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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 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
---------------------------------------------------------------------------
(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 October 21, 2004 there were 37,633,601 shares of the Registrant's 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 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-21
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22-33
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 34
Item 4. Controls and Procedures 34
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 34-36
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 36
Item 6. Exhibits 36
SIGNATURES 37
INDEX TO EXHIBITS 38
-2-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Sept. 26, Dec. 28,
2004 2003(1)
-------- --------
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 67,337 $110,376
Accounts receivable, net of allowances
of $14,449 and $12,003 155,614 137,494
Inventories 91,545 80,986
Other current assets 28,304 32,170
Deferred income taxes 13,006 13,076
-------- --------
Total current assets 355,806 374,102
REVENUE EQUIPMENT ON OPERATING LEASE, net 4,463 4,002
PROPERTY, PLANT, AND EQUIPMENT, net 92,399 100,393
GOODWILL 210,719 212,206
OTHER INTANGIBLES, net 49,996 53,446
OTHER ASSETS 26,684 29,173
-------- --------
TOTAL ASSETS $740,067 $773,322
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and current
portion of long-term debt $ 47,788 $ 79,437
Accounts payable 44,730 62,833
Accrued compensation and related taxes 30,227 36,911
Other accrued expenses 33,066 31,653
Income taxes 22,641 28,120
Unearned revenues 28,512 27,813
Restructuring reserve 8,432 10,173
Other current liabilities 16,277 20,272
-------- --------
Total current liabilities 231,673 297,212
LONG-TERM DEBT, LESS CURRENT MATURITIES 42,243 42,601
CONVERTIBLE SUBORDINATED DEBENTURES - 23,753
ACCRUED PENSIONS 65,673 65,871
OTHER LONG-TERM LIABILITIES 17,349 19,588
MINORITY INTEREST 1,075 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, 3,967 3,948
authorized 100,000,000 shares, issued
39,677,457 and 39,479,407
Additional capital 307,446 282,529
Retained earnings 102,526 93,422
Common stock in treasury, at cost,
2,043,856 shares and 4,640,631 shares (20,701) (47,003)
Accumulated other comprehensive loss (11,184) (9,606)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 382,054 323,290
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $740,067 $773,322
======== ========
See accompanying notes to consolidated financial statements.
(1) Taken from the audited financial statements at December 28, 2003.
-3-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
--------------------- ---------------------
Sept. 26, Sept. 28, Sept. 26, Sept. 28,
2004 2003 2004 2003
-------- -------- -------- --------
(Restated (Restated
see Note 14) see Note 14)
(Thousands, except per share data)
Net revenues $192,344 $177,229 $562,260 $509,366
Cost of revenues 113,728 104,039 335,387 297,416
-------- -------- -------- --------
Gross profit 78,616 73,190 226,873 211,950
Selling, general, and
administrative expenses 61,817 56,118 187,252 167,638
Other operating expense - - 19,950 -
-------- -------- -------- --------
Operating income 16,799 17,072 19,671 44,312
Interest income 395 307 1,180 1,031
Interest expense 1,914 2,632 5,567 8,603
Other (loss)/gain, net (50) 271 (163) 810
-------- -------- -------- --------
Earnings before income taxes
and minority interest 15,230 15,018 15,121 37,550
Income taxes 5,061 5,126 5,932 12,817
Minority interest 52 40 85 74
-------- -------- -------- --------
Net earnings $ 10,117 $ 9,852 $ 9,104 $ 24,659
======== ======== ======== ========
Net earnings per share:
Basic $ .27 $ .30 $ .25 $ .75
======== ======== ======== ========
Diluted $ .26 $ .27 $ .24 $ .69
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
-4-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Nine Months (39 weeks) Ended Sept. 26, 2004
-----------------------------------------------------
Accumu-
lated
Other
Addit- Compre-
Common ional Retained hensive Treasury
Stock Capital Earnings Loss Stock Total
------ ------- -------- ------- -------- -----
(Thousands)
Balance,
December 28, 2003 $3,948 $282,529 $ 93,422 $ (9,606) $(47,003) $323,290
(Common shares:
issued 39,479,407
reacquired 4,640,631)
Net income 9,104 9,104
Exercise of stock
options and related
tax benefits 19 2,625 2,644
(198,050 shares)
Net gain on interest
rate swap 355 355
Subordinated debentures
conversion 22,292 26,302 48,594
Foreign currency
translation adjustment (1,933) (1,933)
------ -------- -------- -------- -------- --------
Balance,
September 26, 2004 $3,967 $307,446 $102,526 $(11,184) $(20,701) $382,054
====== ======== ======== ======== ======== ========
(Common shares:
issued 39,677,457
reacquired 2,043,856)
See accompanying notes to consolidated financial statements.
-5-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
--------------------- --------------------
Sept. 26, Sept. 28, Sept. 26, Sept. 28,
2004 2003 2004 2003
------- ------- ------- -------
(Restated (Restated
see Note 14) see Note 14)
(Thousands)
Net earnings $10,117 $ 9,852 $ 9,104 $24,659
Net gain on interest
rate swap, net of tax 86 70 355 6
Foreign currency
translation adjustment 1,730 1,857 (1,933) 18,125
------- ------- ------- -------
Comprehensive income $11,933 $11,779 $ 7,526 $42,790
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
-6-
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months (39 weeks) Ended
----------------------------
Sept. 26, Sept. 28,
2004 2003
-------- --------
(Restated
see Note 14)
(Thousands)
Cash flows from operating activities:
Net earnings $ 9,104 $ 24,659
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 20,028 22,358
(Gain)on disposal of fixed assets (120) (73)
(Increase)/decrease in current assets, net of
the effects of acquired companies:
Accounts receivable (16,867) (1,311)
Inventories (12,858) (3,597)
Other current assets 2,538 (9,084)
Increase/(decrease) in current liabilities,
net of the effects of acquired
companies:
Accounts payable (17,558) (5,809)
Income taxes (5,051) 832
Unearned revenues 931 1,185
Restructuring reserve (1,870) (1,659)
Other current and accrued liabilities (8,905) 952
-------- --------
Net cash (used in)/provided by operating
activities $(30,628) $ 28,453
-------- --------
Cash flows from investing activities:
Acquisition of property, plant, and equipment (8,136) (9,991)
Acquisitions, net of cash acquired (155) -
Other investing activities 879 590
-------- --------
Net cash used in investing activities $ (7,412) $ (9,401)
-------- --------
Cash flows from financing activities:
Proceeds from stock issuances 2,167 1,869
Net change in short-term debt 3,091 1,983
Proceeds of long-term debt 15,426 -
Payment of long-term debt (24,660) (33,126)
-------- --------
Net cash used in financing activities $ (3,976) $(29,274)
-------- --------
Effect of foreign currency rate fluctuations
on cash and cash equivalents (1,023) 2,709
-------- --------
Net decrease in cash and cash
equivalents $(43,039) $ (7,513)
Cash and cash equivalents:
Beginning of period 110,376 54,670
-------- --------
End of period $ 67,337 $ 47,157
======== ========
See accompanying notes to consolidated financial statements.
