FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 |
For the quarterly period ended March 27, 2005 |
OR |
Commission File No. 1-11257 CHECKPOINT SYSTEMS, INC. |
Pennsylvania | 22-1895850 | |
(State of Incorporation) | (IRS Employer Identification No.) |
101 Wolf Drive, PO Box 188, Thorofare, New Jersey | 08086 | |
(Address of principal executive offices) | (Zip Code) | |
856-848-1800 |
(Registrants 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 ![]() ![]() |
Indicate by check mark whether the Registrant is an accelerated filer, (as defined in Rule 12b-2 of the Act). |
Yes ![]() ![]() |
APPLICABLE ONLY TO CORPORATE ISSUERS: As of May 2, 2005, there were 37,838,520 shares of the Companys Common Stock outstanding. |
1 |
CHECKPOINT SYSTEMS, INC. |
Table of Contents |
PART I. FINANCIAL INFORMATION | Page | ||||
Item 1. | Consolidated Financial Statements (Unaudited) | ||||
Consolidated Balance Sheets | 3 | ||||
Consolidated Statements of Operations | 4 | ||||
Consolidated Statements of Shareholders Equity | 5 | ||||
Consolidated Statements of Comprehensive (Loss) Income | 6 | ||||
Consolidated Statements of Cash Flows | 7 | ||||
Notes to Consolidated Financial Statements | 816 | ||||
Item 2. | Management Discussion and Analysis of Financial Condition and Results of Operations | 1724 | |||
Item 3. | Quantitative and Qualitative Disclosure about Market Risk | 25 | |||
Item 4. | Controls and Procedures | 25 | |||
PART II. OTHER INFORMATION | |||||
Item 1. | Legal Proceedings | 2526 | |||
Item 6. | Exhibits | 27 | |||
SIGNATURES | 28 | ||||
INDEX TO EXHIBITS | 29 |
2 |
CONSOLIDATED BALANCE SHEETS (Unaudited) |
(amounts in thousands) |
March 27, 2005 |
December 26, 2004* |
|||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 76,253 | $ | 102,694 | ||||
Accounts receivable, net of allowance of | ||||||||
$12,007 and $12,647 | 155,084 | 157,337 | ||||||
Inventories | 96,758 | 92,844 | ||||||
Other current assets | 30,178 | 29,991 | ||||||
Deferred income taxes | 17,194 | 17,716 | ||||||
Total Current Assets | 375,467 | 400,582 | ||||||
REVENUE EQUIPMENT ON OPERATING LEASE, net | 4,640 | 4,507 | ||||||
PROPERTY, PLANT, AND EQUIPMENT, net | 88,541 | 91,442 | ||||||
GOODWILL | 184,221 | 191,305 | ||||||
OTHER INTANGIBLES, net | 37,681 | 39,975 | ||||||
DEFERRED INCOME TAXES | 19,160 | 20,064 | ||||||
OTHER ASSETS | 18,516 | 19,073 | ||||||
TOTAL ASSETS | $ | 728,226 | $ | 766,948 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Short-term borrowings and current portion of long term debt | $ | 5,108 | $ | 24,940 | ||||
Accounts payable | 46,554 | 65,436 | ||||||
Accrued compensation and related taxes | 35,029 | 39,789 | ||||||
Other accrued expenses | 26,143 | 28,850 | ||||||
Income taxes | 17,650 | 21,645 | ||||||
Unearned revenues | 29,007 | 27,640 | ||||||
Restructuring reserve | 3,539 | 4,643 | ||||||
Other current liabilities | 18,600 | 20,727 | ||||||
Total Current Liabilities | 181,630 | 233,670 | ||||||
LONG-TERM DEBT, LESS CURRENT MATURITIES | 71,134 | 47,827 | ||||||
ACCRUED PENSIONS | 74,749 | 77,666 | ||||||
OTHER LONG-TERM LIABILITIES | 6,168 | 6,240 | ||||||
DEFERRED INCOME TAXES | 20,427 | 21,657 | ||||||
MINORITY INTEREST | 1,134 | 1,125 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS EQUITY | ||||||||
Preferred stock, no par value, 500,000 shares authorized, none issued | ||||||||
Common stock, par value $.10 per share, | ||||||||
100,000,000 shares authorized, issued 39,875,379 and 39,841,134 | 3,987 | 3,984 | ||||||
Additional capital | 310,061 | 309,503 | ||||||
Retained earnings | 77,061 | 73,230 | ||||||
Common stock in treasury, at cost, 2,041,519 shares | (20,678 | ) | (20,678 | ) | ||||
Accumulated other comprehensive income | 2,553 | 12,724 | ||||||
TOTAL STOCKHOLDERS EQUITY | 372,984 | 378,763 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY | $ | 728,226 | $ | 766,948 | ||||
* Taken from the Companys audited consolidated financial statements at December 26, 2004 See accompanying notes to the consolidated financial statements. |
3 |
CONSOLIDATED STATEMENTS OF OPERATIONS |
(dollar amounts in thousands, except per share data) |
Quarter ended | March 27, 2005 |
March 28, 2004 |
||||||
Net revenues | $ | 182,167 | $ | 180,646 | ||||
Cost of revenues | 107,021 | 104,969 | ||||||
Gross profit | 75,146 | 75,677 | ||||||
Selling, general, and administrative expenses | 64,991 | 60,653 | ||||||
Research and development | 4,868 | 5,694 | ||||||
Litigation settlement income | 350 | | ||||||
Operating income | 5,637 | 9,330 | ||||||
Interest income | 586 | 453 | ||||||
Interest expense | 973 | 2,180 | ||||||
Other gain, net | 178 | 56 | ||||||
Earnings before income taxes and minority interest | 5,428 | 7,659 | ||||||
Income taxes | 1,574 | 2,221 | ||||||
Minority interest | 23 | 9 | ||||||
Net Earnings | $ | 3,831 | $ | 5,429 | ||||
Basic Earnings Per Share | $ | .10 | $ | .16 | ||||
Diluted Earnings Per Share | $ | .10 | $ | .15 | ||||
See accompanying notes to the consolidated financial statements. |
4 |
CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Unaudited) |
(amounts in thousands) |
Additional Capital |
Retained Earnings |
Accumulated Other Comprehensive Income |
Total Stockholders Equity |
|||||||||||||||||||||
Common Stock | Treasury Stock | |||||||||||||||||||||||
Quarter ended | Shares | Amount | Shares | Amount | ||||||||||||||||||||
Balance, December 26, 2004 | 39,841 | $ | 3,984 | $ | 309,503 | $ | 73,230 | 2,042 | $ | (20,678 | ) | $ | 12,724 | $ | 378,763 | |||||||||
Net income | 3,831 | 3,831 | ||||||||||||||||||||||
Proceeds from the exercise | ||||||||||||||||||||||||
of stock options | 34 | 3 | 361 | 364 | ||||||||||||||||||||
Tax benefit related to stock | ||||||||||||||||||||||||
option | 87 | 87 | ||||||||||||||||||||||
Non-employee stock | ||||||||||||||||||||||||
compensation expense | 110 | 110 | ||||||||||||||||||||||
Foreign currency translation | ||||||||||||||||||||||||
adjustment | (10,171 | ) | (10,171 | ) | ||||||||||||||||||||
Balance, March 27, 2005 | 39,875 | $ | 3,987 | $ | 310,061 | $ | 77,061 | 2,042 | $ | (20,678 | ) | $ | 2,553 | $ | 372,984 | |||||||||
See accompanying notes to the consolidated financial statements. |
