SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2004
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- ------
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 May 10, 2004, there were 37,571,514 shares of the Common Stock
outstanding.
This Amendment No. 1 to the Quarterly Report on Form 10-Q of Checkpoint
Systems, Inc. for the quarterly period ended March 28, 2004, is being filed
solely to include exhibits that were inadvertently omitted from the original
filing. There are no other changes to the originally filed Form 10-Q. All
information in this Amendment No. 1 is as of March 28, 2004, and does not
reflect any subsequent information or events other than the change referred
to above.
CHECKPOINT SYSTEMS, INC.
FORM 10-Q/A
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statement of Shareholders' Equity 6
Consolidated Statements of Comprehensive Income 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20-25
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 25
Item 4. Controls and Procedures 25
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 26-28
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 28, Dec. 28,
2004 2003
-------- --------
(Restated
see Note 14)
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 88,170 $110,376
Accounts receivable, net of allowances
of $12,744 and $12,003 136,706 137,494
Inventories 86,080 80,986
Other current assets 32,429 32,170
Deferred income taxes 12,894 13,076
-------- --------
Total current assets 356,279 374,102
REVENUE EQUIPMENT ON OPERATING LEASE, net 4,250 4,002
PROPERTY, PLANT, AND EQUIPMENT, net 98,053 100,393
GOODWILL 209,075 212,206
OTHER INTANGIBLES, net 51,371 53,446
OTHER ASSETS 26,342 29,173
-------- --------
TOTAL ASSETS $745,370 $773,322
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and current
portion of long-term debt $ 81,355 $ 79,437
Accounts payable 44,880 62,833
Accrued compensation and related taxes 32,695 36,911
Other accrued expenses 30,877 31,653
Income taxes 27,695 28,120
Unearned revenues 28,237 27,813
Restructuring reserve 9,420 10,173
Other current liabilities 16,765 20,272
-------- --------
Total current liabilities 271,924 297,212
LONG-TERM DEBT, LESS CURRENT MATURITIES 39,404 42,601
CONVERTIBLE SUBORDINATED DEBENTURES 23,329 23,753
ACCRUED PENSIONS 64,200 65,871
OTHER LONG-TERM LIABILITIES 18,183 19,588
MINORITY INTEREST 1,024 1,007
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized
500,000 shares, none issued
Common Stock, par value $.10 per share,
authorized 100,000,000 shares, issued
39,604,840 and 39,479,407 3,960 3,948
Additional capital 284,288 282,529
Retained earnings 98,851 93,422
Common stock in treasury, at cost,
4,612,291 shares and 4,640,631 shares (46,716) (47,003)
Accumulated other comprehensive loss (13,077) (9,606)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 327,306 323,290
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $745,370 $773,322
======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter (13 weeks) Ended
------------------------
March 28, March 30,
2004 2003
-------- --------
(Restated
see Note 14)
(Thousands, except per share data)
Net revenues $180,646 $156,417
Cost of revenues 109,439 93,268
-------- --------
Gross profit 71,207 63,149
Selling, general, and
administrative expenses 61,877 54,897
-------- --------
Operating income 9,330 8,252
Interest income 453 339
Interest expense 2,180 3,043
Other gain, net 56 748
-------- --------
Earnings before income taxes
and minority interest 7,659 6,296
Income taxes 2,221 2,149
Minority interest 9 17
-------- --------
Net earnings $ 5,429 $ 4,130
======== ========
Net earnings per share:
Basic $ .16 $ .13
======== ========
Diluted $ .15 $ .13
======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Three Months (13 weeks) Ended March 28, 2004
----------------------------------------------------
Accumu-
lated
Other
Addit- Compre-
Common ional Retained hensive Treasury
Stock Capital Earnings Loss Stock Total
------ ------- -------- ------- -------- -----
(Thousands)
Balance,
December 28, 2003:
(Common shares:
issued 39,479,407
reacquired 4,640,631)
As previously
