FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11257
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Checkpoint Systems, Inc.
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 22-1895850
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Wolf Drive, P.O. Box 188, Thorofare, New Jersey 08086
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(Address of principal executive offices) (Zip Code)
(856) 848-1800
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(Registrant's telephone number, including area code)
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
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 22, 2002, there were 32,513,316 shares of the Common Stock
outstanding.
CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Shareholders' Equity 5
Consolidated Statements of Comprehensive
Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20-26
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 27
Item 4. Controls and Procedures 27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 28-29
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 30
CERTIFICATION 31-32
INDEX TO EXHIBITS 33
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
Sept. 29, Dec. 30,
2002 2001
-------- --------
(Unaudited)
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 39,626 $ 43,698
Accounts receivable, net of allowances
of $12,129 and $12,182 137,390 145,768
Inventories 87,535 91,510
Other current assets 20,597 23,309
Deferred income taxes 10,704 9,288
-------- --------
Total current assets 295,852 313,573
REVENUE EQUIPMENT ON OPERATING LEASE, net 5,611 9,059
PROPERTY, PLANT, AND EQUIPMENT, net 98,210 102,613
GOODWILL 255,571 231,138
OTHER INTANGIBLES, net 50,608 58,467
OTHER ASSETS 38,507 37,803
-------- --------
TOTAL ASSETS $744,359 $752,653
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and current
portion of long-term debt $ 27,262 $ 31,423
Accounts payable 39,403 43,008
Accrued compensation and
related taxes 24,148 20,199
Income taxes 11,759 12,934
Unearned revenues 30,868 22,964
Restructuring reserve 4,805 14,179
Other current liabilities 40,291 42,251
-------- --------
Total current liabilities 178,536 186,958
LONG-TERM DEBT, LESS CURRENT MATURITIES 91,941 142,088
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
ACCRUED PENSIONS 50,548 44,851
OTHER LONG-TERM LIABILITIES 10,827 9,230
DEFERRED INCOME TAXES 10,706 8,508
MINORITY INTEREST 812 755
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized
500,000 shares, none issued
Common Stock, par value $.10 per share, 3,887 3,818
authorized 100,000,000 shares, issued
38,869,506 and 38,183,861
Additional capital 261,905 252,342
Retained earnings 131,548 115,093
Common stock in treasury, at cost,
6,359,200 shares (64,410) (64,410)
Accumulated other comprehensive loss (51,941) (66,580)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 280,989 240,263
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $744,359 $752,653
======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
---------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
-------- -------- -------- --------
(Thousands, except per share data)
Net revenues $158,800 $155,322 $463,178 $481,232
Cost of revenues 93,187 92,560 272,051 285,000
-------- -------- -------- --------
Gross profit 65,613 62,762 191,127 196,232
Selling, general, and
administrative expenses 53,337 50,074 157,136 155,560
Other operating expenses (904) - (904) 1,607
-------- -------- -------- --------
Operating income 13,180 12,688 34,895 39,065
Interest income 444 589 1,313 2,099
Interest expense 3,836 5,261 11,463 17,090
Other loss, net (366) (767) (466) (787)
-------- -------- -------- --------
Earnings before income taxes 9,422 7,249 24,279 23,287
Income taxes 3,015 2,827 7,769 9,082
Minority interest 33 61 55 113
-------- -------- -------- --------
Net earnings $ 6,374 $ 4,361 $ 16,455 $ 14,092
======== ======== ======== ========
Net earnings per share:
Basic $ .20 $ .14 $ .51 $ .45
======== ======== ======== ========
Diluted $ .19 $ .14 $ .49 $ .44
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Nine Months (39 weeks) Ended September 29, 2002
-----------------------------------------------------
Accumu-
lated
Other
Addit- Compre-
Common ional Retained hensive Treasury
Stock Capital Earnings Loss Stock Total
------ ------- -------- ------- -------- -----
(Thousands)
Balance,
December 30, 2001 $3,818 $252,342 $115,093 $(66,580) $(64,410) $240,263
(Common shares:
issued 38,183,861
reacquired 6,359,200)
Net earnings 16,455 16,455
Exercise of stock
options 69 9,563 9,632
(685,645 shares)
Net loss on interest
rate swap, net of tax (684) (684)
Foreign currency
translation adjustment 15,323 15,323
------ -------- -------- --------- --------- --------
Balance,
September 29, 2002 $3,887 $261,905 $131,548 $(51,941) $(64,410) $280,989
====== ======== ======== ========= ========= ========
(Common shares:
issued 38,869,506
reacquired 6,359,200)
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
--------------------- ---------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
-------- -------- -------- --------
(Thousands)
Net earnings $ 6,374 $ 4,361 $ 16,455 $ 14,092
Net loss on interest rate
swap, net of tax (473) - (684) -
Foreign currency
translation adjustment (5,171) 7,947 15,323 (12,092)
-------- -------- -------- --------
Comprehensive income $ 730 $ 12,308 $ 31,094 $ 2,000
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months (39 weeks) Ended
----------------------------
Sept. 29, Sept. 30,
2002 2001
-------- --------
(Thousands)
Cash flows from operating activities:
Net earnings $ 16,455 $ 14,092
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Revenue equipment under operating lease (958) 989
Long-term customer contracts 1,792 (3,599)
Depreciation and amortization 23,636 33,017
(Increase)/decrease in current assets,
net of the effects of acquired companies:
Accounts receivable 15,036 15,912
Inventories 8,572 11,934
Other current assets (134) 6,749
Increase/(decrease) in current liabilities,
net of the effects of acquired companies:
Accounts payable (5,135) (8,512)
Income taxes (2,555) (5,304)
Unearned revenues 6,441 3,424
Restructuring reserve (9,661) (8,908)
Other current and accrued liabilities 5,344 1,592
-------- --------
Net cash provided by operating activities 58,833 61,386
-------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment (4,559) (7,551)
Acquisitions, net of cash acquired (681) (13,486)
Other investing activities 1,029 1,343
-------- --------
Net cash used in investing activities (4,211) (19,694)
-------- --------
Cash flows from financing activities:
Proceeds from stock issuances 7,019 11,674
Proceeds of debt 754 6,686
Payment of debt (68,177) (39,926)
-------- --------
Net cash used in financing activities (60,404) (21,566)
-------- --------
Effect of foreign currency rate fluctuations
on cash and cash equivalents 1,710 (562)
-------- --------
Net (decrease)/increase in cash and cash
equivalents (4,072) 19,564
Cash and cash equivalents:
Beginning of period 43,698 28,121
-------- --------
End of period $ 39,626 $ 47,685
======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its majority-owned subsidiaries ("Company"). All
inter-company transactions are eliminated in consolidation. The consolidated
financial statements and related notes are unaudited and do not contain all
disclosures required by generally accepted accounting principles. Refer to the
Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2001
for the most recent disclosure of the Company's accounting policies.
