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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 June 30, 2002
--------------------------------------------
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
---------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 24, 2002, there were 32,237,825 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 18-24
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 25
Part II. OTHER INFORMATION
Item 1. Legal proceedings 25
Item 4. Submission of matters to a vote of security
holders 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
INDEX TO EXHIBITS 28
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, Dec. 30,
2002 2001
-------- --------
(Unaudited)
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 51,783 $ 43,698
Accounts receivable, net of allowances
of $11,377 and $12,182 138,446 145,768
Inventories 92,870 91,510
Other current assets 21,978 23,309
Deferred income taxes 10,638 9,288
-------- --------
Total current assets 315,715 313,573
REVENUE EQUIPMENT ON OPERATING LEASE, net 6,105 9,059
PROPERTY, PLANT, AND EQUIPMENT, net 102,915 102,613
GOODWILL 259,170 231,138
OTHER INTANGIBLES, net 52,988 58,467
OTHER ASSETS 37,528 37,803
-------- --------
TOTAL ASSETS $774,421 $752,653
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and current
portion of long-term debt $ 29,552 $ 31,423
Accounts payable 38,376 43,008
Accrued compensation and
related taxes 24,064 20,199
Income taxes 11,417 12,934
Unearned revenues 30,149 22,964
Restructuring reserve 7,333 14,179
Other current liabilities 41,868 42,251
-------- --------
Total current liabilities 182,759 186,958
LONG-TERM DEBT, LESS CURRENT MATURITIES 122,059 142,088
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
ACCRUED PENSIONS 50,962 44,851
OTHER LONG-TERM LIABILITIES 10,298 9,230
DEFERRED INCOME TAXES 11,147 8,508
MINORITY INTEREST 779 755
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized
500,000 shares, none issued
Common Stock, par value $.10 per share, 3,860 3,818
authorized 100,000,000 shares, issued
38,597,025 and 38,183,861
Additional capital 258,189 252,342
Retained earnings 125,174 115,093
Common stock in treasury, at cost,
6,359,200 shares (64,410) (64,410)
Accumulated other comprehensive loss (46,396) (66,580)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 276,417 240,263
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $774,421 $752,653
======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
--------------------- ----------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
------- -------- -------- --------
(Thousands, except per share data)
Net revenues $160,924 $162,182 $304,378 $325,910
Cost of revenues 94,842 95,858 178,864 192,440
-------- -------- -------- --------
Gross Profit 66,082 66,324 125,514 133,470
Selling, general, and
administrative expenses 53,967 50,771 103,799 105,484
Other operating expenses - - - 1,607
-------- -------- -------- --------
Operating income 12,115 15,553 21,715 26,379
Interest income 454 685 869 1,510
Interest expense 3,902 5,723 7,627 11,829
Other income/(loss),net 131 (317) (100) (22)
-------- -------- -------- --------
Earnings before income taxes 8,798 10,198 14,857 16,038
Income taxes 2,815 3,977 4,754 6,255
Minority interest 16 42 22 52
-------- -------- -------- --------
Net earnings $ 5,967 $ 6,179 $ 10,081 $ 9,731
======== ======== ======== ========
Net earnings per share:
Basic $ .19 $ .20 $ .31 $ .32
======== ======== ======== ========
Diluted $ .18 $ .19 $ .31 $ .31
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Six Months (26 Weeks) Ended June 30, 2002
-----------------------------------------------------
Accumu-
lated
Other
Addit- Compre-
Common ional Retained hensive Treasury
Stock Capital Earnings Loss Stock Total
------ ------- -------- ------ -------- -----
(Thousands)
Balance,
December 30, 2001 $3,818 $252,342 $115,093 $(66,580) $(64,410) $240,263
(Common shares:
issued 38,183,861
reacquired 6,359,200)
Net earnings 10,081 10,081
Exercise of stock
options 42 5,847 5,889
(413,164 shares)
Foreign currency
translation adjustment 20,184 20,184
------ -------- -------- --------- --------- --------
Balance,
June 30, 2002 $3,860 $258,189 $125,174 $(46,396) $(64,410) $276,417
====== ======== ======== ========= ========= ========
(Common shares:
issued 38,597,025
reacquired 6,359,200)
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
--------------------- ---------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
------- ------- ------- -------
(Thousands)
Net earnings $ 5,967 $ 6,179 $ 10,081 $ 9,731
Net loss on interest rate
swap, net of tax (211) - (211) -
Foreign currency
translation adjustment 25,975 (165) 20,494 (20,039)
-------- -------- -------- --------
Comprehensive income/
(loss) $ 31,731 $ 6,014 $ 30,364 $(10,308)
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months (26 Weeks) Ended
---------------------------
June 30, July 1,
2002 2001
-------- -------
(Thousands)
Cash flows from operating activities:
Net earnings $ 10,081 $ 9,731
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Revenue equipment under operating lease (362) 1,364
Long-term customer contracts 2,459 (1,769)
Depreciation and amortization 15,543 22,303
