-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NOmithJtWsGV1W1fPrfXV+z9ZH3SxBWEzjMlE4k0LBXLRA+yg/RAuNWCKs2NKyXC DdSIsigJ5VPGsnLFw1IXuQ== 0000215419-02-000023.txt : 20021118 0000215419-02-000023.hdr.sgml : 20021118 20021115100051 ACCESSION NUMBER: 0000215419-02-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020929 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHECKPOINT SYSTEMS INC CENTRAL INDEX KEY: 0000215419 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 221895850 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11257 FILM NUMBER: 02828554 BUSINESS ADDRESS: STREET 1: 101 WOLF DR STREET 2: P O 188 CITY: THOROFARE STATE: NJ ZIP: 08086 BUSINESS PHONE: 856-384-2460 MAIL ADDRESS: STREET 1: 101 WOLF DRIVE CITY: THOROFARE, STATE: NJ ZIP: 08086 10-Q 1 form3q10q.txt THIRD QUARTER FORM 10-Q 2002 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 2002 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------- ------ Commission file number 1-11257 ----------------------------------------------------- Checkpoint Systems, Inc. - ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 22-1895850 -------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 Wolf Drive, P.O. Box 188, Thorofare, New Jersey 08086 - ---------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (856) 848-1800 --------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- APPLICABLE ONLY TO CORPORATE ISSUERS: As of October 22, 2002, there were 32,513,316 shares of the Common Stock outstanding. CHECKPOINT SYSTEMS, INC. FORM 10-Q INDEX Page No. -------- Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statement of Shareholders' Equity 5 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7-19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20-26 Item 3. Quantitative and Qualitative Disclosures about Market Risk 27 Item 4. Controls and Procedures 27 Part II. OTHER INFORMATION Item 1. Legal Proceedings 28-29 Item 6. Exhibits and Reports on Form 8-K 30 SIGNATURES 30 CERTIFICATION 31-32 INDEX TO EXHIBITS 33 CHECKPOINT SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS Sept. 29, Dec. 30, 2002 2001 -------- -------- (Unaudited) ASSETS (Thousands) CURRENT ASSETS Cash and cash equivalents $ 39,626 $ 43,698 Accounts receivable, net of allowances of $12,129 and $12,182 137,390 145,768 Inventories 87,535 91,510 Other current assets 20,597 23,309 Deferred income taxes 10,704 9,288 -------- -------- Total current assets 295,852 313,573 REVENUE EQUIPMENT ON OPERATING LEASE, net 5,611 9,059 PROPERTY, PLANT, AND EQUIPMENT, net 98,210 102,613 GOODWILL 255,571 231,138 OTHER INTANGIBLES, net 50,608 58,467 OTHER ASSETS 38,507 37,803 -------- -------- TOTAL ASSETS $744,359 $752,653 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings and current portion of long-term debt $ 27,262 $ 31,423 Accounts payable 39,403 43,008 Accrued compensation and related taxes 24,148 20,199 Income taxes 11,759 12,934 Unearned revenues 30,868 22,964 Restructuring reserve 4,805 14,179 Other current liabilities 40,291 42,251 -------- -------- Total current liabilities 178,536 186,958 LONG-TERM DEBT, LESS CURRENT MATURITIES 91,941 142,088 CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000 ACCRUED PENSIONS 50,548 44,851 OTHER LONG-TERM LIABILITIES 10,827 9,230 DEFERRED INCOME TAXES 10,706 8,508 MINORITY INTEREST 812 755 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock, no par value, authorized 500,000 shares, none issued Common Stock, par value $.10 per share, 3,887 3,818 authorized 100,000,000 shares, issued 38,869,506 and 38,183,861 Additional capital 261,905 252,342 Retained earnings 131,548 115,093 Common stock in treasury, at cost, 6,359,200 shares (64,410) (64,410) Accumulated other comprehensive loss (51,941) (66,580) -------- -------- TOTAL SHAREHOLDERS' EQUITY 280,989 240,263 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $744,359 $752,653 ======== ======== See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Quarter Nine Months (13 weeks) Ended (39 weeks) Ended ---------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2002 2001 2002 2001 -------- -------- -------- -------- (Thousands, except per share data) Net revenues $158,800 $155,322 $463,178 $481,232 Cost of revenues 93,187 92,560 272,051 285,000 -------- -------- -------- -------- Gross profit 65,613 62,762 191,127 196,232 Selling, general, and administrative expenses 53,337 50,074 157,136 155,560 Other operating expenses (904) - (904) 1,607 -------- -------- -------- -------- Operating income 13,180 12,688 34,895 39,065 Interest income 444 589 1,313 2,099 Interest expense 3,836 5,261 11,463 17,090 Other loss, net (366) (767) (466) (787) -------- -------- -------- -------- Earnings before income taxes 9,422 7,249 24,279 23,287 Income taxes 3,015 2,827 7,769 9,082 Minority interest 33 61 55 113 -------- -------- -------- -------- Net earnings $ 6,374 $ 4,361 $ 16,455 $ 14,092 ======== ======== ======== ======== Net earnings per share: Basic $ .20 $ .14 $ .51 $ .45 ======== ======== ======== ======== Diluted $ .19 $ .14 $ .49 $ .44 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Nine Months (39 weeks) Ended September 29, 2002 ----------------------------------------------------- Accumu- lated Other Addit- Compre- Common ional Retained hensive Treasury Stock Capital Earnings Loss Stock Total ------ ------- -------- ------- -------- ----- (Thousands) Balance, December 30, 2001 $3,818 $252,342 $115,093 $(66,580) $(64,410) $240,263 (Common shares: issued 38,183,861 reacquired 6,359,200) Net earnings 16,455 16,455 Exercise of stock options 69 9,563 9,632 (685,645 shares) Net loss on interest rate swap, net of tax (684) (684) Foreign currency translation adjustment 15,323 15,323 ------ -------- -------- --------- --------- -------- Balance, September 29, 2002 $3,887 $261,905 $131,548 $(51,941) $(64,410) $280,989 ====== ======== ======== ========= ========= ======== (Common shares: issued 38,869,506 reacquired 6,359,200) See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Quarter Nine Months (13 weeks) Ended (39 weeks) Ended --------------------- --------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2002 2001 2002 2001 -------- -------- -------- -------- (Thousands) Net earnings $ 6,374 $ 4,361 $ 16,455 $ 14,092 Net loss on interest rate swap, net of tax (473) - (684) - Foreign currency translation adjustment (5,171) 7,947 15,323 (12,092) -------- -------- -------- -------- Comprehensive income $ 730 $ 12,308 $ 31,094 $ 2,000 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months (39 weeks) Ended ---------------------------- Sept. 29, Sept. 30, 2002 2001 -------- -------- (Thousands) Cash flows from operating activities: Net earnings $ 16,455 $ 14,092 Adjustments to reconcile net earnings to net cash provided by operating activities: Revenue equipment under operating lease (958) 989 Long-term customer contracts 1,792 (3,599) Depreciation and amortization 23,636 33,017 (Increase)/decrease in current assets, net of the effects of acquired companies: Accounts receivable 15,036 15,912 Inventories 8,572 11,934 Other current assets (134) 6,749 Increase/(decrease) in current liabilities, net of the effects of acquired companies: Accounts payable (5,135) (8,512) Income taxes (2,555) (5,304) Unearned revenues 6,441 3,424 Restructuring reserve (9,661) (8,908) Other current and accrued liabilities 5,344 1,592 -------- -------- Net cash provided by operating activities 58,833 61,386 -------- -------- Cash flows from investing activities: Acquisition of property, plant and equipment (4,559) (7,551) Acquisitions, net of cash acquired (681) (13,486) Other investing activities 1,029 1,343 -------- -------- Net cash used in investing activities (4,211) (19,694) -------- -------- Cash flows from financing activities: Proceeds from stock issuances 7,019 11,674 Proceeds of debt 754 6,686 Payment of debt (68,177) (39,926) -------- -------- Net cash used in financing activities (60,404) (21,566) -------- -------- Effect of foreign currency rate fluctuations on cash and cash equivalents 1,710 (562) -------- -------- Net (decrease)/increase in cash and cash equivalents (4,072) 19,564 Cash and cash equivalents: Beginning of period 43,698 28,121 -------- -------- End of period $ 39,626 $ 47,685 ======== ======== See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF ACCOUNTING The consolidated financial statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries ("Company"). All inter-company transactions are eliminated in consolidation. The consolidated financial statements and related notes are unaudited and do not contain all disclosures required by generally accepted accounting principles. Refer to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2001 for the most recent disclosure of the Company's accounting policies. The consolidated financial statements include adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company's financial position at September 29, 2002 and December 30, 2001 and its results of operations and changes in cash flows for the thirteen and thirty-nine week periods ended September 29, 2002 and September 30, 2001. Certain reclassifications have been made to the 2001 financial statements and related footnotes to conform to the 2002 presentation. 2. INVENTORIES September 29, December 30, 2002 2001 ------------ ----------- (Thousands) Raw materials $ 8,972 $ 10,631 Work in process 3,779 3,619 Finished goods 74,784 77,260 -------- -------- $ 87,535 $ 91,510 ======== ======== Inventories are stated at the lower of cost (first-in, first-out method) or market. Cost includes material, labor and applicable overhead. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 3. LONG-TERM DEBT Long-term debt at September 29, 2002 and December 30, 2001 consisted of the following: September 29, December 30, 2002 2001 ------------ ----------- (Thousands) Six and one-half year EUR 244 million variable interest rate collateralized term loan $ 92,796 $132,037 Six and one-half year $25 million variable interest rate collateralized loan 7,882 9,098 Six and one-half year $100 million multi-currency variable interest rate collateralized revolving credit facility 2,448 16,982 Twenty-two and one-half year EUR 9.5 million capital lease 8,697 8,050 Eight and one-half year EUR 2.7 million capital lease 1,715 1,764 Other capital leases with maturities through 2006 1,503 1,996 -------- -------- Total 115,041 169,927 Less current portion (23,100) (27,839) -------- -------- Total long-term portion (excluding convertible subordinated debentures) 91,941 142,088 Convertible subordinated debentures 120,000 120,000 -------- -------- Total long-term portion $211,941 $262,088 ======== ======== During the third quarter of 2002, unscheduled repayments of EUR 7.0 million (approximately $6.9 million) were made on the EUR 244 million collateralized term loan and the amount outstanding on the $100 million multi-currency revolving credit facility was reduced by JPY 1.9 billion (approximately $15.6 million). At September 29, 2002, EUR 95.3 million (approximately $92.8 million) and JPY 300 million (approximately $2.4 million) were outstanding under the EUR 244 million loan and $100 million multi-currency revolving credit facility, respectively. On March 11, 2002, the Company entered into an interest rate swap to reduce the risk of significant Euro interest rate increases in connection with the floating rate debt under the senior collaterized multi-currency credit facility. The cash flow hedging instrument initially swapped EUR 50 million of variable rate debt for fixed rate debt. The interest rate swap is marked to market and the changes are recorded in other comprehensive income. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 4. INCOME TAXES Income taxes are provided for on an interim basis at an estimated effective annual tax rate. The Company's net earnings generated by the operations of its Puerto Rico subsidiary are exempt from Federal income taxes under Section 936 of the Internal Revenue Code (as amended under the Small Business Job Protection Act of 1996) and substantially exempt from Puerto Rico income taxes. Under current law, this exemption from Federal income tax will be subject to certain limits during the years 2002 through 2005, and will be eliminated thereafter. The Company does not expect its exemption to be negatively impacted by the limits in effect during the years 2002 through 2005. Under Statement of Financial Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes", deferred tax liabilities and assets are determined based on the difference between financial statement and tax basis of assets and liabilities using enacted statutory tax rates in effect at the balance sheet date. 5. PER SHARE DATA The following data shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of potential dilutive common stock: Quarter Nine Months (13 weeks) Ended (39 weeks) Ended --------------------- --------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2002 2001 2002 2001 -------- -------- -------- -------- (Thousands, except per share amounts) BASIC EARNINGS PER SHARE: Net earnings $ 6,374 $ 4,361 $ 16,455 $ 14,092 ======== ======== ======== ======== Weighted average common stock outstanding 32,403 31,654 32,193 31,064 ======== ======== ======== ======== Basic earnings per share $ .20 $ .14 $ .51 $ .45 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE: Net earnings $ 6,374 $ 4,361 $ 16,455 $ 14,092 Add back: Interest on convertible debt, net of tax 961 961 2,882 2,882 -------- -------- -------- -------- Net earnings available for common stock and diluted securities $ 7,335 $ 5,322 $ 19,337 $ 16,974 ======== ======== ======== ======== CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Weighted average common stock outstanding 32,403 31,654 32,193 31,064 Additional common stock: Resulting from stock options 285 666 579 611 Resulting from convertible debentures 6,528 6,528 6,528 6,528 -------- -------- -------- -------- Weighted average common stock and dilutive stock outstanding 39,216 38,848 39,300 38,203 ======== ======== ======== ======== Diluted earnings per share $ .19 $ .14 $ .49 $ .44 ======== ======== ======== ======== 6. SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest and income taxes for the thirteen and thirty-nine week periods ended September 29, 2002 and September 30, 2001 were as follows: Quarter Nine Months (13 weeks) Ended (39 weeks) Ended --------------------- --------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2002 2001 2002 2001 -------- -------- -------- -------- (Thousands) Interest $ 2,248 $ 3,758 $ 9,742 $ 15,144 Income taxes $ 4,234 $ 199 $ 7,493 $ 12,732 CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 7. PROVISION FOR RESTRUCTURING Accrual Cash Accrual at Decrease Payments at Beginning in (and Exchange March 31, of 2002 Goodwill Rate Changes) 2002 --------- -------- ------------ -------- (Thousands) Severance and other employee related charges $ 8,558 $ - $ (2,537) $ 6,021 Lease termination costs 5,621 (679) (2,185) 2,757 ------- ------- -------- ------- $14,179 $ (679) $ (4,722) $ 8,778 ======= ======= ======== ======= Accrual Cash Accrual at Decrease Payments at March 31, in (and Exchange June 30, 2002 Goodwill Rate Changes) 2002 -------- -------- ------------ -------- (Thousands) Severance and other employee related charges $ 6,021 $ - $ (1,061) $ 4,960 Lease termination costs 2,757 - (384) 2,373 ------- ------- -------- ------- $ 8,778 $ - $ (1,445) $ 7,333 ======= ======= ======== ======= Cash Payments Accrual Charge (and Accrual at Charged Reversed Decrease Exchange at June 30, to to in Rate Sept. 29, 2002 Earnings Earnings Goodwill Changes) 2002 ------- -------- -------- -------- -------- -------- (Thousands) Severance and other employee related charges $ 4,960 $ 704 $ (2,446) $ - $ (679) $ 2,539 Lease termination costs 2,373 - (3) - (104) 2,266 ------- ------- -------- -------- -------- -------- $ 7,333 $ 704 $ (2,449) $ - $ (783) $ 4,805 ======= ======= ======== ======== ======== ======== In the third quarter of 2002, the Company recorded in cost of revenues a restructuring charge of $0.7 million for severance costs related to cost reductions in hand-held labeling (HLS) and barcode labeling (BCS) manufacturing. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The Company, as a result of changes in management and the renegotiation of contracts on more favorable terms, reviewed and modified the fourth quarter 2001 restructuring plans in order to reduce the future cash outlay necessary to execute the restructuring. This resulted in the reversal of $2.4 million of the restructuring accrual in the third quarter of 2002. Of this amount, $1.5 million was credited to cost of revenues and $0.9 million to other operating expenses in the quarter. At the end of the third quarter 2002, 270 of the 326 planned employee terminations, related to the 2001 restructuring, had occurred. The restructuring will be substantially complete by the first half of 2003. All employees included in the current period charge had left the Company at the end of the third quarter 2002. Termination benefits are being paid out over a period of 1 to 24 months after termination. During the first quarter of 2002, the Company was able to negotiate the termination of a lease for an office/warehouse facility on more favorable terms than originally estimated. This resulted in a decrease in goodwill related to the acquisition of Meto AG of $0.7 million. 8. OTHER OPERATING EXPENSES Other operating expenses is comprised of the following amounts: Quarter Nine Months (13 weeks) Ended (39 weeks) Ended ---------------------- --------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2002 2001 2002 2001 -------- -------- -------- -------- (Thousands) Restructuring costs $ - $ - $ - $ 1,607 Restructuring charge reversal (904) - (904) - -------- -------- -------- -------- $ (904) $ - $ (904) $ 1,607 ======== ======== ======== ======== Restructuring costs and the restructuring charge reversal are discussed in Note 7. In addition to the reversal indicated above, cost of revenues for the third quarter of 2002 includes a $1.5 million restructuring charge reversal offset by a restructuring charge of $0.7 million for severance costs (see Note 7) and an asset impairment charge of $0.5 million for leasehold improvements abandoned due to the vacation of a facility. The charges are related to cost reductions in hand-held labeling (HLS) and barcode labeling (BCS) manufacturing. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 9. CONTINGENT LIABILITIES The Company is involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business, except for the matters described in the following paragraphs. Management does not believe that the ultimate resolution of such matters will have a material adverse effect on its consolidated results of operations and/or financial condition, except as described below. On May 24, 2002, the jury, in the Civil Action No. 99-CV-577 in the United States District Court for the Eastern District of Pennsylvania, filed by plaintiff ID Security Systems Canada Inc. against Checkpoint Systems, Inc. held in favor of the Company on the plaintiff's claim for Monopolization of Commerce, but against the Company on claims of Attempted Monopolization and Conspiracy to Monopolize. In addition, the jury held against the Company on two tort claims related to tortious interference and unfair competition. Judgement was entered on the verdict in favor of the plaintiff, after trebling, in the amount of $79,170,000 plus attorneys' fees and costs to be determined by the Court. On June 14, 2002, in response to Motions filed by the Company, the Court stayed the execution of the judgement pending disposition of the Company's Motion for Post-Trial Relief and ordered the Company to post a bond in the amount of $26,390,000 and to place into escrow 3,179,600 shares of the Company's treasury stock. The Company has complied with the Court's order. On July 1 and August 14, 2002, the Company filed briefs in support of its Motion for Post-Trial Relief. The Company also filed a Motion to Vacate Judgement on Antitrust Claims Due to Lack of Subject Matter Jurisdiction on August 14, 2002. Management is of the opinion that the jury verdict is not consistent with the law and that judgement should be entered in favor of the Company as a matter of law or, alternatively, that a new trial should be granted. No liability has been recorded for this litigation as Management believes that, at this time, the reasonably possible range of the contingent liability is between zero and $80 million. If, however, the final outcome of this litigation, after all appeals have been exhausted, results in certain of the plaintiff's claims being upheld, the potential damages could be material to the Company's consolidated results of operations and/or financial condition and could cause the Company to be in default of certain bank covenants. Management anticipates that the final judgement, if any, would not be paid prior to the end of 2003 and is of the opinion that the Company will have sufficient financial resources in the form of cash and borrowing capacity, due to the cash flow generated during the intervening period, to satisfy any judgement. The Company continues to wait for the United States District Court for the Eastern District of Pennsylvania to rule on the various Post-Trial Motions filed in the ID Security Systems Canada Inc. case. Management anticipates that, regardless of how the Court rules, the case will be appealed to the Third Circuit Court of Appeals. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) A certain number of follow-on purported class action suits have arisen in connection with the jury decision in the ID Security Systems Canada Inc. litigation. The purported class action complaints generally allege a claim of monopolization, and are substantially based upon the same allegations as contained in the ID Security Systems Canada Inc. case (Civil Action No. 99-CV-577) as follows: On August 1, 2002, a civil action was filed in United States District Court for the Eastern District of Pennsylvania, designated as Civil Action No. 02-6379(ER) by plaintiff Diane Furs, Inc. t/a Diane Furs against Checkpoint Systems, Inc. and served on August 21, 2002. On August 21, 2002, a Notice of Substitution of Plaintiff and Filing of Amended Complaint was filed by the plaintiff, and the named plaintiff was changed to Medi-Care Pharmacy, Inc. On August 2, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-3730(JEI) by plaintiff Club Sports International, Inc., d/b/a Soccer CSI against Checkpoint 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 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 and served on November 1, 2002. On October 18, 2002, The United States District, District of New Jersey (Camden) entered an Order staying the proceedings in the Club Sports International, Inc. and Baby Mika, Inc. cases referred to above. In accordance with the Order, the Stay will also apply to the Washington Square Pharmacy, Inc. case referred to above. In addition, the Medi-Care Pharmacy, Inc. case, referred to above, will be voluntarily dismissed, and it is expected to be re-filed in New Jersey and be included in the Stay Order. The Stay is expected to remain in place until such time as the ID Security Systems case, referred to above, is either terminated or any appeals have been exhausted in the Third Circuit Court of Appeals. No liability has been recorded for any of the purported class action suits as Management believes that, at this time, the lower end of the reasonably possible range of the contingent liability is zero. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 10. BUSINESS SEGMENTS Quarter Nine Months (13 weeks) Ended (39 weeks) Ended ------------------- ------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2002 2001 2002 2001 -------- -------- -------- -------- (Thousands) Business segment net revenue: Security $102,805 $ 93,535 $281,089 $285,116 Labeling Services 33,152 31,915 106,850 103,855 Retail Merchandising 22,843 29,872 75,239 92,261 -------- -------- -------- -------- Total $158,800 $155,322 $463,178 $481,232 ======== ======== ======== ======== Business segment gross profit: Security $ 45,174 $ 37,247 $122,993 $114,992 Labeling Services 10,147 9,426 32,685 30,932 Retail Merchandising 10,292 16,089 35,449 50,308 -------- -------- -------- -------- Total $ 65,613 $ 62,762 $191,127 $196,232 ======== ======== ======== ======== 11. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER STANDARDS In June 2001, the Financial Accounting Standards Board (FASB) approved the issuance of Statements of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations", and No. 142 (SFAS 142), "Goodwill and Other Intangible Assets". SFAS 141 supercedes Accounting Principles Board Opinion No. 16 (APB 16), "Business Combinations". The most significant changes made by SFAS 141 are: (1) requiring that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, (2) establishing specific criteria for the recognition of intangible assets separately from goodwill, and (3) requiring unallocated negative goodwill to be written off immediately as an extraordinary gain (instead of being deferred and amortized). SFAS 142 supercedes APB 17, "Intangible Assets". SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition (i.e. the post-acquisition accounting). The most significant changes made by SFAS 142 are: (1) goodwill and indefinite lived intangible assets will no longer be amortized, (2) goodwill will be tested for impairment at least annually at the reporting unit level, (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually, and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. The FASB has allowed companies a 6-month period from the date of adoption to identify potential goodwill impairment, and then, if there is an impairment, an additional 6-month period to calculate the impairment loss. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) These statements are effective for the Company for fiscal 2002. Consequently, effective December 31, 2001 goodwill is no longer being amortized. The total amount of goodwill amortization recorded by the Company in fiscal 2001 was $11.1 million. As of September 29, 2002, the Company had intangible assets with a net book value of $50.6 million that have a gross carrying value of $80.2 million and accumulated amortization of $29.6 million. The following table reflects the components of intangible assets as of September 29, 2002: Gross Amortizable Carrying Accumulated Life (years) Amount Amortization ----------- -------- ------------ (Thousands) Customer lists 20 $25,311 $ 9,851 Trade name 30 23,537 2,158 Patents, license agreements 5 to 14 30,443 17,253 Other 3 to 6 951 372 ------- ------- $80,242 $29,634 ======= ======= The Company has determined that the life previously assigned to these finite-lived assets is still appropriate, and has recorded $3.9 million and $4.2 million of amortization expense in the first nine months of fiscal 2002 and 2001, respectively. Estimated amortization expense for each of the five succeeding years is anticipated to be: (Thousands) 2002 $5,026 2003 $3,819 2004 $3,643 2005 $3,147 2006 $2,659 CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The changes in the carrying amount of goodwill for the nine months ended September 29, 2002, are as follows: Labeling Retail Security Services Merchandising Total -------- -------- ------------- ------- (Thousands) Balance as of beginning of fiscal year 2002 (December 31, 2001) $81,833 $65,650 $ 92,158 $239,641 Goodwill acquired during year 667 - - 667 Impairment losses - - - - Exchange rate changes and other 2,371 3,771 9,121 15,263 ------- ------- -------- -------- Balance as of September 29, 2002 $84,871 $69,421 $101,279 $255,571 ======= ======= ======== ======== In accordance with SFAS 141, the Company has reclassified an intangible asset, "workforce in place", with a net book value of $8.5 million from intangibles to goodwill effective December 31, 2001. Pursuant to SFAS 142, the Company performed a transitional assessment of goodwill by comparing each individual reporting unit's carrying amount of net assets, including goodwill, to their fair value. The assessment has indicated that there is a potential goodwill impairment in each business segment. The Company is in the process of completing the second step of the transitional goodwill impairment test. Any resulting impairment charge will be recognized as a change in accounting principle in fiscal 2002. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Net income and earnings per share for the thirteen and thirty-nine week periods ended September 29, 2002, and September 30, 2001, excluding amortization for goodwill and "workforce in place", is presented below along with the adjusted net income and earnings per share as required under the transition provisions of SFAS 142: Quarter Nine Months (13 weeks) Ended (39 weeks) Ended -------------------- -------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2002 2001 2002 2001 -------- -------- -------- -------- (Thousands, except per share amounts) Net income $ 6,374 $ 4,361 $16,455 $14,092 Add back: Goodwill/workforce in place amortization, net of tax - 2,660 - 7,992 ------- ------- ------- ------- Adjusted basic net income $ 6,374 $ 7,021 $16,455 $22,084 ======= ======= ======= ======= Basic earnings per share: Net income $ .20 $ .14 $ .51 $ .45 Goodwill/workforce in place amortization, net of tax - .08 - .26 ------- ------- ------- ------- Adjusted basic net income $ .20 $ .22 $ .51 $ .71 ======= ======= ======= ======= Net earnings available for common stock and diluted securities 7,335 5,322 19,337 16,974 Add back: Goodwill/workforce in place amortization, net of tax - 2,660 - 7,992 ------- ------- ------- ------- Adjusted net earnings available for common stock and diluted securities $ 7,335 7,982 19,337 $24,966 ======= ======= ======= ======= Diluted earnings per share: Diluted net income $ .19 $ .14 $ .49 $ .44 Goodwill/workforce in place amortization, net of tax - .07 - .21 ------- ------- ------- ------- Adjusted diluted net income (1) $ .19 $ .21 $ .49 $ .65 ======= ======= ======= ======= (1) Conversion of the subordinated debentures is included in the above calculation as it is dilutive. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" on April 30, 2002. The Company is currently evaluating the effects of SFAS 145, which, among other things, covers the accounting treatment for the early extinguishment of debt. On July 29, 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The provisions of this Statement are effective for exit or disposal activities that are initiated by the Company after December 29, 2002, with early application encouraged. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information relating to Forward-Looking Statements This report includes forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Except for historical matters, the matters discussed are forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, that reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following risk factors, among other possible factors, could cause actual results to differ materially from historical or anticipated results: (1) changes in international business conditions; (2) foreign currency exchange rate and interest rate fluctuations; (3) lower than anticipated demand by retailers and other customers for the Company's products, particularly in the current economic environment; (4) slower commitments of retail customers to chain-wide installations and/or source tagging adoption or expansion; (5) possible increases in per unit product manufacturing costs due to less than full utilization of manufacturing capacity as a result of slowing economic conditions or other factors; (6) the Company's ability to provide and market innovative and cost-effective products; (7) the Company's ability to maintain its intellectual property; (8) competitive pricing pressures causing profit erosion; (9) the availability and pricing of component parts and raw materials; (10) possible increases in the payment time for receivables, as a result of economic conditions or other market factors; (11) changes in regulations or standards applicable to the Company's products; (12) unanticipated liabilities or expenses; (13) adverse determinations in the ID Security Systems Canada Inc. litigation and any other pending litigation affecting the Company; and (14) the impact of adverse determinations in the ID Security Systems Canada Inc. litigation on liquidity and debt covenant compliance. More information about potential factors that could affect the Company's business and financial results is included in the Company's Annual Report on Form 10-K for the year ended December 30, 2001, and the Company's other Securities and Exchange Commission filings. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Third Quarter 2002 Compared to Third Quarter 2001 - ------------------------------------------------- Net Revenues Net revenues for the third quarter of 2002 increased $3.5 million (or 2.2%) over the third quarter of 2001 (from $155.3 million to $158.8 million). Excluding the impact of foreign exchange of approximately $6.9 million, net revenues decreased 2.2% over the comparable quarter in 2001. Continued softness in retail demand resulted in weaker sales in the labeling services and retail merchandising segments. This was partially offset by increases in the security segment, primarily in the CCTV, Fire and Intrusion group in the United States and continuing momentum in the global security source tagging program. Cost of Revenues Cost of revenues increased approximately $0.6 million (or 0.7%) over the third quarter of 2001 (from $92.6 million to $93.2 million). As a percentage of net revenues, cost of revenues decreased from 59.6% to 58.7%. Excluding a restructuring charge of $0.7 million, an asset impairment of $0.5 million, and a restructuring charge reversal of $1.5 million (see Notes 7 and 8 of the consolidated financial statements), cost of revenues as a percentage of net revenues was 58.9%. The decrease in the Company's cost of revenues as a percentage of sales is attributable to lower manufacturing costs, primarily at the Company's Caribbean facilities. Selling, General, and Administrative and Other Operating Expenses SG&A expenses increased $3.2 million (or 6.5%) over the third quarter of 2001 (from $50.1 million to $53.3 million). The increase is primarily the result of compensation costs associated with executive management changes and legal fees for the ID Security Systems Canada Inc. litigation, partially offset by reduced amortization expense. Following the Company's adoption of Financial Accounting Standard No. 142 (SFAS 142) on December 31, 2001, SG&A for fiscal 2002 does not include any goodwill amortization. In the third quarter of 2001, goodwill and workforce in place amortization was $2.7 million. As a percentage of net revenues, SG&A expenses increased from 32.2% to 33.6%. Other operating expenses in the third quarter of 2002 related to a restructuring charge reversal as a result of changes in the fourth quarter 2001 restructuring plans, which will reduce the cash outlay necessary to execute the restructuring. Other Loss, net Other loss, net represented a net foreign exchange loss of $0.4 million and $0.8 million for the third quarters of 2002 and 2001, respectively. Interest Expense and Interest Income Interest expense for the third quarter of 2002 decreased $1.4 million from the comparable quarter in 2001 (from $5.2 million to $3.8 million) due to debt repayment and declining Euro interest rates. Interest income for the third quarter of 2002 decreased by $0.2 million from the comparable quarter in 2001 (from $0.6 million to $0.4 million) as a result of lower interest rates on invested cash. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Income Taxes The effective tax rate for the third quarter of 2002 was 32.0%. The effective tax rate during the third quarter of 2001 was 39.0%. The lower tax rate results primarily from the Company's adoption of Financial Accounting Standards No. 142 (SFAS 142) on December 31, 2001 (fiscal year 2002) as the goodwill amortization expense in 2001 was not tax-deductible. Net Earnings Net earnings for the third quarter of 2002 were $6.4 million or $.19 per diluted share. Net earnings for the third quarter of 2001 were $4.4 million or $.14 per diluted share. Excluding the amortization of goodwill and workforce in place, net earnings for the third quarter of 2001 were $7.0 million or $.21 per diluted share. Exposure to International Operations Approximately 62% of the Company's sales are made in currencies other than U.S. dollars. Sales denominated in currencies other than U.S. dollars increase the Company's potential exposure to currency fluctuations which can affect results. Management cannot predict, with any degree of certainty, changes in currency exchange rates and, therefore, the future impact that such changes may have on its operations. Restructuring The changes in the provision for restructuring are covered in Note 7 of the consolidated financial statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) First Nine Months 2002 Compared to First Nine Months 2001 - --------------------------------------------------------- Net Revenues Net revenues for the first nine months of 2002 decreased $18.0 million (or 3.8%) over the first nine months 2001 (from $481.2 million to $463.2 million). Excluding the benefit from foreign exchange of $4.9 million, revenue decreased 4.8% for the first nine months of year 2002 over the comparable period for year 2001. The decrease in revenue was caused by lower security and retail merchandising sales volumes in Europe and the United States, as well as all business segments in South America, due to a deterioration in economic conditions in the first nine months of 2002 compared to 2001. Cost of Revenues Cost of revenues decreased approximately $12.9 million (or 4.5%) over the first nine months of 2001 (from $285.0 million to $272.1 million). As a percentage of net revenues, cost of revenues decreased from 59.2% to 58.7%. The decrease in the Company's cost of revenues as a percentage of sales is attributable to lower manufacturing costs, primarily at the Company's Caribbean and U.S. manufacturing facilities. Selling, General, and Administrative and Other Operating Expenses SG&A expenses increased $1.6 million (or 1.0%) over the first nine months of 2001 (from $155.5 million to $157.1 million). The increase is the result of compensation costs associated with executive management changes and legal fees for the ID Security Systems Canada Inc. litigation partially offset by reduced amortization expense. Following the Company's adoption of Financial Accounting Standard No. 142 (SFAS 142) on December 31, 2001, SG&A for fiscal 2002 does not include any goodwill amortization. In the first nine months of 2001, goodwill and workforce in place amortization was $8.0 million. As a percentage of net revenues, SG&A expenses increased from 32.3% to 33.9%. Other operating expenses in 2002 related to a restructuring charge reversal as a result of changes in the fourth quarter 2001 restructuring plans, which will reduce the cash outlay necessary to execute the restructuring. The other operating expenses in 2001 related to the exit of certain business segments in Belgium as well as costs associated with executive management changes. Other Loss, net Other loss, net represented a net foreign exchange loss of $0.5 million and $0.8 million for the first nine months of 2002 and 2001, respectively. Interest Expense and Interest Income Interest expense for the first nine months of 2002 decreased $5.6 million from the comparable period in 2001 (from $17.1 million to $11.5 million) due to debt repayment and declining Euro interest rates. Interest income for the first nine months of 2002 decreased by $0.8 million from the comparable period in 2001 (from $2.1 million to $1.3 million) as a result of lower interest rates on invested cash. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Income Taxes The effective tax rate for the first nine months of 2002 was 32.0%. The effective tax rate during the first nine months of 2001 was 39.0%. The lower tax rate results primarily from the Company's adoption of Financial Accounting Standards No. 142 (SFAS 142) on December 31, 2001 (fiscal year 2002) as the goodwill amortization expense in 2001 was not tax-deductible. Net Earnings Net earnings for the first nine months of 2002 were $16.5 million or $.49 per diluted share. Net earnings for the first nine months of 2001 were $14.1 million or $.44 per diluted share. Excluding the amortization of goodwill and workforce in place, net earnings for the first nine months of 2001 were $22.1 million or $.65 per diluted share. Exposure to International Operations Approximately 62% of the Company's sales are made in currencies other than U.S. dollars. Sales denominated in currencies other than U.S. dollars increase the Company's potential exposure to currency fluctuations which can affect results. Management cannot predict, with any degree of certainty, changes in currency exchange rates and, therefore, the future impact that such changes may have on its operations. Restructuring The changes in the provision for restructuring are covered in Note 7 of the consolidated financial statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) FINANCIAL CONDITION - ------------------- Liquidity and Capital Resources The Company's liquidity needs have related to, and are expected to continue to relate to, capital investments, working capital requirements, and acquisitions. The Company has met its liquidity needs over the last three years primarily through funds provided by long-term borrowings and more recently through cash generated from operations. The Company believes that cash provided from operating activities and funding available under its current credit agreements should be adequate to service debt and meet its capital investment requirements. The Company's operating activities generated