.
18
<PAGE>
(5) Includes a $9.0 million pre-tax restructuring charge and non-recurring
pre-tax charges of $8.1 million.
(6) Includes tax benefit of $0.3 million associated with the extraordinary loss
on early extinguishment of debt.
(7) 1996-1999 amounts have been restated to conform with Emerging Issues Task
Force (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs.
19
<PAGE>
SELECTED ANNUAL FINANCIAL DATA (continued)
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Thousands)
AT YEAR-END:
Working capital $153,074 $ 175,430 $186,261 $211,570 $285,753
Long-term debt $347,011 $ 395,256 $164,934 $150,068 $152,616
Shareholders'
equity $237,679 $ 255,795 $261,936 $277,550 $300,794
Total assets $872,005 $ 944,873 $507,663 $516,434 $521,653
Capital
expenditures $ 13,172 $ 8,774 $ 12,301 $ 26,714 $ 10,454
Cash provided by/
(used in)
operating
activities $ 3,172 $ 87,536 $ 29,157 $(59,559) $(17,212)
Cash used in
investing
activities $(26,365) $(250,891) $(39,460) $(36,548) $(19,882)
Cash (used in)/
provided by
financing
activities $(33,899) $ 216,924 $(18,386) $(24,508) $145,738
Ratios
Return on
net sales(a) (.40%) 1.78% 4.85% 2.43% 7.00%
Return on
average
equity(b) (1.12%) 2.57% 6.56% 2.85% 9.33%
Return on
average
assets(c) (.30%) .92% 3.45% 1.59% 4.63%
Current
ratio(d) 1.70 1.74 3.37 3.46 5.58
Percent of total
debt to
capital(e) 59.35% 60.71% 40.10% 36.13% 34.83%
(a) "Return on net sales" is calculated by dividing net earnings by net
sales.
(b) "Return on average equity" is calculated by dividing net earnings by
weighted average equity.
(c) "Return on average assets" is calculated by dividing net earnings by
weighted average assets.
(d) "Current ratio" is calculated by dividing current assets by current
liabilities.
(e) "Percent of total debt to capital" is calculated by dividing total long
term debt by total long term debt and equity.
20
<PAGE>
SELECTED ANNUAL FINANCIAL DATA (continued)
2000 1999(1) 1998 1997 1996
------ -------- ------ ------ ------
(Thousands, except employee data)
Other Information
Average number
of diluted
shares
outstanding 30,624 30,528 33,272 35,184 34,087
Number of
Employees 4,984 5,017 3,044 3,605 2,628
Backlog $38,800 $34,100 $18,800 $24,200 $ 8,400
(1) Includes increase in employees and backlog as a result of the Meto
acquisition.
21
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
QUARTERS (unaudited)
First Second Third Fourth Year
----- ------ ----- ------ ----
(Thousands, except per share data)
2000
Net revenues(9) $163,424 $167,891 $171,225 $188,271 $690,811
Gross profit $ 66,005 $ 69,640 $ 71,583 $ 65,620(1) $272,848
(Loss)/earnings
before
cumulative effect
of change in
accounting
principle $( 1,622)(2) $ 1,934(3) $ 5,208(4) $(3,266)(5) $ 2,254
Net(loss)/
earnings $ (6,642)(6) $ 1,934 $ 5,208 $(3,266) $ (2,766)
(Loss)/earnings
per common share
before
cumulative effect
of change in
accounting
principle
Basic $ (.05) $ .06 $ .17 $ (.11) $ .07
Diluted $ (.05) $ .06 $ .17 $ (.11) $ .07
Net (loss)/earnings
per common
share: (8)
Basic $ (.22) $ .06 $ .17 $ (.11) $ (.09)
Diluted $ (.22) $ .06 $ .17 $ (.11) $ (.09)
1999
Net revenues (9) $ 82,191 $ 87,856 $ 91,424 $111,591 $373,062
Gross profit $ 31,127 $ 35,690 $ 37,038 $ 42,918 $146,773
Earnings/(loss)
before
extraordinary
item $ 1,392 $ 4,146 $ 6,241 $ (4,521)(7) $ 7,258
Net earnings/
(loss) $ 1,392 $ 4,146 $ 6,241 $ (5,113) $ 6,666
Earnings/(loss)
per common share
before
extraordinary
item (8)
Basic $ .05 $ .14 $ .21 $ (.15) $ .24
Diluted $ .05 $ .14 $ .20 $ (.15) $ .24
Net earnings/(loss)
per common
share: (8)
Basic $ .05 $ .14 $ .21 $ (.17) $ .22
Diluted $ .05 $ .14 $ .20 $ (.17) $ .22
22
<PAGE>
(1) Includes a $0.9 million pre-tax restructuring charge, a $0.9 million pre-tax
integration charge, a $7.2 million pre-tax asset impairment and a pre-tax
inventory write-off of $3.7 million.
(2) Includes a $1.6 million pre-tax integration charge.
(3) Includes a $4.0 million pre-tax integration charge.
(4) Includes a $3.1 million pre-tax integration charge.
(5) Includes a $1.3 million pre-tax restructuring charge, a $0.6 million pre-tax
integration charge, and a $5.1 million pre-tax customer-based receivables
write-off.
(6) Includes a non-cash reduction in net earnings of $5.0 million resulting
from the implementation of the SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements.
(7) Includes a $10.9 million pre-tax restructuring charge and a $0.9 million
pre-tax integration charge.
(8) Quarterly earnings per common share are computed independently; therefore
the sum of the quarters may not equal full year earnings per share.
(9) Amounts have been restated to conform with EITF 00-10, Accounting for
Shipping and Handling Fees and Costs.
23
<PAGE>
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 restructuring and
integration charges recorded in 2000, 1999 and 1998.
On December 10, 1999, the Company consummated its acquisition of 98.57% of the
outstanding shares of Meto AG pursuant to a cash tender offer. The Company has
since increased its ownership to 100%. Included in the 2000 results are $19.6
million in restructuring and integration charges related to the completion of
the Meto integration; the subsequent realignment of operations and assets; and
costs related to the consolidation and rationalization of its manufacturing
operations. Included in the 2000 charges are employee severance costs ($1.8
million), facility lease termination costs ($0.4 million), impairments of
manufacturing assets ($7.2 million), and integration costs ($10.2 million) of
which $9.0 million was recorded in cost of revenues and $10.6 million in other
operating expenses. Included in the 1999 results is $11.8 million of
restructuring and integration charges related to the acquisition of the Meto
business. The 1999 charges relate to employee severance costs ($3.1 million),
facility lease termination costs ($3.3 million), certain asset impairments ($4.5
million), and other integration expenses ($0.9 million) of the Company. Most of
the employees affected by the restructuring were in support services including
selling, technical and administrative staff functions. The 1998 restructuring
credit relates to a $0.6 million reversal of the restructuring charge recorded
in 1997.
24
<PAGE>
The table below reflects the income from operations before restructuring and
integration charges. Accordingly, the discussion that follows speaks to the
comparisons in this table through income from operations before restructuring
and integration charges.
2000 1999 (1) 1998
---- ---- ----
(Thousands)
Net revenues (2) $690,811 $373,062 $364,572
Cost of revenues 408,963 226,289 217,475
-------- -------- --------
Gross profit 281,848 146,773 147,097
Selling, general and administrative
expenses 234,490 118,803 117,034
-------- -------- --------
Income from operations before
restructuring and integration
charges 47,358 27,970 30,063
Restructuring and integration
charges 19,551 11,796 (600)
-------- -------- --------
Income from operations after restruct-
uring and integration charges $ 27,807 $ 16,174 $ 30,663
======== ======== ========
Net revenues by product segment (2)
Security $419,696 $362,097 $364,572
Labeling services 138,396 5,310 -
Retail merchandising 132,719 5,655 -
-------- -------- --------
$690,811 $373,062 $364,572
======== ======== ========
(1) The 1999 results include the operations of the Meto business from the date
acquired, December 10, 1999.
(2) 1999 and 1998 amounts have been restated to conform with EITF 00-10,
Accounting for Shipping and Handling Fees and Costs.
Net Revenues
The Company's unit volume is driven by product offerings, number of direct sales
personnel, recurring sales and, to some extent, pricing. The Company's
increasing base of installed systems and printers provide a growing source of
recurring revenues from the sale of disposable tags and service revenues. For
fiscal 2000, 1999, and 1998, approximately 47%, 34%, and 35% respectively of the
Company's net revenues were attributable to sales of disposable tags, custom and
stock labels, printer consumables, and service to its installed base of
customers. The increase in 2000 of the recurring revenues as a percentage of
total net revenues is principally due to the acquisition of the Meto business.
The Company's customers are substantially dependent on retail sales, which are
seasonal and subject to significant fluctuations and are difficult to predict.
Such seasonality and fluctuations impact the Company's sales. Historically, the
Company has experienced lower sales in the first and second quarters of each
year.
During 2000, revenues increased by approximately $317.7 million or 85.2% from
$373.1 million to $690.8 million. This increase was directly attributable to the
Meto acquisition. On a pro forma basis, which includes Meto as if the
acquisition had occurred at the beginning of 1999, revenues decreased $48.2
25
<PAGE>
million or 6.5%. This decrease in revenue was a direct result of the negative
impact of foreign exchange. Excluding the impact of foreign exchange, on a pro
forma basis, revenues decreased by less than 1%.