(Increase)/decrease in current assets, net
of the effects of acquired companies:
Accounts receivable 15,737 11,473
Inventories 4,487 5,223
Other current assets (194) 5,900
Increase/(decrease) in current liabilities, net
of the effects of acquired companies:
Accounts payable (6,483) (6,743)
Income taxes (2,904) (7,026)
Unearned revenues 5,413 2,130
Restructuring reserve (7,177) (7,239)
Other current and accrued liabilities 4,454 886
-------- --------
Net cash provided by operating activities 41,054 36,233
-------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment (3,032) (5,052)
Acquisitions, net of cash acquired (681) (13,486)
Other investing activities 1,723 1,401
-------- --------
Net cash used in investing activities (1,990) (17,137)
-------- --------
Cash flows from financing activities:
Proceeds from stock issuances 4,403 7,634
Proceeds of debt 754 6,143
Payment of debt (38,466) (17,094)
-------- --------
Net cash used in financing activities (33,309) (3,317)
-------- --------
Effect of foreign currency rate fluctuations
on cash and cash equivalents 2,330 (2,145)
-------- --------
Net increase in cash and cash equivalents 8,085 13,634
Cash and cash equivalents:
Beginning of period 43,698 28,121
-------- --------
End of period $ 51,783 $ 41,755
======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its majority-owned subsidiaries ("Company"). All
inter-company transactions are eliminated in consolidation. The consolidated
financial statements and related notes are unaudited and do not contain all
disclosures required by generally accepted accounting principles. Refer to the
Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2001
for the most recent disclosure of the Company's accounting policies.
The consolidated financial statements include adjustments, consisting only of
normal recurring accruals, necessary to present fairly the Company's financial
position at June 30, 2002 and December 30, 2001 and its results of operations
and changes in cash flows for the thirteen and twenty-six week periods ended
June 30, 2002 and July 1, 2001.
Certain reclassifications have been made to the 2001 financial statements and
related footnotes to conform to the 2002 presentation.
2. INVENTORIES
June 30, December 30,
2002 2001
-------- ------------
(Thousands)
Raw materials $ 9,155 $ 10,631
Work in process 4,159 3,619
Finished goods 79,556 77,260
-------- --------
$ 92,870 $ 91,510
======== ========
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes material, labor and applicable overhead.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. LONG-TERM DEBT
Long-term debt at June 30, 2002 and December 30, 2001 consisted of the
following:
June 30, December 30,
2002 2001
-------- ------------
(Thousands)
Six and one-half year EUR 244
million variable interest rate
collateralized term loan $107,593 $132,037
Six and one-half year $25 million
variable interest rate
collateralized loan 8,395 9,098
Six and one-half year $100 million
multi-currency variable interest
rate collateralized revolving
credit facility 18,624 16,982
Twenty two and one-half year
DEM 18.6 million capital lease 8,911 8,050
Eight and one-half year
DEM 5.3 million capital lease 1,824 1,764
Other capital leases with maturities
through 2006 1,665 1,996
-------- --------
Total 147,012 169,927
Less current portion (24,953) (27,839)
-------- --------
Total long-term portion (excluding
convertible subordinated debentures) 122,059 142,088
Convertible subordinated debentures 120,000 120,000
-------- --------
Total long-term portion $242,059 $262,088
======== ========
During the second quarter of 2002, unscheduled repayments of EUR 14.0 million
(approximately $13.0 million) were made on the EUR 244 collateralized term loan.
At June 30, 2002, EUR 108.5 million was outstanding under the loan.
On March 11, 2002, the Company entered into an interest rate swap to reduce the
risk of significant Euro interest rate increases in connection with the floating
rate debt under the senior collaterized multi-currency credit facility. The cash
flow hedging instrument initially swaps EUR 50 million of variable rate debt for
fixed rate debt. The interest rate swap is marked to market and the changes are
recorded in other comprehensive income.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated effective
annual tax rate. The Company's net earnings generated by the operations of its
Puerto Rico subsidiary are exempt from Federal income taxes under Section 936 of
the Internal Revenue Code (as amended under the Small Business Job Protection
Act of 1996) and substantially exempt from Puerto Rico income taxes. Under
current law, this exemption from Federal income tax will be subject to certain
limits during the years 2002 through 2005, and will be eliminated thereafter.
The Company does not expect its exemption to be negatively impacted by the
limits in effect during the years 2002 through 2005. Under Statement of
Financial Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes",
deferred tax liabilities and assets are determined based on the difference
between financial statement and tax basis of assets and liabilities using
enacted statutory tax rates in effect at the balance sheet date.