-7-
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/A for the fiscal
year ended December 28, 2003 for the most recent disclosure of the Company's
accounting policies.
The consolidated financial statements include all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the Company's
financial position at September 26, 2004 and December 28, 2003 and its results
of operations and changes in cash flows for the thirty-nine week periods ended
September 26, 2004 and September 28, 2003.
Certain reclassifications have been made to the 2003 financial statements and
related footnotes to conform to the 2004 presentation.
Variable Interest Entity
- ------------------------
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. The creditors (or beneficial interest
holders) of Goliath Solutions have no recourse to the general credit of the
Company. As of September 26, 2004, the Company's investment in Goliath Solutions
was approximately $2.5 million, representing the Company's maximum exposure to
loss.
Stock Options
- -------------
On September 26, 2004, the Company had three stock-based employee compensation
plans. The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion (APB) No. 25
"Accounting for Stock Issued to Employees". Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's common stock at the date of grant over the amount an employee must
pay to acquire the stock. Since all options were granted at market value, there
is no compensation cost to be recognized.
-8-
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 Statement of Financial Accounting Standards (SFAS) No.
123, the Company's net earnings and net earnings per share would approximate the
pro-forma amounts as follows:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
------------------- -------------------
Sept. 26, Sept. 28, Sept. 26, Sept. 28,
2004 2003 2004 2003
------- ------- ------- -------
(Restated (Restated
see Note 14) see Note 14)
(Thousands)
Net earnings,
as reported $10,117 $ 9,852 $ 9,104 $24,659
Total stock-based
employee compensation
expense determined
under fair value
based method,
net of tax (704) (556) (1,917) (2,228)
------- ------- ------- -------
Pro-forma net
earnings $ 9,413 $ 9,296 $ 7,187 $22,431
======= ======= ======= =======
Net earnings
per share:
Basic, as reported $ .27 $ .30 $ .25 $ .75
======= ======= ======= =======
Basic, pro-forma $ .25 $ .28 $ .20 $ .68
======= ======= ======= =======
Diluted, as reported $ .26 $ .27 $ .24 $ .69
======= ======= ======= =======
Diluted, pro-forma $ .24 $ .26 $ .19 $ .64
======= ======= ======= =======
2. INVENTORIES
September 26, December 28,
2004 2003
------------ -----------
(Thousands)
Raw materials $11,406 $ 8,285
Work in process 3,709 3,547
Finished goods 76,430 69,154
------- -------
$91,545 $80,986
======= =======
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
-9-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company had intangible assets with a net book value of $50.0 million and
$53.4 million as of September 26, 2004 and December 28, 2003, respectively. The
following table reflects the components of intangible assets as of September 26,
2004 and December 28, 2003:
September 26, 2004 December 28, 2003
---------------------- ----------------------
Amortizable Gross Gross
Life Carrying Accumulated Carrying Accumulated
(years) Amount Amortization Amount Amortization
----------- -------- ------------ -------- ------------
(Thousands)
Customer lists 20 $30,583 $14,096 $31,020 $14,584
Trade name 30 27,939 4,773 28,226 3,763
Patents, license
agreements 5 to 14 37,069 27,414 37,362 25,439
Other 3 to 6 981 293 952 328
------- ------- ------- -------
$96,572 $46,576 $97,560 $44,114
======= ======= ======= =======
Estimated amortization expense for 2004 and each of the five succeeding years
is:
(Thousands)
2004 $3,943
2005 $3,925
2006 $3,696
2007 $3,643
2008 $3,600
2009 $3,567
The changes in the carrying amount of goodwill for the nine months ended
September 26, 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 (1,286) (119) (675) (2,080)
-------- ------- ------- --------
Balance as of
Sept. 26, 2004 $105,402 $38,314 $67,003 $210,719
======== ======= ======= ========
-10-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Pursuant to SFAS 142 "Goodwill and Other Intangible Assets", the Company will
perform its annual assessment of goodwill by comparing each individual reporting
unit's carrying amount of net assets, including goodwill, to their fair value
during the fourth quarter of each fiscal year. Future annual assessments could
result in impairment charges, which would be accounted for as an operating
expense.
4. LONG-TERM DEBT
Long-term debt at September 26, 2004 and December 28, 2003 consisted of the
following:
September 26, December 28,
2004 2003
------------ -----------
(Thousands)
EUR 244 million variable interest
rate multi-currency term loan
maturing in 2006 $33,032 $45,863
$100 million multi-currency variable
interest rate revolving credit
facility maturing in 2006 17,707 2,791
EUR 9.5 million capital lease
maturing in 2021 10,354 10,733
EUR 2.7 million capital lease
maturing in 2007 1,375 1,693
Other capital leases with maturities
through 2010 426 27
------- -------
Total 62,894 61,107
Less current portion 20,651 18,506
------- -------
Total long-term portion (excluding
convertible subordinated debentures) 42,243 42,601
Convertible subordinated debentures 23,257 83,753
Less called portion of convertible
subordinated debentures 23,257 60,000
------- -------
Total long-term portion $42,243 $66,354
======= =======
On September 26, 2004, EUR 26.9 million (approximately $33.0 million) was
outstanding under the multi-currency term loan. The outstanding borrowings under
the revolving credit facility were $15.0 million and JPY 300 million
(approximately $2.7 million). The availability under the $100 million
multi-currency revolving credit facility has been reduced by letters of credit
totaling $1.1 million.
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.