reported $3,948 $282,529 $ 97,693 $ (9,606) $(47,003) $327,561
Effect of
Restatement
(See Note 14) (4,271) (4,271)
------ -------- -------- -------- -------- --------
As restated $3,948 $282,529 $ 93,422 $ (9,606) $(47,003) $323,290
Net earnings 5,429 5,429
Exercise of stock
options 12 1,759 1,771
(125,433 shares)
Net gain on interest
rate swap 4 4
Treasury stock issued 287 287
Foreign currency
translation adjustment (3,475) (3,475)
------ -------- -------- -------- -------- --------
Balance,
March 28, 2004 $3,960 $284,288 $ 98,851 $(13,077) $(46,716) $327,306
====== ======== ======== ======== ======== ========
(Common shares:
issued 39,604,840
reacquired 4,612,291)
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Quarter (13 weeks) Ended
------------------------
March 28, March 30,
2004 2003
-------- --------
(Restated
See Note 14)
(Thousands)
Net earnings $ 5,429 $ 4,130
Net gain/(loss) on interest
rate swap, net of tax 4 (45)
Foreign currency
translation adjustment (3,475) 4,789
-------- --------
Comprehensive income $ 1,958 $ 8,874
======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months (13 weeks) Ended
-----------------------------
March 28, March 30,
2004 2003
-------- --------
(Restated
see Note 14)
(Thousands)
Cash flows from operating activities:
Net earnings $ 5,429 $ 4,130
Adjustments to reconcile net earnings
to net cash (used)/provided by operating activities:
Depreciation and amortization 6,395 7,182
(Gain)/loss on disposal of fixed assets (112) (618)
(Increase)/decrease in current assets, net
of the effects of acquired companies:
Accounts receivable 1,069 4,882
Inventories (6,624) (3,302)
Other current assets (399) (1,898)
Increase/(decrease) in current liabilities,
net of the effects of acquired companies:
Accounts payable (17,353) (5,819)
Income taxes (120) 366
Unearned revenues 792 (1,429)
Restructuring reserve (696) (847)
Other current and accrued liabilities (7,686) 61
-------- --------
Net cash (used)/provided by operating activities $(19,305) $ 2,708
-------- --------
Cash flows from investing activities:
Acquisition of property, plant, and equipment (2,987) (5,834)
Acquisitions, net of cash acquired (155) -
Other investing activities 270 417
-------- --------
Net cash used in investing activities $ (2,872) $ (5,417)
-------- --------
Cash flows from financing activities:
Proceeds from stock issuances 1,331 339
Net change in short-term debt 2,077 2,335
Payment of long-term debt (1,930) (19,878)
-------- --------
Net cash provided/(used)in financing activities $ 1,478 $(17,204)
-------- --------
Effect of foreign currency rate fluctuations
on cash and cash equivalents (1,507) 1,077
-------- --------
Net (decrease)in cash and cash
equivalents $(22,206) $(18,836)
Cash and cash equivalents:
Beginning of period 110,376 54,670
-------- --------
End of period $ 88,170 $ 35,834
======== ========
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 28, 2003 for the most recent disclosure of the
Company's accounting policies.
On February 3, 2004, the Company made a $2.5 million minority investment in
Goliath Solutions, a start-up developer of RFID-based technology for
point-of-purchase advertising and display compliance monitoring in the grocery,
chain drug, mass merchandise, and convenience store channels of trade, which is
considered a variable interest entity (VIE). Management has determined that the
Company is the primary beneficiary and has therefore consolidated Goliath
Solutions' assets, liabilities, and results of operations in the Company's
consolidated financial statements. As of March 28, 2004, the Company's
investment in Goliath Solutions was approximately $2.5 million, representing the
Company's maximum exposure to loss.
The consolidated financial statements include all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the Company's
financial position at March 28, 2004 and December 28, 2003 and its results of
operations and changes in cash flows for the thirteen week periods ended
March 28, 2004 and March 30,
2003.
Certain reclassifications have been made to the 2003 financial statements and
related footnotes to conform to the 2004 presentation.