The consolidated financial statements include adjustments, consisting only of
normal recurring accruals, necessary to present fairly the Company's financial
position at September 29, 2002 and December 30, 2001 and its results of
operations and changes in cash flows for the thirteen and thirty-nine week
periods ended September 29, 2002 and September 30, 2001.
Certain reclassifications have been made to the 2001 financial statements and
related footnotes to conform to the 2002 presentation.
2. INVENTORIES
September 29, December 30,
2002 2001
------------ -----------
(Thousands)
Raw materials $ 8,972 $ 10,631
Work in process 3,779 3,619
Finished goods 74,784 77,260
-------- --------
$ 87,535 $ 91,510
======== ========
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes material, labor and applicable overhead.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. LONG-TERM DEBT
Long-term debt at September 29, 2002 and December 30, 2001 consisted of the
following:
September 29, December 30,
2002 2001
------------ -----------
(Thousands)
Six and one-half year EUR 244
million variable interest rate
collateralized term loan $ 92,796 $132,037
Six and one-half year $25 million
variable interest rate
collateralized loan 7,882 9,098
Six and one-half year $100 million
multi-currency variable interest
rate collateralized revolving
credit facility 2,448 16,982
Twenty-two and one-half year
EUR 9.5 million capital lease 8,697 8,050
Eight and one-half year
EUR 2.7 million capital lease 1,715 1,764
Other capital leases with maturities
through 2006 1,503 1,996
-------- --------
Total 115,041 169,927
Less current portion (23,100) (27,839)
-------- --------
Total long-term portion (excluding
convertible subordinated debentures) 91,941 142,088
Convertible subordinated debentures 120,000 120,000
-------- --------
Total long-term portion $211,941 $262,088
======== ========
During the third quarter of 2002, unscheduled repayments of EUR 7.0 million
(approximately $6.9 million) were made on the EUR 244 million collateralized
term loan and the amount outstanding on the $100 million multi-currency
revolving credit facility was reduced by JPY 1.9 billion (approximately $15.6
million). At September 29, 2002, EUR 95.3 million (approximately $92.8 million)
and JPY 300 million (approximately $2.4 million) were outstanding under the EUR
244 million loan and $100 million multi-currency revolving credit facility,
respectively.
On March 11, 2002, the Company entered into an interest rate swap to reduce the
risk of significant Euro interest rate increases in connection with the floating
rate debt under the senior collaterized multi-currency credit facility. The cash
flow hedging instrument initially swapped EUR 50 million of variable rate debt
for fixed rate debt. The interest rate swap is marked to market and the changes
are recorded in other comprehensive income.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated effective
annual tax rate. 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 (as amended under the Small Business Job Protection
Act of 1996) and substantially exempt from Puerto Rico income taxes. Under
current law, this exemption from Federal income tax will be subject to certain
limits during the years 2002 through 2005, and will be eliminated thereafter.
The Company does not expect its exemption to be negatively impacted by the
limits in effect during the years 2002 through 2005. Under Statement of
Financial Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes",
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.