-11-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
On September 30, 2004, the Company called for redemption the remaining aggregate
principal amount of the convertible subordinated debentures. The redemption, in
the amount of $23.3 million, will take place on December 14, 2004. The called
debentures are convertible at any time prior to the close of business on
December 9, 2004. Each Note in the denomination of $1,000 is convertible, at the
holder's option, into 54.4218 shares of the Company's common stock, which is
equivalent to a conversion price of $18.375 per share.
5. INCOME TAXES
Income taxes are provided on an interim basis at an estimated effective annual
tax rate. The Company's 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
SFAS No. 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. The American Jobs Creation Act of 2004 was signed into law
on October 22, 2004. The Company is currently studying the impact of the law,
particularly with respect to the U.S. tax treatment of domestic manufacturing
activities, repatriation of foreign earnings and foreign tax credit
carryforwards.
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 Nine Months
(13 weeks) Ended (39 weeks) Ended
------------------- --------------------
Sept. 26, Sept. 28, Sept. 26, Sept. 28,
2004 2003 2004 2003
------- ------- ------- -------
(Restated (Restated
see Note 14) see Note 14)
(Thousands, except per share amounts)
Basic earnings
per share:
Net earnings $10,117 $ 9,852 $ 9,104 $ 24,659
======= ======= ======= =======
Weighted average common
stock outstanding 37,622 32,847 36,722 32,777
======= ======= ======= =======
Basic earnings per share $ .27 $ .30 $ .25 $ .75
======= ======= ======= =======
-12-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Diluted earnings
per share:
Net earnings $10,117 $ 9,852 $ 9,104 $24,659
Interest on subordinated
debentures, net of tax 198 961 - 2,882
------- ------- ------- -------
Net earnings available
for dilutive securities $10,315 $10,813 $ 9,104 $27,541
======= ======= ======= =======
Weighted average common
stock outstanding 37,622 32,847 36,722 32,777
Additional common shares
resulting from stock
options (1) 718 803 873 465
Additional common shares
resulting from subordinated
debentures 1,266 6,528 - (2) 6,528
------- ------- ------- -------
Weighted average common
stock and dilutive stock
outstanding 39,606 40,178 37,595 39,770
======= ======= ======= =======
Diluted earnings per share $ .26 $ .27 $ .24 $ .69
======= ======= ======= =======
(1) Excludes approximately 1,532, 878, 1,160 and 1,779 anti-dilutive outstanding
stock options for the third quarters of 2004 and 2003, and the first nine
months of 2004 and 2003, respectively.
(2) The conversion of 2,358 common shares from the subordinated debentures is
not included as it is anti-dilutive.
-13-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes for the thirteen and thirty-nine
week periods ended September 26, 2004 and September 28, 2003 were as follows:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- --------------------
Sept. 26, Sept. 28, Sept. 26, Sept. 28,
2004 2003 2004 2003
-------- -------- -------- --------
(Thousands)
Interest $1,054 $ 1,120 $4,064 $ 7,108
Income tax payments, net $4,522 $10,842 $6,850 $13,949
During the first nine months of 2004, $47.7 million of convertible subordinated
debentures were converted into 2.597 million shares of the Company's common
stock.
8. PROVISION FOR RESTRUCTURING
In the fourth quarter of 2003, the Company established a shared services
initiative in Europe and a manufacturing cost reduction program. As of the end
of the third quarter of 2004, the manufacturing cost reduction program, which
included 373 of the 512 planned employee terminations, was complete. An
additional 30 of the planned employee terminations, relating to the shared
services initiative, had occurred as of September 26, 2004. The Company expects
the remaining planned terminations and 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. The total cost of the 2003 restructuring is anticipated to be
approximately $7.8 million.
Accrual Cash Accrual
at Payments at
Beginning (and Exchange Sept. 26,
of 2004(1) Rate Changes) 2004(2)
----------- ------------ --------
(Thousands)
Severance and other employee-
related charges $ 8,878 $(1,751) $ 7,127
Lease termination costs 1,295 10 1,305
------- ------- -------
$10,173 $(1,741) $ 8,432
======= ======= =======
(1) Includes restructuring costs prior to 2003 of $2,261, of which $1,295
relates to lease termination costs.
(2) Includes restructuring costs prior to 2003 of $2,178, of which $1,305
relates to lease termination costs.
-14-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. OTHER OPERATING EXPENSE
On August 1, 2004, the Company and ID Security Systems Canada Inc. entered into
a settlement agreement effective July 30, 2004, pursuant to which the Company
agreed to pay $19.95 million, in full and final settlement of the claims covered
by the litigation between the two companies (see Note 11). This settlement was
accrued in the second quarter of 2004. Payment in full was made on August 5,
2004.
10. PENSION BENEFITS
The components of net periodic benefit cost for the thirteen and thirty-nine
week periods ended September 26, 2004 and September 28, 2003 were as follows:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- --------------------
Sept. 26, Sept. 28, Sept. 26, Sept. 28,
2004 2003 2004 2003
-------- -------- -------- --------
Service cost $ 328 $ 338 $1,009 $ 976
Interest cost 925 830 2,785 2,447
Expected (gain)/loss on plan
assets (1) (1) (4) (3)
Amortization of prior
service cost 1 1 3 2
Amortization of net
loss 28 27 86 78
------ ------ ------ ------
Net benefit cost $1,281 $1,195 $3,879 $3,500
====== ====== ====== ======
The Company expects the cash requirements for funding the pension benefits to be
approximately $3.4 million during fiscal 2004, including $2.4 million which was
funded during the nine months ended September 26, 2004.
-15-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
11. CONTINGENT LIABILITIES AND SETTLEMENTS
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 August 1, 2004, the Company and ID Security Systems Canada Inc. entered into
a settlement agreement effective July 30, 2004, pursuant to which the Company
agreed to pay $19.95 million, in full and final settlement of the claims covered
by the litigation. This settlement was accrued in the second quarter of 2004.
Payment in full was made on August 5, 2004. The settlement did not cause the
Company to be in default on any its debt covenants. The Company does not admit
or acknowledge any wrongdoing or liability regarding the litigation. In
connection with the settlement, the parties have mutually released each other
from all other claims, except for any claims relating to existing contracts
between the parties. A release in favor of the Company was also provided by
various affiliates and associates of ID Security Systems Canada Inc. Management
believes that the settlement is in the best interest of the Company to avoid the
risks, burden, and expenses of continued litigation.
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.
-16-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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. As a result of the settlement of the
litigation with ID Security Systems Canada Inc. described above, an application
can be made to the Court to dissolve the Stay Order at this time.