5 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited) |
(dollar amounts in thousands) |
Quarter ended | March 27, 2005 |
March 28, 2004 |
||||||
Net earnings | $ | 3,831 | $ | 5,429 | ||||
Net gain on interest rate swap, net of tax | | 4 | ||||||
Foreign currency translation adjustment | (10,171 | ) | (3,475 | ) | ||||
Comprehensive (loss) income | $ | (6,340 | ) | $ | 1,958 | |||
See accompanying notes to the consolidated financial statements. |
6 |
CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
(dollar amounts in thousands) |
Quarter ended | March 27, 2005 |
March 28, 2004 |
|||||
---|---|---|---|---|---|---|---|
Cash flows from operating activities: | |||||||
Net earnings | $ | 3,831 | $ | 5,429 | |||
Adjustments to reconcile net earnings to net cash provided by operating | |||||||
activities: | |||||||
Depreciation and amortization | 6,322 | 6,395 | |||||
Loss (gain) on disposal of fixed assets | 42 | (112 | ) | ||||
Stock-based compensation | 110 | | |||||
(Increased) decrease in current assets, net of the effects of acquired companies: | |||||||
Accounts receivable | (2,008 | ) | 1,069 | ||||
Inventories | (6,533 | ) | (6,624 | ) | |||
Other current assets | (1,503 | ) | (399 | ) | |||
Increase (decrease) in current liabilities, net of the effects of acquired | |||||||
companies: | |||||||
Accounts payable | (17,520 | ) | (17,353 | ) | |||
Income taxes | (2,709 | ) | (120 | ) | |||
Unearned revenues | 2,091 | 792 | |||||
Restructuring reserve | (951 | ) | (696 | ) | |||
Other current and accrued liabilities | (6,891 | ) | (7,686 | ) | |||
Net cash used in operating activities | (25,719 | ) | (19,305 | ) | |||
Cash flows from investing activities: | |||||||
Acquisition of property, plant, and equipment | (3,458 | ) | (2,987 | ) | |||
Acquisitions, net of cash acquired | | (155 | ) | ||||
Other investing activities | 235 | 270 | |||||
Net cash used in investing activities | (3,223 | ) | (2,872 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from stock issuances | 364 | 1,331 | |||||
Net change in short-term debt | 3,102 | 2,077 | |||||
Proceeds of long-term debt | 35,000 | | |||||
Payment of long-term debt | (32,804 | ) | (1,930 | ) | |||
Net cash provided by financing activities | 5,662 | 1,478 | |||||
Effect of foreign currency rate fluctuations on cash and cash equivalents | (3,161 | ) | (1,507 | ) | |||
Net decrease in cash and cash equivalents | (26,441 | ) | (22,206 | ) | |||
Cash and cash equivalents: | |||||||
Beginning of period | 102,694 | 110,376 | |||||
End of period | $ | 76,253 | $ | 88,170 | |||
See accompanying notes to consolidated financial statements. |
7 |
(dollar amounts in thousands) | |||||||
---|---|---|---|---|---|---|---|
Quarter ended | March 27, 2005 |
March 28, 2004 |
|||||
Net earnings, as reported | $ | 3,831 | $ | 5,429 | |||
Total stock-based employee compensation expense | |||||||
determined under fair value based method, net of tax | (705 | ) | (541 | ) | |||
Pro forma net earnings | $ | 3,126 | $ | 4,888 | |||
Net earnings per share: | |||||||
Basic: | |||||||
As reported | $ | .10 | $ | .16 | |||
Pro forma | $ | .08 | $ | .14 | |||
Diluted: | |||||||
As reported | $ | .10 | $ | .15 | |||
Pro forma | $ | .08 | $ | .14 | |||
8 |
The following assumptions were used in the estimation of the fair value on the stock options: |
Quarter ended | March 27, 2005 |
March 28, 2004 |
|||||
---|---|---|---|---|---|---|---|
Dividend yield | None | None | |||||
Expected volatility | .3209 | .3048 | |||||
Risk-free interest rates | 2.82% - 4.29 | % | 2.79 | % | |||
Expected life (in years) | 3.42 | 3.22 | |||||
Warranty Reserves We provide product warranties for our various products. These warranties vary in length depending on product and geographical region. We establish our warranty reserves based on historical data of warranty transactions. The following table sets forth the movement in the warranty reserve: |
(dollar amounts in thousands) | |||||||
---|---|---|---|---|---|---|---|
Quarter ended | March 27, 2005 |
March 28, 2004 |
|||||
Balance at beginning of year | $ | 5,171 | $ | 4,591 | |||
Accruals for warranties issued | 233 | 306 | |||||
Accruals related to pre-existing warranties, including changes | |||||||
in estimate | | | |||||
Total accruals | 233 | 306 | |||||
Settlement made | (149 | ) | (204 | ) | |||
Foreign currency translation adjustment | (78 | ) | (57 | ) | |||
Balance at end of year | $ | 5,177 | $ | 4,636 | |||
New Accounting Pronouncements and Other Standards In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, Inventory Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This pronouncement will be effective for our first quarter 2006. We are in the process of evaluating the effects of this pronouncement on our consolidated financial statements. On December 21, 2004, the FASB issued Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, a FASB Staff Position (FSP) that provides guidance on the application of SFAS No. 109 to the tax deduction on qualified production activities provided by the American Jobs Creation Act of 2004. FSP FAS 109-1 states that the qualified production activities deduction should be accounted for as a special deduction in accordance with SFAS No. 109, whereby the deduction is contingent upon the performance of specific activities, including wage levels. The FASB also concluded that the special deductions should be considered when measuring deferred taxes and assessing a valuation allowance. We are currently in the process of evaluating our ability to claim this deduction and the impact, if any, on our consolidated financial statements. On December 21, 2004, the FASB issued Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, a FSP that provides accounting and disclosure guidance for the foreign earnings repatriation provision within the American Jobs Creation Act of 2004. The Act provides special, one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer. FSP FAS 109-2 states that a company is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings, as it applies to the application of SFAS No. 109. The decision process to build the plan may occur in stages, as an enterprise may separately evaluate the provisions of the Act. We are in the process of |