2. INVENTORIES
March 28, December 28,
2004 2003
--------- -----------
(Thousands)
Raw materials $ 10,498 $ 8,285
Work in process 4,993 3,547
Finished goods 70,589 69,154
-------- --------
$ 86,080 $ 80,986
======== ========
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company had intangible assets with a net book value of $51.4 million and
$53.4 million as of March 28, 2004 and December 28, 2003, respectively. The
following table reflects the components of intangible assets as of
March 28, 2004 and December 28, 2003:
March 28, 2004 December 28, 2003
---------------------- ----------------------
Amortizable Gross Gross
Life Carrying Accumulated Carrying Accumulated
(years) Amount Amortization Amount Amortization
----------- -------- ------------ -------- ------------
(Thousands)
Customer lists 20 $30,236 $14,450 $31,020 $14,584
Trade name 30 27,645 4,326 28,226 3,763
Patents, license
agreements 5 to 14 36,684 25,102 37,362 25,439
Other 3 to 6 947 263 952 328
------- ------- ------- -------
$95,512 $44,141 $97,560 $44,114
======= ======= ======= =======
Estimated amortization expense for 2004 and each of the five succeeding years
is:
(Thousands)
2004 $4,032
2005 $3,926
2006 $3,691
2007 $3,638
2008 $3,635
2009 $3,628
The changes in the carrying amount of goodwill for the three months ended
March 28, 2004, are as follows:
Labeling Retail
Security Services Merchandising Total
-------- -------- ------------- -------
(Thousands)
Balance as of
beginning of
fiscal year 2004
(December 29, 2003) $106,095 $38,433 $67,678 $212,206
Goodwill acquired
during year 593 - - 593
Exchange rate changes (2,009) (235) (1,480) (3,724)
-------- ------- ------- --------
Balance as of
March 28, 2004 $104,679 $38,198 $66,198 $209,075
======== ======= ======= ========
Pursuant to SFAS 142, the Company will perform an annual assessment of the
carrying value 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 impairment charges, which would be accounted for as an operating expense.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. LONG-TERM DEBT
Long-term debt at March 28, 2004 and December 28, 2003 consisted of the
following:
March 28, December 28,
2004 2003
------------ -----------
(Thousands)
EUR 244 million variable interest
rate term loan maturing in 2006 $ 43,041 $ 45,863
$100 million multi-currency variable
interest rate revolving credit
facility maturing in 2006 2,832 2,791
EUR 9.5 million capital lease
maturing in 2021 10,391 10,733
EUR 2.7 million capital lease
maturing in 2007 1,557 1,693
Other capital leases with maturities
through 2006 15 27
-------- --------
Total 57,836 61,107
Less current portion 18,432 18,506
-------- --------
Total long-term portion (excluding
convertible subordinated debentures) 39,404 42,601
Convertible subordinated debentures 83,232 83,753
Less called portion of convertible
subordinated debentures 59,903 60,000
-------- --------
Total long-term portion $ 62,733 $ 66,354
======== ========
At March 28, 2004, EUR 35.5 million (approximately $43.0 million) was
outstanding under the multi-currency term loan. The outstanding borrowings under
the revolving credit facility were JPY 300 million (approximately $2.8 million).
The availability under the $100 million multi-currency revolving credit facility
has been reduced by letters of credit totaling $12.2 million, primarily related
to the surety bond posted in connection with ID Security Systems Canada Inc.
litigation.
On February 18, 2004, the Company called $60.0 million of the convertible
subordinated debentures for redemption on April 13, 2004. The debentures were
convertible into common stock at a conversion price of $18.375 per share.
Of the called debentures, $47.2 million were converted into 2.570 million
shares of the Company's common stock and $12.8 million were redeemed for cash.
Prior to March 28, 2004, $0.1 million of the $47.2 million were converted into
shares.
In addition to the $60.0 million convertible subordinated debentures redeemed
in April 2004, certain bondholders elected to convert their bonds into shares of
the Company's common stock during the first quarter 2004. The principal amount
of additional bonds converted into common stock was $0.4 million, which reduced
the outstanding balance of the convertible debentures at March 28, 2004, to
$83.2 million.