In 1999, revenues increased by approximately $8.5 million or 2.3% from
$364.6 million to $373.1 million. This increase was attributable to (i) the
revenue generated from the Meto acquisition (ii) increased sales of the
Company's Electronic Article Surveillance (EAS) product line in the
International retail markets (iii) an increase in revenue of the Company's
Access Control products offset by (iv) a decrease in the Company's EAS and
CCTV/Fire and intrusion products in North America.
US Domestic net revenues accounted for 33.4%, 48.0%, and 54.1% in 2000, 1999,and
1998, respectively. The decrease in 2000 was due to Meto. On a pro forma basis,
the year 2000 US Domestic revenues were comparable to prior year. In 1999, US
Domestic revenues decreased by 9.3%. This decrease was primarily attributable to
a decrease in sales of the Company's US-based CCTV/Fire and intrusion products
partially offset by an increase in sales of the Company's US-based Access
Control product line.
International net revenues accounted for 66.6%, 52.0%, and 45.9% in 2000, 1999,
and 1998, respectively. The increase in 2000 was due to Meto. On a pro forma
basis, excluding the impact of foreign exchange, the year 2000 International
revenues were comparable to prior year. In 1999, excluding the impact of foreign
exchange, International revenues increased 5.0% over 1998. This increase was
primarily attributable to an increase in sales of the Company's EAS, barcode
systems, and CCTV/Fire and intrusion products. This increase was partially
offset by decreases in sales of the Company's hand-held labeling and retail
merchandising product lines.
Cost of Revenues
During 2000 the cost of revenues increase was a direct result of the additional
revenue related to the inclusion of the Meto business for a full year. Cost of
revenues as a percentage of revenues decreased to 59.2% from 60.7%. This
decrease is primarily attributable to a reduction in field service costs due to
the Meto integration and the full year effect of Meto's lower cost of revenues.
These decreases were partially offset by a $3.7 million inventory write-off.
During 1999, cost of revenues increased $8.8 million or 4.0% from $217.5 million
to $226.3 million. As a percentage of net revenues, cost of revenues increased
1.0% (from 59.7% to 60.7%). The increase in the Company's cost of revenues is
primarily attributable to: (i) an increase in field service costs to support
international chain wide installations; and (ii) an increase in product cost
related to idle capacity. These increases were partially offset by a reduction
in research & development expenses.
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: 66% material, 11% labor, and 23% 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. The Company's general practice is to maintain a level
of inventory sufficient to meet anticipated demand for its products.
26
<PAGE>
For fiscal year 2000, 1999, and 1998, field service and installation costs were
8.4%, 10.6% and 10.3% of net revenues, respectively. The decrease in 2000 was
the result of a reduction in costs due to the Meto integration and the lower
field service and installation costs for the Meto product range. 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 2000, the increase in SG&A expenses was directly attributable to the
additional expenses resulting from the inclusion of the Meto business for the
full year. SG&A expenses as a percentage of revenues increased to 33.9% from
31.8%. The increase was due to the amortization of goodwill and other
intangibles associated with the Meto acquisition and a customer-based
receivables write-off of $5.1 million. The full impact of the reduced SG&A
expenses resulting from the integration of Meto will first occur in 2001.
During 1999, SG&A expenses increased $1.8 million or 1.5% from $117.0 million to
$118.8 million. As a percentage of net revenues, SG&A expenses decreased by 0.3%
(from 32.1% to 31.8%). The higher expenses (in dollars) were due to a $4.5
million increase in support costs (finance, administration, legal, MIS, and
operations) offset by a $2.7 million decrease in variable costs (selling,
commissions, and royalties) and sales support costs (marketing and customer
service). SG&A expenses in 1999 included approximately $1.0 million of year 2000
consulting costs, additional Board of Director and advisory fees of $0.4
million, and additional legal costs of $0.7 million related to lawsuits
involving ID Security Systems Canada, Inc. and Checkpoint Software Technologies,
Inc. Also included in SG&A expenses in 1999 is approximately $5.2 million
related to the operations of the Meto business from the date of acquisition.
Other (Loss)/Income, net
Other (loss)/income, net was $(2.5) million, $(1.7) million, and $0.3 million
for 2000, 1999, and 1998, respectively. Other (loss)/income, net of $(2.5) and
$(1.7) million in 2000 and 1999, respectively, resulted from net foreign
exchange losses. Other (loss)/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.
Interest Expense and Interest Income
Interest expense was $24.1 million, $9.8 million, and $9.6 million for 2000,
1999, and 1998, respectively. The increase in interest expense is directly
attributable to the increased borrowings associated with the acquisition of Meto
AG. Interest income for fiscal year 2000, 1999, and 1998, was $4.3 million, $5.5
million, and $4.7 million, respectively. The decrease in 2000 was directly
attributable to a decrease in cash investments primarily resulting from the
payment of interest and principal on the Company's debt along with the cash paid
for restructuring during the fourth quarter of 1999 and throughout 2000. The
increase in 1999 was directly attributable to the increased cash investments
resulting from cash generated from operations beginning with 1998 and continuing
throughout 1999.
27
<PAGE>
Income Taxes
The Company's effective tax rate for fiscal 2000, 1999, and 1998, was 57.2%,
28.6%, and 32.5%, respectively. The higher rate in 2000 was a result of the
non-deductible goodwill associated with the acquisition of Meto in December
1999. The lower rate in 1999 was a result of proportionally higher tax-exempt
earnings in Puerto Rico, and the benefit of tax loss carryforwards, which
previously had been subject to a full valuation allowance.
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 Rican income taxes.
Cumulative Effect Of Change In Accounting Principle
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. In accordance with SEC Staff Accounting Bulletin No. 101, the
Company changed its accounting method for recognizing revenue on the sale of
equipment where post-shipment obligations exist. Previously, the Company
recognized revenue for equipment when title transferred, generally upon
shipment. Beginning with the first quarter of 2000, the Company began
recognizing revenue when installation was complete or other post-shipment
obligations have been satisfied. During the first quarter of 2000, the
cumulative effect of the change in accounting principle was a non-cash reduction
in net earnings of $5.0 million, or $0.16 per diluted share.
Net (Loss)/Income
Net (loss)/income was $(2.8) million or $(.09) per share, $6.7 million or $.22
per share, and $17.7 million or $.53 per share for fiscal years 2000, 1999, and
1998, respectively. The weighted average number of shares used in the diluted
earnings per share computation were 30.6 million, 30.5 million, and 33.3 million
for fiscal years 2000, 1999, and 1998, respectively. The decrease in the
weighted average number of shares from 1998 to 1999 was primarily due to the
repurchase of common stock throughout 1998.
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, cash reserves due to an earlier
secondary issuance of common stock in an underwritten public offering, and more
recently through cash generated from operations. The Company believes that cash
provided from operating activities and funding available under its current
credit agreements, should be adequate for its presently foreseeable working
capital and capital investment requirements.
The Company's operating activities during fiscal 2000 generated approximately
$3.2 million compared to approximately $87.5 million during 1999. This change
from the prior year was primarily the result of an increase in working capital,
28
<PAGE>
income tax payments relating to Meto, and payments made in connection with the
integration of Meto. Excluding restructuring and integration payments, the cash
provided by operating activities in 2000 was approximately $30.3 million.
In December 1999, the Company completed the acquisition of Meto AG. In
connection with the acquisition, the Company entered into a new $425 million six
and one-half year senior collateralized multi-currency credit facility with a
consortium of twenty-one banks led by the Company's principal lending bank. The
credit facility, which expires on March 31, 2006, included a $275 million
equivalent multi-currency term note and a $150 million equivalent multi-currency
revolving line of credit. Interest on the new facility resets quarterly and is
based on the Eurocurrency base rate plus an applicable margin. At December 31,
2000, 217.2 million Euro (approximately $204.6 million) and $19.3 million were
outstanding under the term loan. The outstanding borrowings under the revolving
credit facility were 2.23 billion Japanese Yen (approximately $19.4 million) and
6 million Euro (approximately $5.7 million). Subsequent to year end 2000, the
$150 million revolving line of credit was reduced to $100 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, the availability under the
$100 million revolving credit facility, and cash generated from future
operations.
Capital Expenditures
The Company's capital expenditures during fiscal 2000 totaled $13.2 million
compared to $8.8 million during fiscal 1999. The higher expenditures during 2000
were a direct result of the increase in expenditures attributed to the expansion
of the Company through the Meto acquisition in December 1999. The Company
anticipates its capital expenditures to approximate $19.0 million in 2001.
Stock Repurchase
On October 23, 1998, the Board of Directors authorized the purchase of up to $20
million of the Company's outstanding common stock at an average cost not to
exceed $14.00 per share. During 1997, the Board of Directors approved the
purchase of up to 10% or approximately 3.5 million shares of the Company's
common stock at an average cost not to exceed $14.00 per share. As of December
31, 2000, the Company has purchased 3,441,300 shares of common stock for an
average price of $12.02 per share under the 1997 program, and 1,319,900 shares
of common stock for an average price of $13.02 per share under the 1998 program.
There were no stock repurchases in 2000 and 1999.
Exposure to International Operations
The Company manufactures products in the USA, the Caribbean, Europe and the Asia
Pacific region for both the local marketplace as well as for export 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.
29
<PAGE>
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 31, 2000, the Company had currency exchange forward contracts
totaling approximately $49.8 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. Historically, the Company
has not purchased currency exchange forward contracts for its operations in
South America and the Asia Pacific region.
The Company has entered into a foreign exchange option contract for the
conversion of 3.0 million Euros into US dollars with an expiration date of May
2001.
