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 March 30, 2003
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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
- ----------------------------------------------------------------------------
(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
-- --
Indicate by check mark whether the Registrant is an accelerated filer, (as
defined in Rule 12b-2 of the Act).
Yes X No
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 24, 2003, there were 32,721,381 shares of the Common Stock
outstanding.
CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
--------
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/(Loss) 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-23
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 23
Item 4. Controls and Procedures 23
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 24-26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
CERTIFICATIONS 28-31
INDEX TO EXHIBITS 32
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
March 30, Dec. 29,
2003 2002
-------- --------
(Unaudited)
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 35,834 $ 54,670
Accounts receivable, net of allowances
of $14,480 and $14,420 126,957 130,667
Inventories 84,875 80,152
Other current assets 23,832 22,051
Deferred income taxes 10,098 10,326
-------- --------
Total current assets 281,596 297,866
REVENUE EQUIPMENT ON OPERATING LEASE, net 4,570 4,895
PROPERTY, PLANT, AND EQUIPMENT, net 102,728 100,173
GOODWILL 190,143 185,758
OTHER INTANGIBLES, net 51,839 51,611
OTHER ASSETS 39,979 38,079
-------- --------
TOTAL ASSETS $670,855 $678,382
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and current
portion of long-term debt $ 18,706 $ 20,512
Accounts payable 42,267 47,418
Accrued compensation and related taxes 25,036 25,701
Other accrued expenses 30,597 27,969
Income taxes 19,763 17,860
Unearned revenues 27,556 28,493
Restructuring reserve 4,833 5,600
Other current liabilities 11,799 13,126
-------- --------
Total current liabilities 180,557 186,679
LONG-TERM DEBT, LESS CURRENT MATURITIES 55,314 68,813
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
ACCRUED PENSIONS 56,119 54,006
OTHER LONG-TERM LIABILITIES 10,934 10,608
DEFERRED INCOME TAXES 12,556 12,189
MINORITY INTEREST 858 841
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized
500,000 shares, none issued
Common Stock, par value $.10 per share, 3,908 3,904
authorized 100,000,000 shares, issued
39,077,241 and 39,039,506
Additional capital 263,731 263,386
Retained earnings 72,012 67,811
Common stock in treasury, at cost,
6,356,190 shares (64,379) (64,379)
Accumulated other comprehensive loss (40,755) (45,476)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 234,517 225,246
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $670,855 $678,382
======== ========
See accompanying notes to consolidated financial statements
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 weeks) Ended
------------------------
March 30, March 31,
2003 2002
-------- --------
(Thousands, except per share data)
Net revenues $156,417 $143,454
Cost of revenues 93,268 84,022
-------- --------
Gross profit 63,149 59,432
Selling, general, and
administrative expenses 54,897 49,832
-------- --------
Operating income 8,252 9,600
Interest income 339 415
Interest expense 3,043 3,725
Other gain/(loss), net 748 (231)
-------- --------
Earnings before income taxes 6,296 6,059
Income taxes 2,078 1,939
Minority interest 17 6
-------- --------
Earnings before cumulative
effect of change in
accounting principle 4,201 4,114
Cumulative effect of change
in accounting principle - (72,861)
-------- --------
Net earnings/(loss) $ 4,201 $(68,747)
======== ========
Earnings per share before cumulative
effect of change in accounting principle:
Basic $ .13 $ .13
======== ========
Diluted $ .13 $ .13
======== ========
Net earnings /(loss) per share:
Basic $ .13 $ (2.15)
======== ========
Diluted $ .13 $ (2.10)
======== ========
See accompanying notes to consolidated financial statements
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Three Months (13 weeks) Ended March 30, 2003
-----------------------------------------------------
Accumu-
lated
Other
Addit- Compre-
Common ional Retained hensive Treasury
Stock Capital Earnings Loss Stock Total
------ ------- -------- ------ -------- -----
(Thousands)
Balance,
December 29, 2002 $3,904 $263,386 $ 67,811 $(45,476) $(64,379) $225,246
(Common shares:
issued 39,039,506
reacquired 6,356,190)