approximately $58.8 million during the first nine months of 2002 compared to $61.4 million in the same period in 2001. This change from the prior year was primarily attributable to a decrease in earnings before depreciation and amortization partially offset by a reduction in income taxes paid. In the second quarter of 2001, a legacy Meto German tax liability of $10.0 million was satisfied. At September 29, 2002, EUR 95.3 million (approximately $92.8 million) and $7.9 million were outstanding under the Company's senior secured facility. This facility, which expires on March 31, 2006, includes a $275 million equivalent multi-currency term note and a $100 million equivalent multi-currency revolving line of credit. The outstanding borrowings under the revolving credit facility at September 29, 2002, were JPY 300 million (approximately $2.4 million). During the third quarter of 2002, unscheduled repayments of EUR 7.0 million (approximately $6.9 million) were made on the multi-currency term note and JPY 1.9 billion (approximately $15.6 million) were made on the multi-currency revolving line of credit in order to reduce the Company's leverage and corresponding interest expense. The Company does not anticipate paying any cash dividend in the near future and is limited by existing covenants in the Company's debt instruments with regard to paying dividends. Management believes that its anticipated cash needs for the foreseeable future can be funded from cash and cash equivalents on hand, the availability under the $100 million revolving credit facility, and cash generated from future operations. On May 24, 2002, the jury, in the Civil Action No. 99-CV-577 in the United States District Court for the Eastern District of Pennsylvania, filed by plaintiff ID Security Systems Canada Inc. against Checkpoint Systems, Inc. held in favor of the Company on the plaintiff's claim for Monopolization of Commerce, but against the Company on claims of Attempted Monopolization and Conspiracy to Monopolize. In addition, the jury held against the Company on two tort claims related to tortious interference and unfair competition. Judgement was entered on the verdict in favor of the plaintiff, after trebling, in the amount of $79,170,000 plus attorneys' fees and costs to be determined by the Court. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company is currently appealing the verdict (see Note 9 of the consolidated financial statements) and has posted a bond in the amount of $26.4 million and placed into escrow 3,179,600 shares of the Company's treasury stock. Management anticipates that the final judgement, if any, would not be paid prior to the end of 2003 and is of the opinion that the Company will have sufficient financial resources in the form of cash and borrowing capacity, due to the cash flow generated during the intervening period, to satisfy any judgement. The posting of additional security during the appeals process, the recording of a liability, or a final judgement, could cause the Company to be in default of certain bank covenants. In this event, Management would pursue various alternatives, which may include, among other things, debt covenant waivers, debt covenant amendments, or refinancing of debt. While Management believes it would be successful in pursuing these alternatives, there can be no assurance of success, in which case the Company's financial condition could be materially adversely affected. Capital Expenditures The Company's capital expenditures during the first nine months of fiscal 2002 totaled $4.6 million compared to $7.6 million during the first nine months of fiscal 2001. The Company anticipates its capital expenditures to approximate $8 million in 2002. Exposure to International Operations The Company manufactures products in the USA, the Caribbean, Europe, and the Asia Pacific region for both the local marketplace as well as for export to its foreign subsidiaries. The subsidiaries, in turn, sell these products to customers in their respective geographic area of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations. In order to reduce the Company's exposure resulting from currency fluctuations, the Company has been selectively purchasing currency exchange forward contracts on a regular basis. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows the Company to shift the risk, whether positive or negative, of currency fluctuations from the date of the contract to a third party. As of September 29, 2002, the Company had currency exchange forward contracts totaling approximately $18.3 million. The contracts are in the various local currencies covering primarily the Company's Western European operations along with the Company's Canadian and Australian operations. Historically, the Company has not purchased currency exchange forward contracts for its operations in South America and Asia. The Company will continue to evaluate the use of currency options in order to reduce the impact that exchange rate fluctuations have on the Company's net earnings from sales made by the Company's international operations. The combination of forward exchange contracts and currency options should reduce the Company's risks associated with significant exchange rate fluctuations. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes to the market risks as disclosed in Item 7a of the Company's Annual Report on Form 10-K filed for the year ending December 30, 2001, which item is incorporated herein by reference. Item 4. DISCLOSURE CONTROLS AND PROCEDURES Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective in alerting them, on a timely basis, to material information required to be included in the Company's periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business, except for the matters described in the following paragraphs. Management does not believe that the ultimate resolution of such matters will have a material adverse effect on its consolidated results of operations and/or financial condition, except as described below. On May 24, 2002, the jury, in the Civil Action No. 99-CV-577 in the United States District Court for the Eastern District of Pennsylvania, filed by plaintiff ID Security Systems Canada Inc. against Checkpoint Systems, Inc. held in favor of the Company on the plaintiff's claim for Monopolization of Commerce, but against the Company on claims of Attempted Monopolization and Conspiracy to Monopolize. In addition, the jury held against the Company on two tort claims related to tortious interference and unfair competition. Judgement was entered on the verdict in favor of the plaintiff, after trebling, in the amount of $79,170,000 plus attorneys' fees and costs to be determined by the Court. On June 14, 2002, in response to Motions filed by the Company, the Court stayed the execution of the judgement pending disposition of the Company's Motion for Post-Trial Relief and ordered the Company to post a bond in the amount of $26,390,000 and to place into escrow 3,179,600 shares of the Company's treasury stock. The Company has complied with the Court's order. On July 1 and August 14, 2002, the Company filed briefs in support of its Motion for Post-Trial Relief. The Company also filed a Motion to Vacate Judgement on Antitrust Claims Due to Lack of Subject Matter Jurisdiction on August 14, 2002. Management is of the opinion that the jury verdict is not consistent with the law and that judgement should be entered in favor of the Company as a matter of law or, alternatively, that a new trial should be granted. No liability has been recorded for this litigation. If, however, the final outcome of this litigation, after all appeals have been exhausted, results in certain of the plaintiff's claims being upheld, the potential damages could be material to the Company's consolidated results of operations and/or financial condition. The Company continues to wait for the United States District Court for the Eastern District of Pennsylvania to rule on the various Post-Trial Motions filed in the ID Security Systems Canada Inc. case. Management anticipates that, regardless of how the Court rules, the case will be appealed to the Third Circuit Court of Appeals. A certain number of follow-on purported class action suits have arisen in connection with the jury decision in the ID Security Systems Canada Inc. litigation. The purported class action complaints generally allege a claim of monopolization, and are substantially based upon the same allegations as contained in the ID Security Systems Canada Inc. case (Civil Action No. 99-CV-577) as follows: On August 1, 2002, a civil action was filed in United States District Court for the Eastern District of Pennsylvania, designated as Civil Action No. 02-6379(ER) by plaintiff Diane Furs, Inc. t/a Diane Furs against Checkpoint Systems, Inc. and served on August 21, 2002. On August 21, 2002, a Notice of Substitution of Plaintiff and Filing of Amended Complaint was filed by the plaintiff, and the named plaintiff was changed to Medi-Care Pharmacy, Inc. On August 2, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-3730(JEI) by plaintiff Club Sports International, Inc., d/b/a Soccer CSI against Checkpoint 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 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 and served on November 1, 2002. On October 18, 2002, The United States District, District of New Jersey (Camden) entered an Order staying the proceedings in the Club Sports International, Inc. and Baby Mika, Inc. cases referred to above. In accordance with the Order, the Stay will also apply to the Washington Square Pharmacy, Inc. case referred to above. In addition, the Medi-Care Pharmacy, Inc. case, referred to above, will be voluntarily dismissed, and it is expected to be re-filed in New Jersey and be included in the Stay Order. The Stay is expected to remain in place until such time as the ID Security Systems case, referred to above, is either terminated or any appeals have been exhausted in the Third Circuit Court of Appeals. No liability has been recorded for any of the purported class action suits. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Employment Agreement with George W. Off 10.2 Employment Agreement with John E. Davies 10.3 First Amendment to Employment Agreement with John E. Davies 10.4 Employment Agreement with Per H. Levin 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K On August 19, 2002, the Company filed a Current Report on Form 8-K attaching a press release dated August 15, 2002, announcing the elections of George W. Off as Chairman of the Board of Directors and Chief Executive Officer, R. Keith Elliott as Lead Independent Director of the Board; and W. Craig Burns to the Board. On August 30, 2002, the Company filed a Current Report on Form 8-K attaching a press release dated August 29, 2002, announcing management changes. 