5. PER SHARE DATA
The following data shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of potential
dilutive common stock:
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
-------------------- ---------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
------- -------- -------- --------
(Thousands, except per share amounts)
BASIC EARNINGS PER SHARE:
Net earnings $ 5,967 $ 6,179 $ 10,081 $ 9,731
======== ======== ======== ========
Weighted average common
stock outstanding 32,232 31,205 32,088 30,768
======== ======== ======== ========
Basic earnings
per share $ .19 $ .20 $ .31 $ .32
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Net earnings $ 5,967 $ 6,179 $10,081 $ 9,731
Add back:
Interest on convertible debt,
net of tax 961 961 1,922 1,922
-------- -------- -------- --------
Net earnings available for
common stock and diluted
securities $ 6,928 $ 7,140 $ 12,003 $ 11,653
======== ======== ======== ========
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Weighted average common
stock outstanding 32,232 31,205 32,088 30,768
Additional common stock:
resulting from stock options 718 726 726 583
resulting from convertible
debentures 6,528 6,528 6,528 6,528
-------- -------- -------- --------
Weighted average common
stock and dilutive
stock outstanding 39,478 38,459 39,342 37,879
======== ======== ======== ========
Diluted earnings per share $ .18 $ .19 $ .31 $ .31
======== ======== ======== ========
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes for the thirteen and twenty-six week
periods ended June 30, 2002 and July 1, 2001 were as follows:
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
--------------------- ---------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
------- -------- -------- --------
(Thousands)
Interest $ 5,394 $ 7,041 $ 7,494 $ 11,386
Income Taxes $ 2,391 $ 11,459 $ 3,259 $ 12,533
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. PROVISION FOR RESTRUCTURING
Accrual Cash Accrual
at Decrease Payments at
Beginning in (and Exchange March 31,
of 2002 Goodwill Rate Changes) 2002
--------- -------- ------------ --------
(Thousands)
Severance and
other employee
related charges $ 8,558 $ - $ (2,537) $ 6,021
Lease termination
costs 5,621 (679) (2,185) 2,757
------- ------- -------- -------
$14,179 $ (679) $ (4,722) $ 8,778
======= ======= ======== =======
Accrual Cash Accrual
at Decrease Payments at
March 31, in (and Exchange June 30,
of 2002 Goodwill Rate Changes) 2002
--------- -------- ------------ --------
(Thousands)
Severance and
other employee
related charges $ 6,021 $ - $ (1,061) $ 4,960
Lease termination
costs 2,757 - (384) 2,373
------- ------- -------- -------
$ 8,778 $ - $ (1,445) $ 7,333
======= ======= ======== =======
At the end of the second quarter 2002, 265 of the 347 planned employee
terminations, related to the 2001 restructuring, had occurred. The restructuring
will be substantially complete by the end of 2002. Termination benefits are
being paid out over a period of 1 to 24 months after termination.
During the first quarter of 2002, the settlement of a lease for an
office/warehouse facility resulted in a decrease in goodwill related to the
acquisition of Meto AG of $0.7 million.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. 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 matter described
in the following paragraphs. Management does not believe that the ultimate
resolution of such matters will have a material adverse effect on its
consolidated results of operations and/or financial condition, except as
described below.
On May 24, 2002, the jury, in the Civil Action No. 99-CV-577 in the United
States District Court for the Eastern District of Pennsylvania, filed by
Plaintiff ID Security Systems Canada Inc. against Checkpoint Systems, Inc. held
in favor of the Company on the Plaintiff's claim for Monopolization of Commerce,
but against the Company on claims of Attempted Monopolization and Conspiracy to
Monopolize. In addition, the jury held against the Company on two tort claims
related to tortious interference and unfair competition. Judgement was entered
on the verdict in favor of the Plaintiff, after trebling, in the amount of
$79,170,000 plus attorneys' fees and costs to be determined by the Court.
On June 14, 2002, in response to Motions filed by the Company, the Court stayed
the execution of the judgement pending disposition of the Company's Motion for
Post-Trial relief and ordered the Company to post a bond in the amount of
$26,390,000 and to place into escrow 3,179,000 shares of the Company's treasury
stock. The Company has complied with the Court's order.
On July 1, 2002 the Company filed a brief in support of its Motion for
Post-Trial Relief. Management is of the opinion that the jury verdict is not
consistent with the law and that judgement should be entered in favor of the
Company as a matter of law or, alternatively, that a new trial should be
granted. No liability has been recorded for this litigation as Management
believes that, at this time, the reasonably possible range of the contingent
liability is between zero and $80 million. If, however, the final outcome of
this litigation, after all appeals have been exhausted, results in certain of
the Plaintiff's claims being upheld, the potential damages could be material to
the Company's consolidated results of operations and/or financial condition and
could cause the Company to be in default of certain bank covenants. Management
anticipates that the final judgement, if any, would not be paid prior to the end
of 2003 and is of the opinion that the Company will have sufficient financial
resources in the form of cash and borrowing capacity, due to the cash flow
generated during the intervening period, to satisfy any judgement.