Net earnings 4,201 4,201
Exercise of stock
options 4 345 349
(37,735 shares)
Net loss on interest
rate swap (68)
Foreign currency
translation adjustment 4,789 4,721
------ -------- -------- --------- --------- --------
Balance,
March 30, 2003 $3,908 $263,731 $ 72,012 $(40,755) $ (64,379)$234,517
====== ======== ======== ========= ========= ========
(Common shares:
issued 39,077,241
reacquired 6,356,190)
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
Three Months (13 weeks) Ended
-----------------------------
March 30, March 31,
2003 2002
--------- ---------
(Thousands)
Net earnings/(loss) $ 4,201 $(68,747)
Net loss on interest rate swap,
net of tax (45) -
Foreign currency translation
adjustment 4,789 (5,481)
-------- --------
Comprehensive income/(loss) $ 8,945 $(74,228)
======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months (13 weeks) Ended
-----------------------------
March 30, March 31,
2003 2002
-------- --------
(Thousands)
Cash flows from operating activities:
Net earnings $ 4,201 $(68,747)
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Cumulative effect of change in accounting
principle, net of tax - 72,861
Revenue equipment under operating lease (381) (544)
Long-term customer contracts (1,468) 819
Depreciation and amortization 7,182 7,784
(Gain)/loss on disposal of fixed assets (237) 40
(Increase)/decrease in current assets, net
of the effects of acquired companies:
Accounts receivable 6,350 7,376
Inventories (3,302) 394
Other current assets (1,898) (2,072)
Increase/(decrease) in current liabilities, net
of the effects of acquired companies:
Accounts payable (5,819) (7,322)
Income taxes 295 (324)
Unearned revenues (1,429) 3,580
Restructuring reserve (847) (5,219)
Other current and accrued liabilities 61 274
-------- --------
Net cash provided by operating activities $ 2,708 $ 8,900
-------- --------
Cash flows from investing activities:
Acquisition of property, plant, and equipment (5,834) (1,327)
Acquisitions, net of cash acquired - (681)
Other investing activities 417 503
-------- --------
Net cash used in investing activities $ (5,417) $ (1,505)
-------- --------
Cash flows from financing activities:
Proceeds from stock issuances 339 2,111
Net change in short-term debt 2,335 754
Payment of long-term debt (19,878) (17,824)
-------- --------
Net cash used in financing activities $(17,204) $(14,959)
-------- --------
Effect of foreign currency rate fluctuations
on cash and cash equivalents 1,077 (485)
-------- --------
Net (decrease)/increase in cash and cash
equivalents $(18,836) $ (8,049)
Cash and cash equivalents:
Beginning of period 54,670 43,698
-------- --------
End of period $ 35,834 $ 35,649
======== ========
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 in annual
financial statements. Refer to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2002 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 March 30, 2003 and December 29, 2002 and its results of operations
and changes in cash flows for the thirteen week periods ended March 30, 2003 and
March 31, 2002.
Certain reclassifications have been made to the 2002 financial statements and
related footnotes to conform to the 2003 presentation.
2. INVENTORIES
March 30, December 29,
2003 2002
-------- -----------
(Thousands)
Raw materials $ 8,677 $ 8,184
Work in process 4,353 3,387
Finished goods 71,845 68,581
-------- --------
$ 84,875 $ 80,152
======== ========
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company had intangible assets with a net book value of $51.8 million and
$51.6 million as of March 30, 2003 and December 29, 2002, respectively.
The following table reflects the components of intangible assets as of March 30,
2003 and December 29, 2002:
March 30, 2003 December 29, 2002
---------------------- ----------------------
Amortizable Gross Gross
Life Carrying Accumulated Carrying Accumulated
(years) Amount Amortization Amount Amortization
----------- -------- ------------ -------- ------------
(Thousands)
Customer lists 20 $27,152 $11,979 $26,363 $10,544
Trade name 30 25,065 2,715 24,405 2,440
Patents, license
agreements 5 to 14 33,175 19,402 32,364 19,095
Other 3 to 6 787 244 778 220
------- ------- ------- -------
$86,179 $34,340 $83,910 $32,299
======= ======= ======= =======
The Company has determined that the life previously assigned to these
finite-lived assets is still appropriate, and has recorded $1.2 million and $1.3
million of amortization expense in the first three months of fiscal 2003 and
2002, respectively.