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evaluating the effects of the repatriation provision to determine whether we will repatriate foreign earnings and the impact, if any, this pronouncement will have on our consolidated financial statements. In addition, the U.S. Treasury Department is expected to provide additional clarifying guidance on key elements of the repatriation provision. Until such clarification is received, we will continue our plan and intention to indefinitely reinvest accumulated earnings of our foreign subsidiaries. In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This statement is a revision to SFAS No. 123, Accounting for Stock-Based Compensation and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service, the requisite service period (usually the vesting period), in exchange for the award. On April 14, 2005, the U.S. Securities and Exchange Commission (the SEC) announced a deferral of the effective date of FAS 123R for calendar year companies until the beginning of 2006. In accordance with the SEC announcement, we will adopt SFAS No. 123R effective for our first quarter 2006 beginning December 26, 2005. Upon adoption, we have two application methods to choose from: the modified-prospective transition approach or the modified-retrospective transition approach. Under the modified-prospective transition method, we would be required to recognize compensation cost for share-based awards to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied as well as compensation cost for awards that were granted prior to, but not vested as of the date of adoption. Prior periods remain unchanged and pro forma disclosures previously required by SFAS No. 123 continue to be required. Under the modified-retrospective transition method, we would restate prior periods by recognizing compensation cost in the amounts previously reported in the pro forma footnote disclosure under SFAS No. 123. We would follow the same guidelines as in the modified-prospective transition method for awards granted subsequent to adoption and those that were granted and not yet vested. We have not yet determined which methodology we will adopt but believe that the impact that the adoption of SFAS No. 123R will have on our financial position or results of operations will approximate the magnitude of the stock-based employee compensation cost disclosed in Note 1 pursuant to the disclosure requirements of SFAS No. 148. Note 2. INVENTORIES Inventories consist of the following: |
(dollar amounts in thousands) | |||||||
---|---|---|---|---|---|---|---|
March 27, 2005 |
December 26, 2004 |
||||||
Raw materials | $ | 13,163 | $ | 12,689 | |||
Work-in-process | 5,159 | 4,025 | |||||
Finished goods | 78,436 | 76,130 | |||||
Total | $ | 96,758 | $ | 92,844 | |||
10 |
Note 3. GOODWILL AND OTHER INTANGIBLE ASSETS We had intangible assets with a net book value of $37.7 million and $40.0 million as of March 27, 2005 and December 26, 2004, respectively. The following table reflects the components of intangible assets as of March 27, 2005 and December 26, 2004: |
(dollar amounts in thousands) | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 27, 2005 | December 26, 2004 | |||||||||||||||
Amortizable Life (years) |
Carrying Amount |
Gross Accumulated Amortization |
Carrying Amount |
Gross Accumulated Amortization |
||||||||||||
Customer lists | 20 | $ | 32,216 | $ | 20,269 | $ | 33,555 | $ | 20,955 | |||||||
Trade name | 30 | 29,254 | 12,818 | 30,350 | 13,127 | |||||||||||
Patents, license agreements | 5 to 14 | 38,736 | 30,074 | 40,140 | 30,644 | |||||||||||
Other | 3 to 6 | 1,090 | 454 | 1,096 | 440 | |||||||||||
Total | $ | 101,296 | $ | 63,615 | $ | 105,141 | $ | 65,166 | ||||||||
Estimated amortization expense for each of the five succeeding years is anticipated to be: |
(dollar amounts in thousands) | ||||||
---|---|---|---|---|---|---|
2005 | $ | 3,315 | ||||
2006 | $ | 3,077 | ||||
2007 | $ | 3,015 | ||||
2008 | $ | 2,966 | ||||
2009 | $ | 2,601 |
The changes in the carrying amount of goodwill for the quarter ended March 27, 2005, are as follows: |
(dollar amounts in thousands) | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Security | Labeling Services |
Retail Merchandising |
Total | ||||||||||
Balance as of December 26, 2004 | $ | 114,237 | $ | 3,944 | $ | 73,124 | $ | 191,305 | |||||
Translation adjustment | (4,350 | ) | (1 | ) | (2,733 | ) | (7,084 | ) | |||||
Balance as of March 27, 2005 | $ | 109,887 | 3,943 | 70,391 | 184,221 | ||||||||
Pursuant to SFAS 142 Goodwill and Other Intangible Assets, we will perform our annual assessment of goodwill by comparing each individual reporting units 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. |
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Note 4. LONG-TERM DEBT Long-term debt at March 27, 2005 and December 26, 2004 consisted of the following: |
(dollar amounts in thousands) | |||||||
---|---|---|---|---|---|---|---|
March 27, 2005 |
December 26, 2004 | ||||||
Senior secured credit facility: | |||||||
244 million variable interest rate term loan maturing in 2006 | $ | | $ | 30,625 | |||
$100 million multi-currency variable interest rate revolving credit facility maturing in 2006 |
| 27,893 | |||||
Senior unsecured credit facility: | |||||||
$150 million variable interest rate revolving credit facility maturing in 2010 | 59,715 | | |||||
9.5 million capital lease maturing in 2021 | 10,756 | 11,330 | |||||
2.7 million capital lease maturing in 2007 | 1,234 | 1,404 | |||||
Other capital leases with maturities through 2010 | 495 | 550 | |||||
Total | 72,200 | 71,802 | |||||
Less current portion | 1,066 | 23,975 | |||||
Total long-term portion | $ | 71,134 | $ | 47,827 | |||