Management expects that a certain number of follow-on class action suits may
arise in connection with the jury decision in the ID Security Systems Canada
Inc. litigation.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. BUSINESS SEGMENTS
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
------------------- -------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- -------- -------- --------
(Thousands)
Business segment net revenue:
Security $ 99,187 $ 98,323 $178,284 $191,583
Labeling Services 37,851 34,619 73,698 71,940
Retail Merchandising 23,886 29,240 52,396 62,387
-------- -------- -------- --------
Total $160,924 $162,182 $304,378 $325,910
======== ======== ======== ========
Business segment gross profit:
Security $ 43,960 $ 39,881 $ 77,820 $ 77,873
Labeling Services 11,291 10,498 22,539 21,446
Retail Merchandising 10,831 15,945 25,155 34,151
-------- -------- -------- --------
Total $ 66,082 $ 66,324 $125,514 $133,470
======== ======== ======== ========
10. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) approved the
issuance of Statements of Financial Accounting Standards No. 141 (SFAS 141),
"Business Combinations", and No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets".
SFAS 141 supercedes Accounting Principles Board Opinion No. 16 (APB 16),
"Business Combinations". The most significant changes made by SFAS 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) establishing specific criteria
for the recognition of intangible assets separately from goodwill, and (3)
requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized).
SFAS 142 supercedes APB 17, "Intangible Assets". SFAS 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their
acquisition (i.e. the post-acquisition accounting). The most significant
changes made by SFAS 142 are: (1) goodwill and indefinite lived intangible
assets will no longer be amortized, (2) goodwill will be tested for impairment
at least annually at the reporting unit level, (3) intangible assets deemed to
have an indefinite life will be tested for impairment at least annually, and
(4) the amortization period of intangible assets with finite lives will no
longer be limited to forty years. The FASB has allowed companies a 6-month
period from the date of adoption to identify potential goodwill impairment,
and then, if there is an impairment, an additional 6-month period to calculate
the impairment loss.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
These statements are effective for the Company for fiscal 2002. Consequently,
effective December 31, 2001 goodwill is no longer being amortized. The total
amount of goodwill amortization recorded by the Company in fiscal 2001 was $11.1
million.
As of June 30, 2002, the Company has $53.0 million of intangible assets that
have a gross carrying value of $81.6 million and accumulated amortization of
$28.6 million.
The following table reflects the components of intangible assets as of June 30,
2002:
Gross
Amortizable Carrying Accumulated
Life (years) Amount Amortization
----------- -------- ------------
(Thousands)
Customer lists 20 $25,294 $ 9,108
Trade name 30 23,970 1,998
Patents, license agreements 5 to 14 31,069 16,895
Other 3 to 6 1,306 650
------- -------
$81,639 $28,651
======= =======
The Company has determined that the life previously assigned to these
finite-lived assets is still appropriate, and has recorded $2.6 million and
$2.8 million of amortization expense in the first half of fiscal 2002 and 2001,
respectively.
Estimated amortization expense for each of the five succeeding years is
anticipated to be:
(Thousands)
2002 $5,026
2003 $3,819
2004 $3,643
2005 $3,147
2006 $2,659
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The changes in the carrying amount of goodwill for the six months ended June 30,
2002, are as follows:
Labeling Retail
Security Services Merchandising Total
-------- -------- ------------- -------
(Thousands)
Balance as of
beginning of
fiscal year 2002
(December 31, 2001) $81,833 $65,650 $ 92,158 $239,641
Goodwill acquired
during year 667 - - 667
Impairment losses - - - -
Exchange rate changes
and other 3,130 5,288 10,444 18,862
------- ------- -------- --------
Balance as of
June 30, 2002 $85,630 $70,938 $102,602 $259,170
======= ======= ======== ========
In accordance with SFAS 141, the Company has reclassified an indefinite lived
asset, "workforce in place", with a net book value of $8.5 million from
intangibles to goodwill effective December 31, 2001.