Estimated amortization expense for each of the five succeeding years is
anticipated to be:
(Thousands)
2003 $4,635
2004 $4,391
2005 $3,862
2006 $3,207
2007 $3,194
The changes in the carrying amount of goodwill for the three months ended March
30, 2003, are as follows:
Labeling Retail
Security Services Merchandising Total
-------- -------- ------------- -------
(Thousands)
Balance as of
beginning of
fiscal year 2003
(December 30, 2002) $91,072 $36,895 $57,791 $185,758
Foreign currency
translation adjustment 2,368 264 1,753 4,385
------- ------- ------- --------
Balance as of
March 30, 2003 $93,440 $37,159 $59,544 $190,143
======= ======= ======= ========
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Pursuant to SFAS 142, the Company will perform its annual assessment of goodwill
by comparing each individual reporting unit's carrying amount of net assets,
including goodwill, to their fair value during the fourth quarter of each fiscal
year. Future annual assessments could result in additional impairment charges,
which would be accounted for as an operating expense.
4. LONG-TERM DEBT
Long-term debt at March 30, 2003 and December 29, 2002 consisted of the
following:
March 30, December 29,
2003 2002
-------- -----------
(Thousands)
Six and one-half year EUR 244 million
variable interest rate collateralized
term loan maturing
in 2006 $ 50,626 $ 64,447
Six and one-half year $25 million
variable interest rate
collateralized term loan maturing in
2006 5,179 7,882
Six and one-half year $100 million
multi-currency variable interest
rate collateralized revolving
credit facility maturing in 2006 2,502 2,502
Twenty-two and one-half year
EUR 9.5 million capital lease
maturing in 2021 9,503 9,267
Eight and one-half year
EUR 2.7 million capital lease
maturing in 2007 1,729 1,757
Other capital leases with maturities
through 2004 61 1,385
-------- --------
Total 69,600 87,240
Less current portion (14,286) (18,427)
-------- --------
Total long-term portion (excluding
convertible subordinated debentures) 55,314 68,813
Convertible subordinated debentures 120,000 120,000
-------- --------
Total long-term portion $175,314 $188,813
======== ========
During the first quarter 2003, EUR 13.5 million (approximately $14.4 million)
and $2.0 million of unscheduled repayments were made on the EUR 244 million and
the $25 million collateralized term loans, respectively. In addition, certain
capital leases in the amount of $1.3 million were paid prior to maturity. At
March 30, 2003, EUR 47.0 million (approximately $50.6 million) and $5.2 million
were outstanding under the multi-currency term loan. The outstanding borrowings
under the revolving credit facility were JPY 300 million (approximately $2.5
million). The availability under the $100 million multi-currency revolving
credit facility has been reduced by letters of credit totaling $25.0 million,
primarily related to the surety bond posted in connection with ID Security
Systems Canada Inc. litigation.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. 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 is subject to certain limits
during the years 2002 through 2005 and will be eliminated thereafter. The
Company's exemption was not negatively impacted in 2002. The Company does not
expect its exemption to be negatively impacted in the years 2003 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.
6. 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 dilutive
potential common stock:
Quarter (13 weeks) Ended
------------------------
March 30, March 31,
2003 2002
-------- --------
(Thousands, except per share amounts)
Basic earnings/(loss) per share:
Earnings before cumulative effect of
change in accounting principle $ 4,201 $ 4,114
Cumulative effect of change in
accounting principle - (72,861)(3)
-------- --------
Net earnings/(loss) $ 4,201 $(68,747)
======== ========
Weighted average common stock
outstanding 32,723 31,944
======== ========
Basic earnings per share before
cumulative effect of change in
accounting principle $ .13 $ .13
Cumulative effect of change in
accounting principle - (2.28)
-------- --------
Basic earnings/(loss) per share $ .13 $ (2.15)
======== ========
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Diluted earnings/(loss) per share:
Earnings before cumulative effect of
change in accounting principle $ 4,201 $ 4,114
Interest on subordinated debentures,
net of tax (1) - -
-------- --------
Net earnings before cumulative
effect of change in accounting
principle available for dilutive
securities 4,201 4,114
Cumulative effect of change in
accounting principle - (72,861)(3)
-------- --------
Net earnings/(loss) after cumulative
effect of change in accounting
principle available for dilutive
securities $ 4,201 $(68,747)
======== ========
Weighted average common stock
outstanding 32,723 31,944
Additional common shares resulting
from stock options (2) 91 735
Additional common shares resulting
from subordinated debentures(1) - -
-------- --------
Weighted average common stock
and dilutive stock
outstanding (1) 32,814 32,679
======== ========
Diluted earnings per share before
cumulative effect of change in
accounting principle $ .13 $ .13
Cumulative effect of change in
accounting principle - (2.23)
-------- --------
Diluted earnings/(loss) per share $ .13 $ (2.10)
======== ========
(1) The conversion of 6,528 common shares from the subordinated debentures is
not included as it is anti-dilutive.