5. PER SHARE DATA
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 potential
dilutive common stock:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
--------------------- ---------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
-------- -------- -------- --------
(Thousands, except per share amounts)
BASIC EARNINGS PER SHARE:
Net earnings $ 6,374 $ 4,361 $ 16,455 $ 14,092
======== ======== ======== ========
Weighted average common
stock outstanding 32,403 31,654 32,193 31,064
======== ======== ======== ========
Basic earnings
per share $ .20 $ .14 $ .51 $ .45
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Net earnings $ 6,374 $ 4,361 $ 16,455 $ 14,092
Add back:
Interest on convertible debt,
net of tax 961 961 2,882 2,882
-------- -------- -------- --------
Net earnings available for
common stock and diluted
securities $ 7,335 $ 5,322 $ 19,337 $ 16,974
======== ======== ======== ========
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Weighted average common
stock outstanding 32,403 31,654 32,193 31,064
Additional common stock:
Resulting from stock options 285 666 579 611
Resulting from convertible
debentures 6,528 6,528 6,528 6,528
-------- -------- -------- --------
Weighted average common
stock and dilutive
stock outstanding 39,216 38,848 39,300 38,203
======== ======== ======== ========
Diluted earnings per share $ .19 $ .14 $ .49 $ .44
======== ======== ======== ========
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes for the thirteen and thirty-nine
week periods ended September 29, 2002 and September 30, 2001 were as follows:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
--------------------- ---------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
-------- -------- -------- --------
(Thousands)
Interest $ 2,248 $ 3,758 $ 9,742 $ 15,144
Income taxes $ 4,234 $ 199 $ 7,493 $ 12,732
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. PROVISION FOR RESTRUCTURING
Accrual Cash Accrual
at Decrease Payments at
Beginning in (and Exchange March 31,
of 2002 Goodwill Rate Changes) 2002
--------- -------- ------------ --------
(Thousands)
Severance and
other employee
related charges $ 8,558 $ - $ (2,537) $ 6,021
Lease termination
costs 5,621 (679) (2,185) 2,757
------- ------- -------- -------
$14,179 $ (679) $ (4,722) $ 8,778
======= ======= ======== =======
Accrual Cash Accrual
at Decrease Payments at
March 31, in (and Exchange June 30,
2002 Goodwill Rate Changes) 2002
-------- -------- ------------ --------
(Thousands)
Severance and
other employee
related charges $ 6,021 $ - $ (1,061) $ 4,960
Lease termination
costs 2,757 - (384) 2,373
------- ------- -------- -------
$ 8,778 $ - $ (1,445) $ 7,333
======= ======= ======== =======
Cash
Payments
Accrual Charge (and Accrual
at Charged Reversed Decrease Exchange at
June 30, to to in Rate Sept. 29,
2002 Earnings Earnings Goodwill Changes) 2002
------- -------- -------- -------- -------- --------
(Thousands)
Severance and
other employee
related charges $ 4,960 $ 704 $ (2,446) $ - $ (679) $ 2,539
Lease termination
costs 2,373 - (3) - (104) 2,266
------- ------- -------- -------- -------- --------
$ 7,333 $ 704 $ (2,449) $ - $ (783) $ 4,805
======= ======= ======== ======== ======== ========
In the third quarter of 2002, the Company recorded in cost of revenues a
restructuring charge of $0.7 million for severance costs related to cost
reductions in hand-held labeling (HLS) and barcode labeling (BCS) manufacturing.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The Company, as a result of changes in management and the renegotiation of
contracts on more favorable terms, reviewed and modified the fourth quarter 2001
restructuring plans in order to reduce the future cash outlay necessary to
execute the restructuring. This resulted in the reversal of $2.4 million of the
restructuring accrual in the third quarter of 2002. Of this amount, $1.5 million
was credited to cost of revenues and $0.9 million to other operating expenses in
the quarter.
At the end of the third quarter 2002, 270 of the 326 planned employee
terminations, related to the 2001 restructuring, had occurred. The restructuring
will be substantially complete by the first half of 2003. All employees included
in the current period charge had left the Company at the end of the third
quarter 2002. Termination benefits are being paid out over a period of 1 to 24
months after termination.
During the first quarter of 2002, the Company was able to negotiate the
termination of a lease for an office/warehouse facility on more favorable terms
than originally estimated. This resulted in a decrease in goodwill related to
the acquisition of Meto AG of $0.7 million.
8. OTHER OPERATING EXPENSES
Other operating expenses is comprised of the following amounts:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
---------------------- ---------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
-------- -------- -------- --------
(Thousands)
Restructuring costs $ - $ - $ - $ 1,607
Restructuring charge
reversal (904) - (904) -
-------- -------- -------- --------
$ (904) $ - $ (904) $ 1,607
======== ======== ======== ========
Restructuring costs and the restructuring charge reversal are discussed in
Note 7.
In addition to the reversal indicated above, cost of revenues for the third
quarter of 2002 includes a $1.5 million restructuring charge reversal offset by
a restructuring charge of $0.7 million for severance costs (see Note 7) and an
asset impairment charge of $0.5 million for leasehold improvements abandoned due
to the vacation of a facility. The charges are related to cost reductions in
hand-held labeling (HLS) and barcode labeling (BCS) manufacturing.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. CONTINGENT LIABILITIES
The Company is involved in certain legal and regulatory actions, all of which
have arisen in the ordinary course of business, except for the matters described
in the following paragraphs. Management does not believe that the ultimate
resolution of such matters will have a material adverse effect on its
consolidated results of operations and/or financial condition, except as
described below.
On May 24, 2002, the jury, in the Civil Action No. 99-CV-577 in the United
States District Court for the Eastern District of Pennsylvania, filed by
plaintiff ID Security Systems Canada Inc. against Checkpoint Systems, Inc. held
in favor of the Company on the plaintiff's claim for Monopolization of Commerce,
but against the Company on claims of Attempted Monopolization and Conspiracy to
Monopolize. In addition, the jury held against the Company on two tort claims
related to tortious interference and unfair competition. Judgement was entered
on the verdict in favor of the plaintiff, after trebling, in the amount of
$79,170,000 plus attorneys' fees and costs to be determined by the Court.
On June 14, 2002, in response to Motions filed by the Company, the Court stayed
the execution of the judgement pending disposition of the Company's Motion for
Post-Trial Relief and ordered the Company to post a bond in the amount of
$26,390,000 and to place into escrow 3,179,600 shares of the Company's treasury
stock. The Company has complied with the Court's order.
On July 1 and August 14, 2002, the Company filed briefs in support of its Motion
for Post-Trial Relief. The Company also filed a Motion to Vacate Judgement on
Antitrust Claims Due to Lack of Subject Matter Jurisdiction on August 14, 2002.