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 partially 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. 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 28, March 30,
2004 2003
-------- --------
(Restated
see Note 14)
(Thousands, except per share amounts)
Basic earning per share:
Net earnings $ 5,429 $ 4,130
======== ========
Weighted average common
stock outstanding 34,967 32,723
======== ========
Basic earnings per share $ .16 $ .13
======== ========
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Diluted earnings per share:
Net earnings $ 5,429 $ 4,130
Interest on subordinated
debentures, net of tax 664 -(2)
-------- --------
Net earnings available for
dilutive securities $ 6,093 $ 4,130
======== ========
Weighted average common
stock outstanding 34,967 32,723
Additional common shares
resulting from stock
options (1) 1,064 91
Additional common shares
resulting from subordinated
debentures 4,538 -(2)
-------- --------
Weighted average common
stock and dilutive stock
outstanding 40,569 32,814
======== ========
Diluted earnings $ .15 $ .13
======== ========
(1) Excludes approximately 440, and 2,519 anti-dilutive outstanding stock
options for the first quarters of 2004 and 2003, respectively.
(2) The conversion of the subordinated debentures is not included as it is
anti-dilutive.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes for the thirteen week periods ended
March 28, 2004 and March 30, 2003 were as follows:
Quarter (13 weeks) Ended
------------------------
March 28, March 30,
2004 2003
-------- --------
(Thousands)
Interest $ 1,070 $ 1,474
Income tax payments, net $ 250 $ (1,046)
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. PROVISION FOR RESTRUCTURING
Accrual Cash Accrual
at Payments at
Beginning (and Exchange March 28,
of 2004 Rate Changes) 2004
--------- ------------ --------
(Thousands)
Severance and
other employee
related charges $ 8,878 $ (679) $ 8,199
Lease termination
costs 1,295 (74) 1,221
------- ------- -------
$10,173 $ (753) $ 9,420
======= ======= =======
At the end of the first quarter 2004, 22 of the 512 planned employee
terminations, related to the 2003 restructuring, had occurred. The Company
expects the terminations and restructuring actions to be completed by the end
of 2005. Termination benefits are being paid out over a period of 1 to 24 months
after termination.
9. PENSION BENEFITS
The components of net periodic benefit cost for the thirteen week periods
ended March 28, 2004 and March 30, 2003
were as follows:
Quarter (13 weeks) Ended
------------------------
March 28, March 30,
2004 2003
-------- --------
(Thousands)
Service cost $ 352 $ 302
Interest cost 933 793
Expected return on plan assets 1 1
Amortization of prior service cost 1 -
Amortization of net (gain)/loss 29 25
======== ========
Net benefit cost $ 1,314 $ 1,119
======== ========
The Company expects the cash requirements for funding the pension benefits to be
approximately $3.6 million during fiscal 2004, including $0.9 million which was
funded during the quarter ended March 28, 2004.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
10. 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 remotely possible that
the ultimate resolution of such matters will have a material adverse effect on
the Company's consolidated results of operations and/or financial condition,
except as described below.
ID Security Systems Canada Inc. versus Checkpoint Systems, Inc.
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. Judgment 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
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. The Court granted the Company's motion, and on May 20, 2003
further reduced the judgment from $13 million to $10.9 million. On the same
date, the Court stayed execution of the judgment upon the posting of a bond in
the amount of $11.3 million by the Company. The Company promptly posted the
requisite bond and execution on the judgment in the amount of $10.9 million is
now stayed.
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.
Oral arguments for these appeals were heard on March 30, 2004. 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 judgment will be upheld and that the reasonably possible
range of the contingent liability is between zero and $80 million. Although
management believes it is not likely, it is possible that the Court of Appeals
could reverse the decision of the lower Court as it relates to the antitrust
claims and reinstate the original judgment of $79.2 million plus attorneys'
fees and costs. 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 be successful
in the appeal process, should the appeal be unsuccessful, management anticipates
that any
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
final judgment would be paid in the second half 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 judgment.
Matters related to ID Security Systems Canada Inc. versus Checkpoint
Systems, Inc.
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 discussed below.
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 has been re-filed in New Jersey and is 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.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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
October 18, 2002 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 that the Court of Appeals will reverse the decision of the lower Court
in the ID Security Systems Canada Inc. litigation as it relates to the antitrust
claims 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.