On March 4, 2005, we entered into a new $150.0 million five-year senior unsecured multi-currency revolving credit agreement (Credit Agreement) with a syndicate of lenders. The Credit Agreement replaces the $425.0 million senior collateralized multi-currency credit facility arranged in December 1999. In connection with the refinancing, we borrowed $60.0 million to repay the outstanding principal, interest and fees and expenses associated with the extinguishment of the previous credit facility. In the first quarter of 2005, we recorded a $1.1 million charge for the unamortized fees from the extinguished credit facility. Borrowings under the Credit Agreement bear interest rates of LIBOR plus an applicable margin ranging from 0.75% to 1.75% and/or prime plus 0.00% to 0.50%. The interest rate matrix is based on our leverage ratio of funded debt to EBITDA, as defined by the Credit Agreement. Under the Credit Agreement, we pay an unused line fee ranging from 0.18% to 0.30% per annum on the unused portion of the commitment. In connection with the refinancing, our aggregate fees and expenses are anticipated to approximate $0.7 million, which are being amortized over the term of the Credit Agreement. The Credit Agreement contains certain covenants, as defined in the Credit Agreement, that include requirements for a maximum ratio of debt to EBITDA, a maximum ratio of interest to EBITDA, and a maximum threshold for capital expenditures. Note 5. INCOME TAXES Income taxes are provided on an interim basis at an estimated effective annual tax rate. Our 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. We are 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. |
12 |
Note 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: |
(amounts in thousands, except per share data) | ||||||||
Quarter ended | March 27, 2005 |
March 28, 2004 |
||||||
Basic earnings available to common stockholders: | ||||||||
Earnings available to common stockholders | $ | 3,831 | $ | 5,429 | ||||
Interest on convertible subordinated debentures, net of tax | | 664 | ||||||
Diluted earnings available to common stockholders | $ | 3,831 | $ | 6,093 | ||||
Shares: | ||||||||
Basic weighted average number of common shares outstanding |
37,806 | 34,967 | ||||||
Common shares assumed upon exercise of stock options |
623 | 1,064 | ||||||
Common shares assumed upon conversion of subordinates debentures |
| 4,538 | ||||||
Weighted average common stock and dilutive stock outstanding |
38,429 | 40,569 | ||||||
Basic earnings per share | $ | .10 | $ | .16 | ||||
Diluted earnings per share | $ | .10 | $ | .15 | ||||
Options to purchase 1.4 million and 0.4 million shares of common stock were outstanding at March 27, 2005 and March 28, 2004, respectively, but were not included in the computation of diluted EPS because the options exercise prices were greater than the average market price of the common shares on such dates. Note 7. SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest and income taxes for the thirteen-week periods ended March 27, 2005 and March 28, 2004 were as follows: |
(amounts in thousands, except per share data) | ||||||||
Quarter ended | March 27, 2005 |
March 28, 2004 |
||||||
Interest | $ | 1,124 | $ | 1,070 | ||||
Income tax payments | $ | 4,499 | $ | 250 | ||||
13 |
Note 8. PROVISION FOR RESTRUCTURING In the fourth quarter of 2003, we established a shared services initiative in Europe and a manufacturing cost reduction program. The manufacturing cost reduction program included 373 planned employee terminations and was completed as of the end of the third quarter 2004. The shared services initiative in Europe included 139 planned employee terminations. We expect the 31 remaining planned terminations and other 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 $4.8 million. Restructuring accrual activity was as follows: (dollar amounts are in thousands) |
Accrual at Beginning of Year (1) |
Charged to Earnings |
Charge Reversed to Earnings |
Cash Payments |
Exchange Rate Changes |
Accrual at 3/27/05 (2) |
||||||||||||||
2005 | |||||||||||||||||||
Severance and other employee-related charges |
$ | 3,737 | $ | | $ | | $ | (877 | ) | $ | (141 | ) | $ | 2,719 | |||||
Lease termination costs | 906 | | | (74 | ) | (12 | ) | 820 | |||||||||||
$ | 4,643 | $ | | $ | | $ | (951 | ) | $ | (153 | ) | $ | 3,539 | ||||||
(1) Includes restructuring costs prior to 2003 of $1,708, of which $906 relates to lease termination
costs. Note 9. PENSION BENEFITS The components of net periodic benefit cost for the thirteen-week periods ended March 27, 2005 and March 28, 2004 were as follows: |
(dollar amounts in thousands) | ||||||||
Quarter ended | March 27, 2005 |
March 28, 2004 |
||||||
Service cost | $ | 364 | $ | 352 | ||||
Interest cost | 1,012 | 933 | ||||||
Expected return on plan assets | (1 | ) | 1 | |||||
Amortization of actuarial gain | 19 | 29 | ||||||
Amortization of transition obligation | 31 | | ||||||
Amortization of prior service costs | 1 | 1 | ||||||
Net periodic pension cost | $ | 1,426 | $ | 1,314 | ||||
We expect the cash requirements for funding the pension benefits to be approximately $3.9 million during fiscal 2005, including $0.9 million which was funded during the quarter ended March 27, 2005. |
14 |
Note 10. CONTINGENT LIABILITIES AND SETTLEMENTS We are 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 our 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 was 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 ID Security Systems Canada Inc. litigation. The purported class action complaints generally allege a claim of monopolization and are substantially based upon the same allegations as contained in the ID Security Systems Canada Inc. case (Civil Action No. 99-CV-577) as discussed below. On August 1, 2002, a civil action was filed in United States District Court for the Eastern District of Pennsylvania, designated as Civil Action No. 02-6379(ER) by plaintiff Diane Furs, Inc. t/a Diane Furs against Checkpoint Systems, Inc. and served on August 21, 2002. On August 21, 2002, a Notice of Substitution of Plaintiff and Filing of Amended Complaint was filed by the plaintiff, and the named plaintiff was changed to Medi-Care Pharmacy, Inc. On August 2, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-3730(JEI) by plaintiff Club Sports International, Inc., d/b/a Soccer CSI against Checkpoint Systems, Inc. and served on August 26, 2002. On October 2, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-4777(JBS) by plaintiff Baby Mika, Inc. against Checkpoint Systems, Inc. and served on October 7, 2002. On October 23, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5001(JEI) by plaintiff Washington Square Pharmacy, Inc. against Checkpoint Systems, Inc. and served on November 1, 2002. On October 18, 2002, The United States District, District of New Jersey (Camden) entered an Order staying the proceedings in the Club Sports International, Inc. and Baby Mika, Inc. cases referred to above. In accordance with the Order, the Stay will also apply to the Washington Square Pharmacy, Inc. case referred to above. In addition, the Medi-Care Pharmacy, Inc. case, referred to above, will be voluntarily dismissed, and it has been re-filed in New Jersey and is included in the Stay Order. 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. |