Management is of the opinion that the jury verdict is not consistent with the
law and that judgement should be entered in favor of the Company as a matter of
law or, alternatively, that a new trial should be granted. No liability has been
recorded for this litigation as Management believes that, at this time, the
reasonably possible range of the contingent liability is between zero and $80
million. If, however, the final outcome of this litigation, after all appeals
have been exhausted, results in certain of the plaintiff's claims being upheld,
the potential damages could be material to the Company's consolidated results of
operations and/or financial condition and could cause the Company to be in
default of certain bank covenants. Management anticipates that the final
judgement, if any, would not be paid prior to the end of 2003 and is of the
opinion that the Company will have sufficient financial resources in the form of
cash and borrowing capacity, due to the cash flow generated during the
intervening period, to satisfy any judgement.
The Company continues to wait for the United States District Court for the
Eastern District of Pennsylvania to rule on the various Post-Trial Motions
filed in the ID Security Systems Canada Inc. case. Management anticipates
that, regardless of how the Court rules, the case will be appealed to the
Third Circuit Court of Appeals.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
A certain number of follow-on purported class action suits have arisen in
connection with the jury decision in the ID Security Systems Canada Inc.
litigation. The purported class action complaints generally allege a claim of
monopolization, and are substantially based upon the same allegations as
contained in the ID Security Systems Canada Inc. case (Civil Action No.
99-CV-577) as follows:
On August 1, 2002, a civil action was filed in United States District Court for
the Eastern District of Pennsylvania, designated as Civil Action No. 02-6379(ER)
by plaintiff Diane Furs, Inc. t/a Diane Furs against Checkpoint Systems, Inc.
and served on August 21, 2002. On August 21, 2002, a Notice of Substitution of
Plaintiff and Filing of Amended Complaint was filed by the plaintiff, and the
named plaintiff was changed to Medi-Care Pharmacy, Inc.
On August 2, 2002, a civil action was filed in the United States District Court,
District of New Jersey (Camden) designated as Docket No. 02-CV-3730(JEI) by
plaintiff Club Sports International, Inc., d/b/a Soccer CSI against Checkpoint
and served on August 26, 2002.
On October 2, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-4777(JBS)
by plaintiff Baby Mika, Inc. against Checkpoint and served on October 7, 2002.
On October 23, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5001 (JEI)
by plaintiff Washington Square Pharmacy, Inc. against Checkpoint and served on
November 1, 2002.
On October 18, 2002, The United States District, District of New Jersey (Camden)
entered an Order staying the proceedings in the Club Sports International, Inc.
and Baby Mika, Inc. cases referred to above. In accordance with the Order, the
Stay will also apply to the Washington Square Pharmacy, Inc. case referred to
above. In addition, the Medi-Care Pharmacy, Inc. case, referred to above, will
be voluntarily dismissed, and it is expected to be re-filed in New Jersey and be
included in the Stay Order. The Stay is expected to remain in place until such
time as the ID Security Systems case, referred to above, is either terminated or
any appeals have been exhausted in the Third Circuit Court of Appeals. No
liability has been recorded for any of the purported class action suits as
Management believes that, at this time, the lower end of the reasonably possible
range of the contingent liability is zero.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
10. BUSINESS SEGMENTS
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
------------------- -------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
-------- -------- -------- --------
(Thousands)
Business segment net revenue:
Security $102,805 $ 93,535 $281,089 $285,116
Labeling Services 33,152 31,915 106,850 103,855
Retail Merchandising 22,843 29,872 75,239 92,261
-------- -------- -------- --------
Total $158,800 $155,322 $463,178 $481,232
======== ======== ======== ========
Business segment gross profit:
Security $ 45,174 $ 37,247 $122,993 $114,992
Labeling Services 10,147 9,426 32,685 30,932
Retail Merchandising 10,292 16,089 35,449 50,308
-------- -------- -------- --------
Total $ 65,613 $ 62,762 $191,127 $196,232
======== ======== ======== ========
11. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) approved the
issuance of Statements of Financial Accounting Standards No. 141 (SFAS 141),
"Business Combinations", and No. 142 (SFAS 142), "Goodwill and Other Intangible
Assets".
SFAS 141 supercedes Accounting Principles Board Opinion No. 16 (APB 16),
"Business Combinations". The most significant changes made by SFAS 141 are:
(1) requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) establishing specific criteria
for the recognition of intangible assets separately from goodwill, and (3)
requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized).
SFAS 142 supercedes APB 17, "Intangible Assets". SFAS 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their
acquisition (i.e. the post-acquisition accounting). The most significant changes
made by SFAS 142 are: (1) goodwill and indefinite lived intangible assets will
no longer be amortized, (2) goodwill will be tested for impairment at least
annually at the reporting unit level, (3) intangible assets deemed to have an
indefinite life will be tested for impairment at least annually, and (4) the
amortization period of intangible assets with finite lives will no longer be
limited to forty years. The FASB has allowed companies a 6-month period from the
date of adoption to identify potential goodwill impairment, and then, if there
is an impairment, an additional 6-month period to calculate the impairment loss.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
These statements are effective for the Company for fiscal 2002. Consequently,
effective December 31, 2001 goodwill is no longer being amortized. The total
amount of goodwill amortization recorded by the Company in fiscal 2001 was $11.1
million.
As of September 29, 2002, the Company had intangible assets with a net book
value of $50.6 million that have a gross carrying value of $80.2 million and
accumulated amortization of $29.6 million.