Pursuant to SFAS 142, the Company performed a transitional assessment of
goodwill by comparing each individual reporting unit's carrying amount of net
assets, including goodwill, to their fair value. The assessment has indicated
that there is a potential goodwill impairment in each business segment. The
Company will be performing the second step of the transitional goodwill
impairment test during the second half of fiscal 2002. Any resulting impairment
charge will be recognized as a change in accounting principle.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Net income and earnings per share for the thirteen and twenty-six week periods
ended June 30, 2002, and July 1, 2001, excluding amortization for goodwill and
"workforce in place", is presented below along with the adjusted net income and
earnings per share as required under the transition provisions of SFAS 142:
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
-------------------- --------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- -------- -------- --------
(Thousands, except per share amounts)
Net income $ 5,967 $ 6,179 $10,081 $ 9,731
Add back:
Goodwill/workforce in place
amortization, net of tax - 2,692 - 5,332
------- ------- ------- -------
Adjusted basic net income $ 5,967 $ 8,871 $10,081 $15,063
======= ======= ======= =======
Basic earnings per share:
Net income $ .19 $ .20 $ .31 $ .32
Goodwill/workforce in place
amortization, net of tax - .08 - .17
------- ------- ------- -------
Adjusted basic net income $ .19 $ .28 $ .31 $ .49
======= ======= ======= =======
Net income $ 5,967 $ 6,179 $10,081 $ 9,731
Add back:
Interest on convertible debt,
net of tax 961 961 1,922 1,922
------- ------- ------- ------
Diluted net income 6,928 7,140 12,003 11,653
Add back:
Goodwill/workforce in place
amortization, net of tax - 2,692 - 5,332
------- ------- ------- -------
Net earnings available for
common stock and diluted
securities $ 6,928 $ 9,832 $12,003 $16,985
======= ======= ======= =======
Diluted earnings per share:
Diluted net income $ .18 $ .19 $ .31 $ .31
Goodwill/workforce in place
amortization, net of tax - .07 - .14
------- ------- ------- -------
Adjusted diluted net income (1) $ .18 $ .26 $ .31 $ .45
======= ======= ======= =======
(1) Conversion of the subordinated debentures is included in the above
calculation as it is dilutive.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
On December 31, 2001 (fiscal year 2002), the Company adopted Statement of
Financial Accounting Standards No. 144 (SFAS 144) "Accounting for the Impairment
or Disposal of Long-Lived Assets". The adoption of SFAS 144 has not
significantly impacted the Company's results at this time.
The FASB issued Statement of Financial Accounting Standards No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" on April 30, 2002. The Company is currently
evaluating the effects of SFAS 145, which, among other things, covers the
accounting treatment for the early extinguishment of debt.
On July 29, 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The
provisions of this Statement are effective for exit or disposal activities that
are initiated by the Company after December 29, 2002, with early application
encouraged.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information relating to Forward-Looking Statements
This report includes forward-looking statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Except for
historical matters, the matters discussed are forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933, as amended, that
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from
historical results or those anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following risk factors, among other possible factors,
could cause actual results to differ materially from historical or anticipated
results: (1) changes in international business conditions; (2) foreign currency
exchange rate and interest rate fluctuations; (3) lower than anticipated demand
by retailers and other customers for the Company's products, particularly in the
current economic environment; (4) slower commitments of retail customers to
chain-wide installations and/or source tagging adoption or expansion; (5)
possible increases in per unit product manufacturing costs due to less than full
utilization of manufacturing capacity as a result of slowing economic conditions
or other factors; (6) the Company's ability to provide and market innovative and
cost-effective products; (7) competitive pricing pressures causing profit
erosion; (8) the availability and pricing of component parts and raw materials;
(9) possible increases in the payment time for receivables, as a result of
economic conditions or other market factors; (10) changes in regulations or
standards applicable to the Company's products; (11) unanticipated liabilities
or expenses; (12) adverse determinations in the ID Security Systems Canada Inc.
litigation and any other pending litigation affecting the Company; and (13) the
impact of adverse determinations in the ID Security Systems Canada Inc.
litigation on liquidity and debt covenant compliance. More information about
potential factors that could affect the Company's business and financial results
is included in the Company's Annual Report on Form 10-K for the year ended
December 30, 2001, and the Company's other Securities and Exchange Commission
filings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Second Quarter 2002 Compared to Second Quarter 2001
- ---------------------------------------------------
Net Revenues
Net revenues for the second quarter of 2002 decreased $1.3 million (or 0.8%)
over the second quarter of 2001 (from $162.2 million to $160.9 million).
Excluding the impact of foreign exchange of approximately $2.6 million, net
revenues decreased 2.4% over the comparable quarter in 2001. The preparation for
the introduction of the Euro on January 1, 2002, resulted in strong European
retail merchandising revenues in 2001. The decrease in revenue in the second
quarter of 2002 was caused by lower retail merchandising sales volumes following
the completion of the Euro introduction. This was partially offset by increases
in Labeling Services, primarily in Service Bureau (Check.Net(TM)).
Cost of Revenues
Cost of revenues decreased approximately $1.1 million (or 1.1%) over the
second quarter of 2001 (from $95.9 million to $94.8 million). As a percentage of
net revenues, cost of revenues decreased from 59.1% to 58.9%. The decrease in
the Company's cost of revenues as a percentage of sales is attributable to lower
manufacturing costs, primarily at the Company's Puerto Rico manufacturing
facility, and to lower field service costs.