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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, based upon the advice of outside legal counsel, it is not probable that the purported class action suits will be successful. Management believes that the lower end of the reasonably possible range of the contingent liability is zero at this time. The high end of the range cannot be estimated at this time. All-Tag Security S.A., et al On April 22, 2004, the United States District Court for the Eastern District of Pennsylvania issued an opinion granting All-Tag Security S.A. and All-Tag Security Americas, Inc.s (jointly All-Tag) and Sensormatic Electronics Corporations 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 Courts decision. Our appeal is currently pending before the United States Court of Appeals for the Federal Circuit. Note 11. BUSINESS SEGMENTS |
(dollar amounts in thousands) | ||||||||
Quarter ended | March 27, 2005 |
March 28, 2004 |
||||||
Business segment net revenue: | ||||||||
Security | $ | 117,434 | $ | 112,529 | ||||
Labeling Services | 39,020 | 41,040 | ||||||
Retail Merchandising | 25,713 | 27,077 | ||||||
Total | $ | 182,167 | $ | 180,646 | ||||
Business segment gross profit: | ||||||||
Security | $ | 50,651 | $ | 50,528 | ||||
Labeling Services | 11,976 | 11,893 | ||||||
Retail Merchandising | 12,519 | 13,256 | ||||||
Total gross profit | 75,146 | 75,677 | ||||||
Operating expenses (1) | 69,509 | 66,347 | ||||||
Interest expense, net | 387 | 1,727 | ||||||
Other gain, net | 178 | 56 | ||||||
Earnings before income taxes and minority interest | $ | 5,428 | $ | 7,659 | ||||
(1) Includes $350 of legal settlement income. |
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On March 4, 2005, we entered into a new $150.0 million five-year senior unsecured multi-currency revolving credit agreement (Credit Agreement) with a syndicate of lenders. This agreement will allow us the flexibility for the execution of future business plans. Revenue for the first quarter of 2005 was $182.2 million, a 0.8% increase over the comparable periods in 2004. Foreign currency translation had a positive impact on revenue of approximately 3.0%, for the quarter ended March 27, 2005. The net decrease in sales for the first quarter ended 2005 was primarily due to the declines in European sales and our bar code labeling businesses partially offset by continued growth in the our US EAS business. The decrease in Europe was due primarily to the continued difficult market conditions in this region. The bar code businesses continued to decline as we transition these businesses for divesture. The increase in our US EAS business was due to new large chain-wide roll-outs. The net income for the first quarter of 2005 was $3.8 million compared to $5.4 million in 2004. Our results reflect higher than normal operating expenses and large customer installation activity. We expect the margins to improve as we progress through 2005. Future financial results will be dependent upon our ability to expand the functionality of our existing product lines, develop or acquire new products for sale through our global distribution channels, and reduce the cost of our products and infrastructure to respond to competitive pricing pressures. Our strong base of recurring revenue (revenues from the sale of consumables into the installed base of security systems, and hand-held labeling tools), repeat customer business, and our borrowing capacity should provide us with adequate cash flow and liquidity to execute our business plan. Results of Operations (All comparisons are with the prior year period, unless otherwise stated.) Net Revenues Our unit volume is driven by product offerings, number of direct sales personnel, recurring sales and, to some extent, pricing. Our base of installed systems and printers provides a source of recurring revenues from the sale of disposable tags and service revenues. Our customers are substantially dependent on retail sales, which are seasonal, subject to significant fluctuations, and difficult to predict. Such seasonality and fluctuations impact our sales. Historically, we have experienced lower sales in the first half of each year. |
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Analysis of Statement of Operations 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 of Total Revenues | Percentage Change |
|||||||||
Quarter ended | March 27, 2005 (Fiscal 2005) |
March 28, 2004 (Fiscal 2004) |
Fiscal 2005 vs. Fiscal 2004 |
|||||||
Net Revenues | ||||||||||
Security | 64.5 | % | 62.3 | % | 4.4 | % | ||||
Labeling services | 21.4 | 22.7 | (4.9 | ) | ||||||
Retail merchandising | 14.1 | 15.0 | (5.0 | ) | ||||||
Net revenues | 100.0 | 100.0 | 0.8 | |||||||
Cost of revenues | 58.7 | 58.1 | 2.0 | |||||||
Total gross profit | 41.3 | 41.9 | (0.7 | ) | ||||||
Selling, general, and administrative expenses |
35.7 | 33.6 | 7.2 | |||||||
Research and development | 2.7 | 3.2 | (14.5 | ) | ||||||
Legal settlement income | 0.2 | | | |||||||
Operating income | 3.1 | 5.2 | (39.6 | ) | ||||||
Interest income | 0.3 | 0.3 | 29.4 | |||||||
Interest expense | 0.6 | 1.1 | (55.4 | ) | ||||||
Other gain, net | 0.1 | 0.0 | 217.9 | |||||||
Earnings before income taxes and minority interest |
2.9 | 4.3 | (29.1 | ) | ||||||
Income taxes | 0.9 | 1.2 | (29.1 | ) | ||||||
Minority interest | 0.0 | 0.0 | 187.5 | |||||||
Net earnings | 2.1 | % | 3.1 | % | (29.4 | )% | ||||