The following table set forth the movement in the warranty reserve:
Quarter (13 weeks) Ended
------------------------
March 28, March 30,
2004 2003
-------- --------
(Thousands)
Balance at the beginning of the period $4,591 $4,002
Accruals for warranties issued $ 306 $ 216
Settlement made (204) (180)
Foreign currency translation adjustment (57) 73
------ ------
Balance at the end of period $4,636 $4,111
====== ======
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
11. BUSINESS SEGMENTS
Quarter (13 weeks) Ended
------------------------
March 28, March 30,
2004 2003
-------- --------
(Thousands)
Business segment net revenues:
Security $112,529 $ 92,764
Labeling Services 41,040 38,623
Retail Merchandising 27,077 25,030
-------- --------
Total $180,646 $156,417
======== ========
Business segment gross profit:
Security $ 48,017 $ 39,515
Labeling Services 10,657 11,322
Retail Merchandising 12,533 12,312
-------- --------
Total gross profit $ 71,207 $ 63,149
Operating expenses 61,877 54,897
Interest expense, net 1,727 2,704
Other gain, net 56 748
-------- --------
Earnings before income taxes
and minority interest $ 7,659 $ 6,296
======== ========
12. STOCK OPTIONS
At March 28, 2004, 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.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 earnings/(loss) and net
earnings/(loss) per share would approximate the pro-forma amounts as follows:
Quarter (13 weeks) Ended
------------------------
March 28, March 30,
2004 2003
-------- --------
(Restated
see Note 14)
(Thousands)
Net earnings, as reported $ 5,429 $ 4,130
Total stock-based
employee compensation
expense determined
under fair value
based method,
net of tax (468) (822)
-------- --------
Pro-forma net earnings $ 4,961 $ 3,308
======== ========
Net earnings per share:
Basic, as reported $ .16 $ .13
======== ========
Basic, pro-forma $ .14 $ .10
======== ========
Diluted, as reported $ .15 $ .13
======== ========
Diluted, pro-forma $ .14 $ .10
======== ========
The following assumptions were used in estimating fair value of stock options:
Quarter (13 Weeks) Ended
------------------------
March 28, March 30,
2004 2003
-------- --------
Dividend yields None None
Expected volatility .3048 .4693
Risk-free interest rates 2.79% 1.99%
Expected life (in years) 3.22 2.81
13. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER STANDARDS
No new accounting pronouncements and other standards material to the Company
were issued in the first quarter of 2004.
14. RESTATEMENT
On May 12, 2004 the Company issued a press release that it had discovered errors
in the computation of its income tax expense relating to tax credits on the
income from the Company's Puerto Rico operations as well as certain foreign
income inclusions for U.S. tax purposes for fiscal years 2002 and 2003 and as a
result will be restating its financial statements for those periods. The effect
of the adjustments was to increase income tax expense, and decrease net earnings
by $3.6 million in fiscal year 2002 and $0.7 million in fiscal year 2003. The
Company has also restated its consolidated balance sheet at December 28, 2003
and its consolidated statement of operations for the period ended March 30, 2003
that are included in this quarterly report on Form 10-Q.
In 1996, Congress revised the Section 936 credit for U.S. manufacturers doing
business in Puerto Rico. The tax credits expire for fiscal years beginning after
December 31, 2005. The U.S. Internal Revenue Code provides limitations on the
use of the tax credits during a phase-out period for years 2002-2005. The
Company made an error in computing the limitation during the phase-out period.
The effects of the adjustments are summarized as follows:
Previously As
reported restated
---------- --------
Consolidated Balance Sheet
at Dec. 28, 2003
Income taxes accrued $ 23,849 $ 28,120
Retained earnings $ 97,693 $ 93,422
Consolidated Statement of Operations
for the Quarter ended March 30, 2003
Income taxes $ 2,078 $ 2,149
Net earnings $ 4,201 $ 4,130
The restatement did not have an effect on earnings per share or cash flows
for the period ended March 30, 2003.
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 28, 2003, and
the Company's other Securities and Exchange Commission filings.
Critical Accounting Policies and Estimates
- ------------------------------------------
For a discussion of the Company's critical accounting policies and estimates,
see Item 7 "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations" in the Company's Annual Report on Form 10-K filed
for the year ended December 28, 2003.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Quarter 2004 Compared to First Quarter 2003
- ---------------------------------------------------
As discussed in Note 14 of the Financial Statements, the Company has restated
its Financial Statements for the first quarter of 2003.