(2) Excludes approximately 2,519 and 1,358 anti-dilutive outstanding stock
options for the first quarters of 2003 and 2002, respectively.
(3) No tax effect as goodwill amortization is non-deductible for tax.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes for the thirteen week periods ended
March 30, 2003 and March 31, 2002 were as follows:
Quarter (13 weeks) Ended
------------------------
March 30, March 31,
2003 2002
-------- --------
(Thousands)
Interest $ 1,474 $ 2,100
Income tax (refunds)/payments, net $ (1,046) $ 868
8. PROVISION FOR RESTRUCTURING
Accrual Cash Accrual
at Decrease Payments at
Beginning in (and Exchange March 30,
of 2003 Goodwill Rate Changes) 2003
--------- -------- ------------ --------
(Thousands)
Severance and
other employee
related charges $ 3,788 $ - $ (639) $ 3,149
Lease termination
costs 1,812 - (128) 1,684
------- ------- ------- -------
$ 5,600 $ - $ (767) $ 4,833
======= ======= ======= =======
At the end of the first quarter 2003, 26 of the 61 planned employee
terminations, related to the 2002 restructuring, and 292 of the 322 planned
employee terminations, related to the 2001 restructuring, had occurred. The
Company expects the terminations and restructuring actions to be completed by
the end of 2003. Termination benefits are being paid out over a period of 1 to
24 months after termination.
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 believes it is remote 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
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
trebling, in the amount of $79.2 million 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 $26.4
million 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 March 28, 2003, in response to the Company's Motion for Post-Trial Relief,
filed on July 1 and August 14, 2002, the Court issued an order which vacated the
jury verdict on the antitrust claims and reduced the damages award related to
tortious interference and unfair competition from $19 million to $13 million.
The Company has subsequently filed an additional motion to further reduce the
$13 million by $2.1 million based on a prior agreement between the parties and a
previous Order by the Court. Both ID Security Systems Canada Inc. and the
Company have filed appeals to the Third Circuit Court of Appeals related to the
various decisions of the Court. Based on input from outside legal counsel,
management is of the opinion that the Judge's Order is consistent with the law
as it relates to the antitrust issues, and is not consistent with the law as it
relates to the tortious interference and unfair competition aspects of the case.
Accordingly, no liability has been recorded for this litigation, as management
believes that, at this time, it is not probable the remaining judgement will be
upheld and that the reasonably possible range of the contingent liability is
between zero and $13 million. It is possible, although management believes it is
remote, that the Court of Appeals could reverse the decision of the lower Court
as it relates to the antitrust claims and reinstate the original judgement of
$80 million. If 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. Although management expects to prevail in the
appeal process, should the appeal be unsuccessful, management anticipates that
any final judgement would not be paid prior to the end of 2004 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.
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
Systems, Inc. and served on August 26, 2002.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 Systems, Inc. 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 Systems, Inc.
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.
On November 13, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5319 (JEI)
by plaintiff 1700 Pharmacy, Inc. against Checkpoint Systems, Inc. and served on
November 15, 2002.
On December 30, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-6131 (JEI)
by plaintiff Medi-Care Pharmacy, Inc. against Checkpoint Systems, Inc. and
served on January 3, 2003.