Selling, General, and Administrative Expenses
SG&A expenses increased $3.2 million (or 6.3%) over the second quarter of
2001 (from $50.8 million to $54.0 million). The increase is primarily the result
of compensation costs associated with executive management changes and legal
fees for the ID Security Systems Canada Inc. litigation, partially offset by
reduced amortization expense. Following the Company's adoption of Financial
Accounting Standard No. 142 (SFAS 142) on December 31, 2001, SG&A for fiscal
2002 does not include any goodwill amortization. In the second quarter of 2001,
goodwill and workforce in place amortization was $2.7 million. As a percentage
of net revenues, SG&A expenses increased from 31.3% to 33.5%.
Other Income/(Loss), net
Other income/(loss), net represented a net foreign exchange gain of $0.1 million
and a net foreign exchange loss of $0.3 million for the second quarters of 2002
and 2001, respectively.
Interest Expense and Interest Income
Interest expense for the second quarter of 2002 decreased $1.8 million from the
comparable quarter in 2001 (from $5.7 million to $3.9 million) due to debt
repayment and declining Euro interest rates. Interest income for the second
quarter of 2002 decreased by $0.2 million from the comparable quarter in 2001
(from $0.7 million to $0.5 million) as a result of lower interest rates on
invested cash.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Income Taxes
The effective tax rate for the second quarter of 2002 was 32.0%. The effective
tax rate during the second quarter of 2001 was 39.0%. The lower tax rate results
primarily from the Company's adoption of Financial Accounting Standards No. 142
(SFAS 142) on December 31, 2001 (fiscal year 2002) as the goodwill amortization
expense in 2001 was not tax-deductible.
Net Earnings
Net earnings for the second quarter of 2002 were $6.0 million or $.18 per
diluted share. Net earnings for the second quarter of 2001 were $6.2 million or
$.19 per diluted share. Excluding the amortization of goodwill and workforce in
place, net earnings for the second quarter of 2001 were $8.9 million or $.26 per
diluted share.
Exposure to International Operations
Approximately 62% of the Company's sales are made in currencies other than U.S.
dollars. Sales denominated in currencies other than U.S. dollars increase the
Company's potential exposure to currency fluctuations which can affect results.
Management cannot predict, with any degree of certainty, changes in currency
exchange rates and therefore, the future impact that such changes may have on
its operations.
Restructuring
The changes in the provision for restructuring are covered in Note 7 of the
consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Half 2002 Compared to First Half 2001
- -------------------------------------------
Net Revenues
Net revenues for the first half of 2002 decreased $21.5 million (or 6.6%) over
the first half of 2001 (from $325.9 million to $304.4 million). Excluding the
impact of foreign exchange of $2.0 million, revenue decreased 6.0% for the first
six months of year 2002 over the comparable period for year 2001. The decrease
in revenue was caused by lower security and retail merchandising sales volumes
in Europe and the United States, as well as all business segments in South
America, due to a deterioration in economic conditions in the first half of 2002
compared to 2001.
Cost of Revenues
Cost of revenues decreased approximately $13.6 million (or 7.1%) over the
second quarter of 2001 (from $192.4 million to $178.8 million). As a percentage
of net revenues, cost of revenues decreased from 59.0% to 58.8%. The decrease in
the Company's cost of revenues as a percentage of sales is attributable to lower
manufacturing costs, primarily at the Company's Caribbean and U.S. manufacturing
facilities.
Selling, General, and Administrative Expenses
SG&A expenses decreased $1.7 million (or 1.6%) over the first half of
2001 (from $105.5 million to $103.8 million). The decrease is the result of
reduced amortization expense partially offset by compensation costs associated
with executive management changes and legal fees for the ID Security Systems
Canada, Inc. litigation. Following the Company's adoption of Financial
Accounting Standard No. 142 (SFAS 142) on December 31, 2001, SG&A for fiscal
2002 does not include any goodwill amortization. In the first half of 2001,
goodwill and workforce in place amortization was $5.3 million. As a percentage
of net revenues, SG&A expenses increased from 32.4% to 34.1%.
Other Income/(Loss), net
Other income/(loss), net represented a net foreign exchange loss of $0.1 million
for the first half of 2002.
Interest Expense and Interest Income
Interest expense for the first half of 2002 decreased $4.2 million from the
comparable half in 2001 (from $11.8 million to $7.6 million) due to debt
repayment and declining Euro interest rates. Interest income for the first half
of 2002 decreased by $0.6 million from the comparable half in 2001 (from $1.5
million to $0.9 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 on invested cash.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Income Taxes
The effective tax rate for the first half of 2002 was 32.0%. The effective tax
rate during the first half of 2001 was 39.0%. The lower tax rate results
primarily from the Company's adoption of Financial Accounting Standards No. 142
(SFAS 142) on December 31, 2001 (fiscal year 2002) as the goodwill amortization
expense in 2001 was not tax-deductible.