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First Quarter 2005 Compared to First Quarter 2004 Net Revenues Revenues for the first quarter 2005 compared to the first quarter 2004 increased by $1.6 million or 0.8% from $180.6 million to $182.2 million. Foreign currency translation had a positive impact on revenues of approximately $5.4 million or 3.0% in the first quarter of 2005 as compared to the first quarter of 2004. (dollar amounts in thousands) |
Quarter ended | March 27, 2005 (Fiscal 2005) |
March 28, 2004 (Fiscal 2004) |
Dollar Amount Change Fiscal 2005 vs. Fiscal 2004 |
Percentage Change Fiscal 2005 Vs. Fiscal 2004 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Net Revenues: | ||||||||||||
Security | $ | 117.5 | $ | 112.5 | $ | 5.0 | 4.4 | % | ||||
Labeling Services | 39.0 | 41.0 | (2.0 | ) | (4.9 | ) | ||||||
Retail Merchandising | 25.7 | 27.1 | (1.4 | ) | (5.2 | ) | ||||||
Net revenues | $ | 182.2 | $ | 180.6 | $ | 1.6 | 0.8 | % | ||||
Security revenues increased by $5.0 million or 4.4% in the first quarter 2005 as compared to the first quarter 2004. Foreign currency translation had a positive impact of approximately $3.0 million. The remaining increase was primarily due to growth in EAS revenues in the US ($6.6 million), partially offset by a decline in European and Asia Pacific EAS sales of $2.5 million and $2.4 million, respectively. The growth in the US EAS revenues can be primarily attributed to large account chain-wide installations. The decrease in Europe is due primarily to poor economic conditions in that region. In Asia Pacific, the decrease was primarily the result of large account chain-wide installations in the prior year, which did not occur in the first quarter of 2005. Labeling services revenues decreased by $2.0 million or 4.9%. The positive impact of foreign currency translation was approximately $1.1 million. The remaining decrease was primarily due to lower BCS revenues of $5.9 million offset, in part, by an increase in Check-Net and intelligent library system revenues of $1.7 million and $1.1 million, respectively. Retail merchandising revenues decreased by $1.4 million or 5.2%. The positive impact of foreign currency translation was approximately $1.3 million. The remaining decrease was primarily due to continued decreases in HLS revenues. The continuing transition from hand-held price labeling to automated bar-coding and scanning by retailers caused the decline in HLS revenues. Gross Profit Gross profit for the first quarter 2005 was $75.1 million, or 41.3% of revenues, compared to $75.7 million, or 41.9% of revenues, for the first quarter 2004. The benefit of foreign currency translation on gross profit was approximately $2.4 million in the first quarter of 2005. Security gross profit, as a percentage of net revenues, decreased to 43.1% in the first quarter 2005 from 44.9% in the first quarter 2004. Security gross profit was negatively impacted by large account chain-wide installations of our EAS products. Gross profit, as a percentage of net revenues, for labeling services increased to 30.7% in the first quarter 2005 from 29.0% in the first quarter 2004. The increase in labeling gross profit, as a percentage of labeling revenues, was primarily due to supply chain and manufacturing efficiencies. The retail merchandising gross profit, as a percentage of net revenues, decreased to 48.7% in the first quarter 2005 from 49.0% in the first quarter of 2004. This decrease, as a percentage of retail merchandise revenues, was mainly due to a shift in sales mix coupled with competitive price pressures in the industry. Field service and installation costs for the first quarter 2005 and 2004 were 11.0% and 9.6% of net revenues, respectively. The increase was due primarily to the large account chain-wide installations of our EAS products. |
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Selling, General, and Administrative Expenses SG&A expenses increased, as a percentage of revenues, from 33.6% in 2004 to 35.7% in 2005. This was an increase of $4.4 million, or 7.2% over the first quarter 2004. Foreign currency translation increased SG&A expenses by approximately $2.0 million. The remaining increase was primarily due to consulting costs associated with the evaluation of our business and the write-off of unamortized bank fees associated with the term loan and secured revolving credit facility resulting from the refinancing. Research and Development Expenses Research and development (R&D) costs were $4.9 million, or 2.7% of revenues in the first quarter 2005 and $5.7 million, or 3.2% in the first quarter 2004. We continue to reinvest in the Company through technology and process improvement. Litigation Settlement Income Litigation settlement income of $0.4 million for the first quarter of 2005 consisted of an amount received in accordance with a settlement agreement related to litigation resulting from the acquisition of AW printing in 2001. Interest Expense Interest expense for the first quarter 2005 decreased $1.2 million from the comparable quarter in 2004 due primarily to lower overall debt levels. Income Taxes The effective tax rate for both the first quarter 2005 and the first quarter 2004 was 29.0%. Net Earnings Net earnings were $3.8 million, or $.10 per diluted share, in the first quarter 2005 compared to $5.4 million, or $.15 per diluted share, in the first quarter 2004. The weighted average number of shares used in the diluted earnings per share computation were 38.4 million and 40.6 million for the first quarters of 2005 and 2004, respectively. |