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.
Management is of the opinion that the claims are baseless both in fact and in
law and believes that, based on input from outside legal counsel, it is not
probable the claims will be upheld and that the lower end of the reasonably
possible range of the contingent liability is zero at this time. The high end of
the range cannot be estimated at this time.
-17-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Warranty Reserves
The Company provides product warranties for its various products. These
warranties vary in length depending on product and geographical region. The
Company establishes its warranty reserves based on historical data of warranty
transactions.
The following table sets forth the movements in the warranty reserve:
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- --------------------
Sept. 26, Sept. 28, Sept. 26, Sept. 28,
2004 2003 2004 2003
-------- -------- -------- --------
(Thousands)
Balance at the beginning
of the period $4,753 $4,373 $4,591 $4,002
Accruals for warranties
issued $ 172 $ 396 $ 967 $ 892
Accruals related to
pre-existing warranties,
including changes
in estimate 18 (27) 33 (27)
------ ------ ------ ------
Total accruals $ 190 $ 369 $1,000 $ 865
Settlement made (241) (271) (868) (656)
Foreign currency
translation adjustment 57 (15) 36 245
------ ------ ------ ------
Balance at the end of period $4,759 $4,456 $4,759 $4,456
====== ====== ====== ======
-18-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
12. BUSINESS SEGMENTS
Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- --------------------
Sept. 26, Sept. 28, Sept. 26, Sept. 28,
2004 2003 2004 2003
-------- -------- -------- --------
(Thousands)
Business segment net revenues:
Security $131,858 $117,104 $365,053 $321,829
Labeling Services 36,556 36,688 119,042 114,703
Retail Merchandising 23,930 23,437 78,165 72,834
-------- -------- -------- --------
Total $192,344 $177,229 $562,260 $509,366
======== ======== ======== ========
Business segment gross profit:
Security $ 58,279 $ 52,640 $162,143 $144,204
Labeling Services 9,210 9,985 31,852 33,032
Retail Merchandising 11,127 10,565 32,878 34,714
-------- -------- -------- --------
Total gross profit $ 78,616 $ 73,190 $226,873 $211,950
Operating expenses 61,817 56,118 207,202 167,638
Interest expense, net 1,519 2,325 4,387 7,572
Other (loss)/gain, net (50) 271 (163) 810
-------- -------- -------- --------
Earnings before income taxes $ 15,230 $ 15,018 $ 15,121 $ 37,550
======== ======== ======== ========
-19-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
13. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER STANDARDS
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revised SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits-an amendment of FASB Statements No. 87, 88, and 106."
This Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. This Statement retains the disclosure requirements
contained in SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which it replaces. Additional disclosures have been
added including information describing the types of plan assets, investment
strategy, measurement dates, plan obligations, cash flows, and components of net
periodic benefit cost recognized during interim periods. Except as noted below,
this Statement was effective for fiscal years ending after December 15, 2003.
Disclosure of certain information regarding foreign defined benefit plans are
effective for the fiscal years ending after June 15, 2004. Disclosure of the
estimated future benefits is also deferred for companies until fiscal years
ending after June 15, 2004. The Company has adopted the effective provisions of
SFAS 132 (revised 2003) in the fourth quarter ended December 28, 2003 with no
material effect on its consolidated financial statements (see note 10 for the
Company's interim disclosures regarding pensions). All of the Company's pension
plans are outside the USA and as a result, certain of the annual disclosure
provisions are not effective for the Company until the fiscal year ending
December 26, 2004. The Company will adopt these provisions in the fourth quarter
ending December 26, 2004 with no material effect on its consolidated financial
statements.
In October 2004, the FASB ratified the consensus reached by the Emerging Issues
Task Force (EITF) with respect to EITF Issue No. 04-10, "Determining Whether to
Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds,"
which clarifies the guidance in paragraph 19 of SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." According to EITF 04-10,
operating segments that do not meet the quantitative thresholds can be
aggregated only if aggregation is consistent with the objective and basic
principle of SFAS 131, the segments have similar economic characteristics, and
the segments share a majority of the aggregation criteria listed in items
(a)-(e) in paragraph 17 of SFAS 131. The consensus applies to fiscal years
ending after October 13, 2004. The Company is currently evaluating the impact of
applying this guidance.
-20-
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
14. RESTATEMENT
On May 21, 2004 the Company filed Amendment No. 1 to the Annual Report on Form
10-K for the fiscal year ended December 28, 2003 (Form 10-K/A) to restate the
Company's financial results for the fiscal years 2002 and 2003 following the
Company's discovery of 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. The Company has also restated its consolidated statements
of operations for the quarter and nine months ended September 28, 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 Statement of Operations
for the quarter ended September 28,
2003
Income taxes $ 4,956 $ 5,126
Net earnings $ 10,022 $ 9,852
Consolidated Statement of Operations
for the nine months ended September 28,
2003
Income taxes $ 12,391 $ 12,817
Net earnings $ 25,085 $ 24,659
The restatement did not change the diluted earnings per share for the quarter
ended September 28, 2003 of $.27. The restatement reduced diluted earnings per
share for the nine months ended September 28, 2003 from $.70 to $.69, but had no
effect on cash flows.
-21-
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 pending litigation affecting the Company; and (15) the impact
of adverse determinations in pending 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/A for the year ended December 28, 2003, and the Company's
other Securities and Exchange Commission filings.
Critical Accounting Policies and Estimates
- ------------------------------------------
Except as noted below, there has been no change to the Company's critical
accounting policies and estimates, contained in Item 7 "Management's Discussion
And Analysis Of Financial Condition And Results Of Operations" of the Company's
Annual Report on Form 10-K/A filed for the year ended December 28, 2003.
Pension Plans. The Company has various unfunded pension plans outside the USA.
These plans have significant pension costs and liabilities that are developed
from actuarial valuations. Inherent in these valuations are key assumptions
including discount rates, expected return on plan assets, mortality rates and
merit and promotion increases. The Company is required to consider current
market conditions, including changes in interest rates in selecting these
assumptions. Changes in the related pension costs or liabilities may occur in
the future due to changes in the assumptions. A change in interest rates of .25%
would have a $0.2 million effect on pension expense.
-22-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Management's discussion and analysis of financial condition and results of
operations reflects the restatement of the Company's financial statements for
the fiscal years 2002 and 2003 following the Company's discovery of 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. See Note 14 to
the Consolidated Financial Statements.