Both the 1700 Pharmacy, Inc. case and the Medi-Care Pharmacy, Inc. case were
consolidated with the previously mentioned cases and are included in the Stay
Order referred to above. No liability has been recorded for any of the purported
class action suits as management believes that, based on input from outside
legal counsel, it is not probable the judgement will be upheld and that the
lower end of the reasonably possible range of the contingent liability is zero
at this time. The high end of the range cannot be estimated at this time.
On March 13, 2003, the Company deposited with the Escrow Agent an additional
1,195,400 shares of the Company's treasury stock, as a result of the reduction
in market value of the Company's publicly traded shares. Such deposit was
intended to maintain the Court's Stay pending disposition of the Company's
Motion for Post-Trial Relief in the ID Security Systems Canada Inc. case
referred to above. As a result of the Court's actions on March 28, 2003,
management expects that the bond will be reduced to the amended judgement amount
of $13 million and the escrow of treasury stock will be eliminated.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table sets forth the movements on the warranty reserve:
Quarter (13 weeks) Ended
------------------------
March 30, March 31,
2003 2002
-------- --------
(Thousands)
Balance at the beginning of the year $4,002 $3,303
Accruals for warranties issued $ 216 $ 257
Accruals related to pre-existing
warranties, including changes in estimates - (114)
------ ------
Total accruals $ 216 $ 143
Settlements made (180) (195)
Foreign currency translation adjustment 73 (38)
------ ------
Balance at the end of the quarter $4,111 $3,213
====== ======
10. BUSINESS SEGMENTS
Quarter (13 weeks) Ended
------------------------
March 30, March 31,
2003 2002
-------- --------
(Thousands)
Business segment net revenue:
Security $ 92,764 $ 79,098
Labeling Services 38,623 35,848
Retail Merchandising 25,030 28,508
-------- --------
Total $156,417 $143,454
======== ========
Business segment gross profit:
Security $ 39,515 $ 33,860
Labeling Services 11,322 11,246
Retail Merchandising 12,312 14,326
-------- --------
Total gross profit $ 63,149 $ 59,432
Operating expenses 54,897 49,832
Interest expense, net 2,704 3,310
Other gain/(loss) 748 (231)
-------- --------
Earnings before income taxes $ 6,296 $ 6,059
======== ========
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
11. STOCK OPTIONS
At March 30, 2003, the Company has one stock-based employee compensation plan.
Statement of Financial Accounting Standards No. 123 (SFAS 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 (APB 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 123, the Company's net (loss)/earnings and net
(loss)/earnings per share would approximate the pro-forma amounts as follows:
Quarter (13 weeks) Ended
------------------------
March 30, March 31,
2003 2002
-------- --------
(Thousands)
Net (loss)/earnings, as reported $ 4,201 $(68,747)
Total stock-based employee
compensation expense determined
under fair value based method,
net of tax (822) (1,326)
-------- -------
Pro-forma net(loss)/earnings $ 3,379 $(70,073)
======== =======
Net (loss)/earnings per share:
Basic, as reported $ .13 $ (2.15)
======== =======
Basic, pro-forma $ .10 $ (2.19)
======== =======
Diluted, as reported $ .13 $ (2.10)
======== =======
Diluted, pro-forma $ .10 $ (2.14)
======== =======
The following assumptions were used in estimating fair value of stock options:
Quarter (13 weeks) Ended
------------------------
March 30, March 31,
2003 2002
-------- --------
Dividend yields None None
Expected volatility .4693 .5030
Risk-free interest rates 1.99% 4.91%
Expected life (in years) 2.81 3.18
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
12. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER STANDARDS
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables".
The standard provides guidance on how to account for arrangements that involve
the delivery or performance of multiple products, services, and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into by the Company after June 29, 2003. The Company is
currently evaluating the effect that the adoption of EITF Issue No. 00-21 will
have on its consolidated financial statements.
In January 2003, the FASB issued interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51". FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied to the Company's consolidated financial
statements for the period ending September 28, 2003. The Company does not expect
the adoption of FIN 46 to have a significant impact on its consolidated
financial statements.