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
New Accounting Pronouncements and Other Standards
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes a new model for the
accounting and reporting of derivative and hedging transactions. The statement
amends a number of existing standards and, as amended by SFAS No. 138, became
effective for fiscal years beginning after June 15, 2000. As required, the
Company adopted this standard as of January 1, 2001.
This standard requires that all derivative instruments be reported on the
balance sheet at fair value. For instruments designated as fair value hedges,
changes in the fair value of the instrument will largely be offset on the income
statement by changes in the fair value of the hedge item. For instruments
designated as cash flow hedges, the effective portion of the hedge is reported
in other comprehensive income until it is assigned to earnings in the same
period in which the hedged item has an impact on earnings. For instruments
designated as a hedge of net investment in foreign operating units not using the
US Dollar as its functional currency, changes in the fair value of the
instrument will be offset in other comprehensive income to the extent that they
are effective as economic hedges. Changes in the fair value of derivative
instruments, including embedded derivatives, that are not designated as a hedge
will be recorded each period in current earnings along with any ineffective
portion of hedges.
The Company has concluded that the adoption of SFAS No. 133 will not materially
change management's risk policies and practices nor will compliance with the
standard materially impact the reported results of operations.
30
<PAGE>
The Emerging Issues Task Force (EITF) of the FASB reached consensus in 2000 on
EITF 00-10, Accounting for Shipping and Handling Fees and Costs. This new
accounting guidance is effective for the fourth quarter of 2000 and relates
primarily to the classification of certain costs in the Company's Consolidated
Statements of Operations with restatements of prior reporting required. The
Company has reclassified a total of $3.9 million in shipping and handling fees
to net revenues from cost of revenues in 2000 and has reclassified all prior
reported periods as a result of adopting this standard.
The EITF also reached consensus in 2000 on Issue 00-14, Accounting for Certain
Sales Incentives. The standard addresses the income statement classification of
certain selling costs. The standard is effective beginning in 2001 with prior
restatements required. The Company does not expect the standard to result in a
material reclassification in any period.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
forward exchange 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, Note 1; and "Financial
Instruments and Risk Management", Note 13.) Sensitivity of the Company's
financial instruments to selected changes in market rates and prices, which are
reasonably possible over a one-year period, are described below. Market values
are the present value of projected future cash flows based on the market rates
and prices.
The Company's financial instruments subject to interest rate risk consist of
fixed rate debt instruments. These debt instruments have a net fair value of
$98.0 million and $103.8 million as of December 31, 2000 and December 26, 1999,
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 31, 2000
would result in a $4.0 million decrease in the net market value of the
liability. Conversely, a 100-basis point decrease in interest rates at December
31, 2000 would result in a $2.6 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 $87.9 million
and $92.7 million at December 31, 2000 and December 26, 1999, 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 31, 2000, a 10% strengthening in the Company's common stock would
result in a net increase in the fair value liability of $1.2 million, while a
10% weakening in the Company's common stock would result in a net decrease in
the fair value liability of $0.9 million.
The Company's financial instruments subject to foreign currency exchange risk
include the 244 million Euro term loan, the $100 million multi-currency
revolving credit facility, and the 18.6 million Deutsche Mark and 5.3 million
Deutsche Mark capital leases. At December 31, 2000, 217.2 million Euro
31
<PAGE>
(approximately $204.6 million) was outstanding under the term loan. The amounts
outstanding under the revolving credit facility were 2.23 billion Japanese Yen
(approximately $19.4 million) and 6 million Euro (approximately $5.7 million).
The outstanding borrowings under the capital leases were 18.1 million Deutsche
Mark (approximately $8.7 million) and 4.5 million Deutsche Mark (approximately
$2.2 million). 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 31, 2000, a 10% strengthening of the US dollar versus
the Euro would result in a $20.1 million decrease in the liability of the term
loan, revolving credit facility and capital leases, while a 10% weakening of the
US dollar versus the Euro would result in a $24.6 million increase in the
liability of the term loan, revolving credit facility and capital leases. At
December 31, 2000, a 10% strengthening of the US dollar versus the Japanese Yen
would result in a $1.8 million decrease in the liability of the revolving credit
facility, while a 10% weakening of the US dollar versus the Japanese Yen would
result in a $2.2 million increase in the liability of the revolving credit
facility.
Also subject to foreign currency exchange risk are the Company's foreign
currency forward exchange contracts and options which represent a net asset
position of $0.8 million and $2.5 million at December 31, 2000 and December 26,
1999, 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 31, 2000, a 10% strengthening of the US
dollar versus other currencies would result in an increase of $3.5 million in
the net asset position, while a 10% weakening of the dollar versus all other
currencies would result in a decrease of $2.9 million.
Foreign exchange forward and option contracts are used to hedge the Company's
firm 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.
32
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Accountants.............................................34
Consolidated Balance Sheets as of December 31, 2000 and
December 26, 1999..........................................................35
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 2000...........................37
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 31, 2000.....................39
Consolidated Statements of Comprehensive (Loss)/Income for each
of the years in the three-year period ended December 31, 2000..............41
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2000...........................42
Notes to Consolidated Financial Statements.................................44-77
Financial Statement Schedule
Schedule II -Valuation and Qualifying Accounts.............................78
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Checkpoint Systems, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Checkpoint Systems, Inc. and its Subsidiaries at December 31, 2000 and December
26, 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, 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.
As discussed in Note 1 to the consolidated financial statements, in 2000 the
Company adopted Staff Accounting Bulletin 101, Revenue Recognition in Financial
Statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 15, 2001
34
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 26,
2000 1999
------------ ------------
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 28,121 $ 87,718
Accounts receivable, net of allowances
of $12,427,000 and $10,479,000 176,479 184,378
Inventories, net 122,267 99,148
Other current assets 35,620 20,047
Deferred income taxes 8,668 21,210
-------- -------
Total current assets 371,155 412,501
REVENUE EQUIPMENT ON OPERATING LEASE, net 21,744 18,665
PROPERTY, PLANT AND EQUIPMENT, net 123,417 128,881
GOODWILL, net 245,241 249,823
OTHER INTANGIBLES, net 78,070 88,223
OTHER ASSETS 32,378 46,780
-------- --------
TOTAL ASSETS $872,005 $944,873
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and
current portion
of long-term debt $ 38,070 $ 45,906
Accounts payable 41,996 45,892
Accrued compensation and
related taxes 16,862 25,750
Income taxes 30,793 35,370
Unearned revenues 26,354 18,338
Restructuring reserve 17,707 27,047
Other current liabilities 46,299 38,768
-------- --------
Total current liabilities 218,081 237,071
LONG-TERM DEBT, LESS CURRENT MATURITIES 227,011 275,256
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
OTHER LONG TERM LIABILITIES 57,953 55,775
DEFERRED INCOME TAXES 10,734 -
MINORITY INTEREST 547 976
COMMITMENTS AND CONTINGENCIES
35
<PAGE>
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
36,642,740 and 36,522,584 3,664 3,652
Additional capital 234,407 233,617
Retained earnings 108,458 111,224
Common stock in treasury, at cost,
6,359,200 shares and 6,359,200 shares (64,410) (64,410)
Accumulated other comprehensive loss (44,440) (28,288)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 237,679 255,795
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $872,005 $944,873
======== ========
See accompanying notes to consolidated financial statements.
36
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
2000 1999 1998
-------- -------- --------
(Thousands, except per share data)
Net revenues $690,811 $373,062 $364,572
Cost of revenues 417,963 226,289 217,475
-------- -------- --------
Gross profit 272,848 146,773 147,097
Selling, general and administrative
expenses 234,490 118,803 117,034
Other operating expenses 10,551 11,796 (600)
-------- -------- --------
Operating income 27,807 16,174 30,663
Interest income 4,257 5,495 4,746
Interest expense 24,093 9,792 9,568
Other (loss)/income, net (2,524) (1,670) 343
-------- -------- --------
Earnings before income taxes 5,447 10,207 26,184
Income taxes 3,115 2,915 8,509
Minority interest (78) (34) 10
-------- -------- --------
Earnings before cumulative
effect of change in
accounting principle
and extraordinary item 2,254 7,258 17,685
Cumulative effect of change in
accounting principle (net of
income tax benefit of $2,703) (5,020) - -
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $260) - (592) -
-------- -------- --------
Net (loss)/earnings $ (2,766) $ 6,666 $ 17,685
======== ======== ========
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<PAGE>
Earnings per share before cumulative effect of change in accounting principle:
Basic $ .07 $ .24 $ .55
======== ======== ========
Diluted $ .07 $ .24 $ .53
======== ======== ========
(Loss)/earnings per share before extraordinary item:
Basic $ (.09) $ .24 $ .55
======== ======== ========
Diluted $ (.09) $ .24 $ .53
======== ======== ========
Net (loss)/earnings per share:
Basic $ (.09) $ .22 $ .55
======== ======== ========
Diluted $ (.09) $ .22 $ .53
======== ======== ========
See accompanying notes to consolidated financial statements.