Overview
- --------
Checkpoint Systems, Inc. is a multinational company that manufactures and
markets labeling systems designed to improve efficiency, reduce costs, and
provide value-added label solutions for customers across many markets and
industries. The Company is a leading provider and earns revenues primarily from
the sale of electronic article surveillance (EAS), closed-circuit television
(CCTV), radio frequency identification (RFID) systems, barcode labeling
systems (BCS), hand-held labeling systems (HLS) and retail merchandising
systems. Applications include automatic identification, retail security and
pricing and promotional labels. Operating directly in 30 countries, the Company
has a global network of subsidiaries and distributors, and provides customer
service and technical support around the world.
The Company's results are heavily dependent upon sales to the retail market. The
Company's customers are dependent upon retail sales which are susceptible to
economic cycles and seasonal fluctuations. Furthermore, as approximately
two-thirds of the Company's revenues and operations are located outside the USA,
fluctuations in foreign currency exchange rates have a significant impact on
reported results.
The Company's business plan is to generate sustained revenue growth through
increased investments in product development and marketing. The Company intends
to fund these investments through product cost and operating expense reductions.
Revenue for the third quarter and first nine months of 2004 increased 8.5% and
10.4%, respectively, over the comparable periods in 2003. Foreign currency
translation had a positive impact on revenue of approximately 4.9% and 6.2%,
respectively, for the third quarter and nine months ended September 26, 2004.
The increases in sales for the third quarter and nine months ended September 26,
2004 were due primarily to continued growth in the Company's CCTV and EAS
businesses in North America and Japan partially offset by the ongoing declines
in EAS and BCS businesses in Europe which were impacted by the continued
difficult market conditions in this region. The HLS business continued to
decline as retailers transition from hand-held price labeling to automated
barcoding and scanning.
The net income for the third quarter and the first nine months of 2004 was $10.1
million and $9.1 million, respectively. These results reflected growth in
revenue on a constant currency basis (current period figures translated at prior
period foreign exchange rates), product margins consistent with prior periods,
and an increase in research and development and general and administrative
expenses. The increase in spending offset the benefit to earnings resulting from
an increase in revenue, reduced interest expense, and the positive impact of
exchange rates. Additionally, the results for the first nine months include the
settlement of the ID Security Systems Canada Inc. case for $19.95 million which
is reported in other operating expense.
-23-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Future financial results will be dependent upon the Company's ability to expand
the functionality of its existing products lines, develop or acquire new
products for sale through its global distribution channels, and reduce the cost
of its products and infrastructure to respond to competitive pricing pressures.
The Company's strong base of recurring revenue (revenues from the sale of
consumables into the installed base of security systems, barcode printers, and
hand-held labeling tools), repeat customer business, and its borrowing capacity
should provide the Company with adequate cash flow and liquidity to execute its
business plan.
Third Quarter 2004 Compared to Third Quarter 2003
- ---------------------------------------------------
The following table presents for the periods indicated certain items in the
consolidated statement of operations as a percentage of total revenues and the
percentage change in dollar amounts of such items compared to the indicated
prior period:
Percentage Change
Percentage of Total Revenues In Dollar Amounts
---------------------------- -----------------
Sept. 26, Sept. 28, 2004 vs.
Quarter (13 weeks) Ended 2004 2003 2003
- ---------------------------- -------- -------- --------
(Restated
see Note 14)
Net revenues
Security 68.6% 66.1% 12.6%
Labeling Services 19.0 20.7 (0.4)
Retail Merchandising 12.4 13.2 2.1
----- ----- -----
Net revenues 100.0 100.0 8.5
Cost of revenues
Product and service costs 56.1 56.4 7.9
Research and development 3.0 2.3 44.5
----- ----- -----
Total cost of revenues 59.1 58.7 9.3
Total gross profit 40.9 41.3 7.4
Selling, general, and
administrative expenses 32.2 31.7 10.2
Other operating expense - - -
----- ----- -----
Operating income 8.7 9.6 (1.6)
Interest income 0.2 0.2 28.7
Interest expense 1.0 1.5 (27.3)
Other (loss)/gain, net - 0.2 (118.5)
----- ----- -----
Earnings before income taxes
And minority interest 7.9 8.5 1.4
Income taxes 2.6 2.9 (1.3)
Minority interest - - 30.0
----- ----- -----
Net earnings 5.3 5.6 2.7
===== ===== =====
-24-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Net Revenues
Revenues for the third quarter 2004 compared to the third quarter 2003 increased
by $15.1 million or 8.5% from $177.2 million to $192.3 million. Foreign currency
translation had a positive impact on revenues of approximately $8.7 million or
4.9% in the third quarter of 2004 as compared to the third quarter of 2003.
Security revenues increased by $14.8 million or 12.6% in the third quarter of
2004 as compared to the third quarter of 2003. Foreign currency translation had
a positive impact of approximately $5.2 million. The remaining increase was
primarily due to growth in CCTV revenues in the USA ($10.2 million) and Japan
($0.8 million), partially offset by a decline in European EAS sales of $2.0
million. 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 decreased by $0.1 million or 0.4%. The positive
impact of foreign currency translation was approximately $1.8 million. The
remaining decrease was primarily due to lower BCS revenues in Europe ($2.1
million) caused by weak retail trading and price competition and a decrease in
RFID library system revenues in the USA ($0.6 million) resulting from delayed
purchasing decisions by customers caused by increased competition. This was
partially offset by increases in Check-Net revenues in Europe ($0.7 million).
Retail merchandising revenues increased by $0.5 million or 2.1%. The positive
impact of foreign currency translation was approximately $1.7 million. The
remaining decrease was primarily due to continued decreases in HLS revenues in
Europe ($1.5 million) partially offset by an increase of $0.4 million in retail
display system revenues in Europe. 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 third quarter 2004 was $78.6 million, or 40.9% of revenues,
compared to $73.2 million, or 41.3% of revenues, for the third quarter 2003. The
benefit of foreign currency translation on gross profit was approximately $3.6
million in the third quarter of 2004 as compared to the third quarter of 2003.
Included in gross profit are research and development costs, which increased
from $4.0 million, or 2.3% of revenues, in the third quarter of 2003 to $5.8
million, or 3.0% of revenues, in the third quarter of 2004.