The following table reflects the components of intangible assets as of September
29, 2002:
Gross
Amortizable Carrying Accumulated
Life (years) Amount Amortization
----------- -------- ------------
(Thousands)
Customer lists 20 $25,311 $ 9,851
Trade name 30 23,537 2,158
Patents, license agreements 5 to 14 30,443 17,253
Other 3 to 6 951 372
------- -------
$80,242 $29,634
======= =======
The Company has determined that the life previously assigned to these
finite-lived assets is still appropriate, and has recorded $3.9 million and $4.2
million of amortization expense in the first nine months of fiscal 2002 and
2001, respectively.
Estimated amortization expense for each of the five succeeding years is
anticipated to be:
(Thousands)
2002 $5,026
2003 $3,819
2004 $3,643
2005 $3,147
2006 $2,659
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The changes in the carrying amount of goodwill for the nine months ended
September 29, 2002, are as follows:
Labeling Retail
Security Services Merchandising Total
-------- -------- ------------- -------
(Thousands)
Balance as of
beginning of
fiscal year 2002
(December 31, 2001) $81,833 $65,650 $ 92,158 $239,641
Goodwill acquired
during year 667 - - 667
Impairment losses - - - -
Exchange rate changes
and other 2,371 3,771 9,121 15,263
------- ------- -------- --------
Balance as of
September 29, 2002 $84,871 $69,421 $101,279 $255,571
======= ======= ======== ========
In accordance with SFAS 141, the Company has reclassified an intangible asset,
"workforce in place", with a net book value of $8.5 million from intangibles to
goodwill effective December 31, 2001.
Pursuant to SFAS 142, the Company performed a transitional assessment of
goodwill by comparing each individual reporting unit's carrying amount of net
assets, including goodwill, to their fair value. The assessment has indicated
that there is a potential goodwill impairment in each business segment. The
Company is in the process of completing the second step of the transitional
goodwill impairment test. Any resulting impairment charge will be recognized as
a change in accounting principle in fiscal 2002.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Net income and earnings per share for the thirteen and thirty-nine week periods
ended September 29, 2002, and September 30, 2001, excluding amortization for
goodwill and "workforce in place", is presented below along with the adjusted
net income and earnings per share as required under the transition provisions of
SFAS 142:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- --------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
-------- -------- -------- --------
(Thousands, except per share amounts)
Net income $ 6,374 $ 4,361 $16,455 $14,092
Add back:
Goodwill/workforce in place
amortization, net of tax - 2,660 - 7,992
------- ------- ------- -------
Adjusted basic net income $ 6,374 $ 7,021 $16,455 $22,084
======= ======= ======= =======
Basic earnings per share:
Net income $ .20 $ .14 $ .51 $ .45
Goodwill/workforce in place
amortization, net of tax - .08 - .26
------- ------- ------- -------
Adjusted basic net income $ .20 $ .22 $ .51 $ .71
======= ======= ======= =======
Net earnings available for
common stock and diluted
securities 7,335 5,322 19,337 16,974
Add back:
Goodwill/workforce in place
amortization, net of tax - 2,660 - 7,992
------- ------- ------- -------
Adjusted net earnings available
for common stock and diluted
securities $ 7,335 7,982 19,337 $24,966
======= ======= ======= =======
Diluted earnings per share:
Diluted net income $ .19 $ .14 $ .49 $ .44
Goodwill/workforce in place
amortization, net of tax - .07 - .21
------- ------- ------- -------
Adjusted diluted net income (1) $ .19 $ .21 $ .49 $ .65
======= ======= ======= =======
(1) Conversion of the subordinated debentures is included in the above
calculation as it is dilutive.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The FASB issued Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" on April 30, 2002. The Company is currently
evaluating the effects of SFAS 145, which, among other things, covers the
accounting treatment for the early extinguishment of debt.
On July 29, 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The
provisions of this Statement are effective for exit or disposal activities that
are initiated by the Company after December 29, 2002, with early application
encouraged.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information relating to Forward-Looking Statements
This report includes forward-looking statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Except for
historical matters, the matters discussed are forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933, as amended, that
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from
historical results or those anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following risk factors, among other possible factors,
could cause actual results to differ materially from historical or anticipated
results: (1) changes in international business conditions; (2) foreign currency
exchange rate and interest rate fluctuations; (3) lower than anticipated demand
by retailers and other customers for the Company's products, particularly in the
current economic environment; (4) slower commitments of retail customers to
chain-wide installations and/or source tagging adoption or expansion; (5)
possible increases in per unit product manufacturing costs due to less than full
utilization of manufacturing capacity as a result of slowing economic conditions
or other factors; (6) the Company's ability to provide and market innovative and
cost-effective products; (7) the Company's ability to maintain its intellectual
property; (8) competitive pricing pressures causing profit erosion; (9) the
availability and pricing of component parts and raw materials; (10) possible
increases in the payment time for receivables, as a result of economic
conditions or other market factors; (11) changes in regulations or standards
applicable to the Company's products; (12) unanticipated liabilities or
expenses; (13) adverse determinations in the ID Security Systems Canada Inc.
litigation and any other pending litigation affecting the Company; and (14) the
impact of adverse determinations in the ID Security Systems Canada Inc.
litigation on liquidity and debt covenant compliance. More information about
potential factors that could affect the Company's business and financial results
is included in the Company's Annual Report on Form 10-K for the year ended
December 30, 2001, and the Company's other Securities and Exchange Commission
filings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Third Quarter 2002 Compared to Third Quarter 2001
- -------------------------------------------------
Net Revenues
Net revenues for the third quarter of 2002 increased $3.5 million (or 2.2%) over
the third quarter of 2001 (from $155.3 million to $158.8 million). Excluding the
impact of foreign exchange of approximately $6.9 million, net revenues decreased
2.2% over the comparable quarter in 2001. Continued softness in retail demand
resulted in weaker sales in the labeling services and retail merchandising
segments. This was partially offset by increases in the security segment,
primarily in the CCTV, Fire and Intrusion group in the United States and
continuing momentum in the global security source tagging program.