Net Earnings
Net earnings for the first half of 2002 were $10.1 million or $.31 per diluted
share. Net earnings for the first half of 2001 were $9.7 million or $.31 per
diluted share. Excluding the amortization of goodwill and workforce in place,
net earnings for the first half of 2001 were $15.1 million or $.45 per diluted
share.
Exposure to International Operations
Approximately 62% of the Company's sales are made in currencies other than U.S.
dollars. Sales denominated in currencies other than U.S. dollars increase the
Company's potential exposure to currency fluctuations which can affect results.
Management cannot predict, with any degree of certainty, changes in currency
exchange rates and therefore, the future impact that such changes may have on
its operations.
Restructuring
The changes in the provision for restructuring are covered in Note 7 of the
consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources
The Company's liquidity needs have related to, and are expected to continue to
relate to, capital investments, working capital requirements, and acquisitions.
The Company has met its liquidity needs over the last three years primarily
through funds provided by long-term borrowings and more recently through cash
generated from operations. The Company believes that cash provided from
operating activities and funding available under its current credit agreements
should be adequate to service debt and meet its capital investment requirements.
The Company's operating activities generated approximately $41.1 million during
the first half of 2002 compared to $36.2 million in the same period in 2001.
This change from the prior year was primarily attributable to reductions in
income taxes and working capital, partially offset by a decrease in earnings
before depreciation and amortization. In the second quarter of 2001, a legacy
Meto German tax liability of $10.0 million was satisfied.
At June 30, 2002, EUR 108.5 million (approximately $107.6 million) and $8.4
million were outstanding under the Company's senior secured facility. This
facility, which expires on March 31, 2006, includes a $275 million equivalent
multi-currency term note and a $100 million equivalent multi-currency revolving
line of credit. The outstanding borrowings under the revolving credit facility
at June 30, 2002, were JPY 2.23 billion (approximately $18.6 million). During
the first quarter of 2002, unscheduled repayments of EUR 14.0 million
(approximately $13.0 million) were made on the multi-currency term note in order
to reduce the Company's leverage and corresponding interest expense.
The Company does not anticipate paying any cash dividend in the near future and
is limited by existing covenants in the Company's debt instruments with regard
to paying dividends.
Management believes that its anticipated cash needs for the foreseeable future
can be funded from cash and cash equivalents on hand, the availability under the
$100 million revolving credit facility, and cash generated from future
operations.
On May 24, 2002, the jury, in the Civil Action No. 99-CV-577 in the United
States District Court for the Eastern District of Pennsylvania, filed by
Plaintiff ID Security Systems Canada Inc. against Checkpoint Systems, Inc. held
in favor of the Company on the Plaintiff's claim for Monopolization of Commerce,
but against the Company on claims of Attempted Monopolization and Conspiracy to
Monopolize. In addition, the jury held against the Company on two tort claims
related to tortious interference and unfair competition. Judgement was entered
on the verdict in favor of the Plaintiff, after trebling, in the amount of
$79,170,000 plus attorneys' fees and costs to be determined by the Court.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company is currently appealing the verdict (see Note 8 of the consolidated
financial statements) and has posted a bond in the amount of $26.4 million and
placed into escrow 3,179,000 shares of the Company's treasury stock. Management
anticipates that the final judgement, if any, would not be paid prior to the end
of 2003 and is of the opinion that the Company will have sufficient financial
resources in the form of cash and borrowing capacity, due to the cash flow
generated during the intervening period, to satisfy any judgement. The posting
of additional security during the appeals process, the recording of a liability,
or a final judgement, could cause the Company to be in default of certain bank
covenants. In this event, Management would pursue various alternatives, which
may include, among other things, debt covenant waivers, debt covenant
amendments, or refinancing of debt. While Management believes it would be
successful in pursuing these alternatives, there can be no assurance of success.
Capital Expenditures
The Company's capital expenditures during the first half of fiscal 2002 totaled
$3.0 million compared to $5.1 million during the first half of fiscal 2001. The
Company anticipates its capital expenditures to approximate $9 million in 2002.
Exposure to International Operations
The Company manufactures products in the USA, the Caribbean, Europe, and the
Asia Pacific region for both the local marketplace as well as for export to its
foreign subsidiaries. The subsidiaries, in turn, sell these products to
customers in their respective geographic area of operation, generally in local
currencies. This method of sale and resale gives rise to the risk of gains or
losses as a result of currency exchange rate fluctuations.