Security gross profit, as a percentage of sales, decreased to 44.2% in the third
quarter of 2004 from 45.1% in the third quarter of 2003. Improvements in
manufacturing efficiencies and the benefits of a weaker U.S. dollar on products
sourced in U.S. dollars but sold in a different currency were offset by an
unfavorable product mix. The increase in CCTV revenues as a percentage of
security revenues reduced the security gross profit percentage because the gross
profit percentage of the CCTV business is lower than that of the EAS business.
Gross profit, as a percentage of net revenues, for labeling services declined to
25.2% in the third quarter of 2004 from 27.2% in the third quarter of 2003.
Increased technology spending on RFID library products primarily caused the
decline.
-25-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The retail merchandising gross profit, as a percentage of net revenues,
increased to 46.5% in the third quarter 2004 from 44.5% in the third quarter of
2003. The increase in gross profit as a percentage of net revenues resulted from
manufacturing efficiencies in Europe, which are not expected to continue in the
future.
Field service and installation costs for the third quarter of 2004 and 2003 were
9.0% and 9.3% of net revenues, respectively. The decrease, as a percentage of
net revenues, resulted from improved utilization of field service and
installation resources due to increased levels of activity.
Selling, General, and Administrative Expenses
SG&A expenses increased $5.7 million over the third quarter of 2003. Foreign
currency translation increased SG&A expenses by approximately $2.8 million. The
remaining increase resulted from higher expenses in management, finance, and
administration. The increase in finance and administration related to compliance
with legal regulations associated with the Sarbanes-Oxley Act. As a percentage
of net revenues, SG&A expenses increased from 31.7% to 32.1%.
Interest Expense and Interest Income
Interest expense for the third quarter of 2004 decreased $0.8 million from the
comparable quarter in 2003 due primarily to lower overall debt levels resulting
from debt repayment and the conversion of subordinated debentures into shares of
the Company's common stock, partially offset by income tax-related interest
charges. Interest income for the third 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 balance in third quarter 2004 compared to third quarter
2003.
Other (Loss)/Gain, net
Other (loss)/gain, net resulted from a net foreign currency transaction loss of
$(0.1) million for the third quarter of 2004 and a net foreign currency
transaction gain of $0.3 million in third quarter 2003.
Income Taxes
The effective tax rate for the third quarter 2004 was 33.2%. For the third
quarter 2003, the effective tax rate was 34.1%. The 2004 effective tax rate
includes an increase in tax principally related to tax audit adjustments. In
comparison, the 2003 effective tax rate included an increase resulting from
adjustments related to a change in valuation allowance and an increase in
deferred foreign withholding taxes, which did not occur in 2004.
Net Earnings
Net earnings were $10.1 million, or $0.26 per diluted share, in the third
quarter 2004 compared to $9.9 million, or $0.27 per diluted share, in the third
quarter 2003. The weighted average number of shares used in the diluted earnings
per share computation were 39.6 million and 40.2 million for the third quarters
of 2004 and 2003, respectively.
-26-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Nine Months 2004 Compared to First Nine Months 2003
- ----------------------------------------------------------
The following table presents for the periods indicated certain items in the
consolidated statement of operations as a percentage of total revenues and the
percentage change in dollar amounts of such items compared to the indicated
prior period:
Percentage Change
Percentage of Total Revenues In Dollar Amounts
---------------------------- -----------------
Sept. 26, Sept. 28, 2004 vs.
Nine Months (39 weeks) Ended 2004 2003 2003
- ---------------------------- -------- -------- --------
(Restated
see Note 14)
Net revenues
Security 64.9% 63.2% 13.4%
Labeling Services 21.2 22.5 3.8
Retail Merchandising 13.9 14.3 7.3
----- ----- -----
Net revenues 100.0 100.0 10.4
Cost of revenues
Product and service costs 56.4 56.5 10.2
Research and development 3.2 1.9 92.6
----- ----- -----
Total cost of revenues 59.6 58.4 12.8
Total gross profit 40.4 41.6 7.0
Selling, general, and
administrative expenses 33.3 32.9 11.7
Other operating expense 3.6 - -
----- ----- -----
Operating income 3.5 8.7 (55.6)
Interest income 0.2 0.2 14.5
Interest expense 1.0 1.7 (35.3)
Other (loss)/gain, net - 0.1 (120.1)
----- ----- -----
Earnings before income taxes
And minority interest 2.7 7.3 (59.7)
Income taxes 1.1 2.5 (53.7)
Minority interest - - 14.9
----- ----- -----
Net earnings 1.6% 4.8% (63.1)%
===== ===== =====
Net Revenues
Revenues for the first nine months of 2004 compared to the same period in 2003
increased by $52.9 million or 10.4% from $509.4 million to $562.3 million.
Foreign currency translation had a positive impact on revenues of approximately
$31.8 million or 6.2% in the first nine months of 2004 as compared to the first
nine months of 2003.
-27-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Security revenues increased by $43.2 million or 13.4% in the first nine months
of 2004 as compared to the first nine months of 2003. Foreign currency
translation had a positive impact of approximately $18.5 million. The remaining
increase was primarily due to growth in the CCTV market in the USA, Japan, and
the UK and in the EAS market in Asia Pacific, partially offset by a $5.6 million
decline in European EAS sales. The $25.5 million 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 $4.3 million or 3.8% due to the positive
impact of foreign currency translation of approximately $6.8 million. The
remaining decrease was primarily due to lower BCS revenues in Europe ($6.2
million) caused by weak retail trading and price competition and a decrease in
RFID library system revenues in the USA ($2.6 million) resulting from the timing
of several large orders that were recognized in the first nine months of 2003.
This was largely offset by increases in BCS revenues in the USA ($2.3 million)
and Check-Net revenues in Europe ($2.4 million) and Asia Pacific ($1.3 million).
Retail merchandising revenues increased by $5.3 million or 7.3%. The positive
impact of foreign currency translation was approximately $6.4 million. Increased
retail display system revenues in Europe of $2.1 million were offset by
decreased HLS revenues in Europe of $3.2 million. 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 nine months of 2004 was $226.9 million, or 40.4% of
revenues, compared to $212.0 million, or 41.6% of revenues, for the first nine
months of 2003. The benefit of foreign currency translation on gross profit was
approximately $13.0 million in the first nine months of 2004 as compared to the
same period in 2003. Included in gross profit are research and development
costs, which increased from $9.4 million, or 1.9% of revenues, in the first nine
months of 2003 to $18.2 million, or 3.2% of revenues, in the first nine months
of 2004.