Cost of Revenues
Cost of revenues increased approximately $0.6 million (or 0.7%) over the
third quarter of 2001 (from $92.6 million to $93.2 million). As a percentage of
net revenues, cost of revenues decreased from 59.6% to 58.7%. Excluding a
restructuring charge of $0.7 million, an asset impairment of $0.5 million, and a
restructuring charge reversal of $1.5 million (see Notes 7 and 8 of the
consolidated financial statements), cost of revenues as a percentage of net
revenues was 58.9%. The decrease in the Company's cost of revenues as a
percentage of sales is attributable to lower manufacturing costs, primarily at
the Company's Caribbean facilities.
Selling, General, and Administrative and Other Operating Expenses
SG&A expenses increased $3.2 million (or 6.5%) over the third quarter of
2001 (from $50.1 million to $53.3 million). The increase is primarily the result
of compensation costs associated with executive management changes and legal
fees for the ID Security Systems Canada Inc. litigation, partially offset by
reduced amortization expense. Following the Company's adoption of Financial
Accounting Standard No. 142 (SFAS 142) on December 31, 2001, SG&A for fiscal
2002 does not include any goodwill amortization. In the third quarter of 2001,
goodwill and workforce in place amortization was $2.7 million. As a percentage
of net revenues, SG&A expenses increased from 32.2% to 33.6%. Other operating
expenses in the third quarter of 2002 related to a restructuring charge reversal
as a result of changes in the fourth quarter 2001 restructuring plans, which
will reduce the cash outlay necessary to execute the restructuring.
Other Loss, net
Other loss, net represented a net foreign exchange loss of $0.4 million and $0.8
million for the third quarters of 2002 and 2001, respectively.
Interest Expense and Interest Income
Interest expense for the third quarter of 2002 decreased $1.4 million from the
comparable quarter in 2001 (from $5.2 million to $3.8 million) due to debt
repayment and declining Euro interest rates. Interest income for the third
quarter of 2002 decreased by $0.2 million from the comparable quarter in 2001
(from $0.6 million to $0.4 million) as a result of lower interest rates on
invested cash.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Income Taxes
The effective tax rate for the third quarter of 2002 was 32.0%. The effective
tax rate during the third quarter of 2001 was 39.0%. The lower tax rate results
primarily from the Company's adoption of Financial Accounting Standards No. 142
(SFAS 142) on December 31, 2001 (fiscal year 2002) as the goodwill amortization
expense in 2001 was not tax-deductible.
Net Earnings
Net earnings for the third quarter of 2002 were $6.4 million or $.19 per diluted
share. Net earnings for the third quarter of 2001 were $4.4 million or $.14 per
diluted share. Excluding the amortization of goodwill and workforce in place,
net earnings for the third quarter of 2001 were $7.0 million or $.21 per diluted
share.
Exposure to International Operations
Approximately 62% of the Company's sales are made in currencies other than U.S.
dollars. Sales denominated in currencies other than U.S. dollars increase the
Company's potential exposure to currency fluctuations which can affect results.
Management cannot predict, with any degree of certainty, changes in currency
exchange rates and, therefore, the future impact that such changes may have on
its operations.
Restructuring
The changes in the provision for restructuring are covered in Note 7 of the
consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Nine Months 2002 Compared to First Nine Months 2001
- ---------------------------------------------------------
Net Revenues
Net revenues for the first nine months of 2002 decreased $18.0 million (or 3.8%)
over the first nine months 2001 (from $481.2 million to $463.2 million).
Excluding the benefit from foreign exchange of $4.9 million, revenue decreased
4.8% for the first nine months of year 2002 over the comparable period for year
2001. The decrease in revenue was caused by lower security and retail
merchandising sales volumes in Europe and the United States, as well as all
business segments in South America, due to a deterioration in economic
conditions in the first nine months of 2002 compared to 2001.
Cost of Revenues
Cost of revenues decreased approximately $12.9 million (or 4.5%) over the
first nine months of 2001 (from $285.0 million to $272.1 million). As a
percentage of net revenues, cost of revenues decreased from 59.2% to 58.7%. The
decrease in the Company's cost of revenues as a percentage of sales is
attributable to lower manufacturing costs, primarily at the Company's Caribbean
and U.S. manufacturing facilities.
Selling, General, and Administrative and Other Operating Expenses
SG&A expenses increased $1.6 million (or 1.0%) over the first nine months of
2001 (from $155.5 million to $157.1 million). The increase is the result of
compensation costs associated with executive management changes and legal fees
for the ID Security Systems Canada Inc. litigation partially offset by reduced
amortization expense. Following the Company's adoption of Financial Accounting
Standard No. 142 (SFAS 142) on December 31, 2001, SG&A for fiscal 2002 does not
include any goodwill amortization. In the first nine months of 2001, goodwill
and workforce in place amortization was $8.0 million. As a percentage of net
revenues, SG&A expenses increased from 32.3% to 33.9%. Other operating expenses
in 2002 related to a restructuring charge reversal as a result of changes in the
fourth quarter 2001 restructuring plans, which will reduce the cash outlay
necessary to execute the restructuring. The other operating expenses in 2001
related to the exit of certain business segments in Belgium as well as costs
associated with executive management changes.