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 development of new competitive technologies;
(8) the Company's ability to maintain its intellectual property; (9) competitive
pricing pressures causing profit erosion; (10) the availability and pricing of
component parts and raw materials; (11) possible increases in the payment time
for receivables, as a result of economic conditions or other market factors;
(12) changes in regulations or standards applicable to the Company's products;
(13) unanticipated liabilities or expenses; (14) adverse determinations in the
ID Security Systems Canada Inc. litigation and any other pending litigation
affecting the Company; and (15) 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 29, 2002, and the Company's
other Securities and Exchange Commission filings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Quarter 2003 Compared to First Quarter 2002
- ---------------------------------------------------
Net Revenues
Revenues for the first quarter 2003 increased by $13.0 million or 9.0% from
$143.4 million to $156.4 million. Foreign exchange had a positive impact on
revenues of approximately $15.2 million or 10.6% in the first quarter of 2003 as
compared to the first quarter of 2002.
Security revenues increased by $13.7 million or 17.3% in the first quarter of
2003 as compared to the first quarter of 2002. Foreign exchange had a positive
impact of $7.6 million. The remaining increase was primarily due to better
penetration in the electronic article surveillance (EAS) markets in Europe and
Asia Pacific and in the closed-circuit television (CCTV) market in the USA,
partially offset by a decline in US EAS sales. Labeling services revenues
increased by $2.8 million. The increase was due to the positive impact of
foreign exchange of $3.6 million, which was partially offset by lower barcode
label revenues in Europe. Retail merchandising revenues decreased by $3.5
million or 12.2%, despite the positive impact of foreign exchange of $3.9
million, primarily as a result of the decline of hand-held labeling systems
(HLS) in Europe, due to an unusual increase in the first quarter of 2002 caused
by the conversion to the Euro currency.
Gross Profit
Gross profit for the first quarter 2003 was $63.1 million, or 40.4% of revenues,
compared to $59.4 million, or 41.4% of revenues, for the first quarter 2002.
Security gross profit, as a percentage of sales, decreased from 42.8% in the
first quarter of 2002 to 42.6% in the first quarter of 2003, primarily as a
result of increased spending in research and development. Gross profit, as a
percentage of net revenues, for labeling services decreased from 31.4% in the
first quarter of 2002 to 29.3% in the first quarter of 2003. The decrease in
gross profit percentage was principally due to competitive pricing pressure and
a higher fixed cost per unit due to lower production volumes of barcode labels
in the first quarter of 2003. The retail merchandising gross profit percentage
decreased 1.1% (from 50.3% to 49.2%) in the first quarter of 2003 compared to
the first quarter of 2002. The decrease was principally due to lower HLS
revenues, which have the highest gross profit percentage in the segment,
partially offset by higher margins in retail display systems (RDS).
For the first quarter of 2003 and 2002, field service and installation costs
were 9.0% and 8.9% of net revenues, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Selling, General and Administrative Expenses
SG&A expenses increased $5.1 million (or 10.1%) over the first quarter of
2002 (from $49.8 million to $54.9 million). The negative impact of foreign
exchange was $5.5 million. As a percentage of net revenues, SG&A expenses
increased from 34.7% to 35.1%.
Interest Expense and Interest Income
Interest expense for the first quarter of 2003 decreased $0.7 million from the
comparable quarter in 2002 (from $3.7 million to $3.0 million) due to debt
repayment. Interest income for the first quarter of 2003 decreased by $0.1
million from the comparable quarter in 2002 (from $0.4 million to $0.3 million)
as a result of a decrease in cash investments, due to the payment of interest
and principal on the Company's debt, and lower interest rates.
Other Gain/(Loss), net
Other gain/(loss), net represented a net foreign exchange gain of $0.7 million
and a net foreign exchange loss of $0.2 million for the first quarter of 2003
and 2002, respectively.
Income Taxes
The effective tax rate for the first quarter of 2003 was 33.0%. The effective
tax rate during the first quarter of 2002 was 32.0%. The higher tax rate results
primarily from foreign income tax rate differentials.