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Financial Condition Liquidity and Capital Resources Our liquidity needs have related to, and are expected to continue to relate to, capital investments, product development costs, future restructurings related to the rationalization of the business, acquisitions, and working capital requirements. We believe that cash provided from operating activities and funding available under our current credit agreement should be adequate for the foreseeable future to service debt and meet our anticipated cash requirements. As of March 27, 2005, our cash and cash equivalents were $76.3 million compared to $102.7 million as of December 26, 2004. Our operating activities during the first quarter of 2005 used approximately $25.7 million compared to a use of $19.3 million during the first quarter of 2004. In 2005, our cash from operating activities was impacted negatively by a decrease in accounts payable and other current and accrued liabilities coupled with an increase in inventory. The decrease in accounts payable and the increase in inventory are primarily seasonal changes in our business. The decrease in other current and accrued liabilities is primarily attributed to the payment of annual bonuses. We continue to reinvest in the Company through our investment in technology and process improvement. In the first quarter of 2005, our investment in research and development amounted to $4.9 million. We estimate the investment in research and development during the remainder of 2005 will be approximately $18 million. Our capital expenditures during the first quarter of 2005 totaled $3.5 million, compared to $3.0 million during the first quarter of 2004. We anticipate our capital expenditures, used primarily to upgrade technology and improve our production capabilities, to approximate $14 million for the remainder 2005. On March 4, 2005, we entered into a new $150.0 million five-year senior unsecured multi-currency revolving credit agreement (Credit Agreement) with a syndicate of lenders. The Credit Agreement replaces the $425.0 million senior collateralized multi-currency credit facility arranged in December 1999. In connection with the new credit facility, we borrowed $60.0 million to repay the outstanding principal, interest and fees and expenses associated with the previous credit facility. In the first quarter of 2005, we recorded a $1.1 million charge for the unamortized fees from the extinguished credit facility. Borrowings under the Credit Agreement bear interest rates of LIBOR plus an applicable margin ranging from 0.75% to 1.75% and/or prime plus 0.00% to 0.50%. The interest rate matrix is based on our leverage ratio of funded debt to EBITDA, as defined by the Credit Agreement. Under the Credit Agreement, we pay an unused line fee ranging from 0.18% to 0.30% per annum on the unused portion of the commitment. In connection with the refinancing, our aggregate fees and expenses are anticipated to approximate $0.7 million, which are being amortized over the term of the Credit Agreement. The Credit Agreement contains certain covenants, as defined in the Credit Agreement, that include requirements for a maximum ratio of debt to EBITDA, a maximum ratio of interest to EBITDA, and a maximum threshold for capital expenditures. At March 27, 2005, we were in compliance with all of our debt covenants. As of March 27, 2005, our working capital was $193.8 million compared to $166.9 million as of December 26, 2004. At the end of the first quarter 2005, our percentage of total debt to total stockholders equity increased to 20.4% from 16.1% as of December 26, 2004. As of March 27, 2005, we had available line of credit totaling approximately $88.7 million. We do not anticipate paying any cash dividend on our common stock in the near future. Provisions for Restructuring In the fourth quarter of 2003, we established a shared services initiative in Europe and a manufacturing cost reduction program. The manufacturing cost reduction program included 373 planned employee terminations and was completed as of the end of the third quarter 2004. The shared services initiative in Europe included 139 planned employee terminations and we expect the 31 remaining planned terminations and other actions under this initiative to be completed by the end of 2005. |
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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 $4.8 million. Upon completion, the annual savings are expected to be approximately $7.8 million. Restructuring accrual activity was as follows: (dollar amounts are in thousands) |
Accrual at Beginning of Year (1) |
Charged to Earnings |
Charge Reversed to Earnings |
Cash Payments | Exchange Rate Changes |
Accrual at 3/27/05 (2) |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | ||||||||||||||||||
Severance and other employee-related charges |
$ | 3,737 | $ | | $ | | $ | (877 | ) | $ | (141 | ) | $ | 2,719 | ||||
Lease termination costs | 906 | | | (74 | ) | (12 | ) | 820 | ||||||||||
$ | 4,643 | $ | | $ | | $ | (951 | ) | $ | (153 | ) | $ | 3,539 | |||||
(1) Includes restructuring costs prior to 2003 of $1,708, of which $906 relates to lease termination
costs. Exposure to Foreign Currency We manufacture products in the USA, the Caribbean, Europe, and the Asia Pacific region for both the local marketplace, as well as for export to our 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. We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third party. As of March 27, 2005, we had currency forward exchange contracts totaling approximately $18.7 million. The contracts are in the various local currencies covering primarily our Western European, Canadian, and Australian operations. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia. We have historically not used financial instruments to minimize our exposure to currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We have used third party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. As we reduce our third party foreign currency borrowings, the effect of foreign currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries increases. Off-balance Sheet Arrangements and Contractual Obligations Our significant contractual obligations and off-balance sheet arrangements have not changed materially from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004. |