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 14, 2002 Executive Vice President, Chief Financial Officer and Treasurer /s/ Arthur W. Todd - ---------------------------- November 14, 2002 Vice President, Corporate Controller and Chief Accounting Officer CERTIFICATION I, George W. Off, Chairman of the Board and Chief Executive Officer of Checkpoint Systems, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Checkpoint Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ George W. Off ------------------------------------ Name: George W. Off Title: Chairman of the Board and Chief Executive Officer Date: November 12, 2002 CERTIFICATION I, W. Craig Burns, Executive Vice President, Chief Financial Officer and Treasurer of Checkpoint Systems, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Checkpoint Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ W. Craig Burns -------------------------------- Name: W. Craig Burns Title: Executive Vice President, Chief Financial Officer and Treasurer Date: November 14, 2002 INDEX TO EXHIBITS Exhibit Description - ------- ----------- 10.1 Employment Agreement with George W. Off. 10.2 Employment Agreement with John E. Davies 10.3 First Amendment to Employment Agreement with John E. Davies 10.4 Employment Agreement with Per H. Levin 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-99.1 CERTIFICATIO 3 ex993q2002.txt CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned executive officers of the Registrant hereby certify that this Quarterly Report on Form 10-Q for the quarter ended September 29, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. By: /s/ George W. Off ----------------------------------- Name: George Off Title: Chairman of the Board and Chief Executive Officer By: /s/ W. Craig Burns ----------------------------------- Name: W. Craig Burns Title: Executive Vice President, Chief Financial Officer and Treasurer Date: November 14, 2002 EX-10. 1 MATERIAL CO 4 offempagree.txt G. OFF EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into by and between GEORGE OFF, a resident of the State of Colorado ("Executive"), and CHECKPOINT SYSTEMS, INC., a corporation organized and existing under the laws of the Commonwealth of Pennsylvania ("Company") as of August 15, 2002. WHEREAS, in recognition of Executive's contributions to Company's success and accomplishments during his tenure as an interim President and Chief Executive Officer of Company, the Board of Directors of Company ("Board of Directors") wishes to have the Company retain Executive and obtain his commitment to continue to serve as President and Chief Executive Officer of Company on the terms set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and obligations contained herein, and intending to be legally bound, the parties, subject to the terms and conditions set forth herein, agree as follows: 1. Employment and Term. Executive hereby agrees to be employed as President and Chief Executive Officer of Company, and Company hereby agrees to retain Executive as President and Chief Executive Officer. By executing this Agreement the Company confirms that the Board of Directors has approved this Agreement and has elected Executive Chairman of the Board of Directors effective as of the date hereof. The term of Executive's employment as President and Chief Executive Officer under this Agreement (the "Term") shall be the period commencing on August 15, 2002 and ending on December 31, 2005. 2. Duties. During the Term, Executive will have the titles of President and Chief Executive Officer of Company. Executive shall report to and receive instructions from Company's Board of Directors and shall assume such duties and responsibilities as may be reasonably assigned to Executive from time to time by the Board of Directors provided such duties are of a nature customarily assigned to directors, presidents and chief executive officers of public companies similarly situated. Without limitation, Executive shall have full authority and discretion relating to the general and day-to-day management of the affairs of the Company including, but not limited to, finances and other financial matters, compensation matters (other than with respect to the compensation of Executive, himself, if any, and the other executive officers of the Company which shall be determined by the Compensation Committee of the Board of Directors), personnel matters (other than such matters that relate to Executive himself), budgeting, operations, intellectual property, investor relations, retention of professionals and strategic planning and implementation. Executive will be the most senior executive officer of the Company and all other executives and businesses of the Company will report to Executive or his designee. The foregoing language shall not be construed so as to limit the duties and responsibilities of the Board of Directors as described in the Company's Articles of Incorporation and Bylaws. 3. Other Business Activities. Executive shall serve Company faithfully and to the best of his ability and shall devote his full business time, attention, skill and efforts to the performance of the duties required by or appropriate for his position as President and Chief Executive Officer. In furtherance of the foregoing, and not by way of limitation, for so long as he remains President and Chief Executive Officer of Company, Executive shall not directly or indirectly engage in any other business activities or pursuits, except for those arising from positions held as of August 15, 2002 as a director or otherwise with charitable or business organizations, as identified by Executive to the Board of Directors or such other activities as would not materially interfere with Executive's ability to carry out his duties under this Agreement. Notwithstanding the foregoing, Executive shall be permitted to engage in activities in connection with (i) service as a volunteer, officer or director or in a similar capacity of any charitable or civic organization, (ii) managing personal investments, and (iii) serving as a director, executor, trustee or in another similar fiduciary capacity for a non commercial entity; provided, however, that any such activities do not materially interfere with Executive's performance of his responsibilities and obligations pursuant to this Agreement. 4. Base Salary. The Company shall pay Executive a salary at the annual rate of Six Hundred Seventy-Five Thousand Dollars ($675,000.00) (the "Base Salary"), payable pursuant to the Company's normal practice, but no less frequently than monthly. The Base Salary shall be inclusive of all applicable income, Social Security and other taxes and charges which are required by law or requested to be withheld by Executive and which shall be withheld and paid in accordance with Company's normal payroll practice for its similarly-situated executives as in effect from time to time. The Board of Directors, in consultation with Executive, shall periodically review Executive's Base Salary during the Term, at least annually (at times according to its customary practice) for increases based on Executive's performance and other relevant factors. 5. Annual Incentive Compensation. Executive shall participate in an annual incentive compensation program(s) to be developed by the Board of Directors which will enable Executive to earn incentive compensation up to a maximum of sixty percent (60%) of Base Salary provided specified goals and objectives identified by the Board of Directors in consultation with Executive are achieved. Such goals and objectives shall be identified no later than the end of the first quarter of each calendar year and shall be consistent with the Company's budgets and business plans which are reasonably achievable. Any compensation payable to Executive pursuant to this Section shall be paid to Executive no later than the date of publication of the Company's audited financial statements for the prior fiscal year, whether or not Executive is then employed by the Company, except as otherwise expressly limited in this Agreement. 6. Stock Options. Executive shall be granted stock options under which he may purchase up to a total of Three Hundred Thirty Seven Thousand Five Hundred (337,500) shares of Company common stock (the "Stock Options") subject to the terms and conditions set forth in this Agreement, the Company's Stock Option Plan and, to the extent not inconsistent with this Agreement, to the terms and conditions of stock options provided generally to Company executive officers. Notwithstanding the foregoing, to the extent that this Agreement is contrary to or inconsistent with the Company's Stock Option Plan, then the language of the Company's Stock Option Plan shall apply and prevail. Consistent with the vesting schedule and applicable law, the maximum number of shares subject to the option shall qualify as incentive stock option shares under Section 422 of the Internal Revenue Code. The Board of Directors, in consultation with Executive, shall annually review the number of stock options granted to Executive in order to determine if increases are appropriate after consideration of all relevant factors including but not limited to options granted to other executive employees. 6.1. Grants of Stock Options. (a) One-Third (1/3) of the Stock Options (that is, options for One Hundred Twelve Thousand Five Hundred (112,500) shares (the "2003 Stock Options")) shall be fully vested and exercisable on August 15, 2003. An additional one-third of the Stock Options (that is, options for One Hundred Twelve Thousand Five Hundred (112,500) shares ("2004 Stock Options")) shall be fully vested and exercisable on August 15, 2004. The remainder of the Stock Options (that is, options for One Hundred Twelve Thousand Five Hundred (112,500) shares ("2005 Stock Options")) shall be fully vested and exercisable on August 15, 2005, provided only that Executive remains employed by the Company pursuant to this Agreement at the time such vesting and exercisability are to occur. The Stock Options shall have an exercise price equal to the mean between the highest and lowest quoted selling prices as reported in customary financial reporting services on the date of grant. (b) Notwithstanding paragraph (a) of this Section 6.1, the Stock Options shall become 100% vested upon Executive's termination of employment on account of death or Disability, termination of employment by Company Without Cause, termination of employment by Executive For Good Reason, or upon a Change in Control, as each such term is defined in Section 10.3. (c) In the event of Executive's termination of employment during the Term of this Agreement for any reason other than a termination for Cause, the Stock Options that are vested and exercisable on the date of such termination of employment shall expire on the fifth annual anniversary of the date of such termination of employment. 