Net Earnings/(Loss)
The Company's first quarter 2003 net earnings were $4.2 million, or $0.13 per
diluted share, compared to a net loss of $68.7 million, or $1.73 per diluted
share, in the first quarter 2002. Included in the net loss for the first quarter
2002 is the cumulative effect of the change in accounting principle of $72.9
million, which resulted from the Company's adoption of Statement of Financial
Accounting Standards No. 142 (SFAS 142) "Goodwill and Other Intangible Assets."
The first quarter 2002 earnings before cumulative effect of change in accounting
principle was $4.1 million, or $0.13 per diluted share.
Exposure to International Operations
Approximately 65% 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 8 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, acquisitions, and working capital requirements.
The Company has met its liquidity needs over the last three years primarily
through funds provided by long-term borrowings and more recently through cash
generated from operations. 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.
The Company's operating activities generated approximately $2.7 million during
the first quarter of 2003 compared to $8.9 million in the same period in 2002.
This change from the prior year was primarily attributable to an increase in
working capital.
During the first quarter 2003, EUR 13.5 million (approximately $14.4 million)
and $2.0 million of unscheduled repayments were made on the EUR 244 million and
the $25 million collateralized term loans, respectively. In addition certain
capital leases in the amount of $1.3 million were paid prior to maturity. At
March 30, 2003, EUR 47.0 million (approximately $50.6 million) and $5.2 million
were outstanding under the multi-currency term loan. The outstanding borrowings
under the revolving credit facility were JPY 300 million (approximately $2.5
million). The availability under the $100 million multi-currency revolving
credit facility has been reduced by letters of credit totaling $25.0 million,
primarily related to the surety bond posted in connection with ID Security
Systems Canada Inc. litigation.
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.
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 $79.2
million plus attorneys' fees and costs to be determined by the Court.
On March 28, 2003, the Court issued an order which vacated the jury verdict on
the antitrust claims and reduced the damages award related to tortious
interference and unfair competition from $19 million to $13 million. The Company
has subsequently filed an additional motion to further reduce the $13 million by
$2.1 million based on a prior agreement between the parties and a previous Order
by the Court. Both ID Security Systems Canada Inc. and the Company have filed
appeals to the Third Circuit Court of Appeals related to the various decisions
of the Court. (See Note 9 of the Consolidated Financial Statements.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company has petitioned the Court to reduce the bond of $26.4 million,
principally secured by a letter of credit, and return the 4,375,000 shares of
the Company's treasury stock, which have been placed into escrow. Although
management expects to prevail upon appeal, should the appeal be unsuccessful,
management anticipates that the final judgement would not be paid prior to the
end of 2004 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
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.
Capital Expenditures
The Company's capital expenditures during the first quarter of fiscal 2003
totaled $5.8 million compared to $1.3 million during the first quarter of fiscal
2002. The increase in 2003 principally resulted from additional
manufacturing-related investments. The Company anticipates its capital
expenditures to approximate $14 million in 2003.
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 areas 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.
The Company has been selectively purchasing currency exchange forward contracts
on a regular basis to reduce the risks of currency fluctuations on short-term
receivables. 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 March 30, 2003, the Company had currency exchange forward contracts
totaling approximately $18.1 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 where it is not
economically efficient, specifically for its operations in South America and
Asia.
The Company has historically not used financial instruments to minimize its
exposure to currency fluctuations on its net investments in and cash flows
derived from its foreign subsidiaries.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
OTHER MATTERS
- -------------
New Accounting Pronouncements and Other Standards
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables".
The standard provides guidance on how to account for arrangements that involve
the delivery or performance of multiple products, services, and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into by the Company after June 29, 2003. The Company is
currently evaluating the effect that the adoption of EITF Issue No. 00-21 will
have on its consolidated financial statements.
In January 2003, the FASB issued interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51". FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied to the Company's consolidated financial
statements for the period ending September 28, 2003. The Company does not expect
the adoption of FIN 46 to have a significant impact on its consolidated
financial statements.
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 29, 2002, 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 $79.2
million 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 $26.4
million 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 March 28, 2003, in response to the Company's Motion for Post-Trial Relief,
filed on July 1 and August 14, 2002, the Court issued an order which vacated the
jury verdict on the antitrust claims and reduced the damages award related to
tortious interference and unfair competition from $19 million to $13 million.