38
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumu-
lated
Other
Compre-
Common Additional Retained hensive Treasury
Stock Capital Earnings (Loss) Stock Total
------ ---------- -------- -------- --------- -----
(Thousands)
Balance,
December 28, 1997 $ 3,633 $232,079 $ 86,873 $(17,049) $(27,986) $277,550
(Common shares:
issued 36,333,228;
reacquired, 3,188,700)
Net earnings 17,685 17,685
Exercise of stock
options
(138,356 shares) 14 1,101 1,115
Foreign currency
translation
adjustment 2,010 2,010
Purchase of
common stock
(3,170,500 shares) (36,424) (36,424)
------- -------- -------- -------- -------- --------
Balance,
December 27,1998 3,647 233,180 104,558 (15,039) (64,410) 261,936
(Common shares:
issued 36,471,584
reacquired, 6,359,200)
Net earnings 6,666 6,666
Exercise of stock
options
(51,000 shares) 5 437 442
Foreign currency
translation
adjustment (13,249) (13,249)
Purchase of
common stock -
-------- --------- --------- ---------- -------- --------
Balance,
December 26, 1999 3,652 233,617 111,224 (28,288) (64,410) 255,795
(Common shares:
issued 36,522,584;
reacquired, 6,359,200)
Net loss (2,766) (2,766)
Exercise of stock
options
(120,156 shares) 12 790 802
Foreign currency
translation
adjustment (16,152) (16,152)
Purchase of common
stock -
-------- --------- --------- ---------- -------- --------
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<PAGE>
Balance,
December 31, 2000 $3,664 $234,407 $108,458 $(44,440) $(64,410) $237,679
(Common shares: ====== ======== ======== ======== ======== ========
issued 36,642,740
reacquired, 6,359,200)
See accompanying notes to consolidated financial statements.
40
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
2000 1999 1998
---- ---- ----
(Thousands)
Net (loss)/earnings $ (2,766) $ 6,666 $17,685
Foreign currency translation
adjustment, net of tax (16,152) (13,249) 2,010
-------- ------- -------
Comprehensive (loss)/income $(18,918) $(6,583) $19,695
======== ======= =======
See accompanying notes to consolidated financial statements.
41
<PAGE>
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
2000 1999 1998
---- ---- ----
Cash flows from operating (Thousands)
activities:
Net (loss)/earnings $ (2,766) $ 6,666 $ 17,685
Adjustments to reconcile net earnings
to net cash (used in)/provided by
operating activities:
Cumulative effect of change in
accounting principle, net of tax 5,020 - -
Revenue equipment under
operating lease 3,496 (4,781) (8,307)
Long-term customer contracts - 6,547 (1,433)
Depreciation and amortization 47,883 28,028 25,676
Deferred taxes 5,204 (3,120) 383
Provision for losses on accounts
receivable 7,506 2,180 1,672
Impairment of long-lived assets 7,110 - -
Restructuring and extraordinary
charges 2,205 12,648 (6,692)
(Increase)/decrease in current assets,
net of the effects of acquired
companies:
Accounts receivable (6,508) 15,174 1,310
Inventories (25,914) 16,931 1,313
Other current assets (17,881) 5,201 3,046
Increase/(decrease) in current liabilities net of the effects of acquired
companies:
Accounts payable (3,300) 9,347 3,999
Accrued compensation and related
taxes (7,453) 2,015 498
Income taxes (12,952) 1,804 (1,365)
Unearned revenues 3,354 1,541 (703)
Restructuring reserve (16,925) - -
Other current liabilities 15,093 (12,645) (7,925)
-------- -------- --------
Net cash provided by
operating activities 3,172 87,536 29,157
-------- -------- --------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (13,172) (8,774) (12,301)
Acquisitions, net of cash acquired (15,774) (239,792) (27,584)
Other investing activities 2,581 (2,325) 425
-------- -------- --------
Net cash used in investing
activities (26,365) (250,891) (39,460)
-------- -------- --------
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<PAGE>
Cash flows from financing activities:
Proceeds from stock issuances 802 442 1,115
Proceeds of debt 5,827 293,722 19,548
Payment of debt (40,528) (77,240) (2,625)
Purchase of treasury stock - - (36,424)
Net cash (used in)/provided by -------- -------- --------
financing activities (33,899) 216,924 (18,386)
-------- -------- --------
Effect of foreign currency rate
fluctuations on cash and cash
equivalents (2,505) (1,785) 485
-------- -------- --------
Net (decrease)/increase in cash and
cash equivalents (59,597) 51,784 (28,204)
Cash and cash equivalents:
Beginning of year 87,718 35,934 64,138
-------- -------- --------
End of year $ 28,121 $87,718 $ 35,934
======== ======== ========
See accompanying notes to consolidated financial statements.
43
<PAGE>
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is a multinational manufacturer and marketer of integrated system
solutions for loss prevention, labeling, and merchandising. The Company is a
leading provider of radio frequency (RF) and electromagnetic (EM) electronic
article surveillance (EAS) systems and tags, security source tagging, retail
merchandising system (RMS), hand-held labeling systems (HLS), and barcode
labeling systems (BCS). The Company's labeling systems and services are designed
to improve efficiency, reduce costs and furnish value-added solutions for
customers across many markets and industries. Applications for barcode labeling
systems include auto-ID, retail security, pricing and promotional labels. The
Company also markets closed circuit television (CCTV) systems and point-of-sale
(POS) monitoring systems primarily to help retailers prevent losses caused by
theft of merchandise, as well as electronic access control systems (EAC) for
commercial and industrial applications. The Company holds or licenses over 1,000
patents and proprietary technologies. The Company has achieved substantial
growth since 1993, primarily through internal expansion and acquisitions, new
product introductions, broadened and more direct distribution (particularly in
international markets) and increased and more efficient manufacturing
capabilities.
Principles of Consolidation
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its majority owned subsidiaries (Company). All inter-company
transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fiscal Year
The Company's fiscal year is the 52 or 53 week period ending the last Sunday of
December. References to 2000, 1999, and 1998 are for: the 53 weeks ended
December 31, 2000, the 52 weeks ended December 26, 1999, and the 52 weeks ended
December 27, 1998.
Reclassifications
Certain reclassifications have been made to the 1999 and 1998 financial
statements and related footnotes to conform to the 2000 presentation.
44
<PAGE>
Revenue Recognition
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarized certain of the staffs views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In accordance with SAB 101, the Company changed its accounting method for
recognizing revenue on the sale of equipment where post-shipment obligations
exist. Previously, the Company recognized revenue for equipment when title
transferred, generally upon shipment. Beginning with the first quarter of year
2000, the Company began recognizing revenue when installation is complete or
other post-shipment obligations have been satisfied. During the first quarter of
year 2000, the cumulative effect of the change in accounting method was a
non-cash reduction in net earnings of $5,020,000, net of income tax benefit of
$2,703,000, or $0.16 per diluted share.
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.
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 at the time of purchase.
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.
Revenue Equipment on Operating Lease
The cost of the equipment leased to customers under operating leases is
depreciated on a straight-line basis over the length of the contract, which is
usually between three and five years.
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
45
<PAGE>
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.
Goodwill
Goodwill is amortized over the estimated future periods to be benefited, ranging
from 20 to 30 years. Accumulated amortization approximated $24,262,000 and
$18,267,000 at December 31, 2000 and December 26, 1999, respectively.
Intangibles
Intangibles at December 31, 2000 and December 26, 1999 consisted of the
following:
Amortizable
Life (years) 2000 1999
------------ ---- ----
(Thousands)
Customer lists 20 $ 24,392 $ 24,639
Trade name 30 22,762 24,600
Capitalized software 3 to 5 7,558 6,834
Workforce 13 10,686 11,549
Patents, license agreements 5 to 14 26,912 26,717
Financing 6 7,299 7,299
Other 3 to 6 4,004 2,291
-------- --------
103,613 103,929
Less: accumulated amortization (25,543) (15,706)
-------- --------
Total $ 78,070 $ 88,223
======== ========
Amortization expense was $10.3 million, $2.6 million and $2.8 million for 2000,
1999 and 1998, respectively. Intangibles are amortized on a straight-line basis
over their useful lives (or legal lives if shorter).
Long-Lived Assets
The Company reviews its long-lived assets, including goodwill 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 (undiscounted), then the loss is recognized
on the Consolidated Statements of Operations. The amount of an impairment loss
is the excess of the carrying amount of the impaired asset over the fair value
of the asset. The fair value represents expected future cash flows from the use
of the assets, discounted at the rate used to evaluate potential investments.
46
<PAGE>
Research and Development Costs
Research and development costs are expensed as incurred, and approximated
$9,494,000, $7,278,000, and $8,018,000, in 2000, 1999, and 1998, respectively.
Royalty Expense
Royalty expenses incurred approximated $4,780,000, $3,986,000, and $4,354,000,
in 2000, 1999, and 1998, 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
US 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 US dollars at the year-to-date average rate of
exchange. In addition, gains or losses on long-term intercompany transactions
are excluded from the results of operations and accumulated in the
aforementioned translation adjustment as a 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 (loss)/income, net on the Company's
Consolidated Statements of Operations.
47
<PAGE>
Note 2. INVENTORIES
Inventories consist of the following:
2000 1999
---- ----
(Thousands)
Raw materials $ 10,921 $ 14,544
Work-in-process 6,819 10,984
Finished goods 104,527 73,620
-------- --------
Totals $122,267 $ 99,148
======== ========
Note 3. REVENUE EQUIPMENT ON OPERATING LEASE AND PROPERTY, PLANT, AND
EQUIPMENT
The major classes are:
2000 1999
---- ----
(Thousands)
Revenue equipment on operating lease
Equipment rented to customers $ 56,093 $ 51,667
Accumulated depreciation (34,349) (33,002)
-------- --------
$ 21,744 $ 18,665
======== ========
Property, plant and equipment
Land $ 10,292 $ 11,291
Buildings 64,314 56,627
Machinery & equipment 188,430 183,784
Leasehold improvements 9,123 8,736
-------- --------
272,159 260,438
Accumulated depreciation (148,742) (131,557)
-------- --------
$123,417 $128,881
======== ========
Depreciation expense on the Company's revenue equipment on operating lease and
property, plant and equipment was $28,096,000, $19,698,000, and $18,191,000, for
2000, 1999, and 1998, respectively.