Net Revenues
Revenues for the first quarter 2004 compared to the first quarter 2003 increased
by $24.2 million or 15.5% from $156.4 million to $180.6 million. Foreign
currency translation had a positive impact on revenues of approximately
$15.5 million or 9.9% in the first quarter of 2004 as compared to the first
quarter of 2003.
Security revenues increased by $19.8 million or 21.3% in the first quarter of
2004 as compared to the first quarter of 2003. Foreign currency translation had
a positive impact of approximately $8.8 million. The remaining increase was
primarily due to growth in the closed-circuit television (CCTV) market in the
USA and the UK and in the electronic article surveillance (EAS) market in Asia
Pacific, partially offset by a decline in European EAS sales. The growth in the
US CCTV revenues can be primarily attributed to enhanced products and
applications, as well as a focus on customer service. Labeling services revenues
increased by $2.4 million or 6.3% due to the positive impact of foreign currency
translation of approximately $3.3 million. The remaining decrease was primarily
due to lower barcode labeling systems (BCS) revenues in Europe ($1.7 million)
caused by weak retail trading and price competition and a decrease in radio
frequency identification (RFID) library system revenues in the USA
($1.9 million) resulting from the timing of several large orders that were
recognized in the first quarter of 2003. This was largely offset by increases in
BCS revenues in the USA ($1.5 million) and Check-Net revenues in Europe
($0.9 million) and Asia Pacific ($0.4 million). Retail merchandising revenues
increased by $2.0 million or 8.2%. The positive impact of foreign currency
translation of approximately $3.3 million was partially offset by decreases in
hand-held labeling systems (HLS) in Europe and the USA. The continuing
transition from hand-held price labeling to automated barcoding and scanning by
retailers caused the decline in HLS.
Gross Profit
Gross profit for the first quarter 2004 was $71.2 million, or 39.4% of revenues,
compared to $63.1 million, or 40.4% of revenues, for the first quarter 2003.
The benefit of foreign currency translation on gross profit was approximately
$6.4 million in the first quarter of 2004 as compared to the first quarter
of 2003.
Security gross profit, as a percentage of sales, increased slightly from 42.6%
in the first quarter of 2003 to 42.7% in the first quarter of 2004. Improvements
in manufacturing efficiencies and the benefits of a weaker US dollar on products
sourced in US dollars but sold in a different currency were largely offset by
increases in EAS technology spending and in field service costs due to large
roll-outs. The increase in CCTV products as a percentage of security revenue
also impacted the security gross profit percentage negatively. Gross profit,
as a percentage of net revenues, for labeling services declined to 26.0% in the
first quarter of 2004 from 29.3% in the first quarter of 2003. Increased
technology spending on RFID library products and competitive pricing
pressures primarily caused the decline. The retail merchandising gross profit,
as a percentage of net revenues, declined from 49.2% in the first quarter of
2003 to 46.3% in the first quarter 2004. The decrease resulted from an increase
in technology spending to support the development of in-store merchandising
solutions for US retailers.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Field service and installation costs for the first quarter of 2004 and 2003 were
9.6% and 9.0% of net revenues, respectively. The increase, as a percentage of
net revenues, resulted from an increase in CCTV installations relative to tota
net revenues.
Selling, General, and Administrative Expenses
SG&A expenses increased $7.0 million over the first quarter of 2003. Foreign
currency translation increased SG&A expenses by approximately $5.3 million.
As a percentage of net revenues, SG&A expenses decreased from 35.1% to
34.3%.
Interest Expense and Interest Income
Interest expense for the first quarter of 2004 decreased $0.9 million from the
comparable quarter in 2003 due to debt repayment. Interest income for the first
quarter of 2004 increased by $0.1 million from the comparable quarter in 2003
(from $0.3 million to $0.4 million) as a result of higher cash balances in the
first quarter of 2004.
Other Gain, net
Other gain, net resulted from net foreign currency transaction gains of
$0.1 million and $0.7 million for the first quarters of 2004 and 2003,
respectively.