The Company has subsequently filed an additional motion to further reduce the
$13 million by $2.1 million based on a prior agreement between the parties and a
previous Order by the Court. Both ID Security Systems Canada Inc. and the
Company have filed appeals to the Third Circuit Court of Appeals related to the
various decisions of the Court. Based on input from outside legal counsel,
management is of the opinion that the Judge's Order is consistent with the law
as it relates to the antitrust issues, and is not consistent with the law as it
relates to the tortious interference and unfair competition aspects of the case.
Accordingly, no liability has been recorded for this litigation, as management
believes that, at this time, it is not probable the remaining judgement will be
upheld and that the reasonably possible range of the contingent liability is
between zero and $13 million. It is possible, although management believes it is
remote, that the Court of Appeals could reverse the decision of the lower Court
as it relates to the antitrust claims and reinstate the original judgement of
$80 million. If 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. Although management expects to prevail in the
appeal process, should the appeal be unsuccessful, management anticipates that
any final judgement would not be paid prior to the end of 2004 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.
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
Systems, Inc. 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 Systems, Inc. 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 Systems, Inc.
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.
On November 13, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5319 (JEI)
by plaintiff 1700 Pharmacy, Inc. against Checkpoint Systems, Inc. and served on
November 15, 2002.
On December 30, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-6131 (JEI)
by plaintiff Medi-Care Pharmacy, Inc. against Checkpoint Systems, Inc. and
served on January 3, 2003.
Both the 1700 Pharmacy, Inc. case and the Medi-Care Pharmacy, Inc. case were
consolidated with the previously mentioned cases and are included in the Stay
Order referred to above. No liability has been recorded for any of the purported
class action suits as management believes that, based on input from outside
legal counsel, it is not probable the judgement will be upheld and that the
lower end of the reasonably possible range of the contingent liability is zero
at this time. The high end of the range cannot be estimated at this time.
On March 13, 2003, the Company deposited with the Escrow Agent an additional
1,195,400 shares of the Company's treasury stock, as a result of the reduction
in market value of the Company's publicly traded shares. Such deposit was
intended to maintain the Court's Stay pending disposition of the Company's
Motion for Post-Trial Relief in the ID Security Systems Canada Inc. case
referred to above. As a result of the Court's actions on March 28, 2003,
Management expects that the bond will be reduced to the amended judgement amount
of $13 million and the escrow of treasury stock will be eliminated.
The Company is a plaintiff in a number of patent infringement suits around the
world against various defendants in an effort to enforce certain of the
Company's intellectual property rights. In each of these proceedings, the
defendants have challenged the validity of the Company's patents. In the event
the relevant patent were to be modified or invalidated, such action could
diminish or eliminate the value to the Company of the relevant patent.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 March 31, 2003, the Company filed a Current Report on Form 8-K
attaching a press release dated March 28, 2003, announcing that the
federal judge in the ID Systems Canada Inc. antitrust case against the
Company issued an order which vacates the antitrust verdict in its
entirety. In addition, the judge reduced the damages awarded against the
Company in the tortuous interference and unfair competition part of the
suit from $19 million to $13 million.
On April 23, 2003, the Company filed a Current Report on Form 8-K
attaching a press release dated April 22, 2003, announcing its financial
results for the first quarter of 2003.
On April 25, 2003, the Company filed a Current Report on Form 8-K
attaching a press release dated April 25, 2003, announcing that it has
filed an appeal with the US Third Circuit Court of Appeals of the
decision of the US District Court in the lawsuit brought by ID Security
Systems Canada Inc.
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 May 14, 2003
- ----------------------------
Executive Vice President,
Chief Financial Officer and Treasurer
/s/ Arthur W. Todd May 14, 2003
- ----------------------------
Vice President, Corporate Controller
and Chief Accounting Officer
CERTIFICATION
I, George W. Off, Chairman of the Board, President 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,
President and Chief
Executive Officer
Date: May 14, 2003
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
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Name: W. Craig Burns
Title: Executive Vice President,
Chief Financial Officer
and Treasurer
Date: May 14, 2003
INDEX TO EXHIBITS
-----------------
Exhibit Description
- ------- -----------
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002