48
<PAGE>
Note 4. SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG-TERM DEBT
Short-term borrowings and current portion of long-term debt at December 31, 2000
and at December 26, 1999 consisted of the following:
2000 1999
------ ------
(Thousands)
Overdraft facilities and lines of
credit with interest rates ranging
from 1.38% to 5.50% $ 5,241 $15,322
Current portion of long-term debt 32,829 30,584
------- -------
Total short-term borrowings and
current portion of long-term debt $38,070 $45,906
======= =======
Note 5. LONG-TERM DEBT
Long-term debt at December 31, 2000 and December 26, 1999 consisted of the
following:
2000 1999
------ ------
(Thousands)
Six and one-half year EUR 244
million variable interest rate
collateralized term loan $204,586 $246,904
Six and one-half year $25 million
variable interest rate
collateralized loan 19,250 25,000
Six and one-half year $100 million
multi-currency variable interest
rate collateralized revolving
credit facility 25,108 21,818
Twenty two and one-half year
DEM 18.6 million capital lease 8,738 9,515
Eight and one-half year
DEM 5.3 million capital lease 2,158 2,603
-------- --------
Total 259,840 305,840
Less current portion (32,829) (30,584)
-------- --------
Total long-term portion (excluding
Convertible subordinated
debentures) 227,011 275,256
Convertible subordinated debentures 120,000 120,000
-------- --------
Total long-term portion $347,011 $395,256
======== ========
In connection with the acquisition of Meto AG, the Company entered into a new
$425 million six and one-half year senior collateralized multi-currency credit
facility with a consortium of twenty-one banks led by the Company's principal
lending bank. The credit facility, which expires on March 31, 2006, includes a
$275 million equivalent multi-currency term note and a $150 million equivalent
multi-currency revolving line of credit. Subsequent to year end 2000, the $150
million revolving line of credit was reduced to $100 million. Interest on the
49
<PAGE>
new facility resets quarterly and is based on the Eurocurrency base rate plus an
applicable margin. At December 31, 2000, 217.2 million Euro (approximately
$204.6 million) and $19.3 million were outstanding under the term loan. The
outstanding borrowings under the revolving credit facility were 2.23 billion
Japanese Yen (approximately $19.4 million) and 6 million Euro (approximately
$5.7 million).
The terms of the new credit facility required the Company to retire all existing
senior debt. In connection with the senior debt restructuring, the Company
incurred an after-tax extraordinary loss of $0.6 million, or $.02 per share, for
the year ended December 26, 1999.
The above loan agreements contain certain restrictive covenants which, among
other things, require maintenance of specified minimum financial ratios
including debt to earnings, interest coverage, fixed charge coverage and
tangible net worth. In addition, these agreements limit the Company's ability to
pay cash dividends.
On March 15, 2001, the Company secured an amendment to one of the financial
covenants included in the credit facility, which allowed the Company to be in
compliance with its covenants for the year ended December 31, 2000. Management
believes that it will fulfill all covenant requirements, as defined in the
amended credit facility, going forward.
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. 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 of 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.
The aggregate maturities on all long-term debt are:
(Thousands)
2001 $ 32,829
2002 37,449
2003 37,481
2004 47,199
2005 174,722
Thereafter 50,160
--------
Total $379,840
========
50
<PAGE>
Note 6. STOCK OPTIONS
The Company's 1992 Stock Option Plan (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 31, 2000 total 10,535,821. At December 31, 2000, December 26, 1999 and
December 27, 1998, a total of 1,464,179, 1,296,090 and 1,781,981 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 31,
2000 were issued pursuant to the 1992 Plan. Stock options granted prior to July
1, 1997 were vested upon grant. 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) an additional 33% on or
after the second anniversary date of option grant; and (iii) the remaining 33%
on or after the third anniversary date of option grant.
Options that were fully vested and exercisable totaled 4,025,132 as of December
31, 2000. Options that were outstanding but not yet vested or exercisable
totaled 914,906 as of December 31, 2000.
The estimated weighted average fair value of options granted during 2000, 1999
and 1998 were $1,133,000, $3,546,000 and $4,702,000 respectively, on the date of
the grant using the option pricing model and assumptions referred to below. The
weighted average fair value per share of options granted during 2000, 1999, and
1998 was $4.19, $3.92 and $5.88, respectively.
51
<PAGE>
The following schedules summarize stock option activity and status:
NUMBER OF SHARES
----------------------------------
2000 1999 1998
----------------------------------
Outstanding at beginning of year 5,228,284 4,782,765 4,521,616
Granted 270,500 905,500 800,100
Exercised (120,156) (51,000) (138,356)
Canceled (438,590) (408,981) (400,595)
--------- --------- ---------
Outstanding at end of year 4,940,038 5,228,284 4,782,765
========= ========= =========
Exercisable at end of year 4,025,132 3,631,112 3,428,990
========= ========= =========
WEIGHTED-AVERAGE PRICE
---------------------------
2000 1999 1998
---------------------------
Outstanding at beginning of year $13.24 $14.27 $14.78
Granted $ 8.29 $ 7.77 $12.09
Exercised $ 6.67 $ 8.65 $ 8.07
Canceled $14.59 $17.67 $18.24
------ ------ ------
Outstanding at end of year $13.01 $13.24 $14.27
====== ====== ======
Exercisable at end of year $14.09 $14.68 $14.56
====== ====== ======
Following is a summary of stock options outstanding as of December 31, 2000:
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 12/31/00 Life Price 12/31/00 Price
- -----------------------------------------------------------------------------
$ 3.88--$ 7.56 580,932 1.57 $ 4.41 552,432 $ 4.26
$ 7.56--$ 9.16 1,229,350 8.18 $ 7.85 480,162 $ 7.94
$ 9.19--$12.44 1,291,718 6.17 $11.04 1,154,500 $11.05
$12.44--$28.38 1,838,038 6.40 $20.55 1,838,038 $20.55
- -----------------------------------------------------------------------------
$ 3.88--$28.38 4,940,038 6.22 $13.01 4,025,132 $14.09
52
<PAGE>
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 No. 25,
Accounting for Stock Issued to Employees. 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:
2000 1999 1998
---- ---- ----
(Thousands)
Net (loss)/earnings
As reported $(2,766) $6,666 $17,685
Pro forma $(5,272) $3,595 $15,252
Diluted (loss)/earnings per share
As reported $ (0.09) $0.22 $ 0.53
Pro forma $ (0.17) $0.12 $ 0.46
The following assumptions were used in estimating fair value of stock options:
2000 1999 1998
---- ---- ----
Dividend yields None None None
Expected volatility .508 .487 .485
Risk-free interest rates 6.1% 6.1% 6.1%
Expected life (in years) 3.2 3.1 3.1
53
<PAGE>
Note 7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in 2000, 1999, and 1998, respectively, included payments for
interest of $24,184,000, $9,674,000, and $9,569,000, and income taxes of
$15,057,000, $2,950,000, and $9,555,000.
On December 10, 1999, the Company consummated its acquisition of 98.57% of the
outstanding shares of Meto AG pursuant to a cash tender offer. The Company
acquired the remaining outstanding shares of Meto AG in fiscal year 2000.
In conjunction with the acquisition, the aggregate fair value of assets
acquired, cash paid and direct costs incurred, and liabilities are shown below.
The amounts reflect the acquisition of the remaining outstanding shares and the
final allocation.
Fair value of assets acquired...................$491,004,000
Cash paid and direct costs incurred
for the capital stock.......................... 269,202,000
-----------
Liabilities assumed.............................$221,802,000
============
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 8. 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.
54
<PAGE>
Note 9. STOCK REPURCHASE
On October 23, 1998, the Board of Directors authorized the purchase of up to $20
million of the Company's outstanding common stock at an average cost not to
exceed $14.00 per share. During 1997, the Board of Directors approved the
purchase of up to 10% or approximately 3.5 million shares of the Company's
common stock at an average cost not to exceed $14.00 per share. As of December
31, 2000, the Company has purchased 3,441,300 shares of common stock for an
average price of $12.02 per share under the 1997 program, and 1,319,900 shares
of common stock for an average price of $13.02 per share under the 1998 program.
There were no stock repurchases in 2000 or 1999.
Note 10. EARNINGS PER SHARE
Earnings per share are calculated under the provisions of Statements of
Financial Accounting Standards (SFAS) No. 128, Earnings per share, adopted in
the fourth quarter of 1997.