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New Accounting Pronouncements and Other Standards In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This pronouncement will be effective for our first quarter 2006. We are in the process of evaluating the effects of this pronouncement on our consolidated financial statements. On December 21, 2004, the FASB issued Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, a FASB Staff Position (FSP) that provides guidance on the application of SFAS No. 109 to the tax deduction on qualified production activities provided by the American Jobs Creation Act of 2004. FSP FAS 109-1 states that the qualified production activities deduction should be accounted for as a special deduction in accordance with SFAS No. 109, whereby the deduction is contingent upon the performance of specific activities, including wage levels. The FASB also concluded that the special deductions should be considered when measuring deferred taxes and assessing a valuation allowance. We are currently in the process of evaluating our ability to claim this deduction and the impact, if any, on our consolidated financial statements. On December 21, 2004, the FASB issued Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, a FSP that provides accounting and disclosure guidance for the foreign earnings repatriation provision within the American Jobs Creation Act of 2004. The Act provides special, one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer. FSP FAS 109-2 states that a company is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings, as it applies to the application of SFAS No. 109. The decision process to build the plan may occur in stages, as an enterprise may separately evaluate the provisions of the Act. We are in the process of evaluating the effects of the repatriation provision to determine whether we will repatriate foreign earnings and the impact, if any, this pronouncement will have on our consolidated financial statements. In addition, the U.S. Treasury Department is expected to provide additional clarifying guidance on key elements of the repatriation provision. Until such clarification is received, we will continue our plan and intention to indefinitely reinvest accumulated earnings of our foreign subsidiaries. In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This statement is a revision to SFAS No. 123, Accounting for Stock-Based Compensation and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service, the requisite service period (usually the vesting period), in exchange for the award. On April 14, 2005, the U.S. Securities and Exchange Commission (the SEC) announced a deferral of the effective date of FAS 123R for calendar year companies until the beginning of 2006. In accordance with the SEC announcement, we will adopt SFAS No. 123R effective for our first quarter 2006 beginning December 26, 2005. Upon adoption, we have two application methods to choose from: the modified-prospective transition approach or the modified-retrospective transition approach. Under the modified-prospective transition method, we would be required to recognize compensation cost for share-based awards to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied as well as compensation cost for awards that were granted prior to, but not vested as of the date of adoption. Prior periods remain unchanged and pro forma disclosures previously required by SFAS No. 123 continue to be required. Under the modified-retrospective transition method, we would restate prior periods by recognizing compensation cost in the amounts previously reported in the pro forma footnote disclosure under SFAS No. 123. We would follow the same guidelines as in the modified-prospective transition method for awards granted subsequent to adoption and those that were granted and not yet vested. We have not yet determined which methodology we will adopt but believe that the impact that the adoption of SFAS No. 123R will have on our financial position or results of operations will approximate the magnitude of the stock-based employee compensation cost disclosed in Note 1 pursuant to the disclosure requirements of SFAS No. 148. |
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25 |
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, based upon the advice of outside legal counsel, it is not probable that the purported class action suits will be successful. Management believes that the lower end of the reasonably possible range of the contingent liability is zero at this time. The high end of the range cannot be estimated at this time. All-Tag Security S.A., et al On April 22, 2004, the United States District Court for the Eastern District of Pennsylvania issued an opinion granting All-Tag Security S.A. and All-Tag Security Americas, Inc.s (jointly All-Tag) and Sensormatic Electronics Corporations 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 Courts decision. Our appeal is currently pending before the United States Court of Appeals for the Federal Circuit. |
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Exhibit 3.1 | Articles of Incorporation, as amended, are hereby incorporated by reference to Item 14(a), Exhibit 3(i) of the Registrants 1990 Form 10-K, filed with the SEC on March 14, 1991. | |
Exhibit 3.2 | By-Laws, as Amended and Restated, are hereby incorporated by reference to Item 15(c), Exhibit 3.2 of the Registrants 2004 10-K, filed with the SEC on March 11, 2005. | |
Exhibit 10.1 | Credit Agreement dated March 4, 2005, by and among Registrant and the parties named therein, is here by incorporated by reference to Exhibit 99.1 of the Registrants Form 8-K dated March 4, 2005 and filed with the SEC on March 9, 2005. | |
Exhibit 31.1 | Rule 13a-14(a) Certification of George W. Off, Chairman of the Board, President and Chief Executive Officer. | |
Exhibit 31.2 | Rule 13a-a4(a) Certification of W. Craig Burns, Executive Vice President, Chief Financial Officer and Treasurer. | |
Exhibit 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHECKPOINT SYSTEMS, INC. |
/s/W. Craig Burns | May 5, 2005 |
W. Craig Burns Executive Vice President, Chief Financial Officer and Treasurer |
|
/s/Arthur W. Todd | May 5, 2005 |
Arthur W. Todd Vice President, Corporate Controller and Chief Accounting Officer |
28 |
EXHIBIT | DESCRIPTION |
EXHIBIT 31.1 | Rule 13a-14(a)/15d-14(a) Certification of George W. Off, Chairman of the Board, President and Chief Executive Officer |
EXHIBIT 31.2 | Rule 13a-4(a)/15d-14(a) Certification of W. Craig Burns, Executive Vice President, Chief Financial Officer and Treasurer |
EXHIBIT 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 936 of the Sarbanes-Oxley Act of 2002 |
29 |