Income Taxes
The effective tax rate for the first quarter of 2004 was 29.0%. The effective
tax rate for the first quarter of 2003 was 34.1%. The 2003 provision included a
change in valuation allowance and an adjustment related to the filing of the
2002 US income tax return. These adjustments are not included in the 2004
estimated effective income tax rate and are the primary differences between
the 2003 and 2004 effective income tax rate.
Net Earnings
The Company's first quarter 2004 net earnings were $5.4 million, or $0.15
per diluted share, compared to $4.1 million, or $0.13 per diluted share, in
the first quarter 2003. The weighted average number of shares used in the
diluted earnings per share computation were 40.6 million and 32.8 million for
the first quarters of 2004 and 2003, respectively. The conversion of the
subordinated debentures was not included in the first quarter of 2003 as it was
anti-dilutive.
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 utilized approximately $19.3 million during
the first three months of 2004 compared to $2.7 million generated in the same
period in 2003. This change from the prior year was primarily
attributable to a reduction in current liabilities of $25.1 million.
At March 28, 2004, EUR 35.5 million (approximately $43.0 million) was
outstanding under the multi-currency term loan. The outstanding borrowings under
the revolving credit facility were JPY 300 million (approximately $2.8 million).
The availability under the $100 million multi-currency revolving credit facility
has been reduced by letters of credit totaling $12.2 million, primarily related
to the surety bond posted in connection with ID Security Systems Canada Inc.
litigation.
On February 18, 2004, the Company called $60.0 million of the convertible
subordinated debentures for redemption on April 13, 2004. The debentures were
convertible into common stock at a conversion price of $18.375 per share. Of the
called debentures, $47.2 million were converted into 2.570 million shares of the
Company's common stock and $12.8 million were redeemed for cash. Prior to March
28, 2004, $0.1 million of the $47.2 million were converted into shares.
In addition to the $60.0 million convertible subordinated debentures redeemed in
April 2004, certain bondholders elected to convert their bonds into shares of
the Company's common stock during the first quarter 2004. The principal amount
of additional bonds converted into common stock was $0.4 million, which reduced
the outstanding balance of the convertible debentures at March 28, 2004, to
$83.2 million.
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. Judgment was entered on the
verdict in favor of the plaintiff, after
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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
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. The Court granted the Company's motion, and on May 20, 2003
further reduced the judgment from $13 million to $10.9 million. On the same
date, the Court stayed execution of the judgment upon the posting of a bond in
the amount of $11.3 million by the Company. The Company promptly posted the
requisite bond and execution on the judgment in the amount of $10.9 million is
now stayed. 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. Oral arguments for these appeals were heard on March 30, 2004.
(See Note 10 of the Consolidated Financial Statements.)
Although management expects to be successful upon appeal, should the appeal be
unsuccessful, management anticipates that the final judgment would be paid in
the second half 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
judgment. The recording of a liability or a final judgment 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 2004
totaled $3.0 million compared to $5.8 million during the first quarter of fiscal
2003. The decrease in 2004 principally resulted from lower manufacturing-related
investments. The Company anticipates capital expenditures to primarily upgrade
technology and improve its production capabilities to approximate $14 million in
2004.
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 on the inter-company
receivables and payables. Additionally, the sourcing of product in one currency
and the sales of product in a different currency can cause gross margin
fluctuations due to changes in currency exchange rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company selectively purchases currency forward exchange contracts to reduce
the risks of currency fluctuations on short-term inter-company receivables and
payables. These contracts lock in 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 28, 2004, the Company had currency forward exchange contracts
totaling approximately $25.3 million. The contracts are in the various local
currencies covering primarily the Company's Western European, Canadian, and
Australian operations. Historically, the Company has not purchased currency
forward exchange 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. The Company has used third party
borrowings in foreign currencies to hedge a portion of its net investments in
and cash flows derived from its foreign subsidiaries. As the Company reduces its
third party foreign currency borrowings, the effect of foreign currency
fluctuations on its net investments in and cash flows derived from its foreign
subsidiaries increases.
OTHER MATTERS
- -------------
New Accounting Pronouncements and Other Standards
No new accounting pronouncements and other standards material to the Company
were issued in the first quarter of 2004.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the market risks as disclosed in Item
7a "Quantitative And Qualitative Disclosures About Market Risk" of the Company's
Annual Report on Form 10-K filed for the year ending December 28, 2003.