In order to reduce the Company's exposure resulting from currency fluctuations,
the Company has been selectively purchasing currency exchange forward contracts
on a regular basis. These contracts guarantee a predetermined exchange rate at
the time the contract is purchased. This allows the Company to shift the risk,
whether positive or negative, of currency fluctuations from the date of the
contract to a third party.
As of June 30, 2002, the Company had currency exchange forward contracts
totaling approximately $16.9 million. The contracts are in the various local
currencies covering primarily the Company's Western European operations along
with the Company's Canadian and Australian operations. Historically, the Company
has not purchased currency exchange forward contracts for its operations in
South America and Asia.
The Company will continue to evaluate the use of currency options in order to
reduce the impact that exchange rate fluctuations have on the Company's net
earnings from sales made by the Company's international operations. The
combination of forward exchange contracts and currency options should reduce the
Company's risks associated with significant exchange rate fluctuations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the market risks as disclosed in Item
7a of the Company's Annual Report on Form 10-K filed for the year ending
December 30, 2001, which item is incorporated herein by reference.
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 matter described
in the following paragraphs. Management does not believe that the ultimate
resolution of such matters will have a material adverse effect on its
consolidated results of operations and/or financial condition, except as
described below.
On May 24, 2002, the jury, in the Civil Action No. 99-CV-577 in the United
States District Court for the Eastern District of Pennsylvania, filed by
Plaintiff ID Security Systems Canada Inc. against Checkpoint Systems, Inc. held
in favor of the Company on the Plaintiff's claim for Monopolization of Commerce,
but against the Company on claims of Attempted Monopolization and Conspiracy to
Monopolize. In addition, the jury held against the Company on two tort claims
related to tortious interference and unfair competition. Judgement was entered
on the verdict in favor of the Plaintiff, after trebling, in the amount of
$79,170,000 plus attorneys' fees and costs to be determined by the Court.
On June 14, 2002, in response to Motions filed by the Company, the Court stayed
the execution of the judgement pending disposition of the Company's Motion for
Post-Trial relief and ordered the Company to post a bond in the amount of
$26,390,000 and to place into escrow 3,179,000 shares of the Company's treasury
stock. The Company has complied with the Court's order.
On July 1, 2002 the Company filed a brief in support of its Motion for
Post-Trial Relief. Management is of the opinion that the jury verdict is not
consistent with the law and that judgement should be entered in favor of the
Company as a matter of law or, alternatively, that a new trial should be
granted. No liability has been recorded for this litigation. If, however, the
final outcome of this litigation, after all appeals have been exhausted, results
in certain of the Plaintiff's claims being upheld, the potential damages could
be material to the Company's consolidated results of operations and/or financial
condition.
Management expects that a certain number of follow-on class action suits may
arise in connection with the jury decision in the ID Security Systems Canada
Inc. litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of shareholders was held on May 2, 2002.
(c) Shareholders voted upon and approved the following two matters:
(1) The election of David W. Clark, Jr. and Jack W. Partridge as the
Company's Class II directors to hold office until the 2005 Annual
Shareholders Meeting. Shareholders voted as follows:
David W. Clark, Jr. Jack W. Partridge
------------------- -----------------
For 29,127,664 29,117,024
Against 415,712 426,352
---------- ----------
29,543,376 29,543,376
========== ==========
(2) To amend the Company's Stock Option Plan (1992) to: (a) modify the
number of options issuable to non-employee directors; (b) modify, on a
prospective basis, the period in which options may be exercised in the
case of death, disability or retirement; and (c) other miscellaneous
matters.
For Against Abstained Unvoted
---------- --------- ----------- ---------
16,807,855 5,111,390 61,866 7,562,265
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Sixth Amendment to Employment Agreement with Michael E. Smith
99.1 Certification of Periodic Financial Report 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 June 6, 2002, the Company filed a Current Report on Form 8-K
attaching a press release dated May 24, 2002, announcing that the
lawsuit brought by ID Securities Systems Canada Inc. alleging antitrust
violations and related matters was decided against the Company.
On June 26, 2001, the Company filed a Current Report on Form 8-K
attaching two press releases dated June 19, 2002 and June 24, 2002
announcing that the Company filed a Motion for Post-Trial Relief in the
lawsuit brought by ID Securities Systems Canada Inc., and announcing the
appointment of George Off as Interim Chief Executive Officer and the
resignation of Michael E. Smith as the Company's President and Chief
Executive Officer, respectively.
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
- ---------------------------- August 14, 2002
W. Craig Burns
Executive Vice President,
Chief Financial Officer and Treasurer
/s/ Arthur W. Todd
- ---------------------------- August 14, 2002
Arthur W. Todd
Vice President, Corporate Controller
and Chief Accounting Officer
INDEX TO EXHIBITS
Exhibit Description
- -------- ------------
10.1 Sixth Amendment to Employment Agreement with Michael E. Smith
99.1 Certification of Periodic Financial Report to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.