6.2. Anti-Dilution Adjustments. The number or type of shares or other property subject to the Stock Options and the exercise price of the Stock Options shall be appropriately and proportionately adjusted by the Board of Directors if the class of securities which are subject to the Stock Options are (i) exchanged for or converted into cash, property or a different number or kind of shares or securities as a result of a reorganization, merger, consolidation, recapitalization, restructuring or reclassification, or (ii) if the number of securities of the class of securities then subject to the Stock Options are increased or decreased or if cash, property or shares or securities are distributed in respect of such subject securities as a result of a dividend (other than a regular, quarterly cash dividend) or other distribution, stock split, reverse stock split, spin-off or the like. 6.3. Tax Withholding. Executive shall pay in cash or make other arrangements satisfactory to the Board of Directors for the satisfaction of any withholding tax obligations that arise by reason of exercise of the Stock Options. The Stock Options shall be exercisable, in whole or in part in cash, by surrender of shares previously acquired or through a cashless exercise in accordance with the terms of the Company's plan. Company shall not be required to issue shares of common stock or to recognize the disposition of such shares until such obligations are satisfied. 7. Other Benefits. (a) Pension Plans. Executive shall be entitled to participate in all tax- qualified and non-tax-qualified pension plans maintained or contributed to by Company or for the benefit of its executives (collectively, the "Company Pension Plans"), in accordance with the terms of such Company Pension Plans as they may be amended from time to time in the discretion of the Company. (b) Medical Insurance. During the Term of this Agreement, Executive shall be entitled to participate in any medical and dental insurance plans generally available to the senior management of Company, as such plans may be in effect from time to time. For thirty months (30) months after termination of Executive's employment with Company other than on account of termination by Company for Cause or Executive Without Good Reason, Executive and his eligible dependents or survivors shall be entitled to continue to participate in such plans on the terms generally applied to actively employed senior management of Company, including any employee cost-sharing provisions. To the extent the terms and conditions of the aforesaid plans do not permit participation by Executive, his dependents, or his survivors, Company shall arrange to provide Executive, his dependents, or his survivors with the after-tax economic equivalent of such continued coverage. After the termination of his employment with Company, Executive shall cease to be covered under the foregoing medical and/or dental insurance plans if he obtains coverage under other medical and/or dental insurance plans; provided, however, that if the coverage under the new medical and/or dental insurance plans is less than under the foregoing plans, Company shall provide Executive with a cash payment in an amount necessary for Executive to obtain coverage comparable to that provided under the foregoing plans. (c) Other Benefit Plans. Executive shall be entitled to receive or participate in such further savings, deferred compensation, health or welfare benefit plans offered to Company's senior management generally, in accordance with the terms of such plans as they may be amended from time to time in the discretion of the Company. (d) Perquisites; Expenses. The Company agrees to promptly reimburse Executive for all reasonable business expenses incurred by Executive in performing his duties pursuant to this Agreement, in accordance with Company's reimbursement policies generally applicable to management personnel. During the Term of this Agreement, Company agrees to provide Executive with such perquisites as are generally made available to management personnel from time to time, including the perquisites provided as of the date the Board of Directors approves this Agreement. (e) Vacation and Relocation. Executive shall be entitled to six (6) weeks paid vacation annually, and to cash compensation in respect of accrued but unused vacation days if Executive is terminated under the terms hereof, for the calendar year in which such termination occurs. Executive shall also be entitled to the Relocation benefits described in the attached Exhibit "A". (f) Severance Upon Expiration of Term. Commencing at least nine (9) months prior to the expiration of the Term of this Agreement, the Board of Directors and Executive shall negotiate in good faith to extend the Term of Executives' employment pursuant to terms and conditions similar to this Agreement. In the event that the parties are unable to agree, then upon the expiration of the Term of this Agreement, Executive shall receive, in one lump sum payment, an amount equal to one (1) times the sum of the Base Salary as in effect as of the date of the expiration of the Term and any other compensation received by Executive pursuant to any bonus or incentive plan during the immediately preceding year, in addition to any other amounts due to Executive pursuant to the terms hereof. Those options granted during the nine (9) month period referred to in the first sentence of this Section 7(f), shall expire immediately. However, all other options granted pursuant to this Agreement; including, but not limited to, the 2005 Stock Options, shall vest immediately. 8. Nondisclosure of Confidential Information. (a) Executive and Company acknowledge that Executive will, in the course of his employment, come into possession of confidential, proprietary business and technical information, and trade secrets of Company and its Affiliates (the "Proprietary Information"). Proprietary Information includes, but is not limited to, the following: Business procedures. All information concerning the way Company and its Affiliates conduct their business, which is not publicly available or generally known in the industry or trade in which Company or its Affiliates compete (such as Company contracts, internal business procedures, controls, plans, licensing techniques and practices, supplier, subcontractor and prime contractor names and contacts and other vendor information, computer system passwords and other computer security controls, financial information, distributor information, and employee data) and the physical embodiments of such information (such as check lists, samples, service and operational manuals, contracts, proposals, printouts, correspondence, forms, listings, ledgers, financial statements, financial reports, financial and operational analyses, financial and operational studies, management reports of every kind, databases, employment or personnel records, and any other written or machine-readable expression of such information as are filed in any tangible media). Marketing Plans and Customer Lists. All information which is not publicly available or generally known in the industry or trade in which Company or its Affiliates compete pertaining to Company's and its Affiliates' marketing plans and strategies; forecasts and projections; marketing practices, procedures and policies; goals and objectives; quoting practices, procedures and policies; and customer data including the customer list, contracts, representatives, requirements and needs, specifications, data provided by or about prospective customers, and the physical embodiments of such information. Business Ventures: All information which is not publicly available or generally known in the industry or trade in which Company or its Affiliates compete concerning new product development, negotiations for new business ventures, future business plans, and similar information and the physical embodiments of such information. Software. All information relating to Company's and its Affiliates' software or hardware in operation or various stages of research and development, which is not publicly available or generally known in industry or trade in which Company or its Affiliates compete and the physical embodiments of such information. Litigation. Information which is not publicly available or generally known in the industry or trade in which Company or its Affiliates compete regarding litigation and potential litigation matters and the physical embodiments of such information. Policy Information. Information which is not publicly available or generally known in the industry or trade in which the Company competes regarding the policies and positions that have been or will be advocated by Company and its Affiliates with governmental officials, the views of government officials toward such policies and positions, and the status of any communications that Company or its Affiliates may have with any government officials. Information Not Generally Known. Any information which (a) is not available to the public or within the industry or trade in which Company or its Affiliates compete, (b) gives Company or its Affiliates a significant advantage over its or their competitors, or (c) has significant economic value or potentially significant economic value to Company or its Affiliates, including the physical embodiments of such information. "Proprietary Information" does not include (i) information which at the time of disclosure or thereafter is in the public domain or is already possessed by Executive, free of any confidentiality obligation, (ii) information disclosed to Executive in good faith by a third party who has an independent right to such information and who discloses the same to Executive, free of any confidentiality obligation, (iii) information which is independently developed by Executive, (iv) information which the Company generally discloses to third parties without imposing obligations of confidentiality thereon, and (v) information known by Executive prior to entering into this Agreement. (b) Executive acknowledges that the Proprietary Information is a valuable and unique asset of Company and its Affiliates. Executive agrees that he will not, at any time during his employment or for a period of two (2) years after the termination of his employment with Company, without the prior written consent of Company or its Affiliates, as applicable, either directly or indirectly divulge any Proprietary Information for his own benefit or for any purpose other than the exclusive benefit of Company and/or its Affiliates. 