Item 4. DISCLOSURE CONTROLS AND PROCEDURES
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 as of the end of the period covered
by this report. 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.
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 believes it is remotely possible that
the ultimate resolution of such matters will have a material adverse effect on
the Company's consolidated results of operations and/or financial condition,
except as described below.
ID Security Systems Canada Inc. versus Checkpoint Systems, Inc.
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. Judgment 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
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. The Court granted the Company's motion, and on May 20, 2003
further reduced the judgment from $13 million to $10.9 million. On the same
date, the Court stayed execution of the judgment upon the posting of a bond in
the amount of $11.3 million by the Company. The Company promptly posted the
requisite bond and execution on the judgment in the amount of $10.9 million is
now stayed.
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.
Oral arguments for these appeals were heard on March 30, 2004. 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 judgment will be upheld and that the reasonably possible range of
the contingent liability is between zero and $80 million. Although management
believes it is not likely, it is possible that the Court of Appeals could
reverse the decision of the lower Court as it relates to the antitrust claims
and reinstate the original judgment of $79.2 million plus attorneys' fees and
costs. 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 be successful
in the appeal process, should the appeal be unsuccessful, management anticipates
that any final judgment would be paid in the second half 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 judgment.
Matters related to ID Security Systems Canada Inc. versus Checkpoint Systems,
Inc.
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 discussed below.
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 has been re-filed in New Jersey and is 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 October
18, 2002 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 that the Court of Appeals will reverse the decision of the lower Court
in the ID Security Systems Canada Inc. litigation as it relates to the antitrust
claims 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.
All Tag Security S.A., et al.
On April 22, 2004 the United States District Court For The Eastern District Of
Pennsylvania issued an opinion granting All-Tag Security S.A. and All-Tag
Security Americas, Inc.' (jointly "All-Tag") and Sensormatic Electronics
Corporation's motion for summary judgment, which was filed on February 15, 2002,
and ordered the case closed. Checkpoint originally filed suit on May 1, 2001,
alleging that the disposable, deactivatable radio frequency security tag
manufactured by All-Tag S.A. and sold by Sensormatic infringed on a patent owned
by Checkpoint (US Patent No. 4,876,555). The Court determined that the US patent
is invalid because the original application failed to identify a co-inventor.
The original US application was filed in March 1988 and was scheduled to expire
on March 15, 2008. Checkpoint acquired the patent in 1995 when it acquired
Actron AG. Checkpoint is currently reviewing its options to appeal the decision.
Other
The Company is a plaintiff in other 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
patents were to be modified or invalidated, such action would diminish or
eliminate the value to the Company of the relevant patent.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement with W. Craig Burns
10.2 Employment Agreement with John E. Davies, Jr.
10.3 First Amendment to Employment Agreement with John E. Davies, Jr.
10.4 Employment Agreement with Per Levin
10.5 Amended Employment Agreement with Per Levin
10.6 Employment Agreement with Arthur W. Todd
10.7 Employment Agreement with John R. Van Zile
31.1 Rule 13a-14(a)/15d-14(a) Certification of George W. Off,
Chairman of the Board, President and Chief Executive Officer.
31.2 Rule 13a-a4(a)/15d-14(a) Certification of W. Craig Burns,
Executive Vice President, Chief Financial Officer and Treasurer.
32.1 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
The Registrant filed the following reports during the quarter ended
March 28, 2004:
On April 14, 2004, the Company issued a press release announcing that the
holders of $47.2 million of the $60.0 million of aggregate principal
amount of its existing 5-1/4% Convertible Subordinated Debentures due 2005
("the Notes")called for redemption on April 13, 2004, elected to convert
their Notes into 2,569,797 shares of the Company's common stock at a
conversion price of $18.375 per share. The shares of Company common stock
issuable as a result of the conversion will be freely-tradeable,
unrestricted shares.
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 12, 2004
- ----------------------------
W. Craig Burns
Executive Vice President,
Chief Financial Officer and Treasurer
/s/Arthur W. Todd May 12, 2004
- ----------------------------
Arthur W. Todd
Vice President, Corporate Controller
and Chief Accounting Officer