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:
-------------------------------------
2000 1999 1998
-------------------------------------
(Thousands, except per share data)
Basic earnings/(loss) per share:
Earnings before cumulative effect
of change in accounting principle
and extraordinary item $ 2,254 $ 7,258 $17,685
Cumulative effect of change in
accounting principle (net of
income tax benefit of $2,703) (5,020) - -
------- ------- -------
(Loss)/earnings before
extraordinary item (2,766) 7,258 17,685
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $260) - (592) -
------- ------- -------
Net (loss)/earnings $(2,766) $ 6,666 $17,685
======= ======= =======
Average common stock outstanding 30,219 30,146 32,302
======= ======= =======
Basic earnings per share before
cumulative effect of change in
accounting principle $ .07 $ .24 $ .55
Cumulative effect of change in
accounting principle (net of
income tax benefit of $2,703) (.16) - -
------- ------- -------
55
<PAGE>
Basic (loss)/earnings per share
before extraordinary item (.09) .24 .55
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $260) - (.02) -
------- ------- -------
Basic (loss)/earnings per share $ (.09) $ .22 $ .55
======= ======= =======
Diluted earnings/(loss) per share:
Earnings before cumulative effect
of change in accounting principle
and extraordinary item $ 2,254 $ 7,258 $17,685
Cumulative effect of change in
accounting principle (net of
income tax benefit of $2,703) (5,020) - -
------- ------- -------
(Loss)/earnings before
extraordinary item (2,766) 7,258 17,685
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $260) - (592) -
------- ------- -------
Net (loss)/earnings $(2,766) $ 6,666 $17,685
======= ======= =======
Average Common Stock outstanding 30,219 30,146 32,302
Additional common shares resulting
from stock options 405 382 970
------- ------- -------
Average common stock and dilutive
stock outstanding (1) 30,624 30,528 33,272
======= ======= =======
Diluted earnings per share before
cumulative effect of change in
accounting principle $ .07 $ .24 $ .53
Cumulative effect of change in
accounting principle (net of
income tax benefit of $2,703) (.16) - -
------- ------- -------
Diluted (loss)/earnings per share
before extraordinary item (.09) .24 .53
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $260) - (.02) -
------- ------- -------
Diluted (loss)/earnings per share $ (.09) $ .22 $ .53
======= ======= =======
(1) Conversion of the subordinated debentures for 2000, 1999, and 1998 are not
included in the above calculation as they are anti-dilutive.
56
<PAGE>
Note 11. INCOME TAXES
The domestic and foreign components of earnings/(losses) before income taxes
are:
2000 1999 1998
---- ---- ----
(Thousands)
Domestic $ 2,680 $ 19,009 $ 27,864
Foreign 2,767 (8,802) (1,680)
------- ------- -------
Total $ 5,447 $ 10,207 $ 26,184
======= ======= =======
The domestic component includes the earnings of the Company's operations in
Puerto Rico.
The related provisions/(benefits) for income taxes consist of:
2000 1999 1998
---- ---- ----
Currently Payable (Thousands)
Federal $ 155 $ 3,531 $ 5,970
State 721 300 300
Puerto Rico 273 554 572
Foreign 604 1,650 1,284
Deferred
Federal (2,311) 927 2,935
State (263) - -
Puerto Rico 87 137 192
Foreign 3,849 (4,184) (2,744)
------- ------- ------
Total Provision $ 3,115 $ 2,915 $ 8,509
======= ======= =======
57
<PAGE>
Deferred tax assets/liabilities at December 31, 2000 and December 26, 1999
consist of:
2000 1999
---- ----
(Thousands)
Inventory $ 2,775 $ 5,754
Accounts receivable 2,855 1,579
Net operating loss carryforwards 39,129 24,656
Restructuring 2,361 11,357
Pension 4,700 4,598
Warranty 480 546
Other 197 1,973
Valuation allowance (24,887) (19,717)
-------- --------
Deferred tax assets 27,610 30,746
-------- --------
Depreciation 1,183 2,855
Intangibles 26,080 1,272
Deferred revenue (418) 1,123
Other 2,831 1,498
-------- --------
Deferred tax liabilities 29,676 6,748
-------- --------
Net deferred tax asset
(liability) $( 2,066) $ 23,998
======== ========
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.
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 2000, 1999, and 1998, a full provision was made for
tollgate taxes. The Company has not provided for tollgate taxes on approximately
$37,000,000 of its subsidiary's unremitted earnings since they are expected to
be reinvested indefinitely.
The net operating loss carryforwards as of December 31, 2000 in the amount of
$118,864,000 include $37,100,000 of loss carryforwards that were acquired in
connection with the acquisition of the ID Systems Group, Actron Group Limited,
and Meto AG. 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 2000, $15,550,000 of foreign tax losses expired. A full
valuation allowance had been recorded against these losses. In 2000, 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, $26,930,000
expire beginning January 2001 through December 2010, and the remaining portion
may be carried forward indefinitely.
58
<PAGE>
A reconciliation of the tax provision at the statutory US Federal income tax
rate with the tax provision at the effective income tax rate follows:
2000 1999 1998
---- ---- ----
(Thousands)
Tax Provision at the Statutory federal
income tax rate $1,907 $3,572 $9,165
Tax exempt earnings of subsidiary in
Puerto Rico (1,740) (2,746) (3,624)
Non-deductible goodwill 3,842 1,306 1,326
Non-deductible meals and entertainment 265 200 200
Foreign losses with no benefit 391 1,629 2,373
State and local income taxes, net
of federal benefit 245 612 639
Benefit of foreign sales corporation (571) (414) (700)
Foreign loss carryforwards utilized - (1,741) (640)
Foreign rate differentials (749) 497 -
Other (475) - (230)
------ ------ ------
Tax provision at the effective tax rate $3,115 $2,915 $8,509
====== ====== ======
The effective tax rate related to the cumulative effect of the change in
accounting principle approximates the statutory rate.
59
<PAGE>
Note 12. 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 one to five years of service. The Company's contributions under
the plans approximated $999,000, $672,000, and $690,000, in 2000, 1999, and
1998, 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 in
Canada, Puerto Rico and the USA 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 $179,000, $176,000, and $220,000, in
2000, 1999, and 1998, respectively.
Under the Company's 2000 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 2000, 1999, and 1998, net
earnings did not exceed the required criteria and, accordingly, no bonuses were
provided.
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The Company maintains several defined benefit pension plans, principally in
Europe. The plans covered approximately 20% of the total workforce at December
31, 2000. The benefits accrue according to the length of service, age and
remuneration of the employee. The table below sets forth the funded status of
the Company's plans and amounts recognized in the accompanying balance sheets.
December 31, December 26,
2000 1999
----------- -----------
(Thousands)
Change in benefit obligation
Net benefit obligation at the beginning of year $49,380 $49,872
Service cost 1,325 1,669
Interest cost 2,701 3,262
Net amortization and deferrals (14) 22
Actuarial (gain) loss (538) -
Divestments (1) - (2,835)
Gross benefits paid (1,885) (2,610)
Foreign currency exchange rate changes (3,474) -
------- -------
Net benefit obligation at end of year 47,495 49,380
======= =======
Change in plan assets
Fair value of plan assets at beginning of year 71 -
Employer contributions 1,885 2,682
Gross benefits paid (1,885) (2,610)
Foreign currency exchange rate changes (2) (1)
------- -------
Fair value of plan assets at end of year 69 71
------- -------
Funded status at end of year 47,426 49,309
Unrecognized net actuarial gain 716 -
------- -------
Accrued post-retirement benefit cost $48,142 $49,309
======= =======
(1) The divestments represent the impact of employees leaving the Company to
join Raflatac Produktions GmbH in connection with the sale of the Company's
German laminating operation.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $47,495, $42,499, and $69, respectively, as of
December 31, 2000, and $49,380, $47,954, and $71, respectively as of December
26, 1999.
The weighted average rate assumptions used in determining pension costs and the
projected benefit obligation are as follows:
December 31, December 26,
2000 1999
------------ ------------
Discount rate 6.25% 6.00%
Expected rate of return on plan assets 6.25% 6.50%
Expected rate of increase in future
compensation levels 3.25% 3.50%
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Note 13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company's major market risk exposures are movements in foreign currency
exchange and interest rates. The Company's policy generally is to hedge major
foreign currency exposures through foreign exchange forward contracts. These
contracts are entered into with major financial institutions thereby minimizing
the risk of credit loss. The Company's policy is to manage interest rates
through the use of interest rate caps. The Company does not hold or issue
derivative financial instruments for speculative or trading purposes. The
Company is subject to other foreign exchange market risk exposure as a result of
non-financial instrument anticipated foreign currency cash flows which are
difficult to reasonably predict, and have therefore not been included in the
table below. All listed items described are non-trading and are stated in US
dollars.
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 US dollar from its foreign
sales subsidiaries. The term of the currency exchange forward contracts is
rarely more than one year. The Company also entered into a range forward option
in Euros which provides the Company with limited protection against exchange
rate volatility for converting Euros into US dollars. Unrealized and realized
gains and losses on these contracts and options are included in other
(loss)/income, net. Notional amounts of currency exchange forward contracts
outstanding at December 31, 2000 were $49,760,000, with various maturity dates
ranging through the end of 2001. At December 26, 1999, the notional
amounts of currency exchange forward contracts outstanding were $44,787,000.
Counterparties to these contracts are major financial institutions, and credit
loss from counterparty non-performance is not anticipated.
Aggregate foreign currency transaction losses in 2000, 1999, and 1998, were
$2,524,000, $1,670,000, and $981,000, respectively, and are included in other
(loss)/income, net in the Consolidated Statements of Operations.
Additionally, there were no deferrals of gains or losses on currency exchange
forward contracts or options at December 31, 2000.
Interest Rate Risk Management
In connection with the Company's floating rate debt under the senior
collateralized multi-currency credit facility, the Company purchased interest
rate caps to reduce the risk of significant Euro interest rate increases. The
fair value and premiums paid for the instruments were not material.
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Fair Values
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2000 and December 26, 1999:
2000 1999
------------------- ------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(Thousands)
Long-term debt (including
current maturities) (1) $(259,840) $(259,034) $(305,840) $(304,903)
Subordinated debentures (1) (120,000) (87,888) (120,000) ( 92,664)
Currency exchange
forward contracts
and options (2) 757 757 2,457 2,457
(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.