Security gross profit, as a percentage of sales, decreased to 44.4% in the first
nine months of 2004 from 44.8% in the first nine months of 2003. Improvements in
manufacturing efficiencies and the benefits of a weaker U.S. dollar on products
sourced in U.S. dollars but sold in a different currency were more than offset
by increases in field service costs due to large roll-outs. The increase in CCTV
revenues as a percentage of security revenues also impacted the security gross
profit percentage negatively.
Gross profit, as a percentage of net revenues, for labeling services declined to
26.8% in the first nine months of 2004 from 28.8% in the first nine months of
2003. Increased technology spending of $1.3 million on RFID library products and
competitive pricing pressures on BCS products primarily caused the decline.
The retail merchandising gross profit, as a percentage of net revenues, declined
to 42.1% in the comparable period of 2004 from 47.7% in the first nine months of
2003. The decrease resulted primarily from a $4.5 million increase in RFID
technology spending to support the development of supply chain and in-store
merchandising solutions for US and European retailers.
-28-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Field service and installation costs for the first nine months of 2004 and 2003
were 9.3% and 9.0% of net revenues, respectively. The increase, as a percentage
of net revenues, resulted from an increase in CCTV installations relative to
total net revenues.
Selling, General, and Administrative Expenses
SG&A expenses increased $19.6 million over the first nine months of 2003.
Foreign currency translation increased SG&A expenses by approximately $10.6
million. The remaining increase resulted from investments in selling and
marketing and increased expenses in management, finance, and administration. The
increase in finance and administration related to compliance with legal
regulations associated with the Sarbanes-Oxley Act. As a percentage of net
revenues, SG&A expenses increased from 32.9% to 33.3%.
Other Operating Expense
On August 1, 2004, the Company and ID Security Systems Canada Inc. entered into
a settlement agreement effective July 30, 2004, pursuant to which the Company
agreed to pay $19.95 million, in full and final settlement of the claims covered
by the litigation between the two companies (see Note 11 of the Consolidated
Financial Statements). This settlement was accrued in the second quarter of
2004. Payment in full was made on August 5, 2004.
Interest Expense and Interest Income
Interest expense for the first nine months of 2004 decreased $3.0 million from
the comparable period in 2003 due primarily to lower overall debt levels
resulting from debt repayment and the conversion of subordinated debentures into
shares of the Company's common stock. Interest income for the first nine months
of fiscal 2004 increased by $0.1 million from the comparable quarter in 2003
(from $1.0 million to $1.1 million). Higher cash balances in the first nine
months of 2004 were largely offset by lower interest rates during the same
period.
Other (Loss)/Gain, net
Other (loss)/gain, net resulted from a net foreign currency transaction loss of
$(0.2) million in the first nine months of fiscal 2004 and a gain of $0.8
million in the first nine months of fiscal 2003.
Income Taxes
Excluding the tax impact of the ID Systems settlement, the effective tax rate
for the first nine months of 2004 was 31.4%. For the same period in 2003, the
effective tax rate was 34.1%. The 2004 effective tax rate includes an increase
in tax principally related to tax audit adjustments. In 2004, the Company
recorded a tax benefit on the ID Systems settlement at the US statutory tax
rate. However, as the ID Systems settlement created a taxable loss in the US,
the Company recorded a valuation allowance of $1.9 million on US deferred tax
assets related to foreign tax credit carryforwards. In comparison, the 2003
effective tax rate included an increase resulting from adjustments related to a
change in valuation allowance and an increase in deferred foreign withholding
taxes, which did not occur in 2004.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Net Earnings
The Company's net earnings were $9.1 million, or $0.24 per diluted share, for
the first nine months of 2004 compared to $24.7 million, or $0.69 per diluted
share, in the same period of 2003. The ID Systems settlement resulted in a
reduction of net earnings of $14.9 million, or approximately $0.39 per diluted
share. The weighted average number of shares used in the diluted earnings per
share computation were 37.6 million and 39.8 million for the first nine months
of 2004 and 2003, respectively.
Exposure to International Operations
Approximately 64.1% 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
In the fourth quarter of 2003, the Company established a shared services
initiative in Europe and a manufacturing cost reduction program. As of the end
of the third quarter of 2004, the manufacturing cost reduction program, which
included 373 of the 512 planned employee terminations, was complete. An
additional 30 of the planned employee terminations, relating to the shared
services initiative, had occurred as of September 26, 2004. The Company expects
the remaining planned terminations and 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. The total cost of the 2003 restructuring is anticipated to be
approximately $7.8 million. Upon completion, the annual savings are expected to
be approximately $8.5 million.
Accrual Cash Accrual
at Payments at
Beginning (and Exchange Sept. 26,
of 2004(1) Rate Changes) 2004(2)
----------- ------------ --------
(Thousands)
Severance and other employee-
related charges $ 8,878 $(1,751) $ 7,127
Lease termination costs 1,295 10 1,305
------- ------- -------
$10,173 $(1,741) $ 8,432
======= ======= =======
(1) Includes restructuring costs prior to 2003 of $2,261, of which $1,295
relates to lease termination costs.
(2) Includes restructuring costs prior to 2003 of $2,178, of which $1,305
relates to lease termination costs.
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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 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 used approximately $30.6 million of cash
during the first nine months of 2004 compared to $28.5 million generated in the
same period of 2003. This change from the prior year was primarily attributable
to the payment of the ID Security Systems Canada Inc. settlement of $19.95
million, a seasonal reduction in accounts payable and accrued compensation of
$23.9 million, and increases of $12.9 million in inventories and $16.9 million
in accounts receivable due to increased revenues.
At September 26, 2004, EUR 26.9 million (approximately $33.0 million) was
outstanding under the multi-currency term loan. The outstanding borrowings under
the revolving credit facility were $15.0 million and JPY 300 million
(approximately $2.7 million). The availability under the $100 million
multi-currency revolving credit facility has been reduced by letters of credit
totaling $1.1 million.
At September 26, 2004, the Company was in compliance with its debt covenants.
On February 18, 2004, the Company called $60.0 million of its 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.