Other Loss, net
Other loss, net represented a net foreign exchange loss of $0.5 million and $0.8
million for the first nine months of 2002 and 2001, respectively.
Interest Expense and Interest Income
Interest expense for the first nine months of 2002 decreased $5.6 million from
the comparable period in 2001 (from $17.1 million to $11.5 million) due to debt
repayment and declining Euro interest rates. Interest income for the first nine
months of 2002 decreased by $0.8 million from the comparable period in 2001
(from $2.1 million to $1.3 million) as a result of lower interest rates on
invested cash.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Income Taxes
The effective tax rate for the first nine months of 2002 was 32.0%. The
effective tax rate during the first nine months of 2001 was 39.0%. The lower tax
rate results primarily from the Company's adoption of Financial Accounting
Standards No. 142 (SFAS 142) on December 31, 2001 (fiscal year 2002) as the
goodwill amortization expense in 2001 was not tax-deductible.
Net Earnings
Net earnings for the first nine months of 2002 were $16.5 million or $.49 per
diluted share. Net earnings for the first nine months of 2001 were $14.1 million
or $.44 per diluted share. Excluding the amortization of goodwill and workforce
in place, net earnings for the first nine months of 2001 were $22.1 million or
$.65 per diluted share.
Exposure to International Operations
Approximately 62% of the Company's sales are made in currencies other than U.S.
dollars. Sales denominated in currencies other than U.S. dollars increase the
Company's potential exposure to currency fluctuations which can affect results.
Management cannot predict, with any degree of certainty, changes in currency
exchange rates and, therefore, the future impact that such changes may have on
its operations.
Restructuring
The changes in the provision for restructuring are covered in Note 7 of the
consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources
The Company's liquidity needs have related to, and are expected to continue to
relate to, capital investments, working capital requirements, and acquisitions.
The Company has met its liquidity needs over the last three years primarily
through funds provided by long-term borrowings 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 to service debt and meet its capital investment requirements.
The Company's operating activities generated approximately $58.8 million during
the first nine months of 2002 compared to $61.4 million in the same period in
2001. This change from the prior year was primarily attributable to a decrease
in earnings before depreciation and amortization partially offset by a reduction
in income taxes paid. In the second quarter of 2001, a legacy Meto German tax
liability of $10.0 million was satisfied.
At September 29, 2002, EUR 95.3 million (approximately $92.8 million) and
$7.9 million were outstanding under the Company's senior secured facility. This
facility, which expires on March 31, 2006, includes a $275 million equivalent
multi-currency term note and a $100 million equivalent multi-currency revolving
line of credit. The outstanding borrowings under the revolving credit facility
at September 29, 2002, were JPY 300 million (approximately $2.4 million). During
the third quarter of 2002, unscheduled repayments of EUR 7.0 million
(approximately $6.9 million) were made on the multi-currency term note and
JPY 1.9 billion (approximately $15.6 million) were made on the multi-currency
revolving line of credit in order to reduce the Company's leverage and
corresponding interest expense.
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.
On May 24, 2002, the jury, in the Civil Action No. 99-CV-577 in the United
States District Court for the Eastern District of Pennsylvania, filed by
plaintiff ID Security Systems Canada Inc. against Checkpoint Systems, Inc. held
in favor of the Company on the plaintiff's claim for Monopolization of Commerce,
but against the Company on claims of Attempted Monopolization and Conspiracy to
Monopolize. In addition, the jury held against the Company on two tort claims
related to tortious interference and unfair competition. Judgement was entered
on the verdict in favor of the plaintiff, after trebling, in the amount of
$79,170,000 plus attorneys' fees and costs to be determined by the Court.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company is currently appealing the verdict (see Note 9 of the consolidated
financial statements) and has posted a bond in the amount of $26.4 million and
placed into escrow 3,179,600 shares of the Company's treasury stock. Management
anticipates that the final judgement, if any, would not be paid prior to the end
of 2003 and is of the opinion that the Company will have sufficient financial
resources in the form of cash and borrowing capacity, due to the cash flow
generated during the intervening period, to satisfy any judgement. The posting
of additional security during the appeals process, the recording of a liability,
or a final judgement, could cause the Company to be in default of certain bank
covenants. In this event, Management would pursue various alternatives, which
may include, among other things, debt covenant waivers, debt covenant
amendments, or refinancing of debt. While Management believes it would be
successful in pursuing these alternatives, there can be no assurance of success,
in which case the Company's financial condition could be materially adversely
affected.
Capital Expenditures
The Company's capital expenditures during the first nine months of fiscal 2002
totaled $4.6 million compared to $7.6 million during the first nine months of
fiscal 2001. The Company anticipates its capital expenditures to approximate
$8 million in 2002.
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.
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 September 29, 2002, the Company had currency exchange forward contracts
totaling approximately $18.3 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 Asia.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the market risks as disclosed in Item
7a of the Company's Annual Report on Form 10-K filed for the year ending
December 30, 2001, which item is incorporated herein by reference.
Item 4. DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on this evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective in alerting them, on a timely basis, to
material information required to be included in the Company's periodic SEC
reports. It should be noted that the design of any system of controls is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how remote.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
date of their last evaluation.
PART II. OTHER INFORMATION
Item 1. 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 matters described
in the following paragraphs. Management does not believe that the ultimate
resolution of such matters will have a material adverse effect on its
consolidated results of operations and/or financial condition, except as
described below.