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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 2006.
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 14. PROVISION FOR RESTRUCTURING AND ASSET IMPAIRMENTS
The 1999 restructuring accrual established in connection with the Company's
acquisition of Meto was updated in 2000 for additional severance costs for
approximately 90 employees ($1.8 million) and lease termination costs for one
office/warehouse facility ($0.4 million). In addition, the Company recorded an
asset impairment charge of $7.2 million relating to the realignment of its
manufacturing processes. This impairment charge is comprised of a $3.7 million
charge relating to the consolidation of the Company's manufacturing facilities
in Japan and a $3.5 million charge related to equipment abandoned in the fourth
quarter 2000 in connection with rationalizing manufacturing operations in the
Caribbean. The charge recorded in connection with consolidating manufacturing
facilities in Japan was determined on a "held for use" basis until manufacturing
operations cease (estimated to occur in the second half of 2001) at which time
the facility will be held for disposal.
An additional $5.0 million of severance costs for approximately 72 employees and
$0.4 million of additional lease termination costs relating to the acquired
company were recorded as an increase to goodwill in connection with the
completion of the Meto restructuring plan.
A restructuring accrual was established in 1999 for costs related to the
acquisition of Meto AG. A portion of these costs resulted in a before-tax charge
of $10.9 million largely for severance costs for approximately 135 employees
($3.1 million), lease termination costs for 15 office/warehouse facilities ($3.3
million) and asset impairments ($4.5 million). The charge for asset impairments
relates to leasehold improvements on abandoned facilities and related computer
hardware and software as well as previously acquired goodwill.
An additional $20.7 million associated with severance (for approximately 289
employees) and lease termination costs of the acquired company was recorded as
an increase to goodwill. Most of the 424 employees affected were in the support
services, including selling, technical and administrative staff functions.
As of December 31, 2000, 453 of the 586 planned employee terminations had been
completed and substantially all of the office/warehouses included in the
restructuring plan had been vacated.
Termination benefits are being paid out over a period of 1 to 24 months after
termination.
Restructuring accrual activity was as follows:
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Accrual Accrual
at Begin- Charged Increase at
ning of to in Cash End of
Year Earnings Goodwill Payments Year
-------- -------- -------- -------- -------
(Thousands)
1999
Severance and
other employee
related charges $ - $ 3,097 $17,642 $ - $20,739
Lease termination
costs - 3,248 3,060 - 6,308
------- ------- ------- -------- -------
$ - $ 6,345 $20,702 $ - $27,047
======= ======= ======= ======== =======
2000
Severance and
other employee
related charges $20,739 $ 1,766 $ 5,014 $(15,763) $11,756
Lease termination
costs 6,308 439 366 (1,162) 5,951
------- ------- ------- -------- -------
$27,047 $ 2,205(1) $ 5,380 $(16,925) $17,707
======= ======= ======= ======== =======
(1) $0.9 million is included in cost of revenues and $1.3 million in other
operating expenses.
Note 15. OTHER OPERATING EXPENSES
Other operating expenses is comprised of the following amounts:
2000 1999 1998
---- ---- ----
(Thousands)
Restructuring costs $ 1,263 $ 6,345 $ (600)
Integration costs 9,288 904 -
Asset impairments - 4,547 -
------- ------- ------
$10,551 $11,796 $ (600)
------- ------- ------
Integration costs consist primarily of consulting, legal and marketing costs
incurred in connection with integrating Meto/Checkpoint operations. Integration
costs were charged to expense as incurred. Restructuring and asset impairment
costs were discussed in Note 14.
In addition to the charges indicated above, cost of revenues in 2000 includes
charges for restructuring, integration and asset impairments of $0.9 million,
$0.9 million and $7.2 million, respectively. These charges were recorded in
connection with the consolidation and rationalization of the Company's
manufacturing operations.
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Note 16. COMMITMENTS AND CONTINGENCIES
The Company leases its offices, distribution centers and certain production
facilities. Rental expense for all operating leases approximated $13,748,000,
$5,619,000, and $7,613,000, in 2000, 1999, and 1998, respectively. Future
minimum payments for operating leases having non-cancelable terms in excess of
one year at December 31, 2000 are: $11,594,600 (2001); $9,059,600 (2002);
$6,718,000 (2003); $5,488,000 (2004); $4,293,400 (2005) and $15,167,600
thereafter.
The Company is renting its German laminating facility to Raflatac Produktions
GmbH. In connection with the rental agreement, the Company has agreed to
purchase a certain volume of paper, which equates to approximately 50% of its
current annual worldwide paper consumption. The supply agreement, which remains
in place until terminated by either party, provides for a termination fee of
$1,926,754 prior to 2009 and $722,533 after 2009 to be paid by the terminating
party.
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 RF-EAS 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.
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 December 10, 1999, the Company consummated its acquisition of 98.57% of the
outstanding shares of Meto AG pursuant to a cash tender offer. In fiscal year
2000, the Company increased its ownership to 100%. The aggregate purchase price
for the shares acquired was $263.9 million, plus transaction costs of $5.3
million. In connection with the acquisition, the Company entered into a new $425
million credit facility provided by several lenders. The credit facility
includes a $275 million term note and a $150 million revolving line of credit.
The terms of the new credit facility required the Company to retire all existing
senior debt. In connection with the senior debt restructuring, the Company
incurred $7.3 million in placement fees which have been capitalized and are
being amortized over the term of the new facility. In addition, the Company
incurred a $852,000 pre-tax extraordinary charge consisting of $745,000
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prepayment penalty and the write-off of $107,000 of unamortized deferred
financing costs related to debt extinguishment.
In 2000, the Company finalized its allocation of the purchase price associated
with the acquisition of Meto AG which resulted in a step up of fixed assets of
$19,861,000. The financial statements reflect the allocations of the purchase
price based on fair values at the date of acquisition. This allocation has
resulted in acquired goodwill of $202.0 million which is being amortized on a
straight-line basis over 30 years and other intangibles of $66.7 million which
are being amortized on a straight-line basis over periods of 5 to 30 years.
The following unaudited pro forma information presents the results of operations
of the Company as if the acquisition of Meto had taken place at the beginning of
each period mentioned.
1999 1998
-------- --------
(Thousands, except per share data)
Net revenues (1) $739,043 $747,736
Net (loss)/earnings $ (7,612) $ 7,230
Diluted (loss)/earnings per share $ (.25) $ .22
(1) Amounts have been restated to conform with Emerging Issues Task Force (EITF)
00-10, Accounting for Shipping and Handling Fees and Costs.
The 1999 pro forma results of operations are for comparative purposes only and
reflect increased amortization, interest expense, and restructuring costs
resulting from the acquisitions described above, but do not include any
potential cost savings from combining the acquired businesses with the Company's
operations.
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.
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Note 19. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
The Company adopted provisions of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Company operates in three business
segments consisting of:
(i) Security - includes electronic article surveillance (EAS) systems,
access control systems and closed circuit television (CCTV) systems,
and fire and intrusion alarm systems.
(ii) Labeling Services - includes barcoding (BCS) systems, service bureau
and radio frequency identification (RFID) systems.
(iii) Retail Merchandising - includes hand-held labeling (HLS) systems and
retail merchandising (RMS) systems.
With the recent acquisition of Meto AG, the Company has revised its segments
to reflect the combined company. As a result, the Company has reclassified the
prior period segment information to conform with the current period
presentation. The information set forth below is that viewed by the chief
operating decision maker:
(A) Business Segments
2000 1999 1998
-------- -------- --------
(Thousands)
Business segment net revenue:
Security $419,696 $362,097 $364,572
Labeling Services 138,396 5,310 -
Retail Merchandising 132,719 5,655 -
-------- -------- --------
Total $690,811 $373,062(2) $364,572(2)
-------- -------- --------
Business segment gross profit:
Security $165,363(1) $145,443 $149,144
Labeling Services 40,377 (359) (2,047)
Retail Merchandising 67,108 1,689 -
-------- -------- --------
Total $272,848 $146,773 $147,097
-------- -------- --------
Business segment total assets:
Security $705,725 $792,835 $506,536
Labeling Services 82,335 79,227 1,127
Retail Merchandising 83,945 72,811 -
-------- -------- --------
Total $872,005 $944,873 $507,663
-------- -------- --------
(1) Includes $9.0 million in pre-tax restructuring, integration and impairment
charges and a pre-tax inventory write-off of $3.7 million. See note 15.
(2) Amounts have been restated to conform with Emerging Issues Task Force (EITF)
00-10, Accounting for Shipping and Handling Fees and Costs.
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(B) Geographic Information
Operating results are prepared on a "customer basis", meaning that net revenues
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 revenues. Gross
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 table shows net revenues, gross profit and other financial
information by geographic area for the years 2000, 1999, and 1998.
Inter-
United States national Asia
and Puerto Rico Europe Americas Pacific Total
--------------- ------- -------- ------- -------
(Thousands)
2000
Net revenues from
unaffiliated customers $230,451 $353,805 $49,465 $57,090 $690,811
Gross profit $102,985(1) $134,650(2) $16,347(3) $18,866(4) $272,848
Long-lived assets $ 87,835 $334,159 $11,854 $34,624 $468,472
1999
Net revenues from
unaffiliated customers(5)$179,057 $125,126 $39,931 $28,948 $373,062
Gross profit $ 59,214 $ 58,544 $20,041 $ 8,974 $146,773
Long-lived assets $ 88,034 $342,701 $12,046 $42,811 $485,592
1998
Net revenues from
unaffiliated customers(5)$197,294 $102,112 $43,462 $21,704 $364,572
Gross profit $ 68,549 $ 47,829 $22,777 $ 7,942 $147,097
Long-lived assets $ 80,422 $ 67,316 $13,004 $32,513 $193,255
(1) Includes $4.1 million in pre-tax restructuring and impairment charges. See
note 15.