On September 30, 2004, the company called for redemption the remaining aggregate
principal amount of the convertible subordinated debentures. The redemption, in
the amount of $23.3 million, will take place on December 14, 2004. The called
debentures are convertible at any time prior to the close of business on
December 9, 2004. Each Note in the denomination of $1,000 is convertible, at the
holder's option, into 54.4218 shares of the Company's common stock, which is
equivalent to a conversion price of $18.375 per share.
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 August 1, 2004, the Company and ID Security Systems Canada Inc. entered into
a settlement agreement effective July 30, 2004, pursuant to which the Company
agreed to pay $19.95 million, in full and final settlement of the claims covered
by the litigation. This settlement was accrued in the second quarter of 2004.
Payment in full was made on August 5, 2004 from cash on hand and borrowing
capacity. The settlement did not cause the Company to be in default on any its
debt covenants. Subsequent to the payment, management continues to believe that
its anticipated cash needs for the foreseeable
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
future can be funded from cash and cash equivalents on hand, the availability
under the $100 million revolving credit facility, and cash generated from future
operations.
Capital Expenditures
The Company's capital expenditures during the first nine months of fiscal 2004
totaled $8.1 million compared to $10.0 million during the first nine months 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 total
approximately $12 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.
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 September 26, 2004, the Company had currency forward exchange contracts
totaling approximately $22.2 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.
-32-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
OTHER MATTERS
- -------------
New Accounting Pronouncements and Other Standards
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revised Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits-an amendment of
FASB Statements No. 87, 88, and 106." This Statement revises employers'
disclosures about pension plans and other postretirement benefit plans. This
Statement retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
it replaces. Additional disclosures have been added including information
describing the types of plan assets, investment strategy, measurement dates,
plan obligations, cash flows, and components of net periodic benefit cost
recognized during interim periods. Except as noted below, this Statement was
effective for fiscal years ending after December 15, 2003. Disclosure of certain
information regarding foreign defined benefit plans are effective for the fiscal
years ending after June 15, 2004. Disclosure of the estimated future benefits is
also deferred for companies until fiscal years ending after June 15, 2004. The
Company has adopted the effective provisions of SFAS 132 (revised 2003) in the
fourth quarter ended December 28, 2003 with no material effect on its
consolidated financial statements (see note 10 for the Company's interim
disclosures regarding pensions). All of the Company's pension plans are outside
the USA and as a result, certain of the annual disclosure provisions are not
effective for the Company until the fiscal year ending December 26, 2004. The
Company will adopt these provisions in the fourth quarter ending December 26,
2004 with no material effect on its consolidated financial statements.
In October 2004, the FASB ratified the consensus reached by the Emerging Issues
Task Force (EITF) with respect to EITF Issue No. 04-10, "Determining Whether to
Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds,"
which clarifies the guidance in paragraph 19 of SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." According to EITF 04-10,
operating segments that do not meet the quantitative thresholds can be
aggregated only if aggregation is consistent with the objective and basic
principle of SFAS 131, the segments have similar economic characteristics, and
the segments share a majority of the aggregation criteria listed in items
(a)-(e) in paragraph 17 of SFAS 131. The consensus applies to fiscal years
ending after October 13, 2004. The Company is currently evaluating the impact of
applying this guidance.
-33-
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/A filed for the year ended 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.
There have not been any changes in the Company's internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934) during the first nine months of 2004 that have materially affected, or are
reasonably likely to affect materially, the Company's internal control over
financial reporting.
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. (Civil Action
No. 99-CV-577)
On August 1, 2004, the Company and ID Security Systems Canada Inc. entered into
a settlement agreement effective July 30, 2004, pursuant to which the Company
agreed to pay $19.95 million, in full and final settlement of the claims covered
by this litigation. This settlement was accrued in the second quarter of 2004.
Payment in full was made on August 5, 2004. The Company does not admit or
acknowledge any wrongdoing or liability regarding the litigation. In connection
with the settlement, the parties have mutually released each other from all
other claims, except for any claims relating to existing contracts between the
parties. A release in favor of the Company was also provided by various
affiliates and associates of ID Security Systems Canada Inc. Management believes
that the settlement is in the best interest of the Company to avoid the risks,
burden, and expenses of continued litigation.
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
-34-
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. As a result of the settlement
of the litigation with ID Security Systems Canada Inc. described above, an
application can be made to the Court to dissolve the Stay Order at this time.
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.
Management is of the opinion that the claims are baseless both in fact and in
law and believes that, based on input from outside legal counsel, it is not
probable the claims will be upheld and that the lower end of the reasonably
possible range of the contingent liability is zero at this time. The high end of
the range cannot be estimated at this time.
-35-
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.'s (jointly "All-Tag") and Sensormatic Electronics
Corporation's motion for summary judgment, which was filed on February 15, 2002,
and ordered the case closed. The Company 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 the Company. 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. The Company acquired the patent in 1995 when it acquired Actron AG. On May
24, 2004, the Company filed a Notice of Appeal to the District Court's decision.
The Company's appeal is currently pending before the United States Court of
Appeals for the Federal Circuit.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 1, 2004, the Compensation Committee of the Board of Directors approved a
grant of non-qualified options to purchase 200,000 shares of the Company's
common stock at an exercise price of $17.74 per share as an inducement to hire
the Company's President - North America. The options, which were granted
pursuant to the exemption from registration provided by section 4(2) of the
Securities Act, vest in three equal installments over a three year period.
Item 6. EXHIBITS
3.1 Articles of Incorporation, as amended, are hereby incorporated by
reference to Item 14(a), Exhibit 3(i) of the Registrant's 1990 Form
10-K, filed with the SEC on March 14, 1991.
3.2 By-Laws, as Amended and Restated, are hereby incorporated by Reference
to the Registrant's 1992 Form 10-K, filed with the SEC on March 25,
1993.
10.1 Employment Agreement with David C. Donnnan.
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.
-36-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHECKPOINT SYSTEMS, INC.
/s/W. Craig Burns November 5, 2004
- ----------------------------
W. Craig Burns
Executive Vice President,
Chief Financial Officer and Treasurer
/s/Arthur W. Todd November 5, 2004
- ----------------------------
Arthur W. Todd
Vice President, Corporate Controller
and Chief Accounting Officer
-37-
INDEX TO EXHIBITS
- -----------------
Exhibit Description
- ---------- -----------
10.1 Employment Agreement with David C. Donnnan
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-4(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 936 of the Sarbanes-Oxley
Act of 2002
-38-