On May 24, 2002, the jury, in the Civil Action No. 99-CV-577 in the United
States District Court for the Eastern District of Pennsylvania, filed by
plaintiff ID Security Systems Canada Inc. against Checkpoint Systems, Inc. held
in favor of the Company on the plaintiff's claim for Monopolization of Commerce,
but against the Company on claims of Attempted Monopolization and Conspiracy to
Monopolize. In addition, the jury held against the Company on two tort claims
related to tortious interference and unfair competition. Judgement was entered
on the verdict in favor of the plaintiff, after trebling, in the amount of
$79,170,000 plus attorneys' fees and costs to be determined by the Court.
On June 14, 2002, in response to Motions filed by the Company, the Court stayed
the execution of the judgement pending disposition of the Company's Motion for
Post-Trial Relief and ordered the Company to post a bond in the amount of
$26,390,000 and to place into escrow 3,179,600 shares of the Company's treasury
stock. The Company has complied with the Court's order.
On July 1 and August 14, 2002, the Company filed briefs in support of its Motion
for Post-Trial Relief. The Company also filed a Motion to Vacate Judgement on
Antitrust Claims Due to Lack of Subject Matter Jurisdiction on August 14, 2002.
Management is of the opinion that the jury verdict is not consistent with the
law and that judgement should be entered in favor of the Company as a matter of
law or, alternatively, that a new trial should be granted. No liability has been
recorded for this litigation. If, however, the final outcome of this litigation,
after all appeals have been exhausted, results in certain of the plaintiff's
claims being upheld, the potential damages could be material to the Company's
consolidated results of operations and/or financial condition.
The Company continues to wait for the United States District Court for the
Eastern District of Pennsylvania to rule on the various Post-Trial Motions filed
in the ID Security Systems Canada Inc. case. Management anticipates that,
regardless of how the Court rules, the case will be appealed to the Third
Circuit Court of Appeals.
A certain number of follow-on purported class action suits have arisen in
connection with the jury decision in the ID Security Systems Canada Inc.
litigation. The purported class action complaints generally allege a claim of
monopolization, and are substantially based upon the same allegations as
contained in the ID Security Systems Canada Inc. case (Civil Action No.
99-CV-577) as follows:
On August 1, 2002, a civil action was filed in United States District Court for
the Eastern District of Pennsylvania, designated as Civil Action No. 02-6379(ER)
by plaintiff Diane Furs, Inc. t/a Diane Furs against Checkpoint Systems, Inc.
and served on August 21, 2002. On August 21, 2002, a Notice of Substitution of
Plaintiff and Filing of Amended Complaint was filed by the plaintiff, and the
named plaintiff was changed to Medi-Care Pharmacy, Inc.
On August 2, 2002, a civil action was filed in the United States District Court,
District of New Jersey (Camden) designated as Docket No. 02-CV-3730(JEI) by
plaintiff Club Sports International, Inc., d/b/a Soccer CSI against Checkpoint
and served on August 26, 2002.
On October 2, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-4777(JBS)
by plaintiff Baby Mika, Inc. against Checkpoint and served on October 7, 2002.
On October 23, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5001 (JEI)
by plaintiff Washington Square Pharmacy, Inc. against Checkpoint and served on
November 1, 2002.
On October 18, 2002, The United States District, District of New Jersey (Camden)
entered an Order staying the proceedings in the Club Sports International, Inc.
and Baby Mika, Inc. cases referred to above. In accordance with the Order, the
Stay will also apply to the Washington Square Pharmacy, Inc. case referred to
above. In addition, the Medi-Care Pharmacy, Inc. case, referred to above, will
be voluntarily dismissed, and it is expected to be re-filed in New Jersey and be
included in the Stay Order. The Stay is expected to remain in place until such
time as the ID Security Systems case, referred to above, is either terminated or
any appeals have been exhausted in the Third Circuit Court of Appeals. No
liability has been recorded for any of the purported class action suits.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement with George W. Off
10.2 Employment Agreement with John E. Davies
10.3 First Amendment to Employment Agreement with John E. Davies
10.4 Employment Agreement with Per H. Levin
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
On August 19, 2002, the Company filed a Current Report on Form 8-K
attaching a press release dated August 15, 2002, announcing the elections
of George W. Off as Chairman of the Board of Directors and Chief Executive
Officer, R. Keith Elliott as Lead Independent Director of the Board; and W.
Craig Burns to the Board.
On August 30, 2002, the Company filed a Current Report on Form 8-K
attaching a press release dated August 29, 2002, announcing management
changes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHECKPOINT SYSTEMS, INC.
/s/ W. Craig Burns
- ---------------------------- November 14, 2002
Executive Vice President,
Chief Financial Officer and Treasurer
/s/ Arthur W. Todd
- ---------------------------- November 14, 2002
Vice President, Corporate Controller
and Chief Accounting Officer
CERTIFICATION
I, George W. Off, Chairman of the Board and Chief Executive Officer of
Checkpoint Systems, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Checkpoint
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
By: /s/ George W. Off
------------------------------------
Name: George W. Off
Title: Chairman of the Board and
Chief Executive Officer
Date: November 12, 2002
CERTIFICATION
I, W. Craig Burns, Executive Vice President, Chief Financial Officer and
Treasurer of Checkpoint Systems, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Checkpoint
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
By: /s/ W. Craig Burns
--------------------------------
Name: W. Craig Burns
Title: Executive Vice President,
Chief Financial Officer
and Treasurer
Date: November 14, 2002
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
10.1 Employment Agreement with George W. Off.
10.2 Employment Agreement with John E. Davies
10.3 First Amendment to Employment Agreement with John E. Davies
10.4 Employment Agreement with Per H. Levin
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002