(2) Includes a $0.9 million pre-tax integration charge and a $2.6 million pre-
tax inventory write-off. See note 15.
(3) Includes a $1.1 million pre-tax inventory write-off. See note 15.
(4) Includes a $4.0 million pre-tax restructuring charge and impairment charges.
See note 15.
(5) 1999 and 1998 amounts have been restated to conform with EITF 00-10,
Accounting for Shipping and Handling Fees and Costs.
The Company's export revenues to foreign distributors approximated $9,803,000,
$8,899,000, and $10,897,000, in 2000, 1999, and 1998, respectively.
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Note 20. MINORITY INTEREST
On July 1, 1997, Checkpoint Systems Japan Co. Ltd. (Checkpoint Japan), a
wholly-owned subsidiary of the Company 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 Sheets include 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 Sheets and Consolidated Statements of Operations,
respectively.
Note 21. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER STANDARDS
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes a new model for the
accounting and reporting of derivative and hedging transactions. The statement
amends a number of existing standards and, as amended by SFAS No. 138, became
effective for fiscal years beginning after June 15, 2000. As required, the
Company adopted this standard as of January 1, 2001.
This standard requires that all derivative instruments be reported on the
balance sheet at fair value. For instruments designated as fair value hedges,
changes in the fair value of the instrument will largely be offset on the income
statement by changes in the fair value of the hedge item. For instruments
designated as cash flow hedges, the effective portion of the hedge is reported
in other comprehensive income until it is assigned to earnings in the same
period in which the hedged item has an impact on earnings. For instruments
designated as a hedge of net investment in foreign operating units not using the
US dollar as its functional currency, changes in the fair value of the
instrument will be offset in other comprehensive income to the extent that they
are effective as economic hedges. Changes in the fair value of derivative
instruments, including embedded derivatives, that are not designated as a hedge
will be recorded each period in current earnings along with any ineffective
portion of hedges.
The Company has concluded that the adoption of SFAS No. 133 will not materially
change management's risk policies and practices nor will compliance with the
standard materially impact the reported results from operations.
The Emerging Issues Task Force (EITF) of the FASB reached consensus in 2000 on
EITF 00-10, Accounting for Shipping and Handling Fees and Costs. This new
accounting guidance is effective for the fourth quarter of 2000 and relates
primarily to the classification of certain costs in the Company's Consolidated
Statements of Operations with restatements of prior reporting required. The
Company has reclassified a total of $3.9 million in shipping and handling fees
to net revenues from cost of revenues in 2000 and has reclassified all prior
reported periods as a result of adopting this standard.
The EITF also reached consensus in 2000 on Issue 00-14, Accounting for Certain
Sales Incentives. The standard addresses the income statement classification of
certain selling costs. The standard is effective beginning in 2001 with prior
restatements required. The Company does not expect the standard to result in a
material reclassification in any period.
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Note 22. SUBSEQUENT EVENTS
On January 9, 2001, the Company announced the acquisition of A.W. Printing,
Inc., a leading provider of high quality tags, labels and packaging products for
the apparel industry. The acquisition was a cash transaction valued at
approximately $13 million.
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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 3, 2001, 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.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
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 31, 2000 and
December 26, 1999 ............................................... 35
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 2000................. 37
Consolidated Statements of Shareholders' Equity for each
of the years in the three-year period ended
December 31, 2000................................................ 39
Consolidated Statements of Comprehensive (Loss)/Income for each
of the years in the three-year period ended December 31, 2000.... 41
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2000................. 42
Notes to Consolidated Financial Statements......................... . 44-73
2. Financial Statement Schedule
The following consolidated schedule is required to be filed
by Part IV, Item, 14(a)2:
Schedule II - Valuation and Qualifying Accounts.................... 78
All other schedules are omitted because they are not applicable, not
required or because the required information is included in the financial
statements or notes thereto.
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 Registrant's 1992 Form 10-K, filed with the
SEC on March 25, 1993.
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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 Registrant's 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 with the
SEC on March 22, 1996, is 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 therein, 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 is incorporated
herein by reference.
Exhibit 10.10 Credit Agreement dated October 27, 1999, by and among
Registrant, First Union National Bank, as Administrative
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Agent, and the lenders named therein, is incorporated herein
by reference to Item 7(c), Exhibit 10 of the Registrant's
Form 8-K filed on December 27, 1999.
Exhibit 10.11 Amendment to Employment Agreement with Kevin P. Dowd is
incorporated herein by reference.
Exhibit 21 Subsidiaries of the Registrant.
Exhibit 23 Consent of Independent Accountants.
Exhibit 24 Power of Attorney, contained in signature page.
(b) Reports on Form 8-K
The Registrant filed has not filed any reports on Form 8-K during the fiscal
year ended December 31, 2000.
75
<PAGE>
CHECKPOINT SYSTEMS, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Addition
Balance at through Charged to Balance at
Beginning Acqui- Costs and Deductions End of
Year Classification of Year sition Expenses Year
- ---- -------------- -------- -------- ---------- ---------- ---------
2000 Allowance for
doubtful accounts $10,479 - $7,506 $5,558 $12,427
------- ------ ------ ------ -------
1999 Allowance for
doubtful accounts $ 5,556 $4,539 $2,180 $1,796 $10,479
------ ------ ------ ------ -------
1998 Allowance for
doubtful accounts $ 5,703 - $1,672 $1,819 $ 5,556
------- ------ ------ ------ -------
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
EXHIBIT 10.1 . . . . 2000 Bonus Plan
EXHIBIT 21 . . . . . Subsidiaries of Registrant
EXHIBIT 23 . . . . . Consent of Independent Accountants
EXHIBIT 24 . . . . . Power of Attorney, Contained in Signature
76
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in Thorofare, New
Jersey, on March 29, 2001.
CHECKPOINT SYSTEMS, INC.
/s/Michael E. Smith
- -------------------
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Michael E. Smith and W. Craig Burns 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/Michael E. Smith President and Chief March 29, 2001
- ------------------------ Executive Officer
/s/W. Craig Burns Executive Vice President, March 29, 2001
- ------------------------ Chief Financial Officer,
and Treasurer
/s/Arthur W. Todd Vice President, Corporate March 29, 2001
- ------------------------ Controller and Chief
Accounting Officer
/s/Roger D. Blackwell Director March 29, 2001
- ------------------------
/s/Richard J. Censits Director March 29, 2001
- ------------------------
/s/David W. Clark, Jr. Director March 29, 2001
- ------------------------
/s/R. Keith Elliott Director March 29, 2001
- ------------------------
/s/Alan R. Hirsig Director March 29, 2001
- ------------------------
/s/William P. Lyons, Jr. Director March 29, 2001
- ------------------------
77
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>EXHIBIT 10.1
<TEXT>
<PAGE>
EXHIBIT 10.1
CHECKPOINT SYSTEMS, INC.
2000 BONUS PLAN
For 2000 the Board of Directors approved the 2000 Bonus Plan. The 2000 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, Reilly, Smith and Burns, whose
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 2000 EPS attains a
specified level. The specified minimum target for EPS was not attained for the
fiscal year 2000 and therefore no bonuses were paid. No discretionary bonuses
were paid for the fiscal year 2000.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>EXHIBIT 21
<TEXT>
<PAGE>
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 - 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.
Meto Australia Pty. Ltd. - Australia
Meto GmbH - Austria
Kimball Graphics Ltd. - Bangladesh
Meto N.V. - Belgium
Meto Canada Inc. - Canada
Meto Danmark A/S - Denmark
Unistik (Fiji) Ltd. - Fiji
Meto Finland OY - Finland
Meto Holding SA - France
Meto SA - France
Meto AG - Germany
Meto GmbH - Germany
Meto International GmbH - Germany
Go East Ltd. - Gibraltar
Meto Ltd. - Hong Kong
Meto Hungary KFT - Hungary
Meto S.p.A. - Italy
Meto (Malaysia) Sdn. Bhd. - Malaysia
Meto Sale & Services Sdn. Bhd. - Malaysia
Kimball Systems B.V. - Netherlands
Meto B.V. - Netherlands
Quik Stik International Ltd. - New Zealand
Meto Norge AS - Norway
Meto Polska Sp. z.o.o. - Poland
Esselte Meto (Portugal) Equipa-mentos e Sistemas Para o Comercio e Industria,
LDA - Portugal
Meto Identification Systems S.A. - Spain
Jinnestal Tryckeri AB - Sweden
Meto Sverige AB - Sweden
OPV Systems i Kalmar AB - Sweden
Meto - Switzerland
Meto UK Ltd. - UK
Thamesdown Labels Ltd. - UK
Meto, Inc. - USA
A.W. Printing, Inc. - USA
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>EXHIBIT 23
<TEXT>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 [Registration No. 333-70213 and No. 33-49191] and Forms
S-3 [Registration No. 333-01085, No. 333-35539 and No. 33-16721] of Checkpoint
Systems, Inc. and its subsidiaries of our report dated March 15, 2001 relating
to the financial statements and financial statement schedule, which appears in
this Form 10-K.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 29, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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