9. Agreement Not to Compete. (a) Executive agrees that he shall not compete with Company or its Affiliates for the Restricted Period. The Restricted Period is defined as the period beginning on the date hereof and ending (i) if Executive is terminated for Cause (as defined in Section 10.4(a)) or Executive terminates this Agreement Without Good Reason (as defined in Section 10.2(b)), on the date which is thirty (30) months following the date of termination, (ii) if this Agreement is terminated by the Company for any reason other than Cause or Executive for Good Reason, on the date of such termination, and (iii) if this Agreement terminates due to the expiration of the Term, on the date which is twelve (12) months following the expiration of the Term. (b) For the purposes of this Section 9, "compete" shall mean directly or indirectly through one or more intermediaries (i) working or serving as a director, officer, employee, consultant, agent, representative, or in any other capacity, with or without compensation, on behalf of one or more entities engaged in the Company's Business (as defined below) in any country where Company (including any Affiliate) either engages in the Company's Business at the time of Executive's termination or where Company, at the time of Executive's termination, has developed a business plan or taken affirmative steps to engage in the Company's Business, (ii) soliciting any employees of the Company other than a general solicitation via any communication medium directed generally to the public at large or to industry participants or if Executive's employer solicited such employee without input or encouragement from Executive, and/or (iii) inducing any customer or business partner of the Company to breach a contract with the Company or otherwise cease doing business with the Company or any principal for whom the Company acts as agent to terminate such agency relationship. For purposes of this provision, the term "the Company's Business" shall mean any business activity or line of business similar to the type of business conducted by Company, and/or its Affiliates at the time of Executive's termination of employment or which Company, and/or its Affiliates at the time of Executive's termination of employment or within one year prior thereto have developed a business plan or taken affirmative steps to enter into or conduct. Executive expressly agrees that the markets served by Company and its Affiliates extend worldwide and are not dependent on the geographic location of the executive personnel or the businesses by which they are employed and that the restrictions set forth in this Section 9 are reasonable and are no greater than are required for the protection of Company, and its Affiliates. For purposes of this Agreement, the term "Affiliate" shall be deemed to refer to Company, and any entity (whether or not existing on the date hereof) controlling, controlled by or under common control with Company. 10. Termination. Executive's employment hereunder may be terminated during the Term upon the occurrence of any one of the events described in this Section 10 upon fifteen days prior written notice to Executive. Upon termination, Executive shall be entitled only to such compensation and benefits as described in this Section 10. 10.1. Disability and Death. (a) Disability. If Executive becomes physically or mentally disabled to such an extent that he has not been able to perform the duties set forth in Section 2 of this Agreement, with or without a reasonable accommodation, for a period of more than 180 days, either consecutively or within any 365-day period ("Disability"), Company may terminate Executive's employment hereunder. The determination of whether Executive has a Disability under this Agreement shall be made by the Board of Directors, which shall consider the information presented by Executive's personal physician and by any other advisors, including any other physician, which the Board of Directors determines appropriate. The determination of the Board of Directors shall be final and binding, unless it is determined to have been arbitrary and capricious. If the employment of Executive terminates during the Term due to the Disability of Executive, Company shall provide to Executive (i) whatever benefits are available to him under any disability benefit plan(s) applicable to him at the time of such termination to the extent Executive satisfies the requirements of such plan(s), and (ii) the payments set forth in Section 10.1.(c). (b) Death. If Executive dies during the Term, Company shall pay to Executive's executors, legal representatives or administrators the payments set forth in Section 10.1.(c). Except as specifically set forth in this Section 10.1 or under applicable laws, Company shall have no liability or obligation hereunder to Executive's executors, legal representatives, administrators, heirs or assigns or any other person claiming under or through him by reason of Executive's death, except that Executive's executors, legal representatives or administrators will be entitled to receive any death benefit payable to them as beneficiaries under any insurance policy or other benefits plans in which Executive participates as an employee of Company and to exercise any rights afforded them under any benefit plan then in effect. (c) Payment Upon Disability or Death. Upon termination of the employment of Executive due to death or Disability during the Term, Company shall pay an amount equal to all accrued but unpaid Base Salary through the date of termination of employment, plus a portion of the Average Annual Incentive Compensation (as defined in Section 10.2(d) below) pro-rated for the year through the date of termination. 10.2. Termination By Company Without Cause; Termination By Executive For Good Reason. (a) Termination By Company Without Cause. The Company may terminate Executive's employment hereunder at any time for any reason other than Cause, Disability or Death upon thirty (30) days written notice to Executive ("Termination Without Cause"). (b) Termination By Executive For Good Reason. Executive may terminate his employment hereunder at any time for Good Reason ("Termination for Good Reason"). For purposes of this Agreement, Good Reason shall mean (i) a material reduction in the position or responsibilities of Executive, provided that a Change in Control (including the fact that the Company's stock is not publicly held or is held or controlled by a single stockholder as a result of a Change in Control) shall of itself be deemed a material reduction in the position or responsibilities of Executive; (ii) a reduction in Executive's Base Salary or a material reduction in Executive's compensation arrangements or benefits; (iii) a substantial failure of Company to perform any material provision of this Agreement; (iv) a relocation of Company's executive offices to a distance of more than seventy-five (75) miles from its location as of the date of this Agreement, unless such relocation results in Company's executive offices being closer to Executive's then primary residence or does not substantially increase the average commuting time of Executive; and (v) if Executive ceases involuntarily (other than by reason of death, disability or Termination for Cause) to be the Chairman of the Board of Directors. (c) In the event of a Termination Without Cause or a Termination For Good Reason, Company shall pay to Executive within forty-five (45) days after termination an amount equal to all accrued but unpaid Base Salary through the date of termination of employment, plus a portion of the Average Annual Incentive Compensation pro-rated for the year through the date of termination, plus the Multiplier times the Compensation Amount (as such terms are defined in Section 10.2(d) below). In addition, upon Executive's Termination Without Cause or Termination For Good Reason, the Stock Options shall fully vest and be exercisable in accordance with Section 6.1(c). (d) The Multiplier is defined as two and one-half (2-1/2). The Compensation Amount is defined as the sum of (i) the annual Base Salary of Executive as in effect immediately prior to Executive's termination of employment, and (ii) the Average Annual Incentive Compensation. The Average Annual Incentive Compensation shall be a cash payment determined as follows: (i) if the termination occurs on or before December 31, 2003, the Average Annual Incentive Compensation shall be deemed to equal one-half (1/2) of the maximum annual incentive compensation or thirty percent (30%) of Base Salary; (ii) if the termination occurs between January 1, 2004 and December 31, 2004, the Average Annual Incentive Compensation shall be the actual amount of Annual Incentive Compensation earned for the preceding calendar year; (iii) if the termination occurs on or after January 1, 2005, the Average Annual Incentive Compensation shall be the average of the Annual Incentive Compensation earned for the two preceding calendar years. For purposes of determining the Average Annual Incentive Compensation earned by Executive in any past year, any non-cash compensation awarded to Executive shall be included as annual incentive compensation only if specifically designated as such by the Board of Directors, and such non-cash compensation shall be valued by such method as the Board of Directors in its discretion shall determine, which may be the manner in which such compensation is valued for proxy reporting purposes. 10.3. Change in Control. (a) For purposes of this Agreement, "Change in Control" shall mean an occurrence of one or more of the following events: (i) an acquisition of any voting securities of Company (the "Voting Securities") by any "person" or "group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) other than an employee benefit plan of Company, immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 under the Exchange Act) of more than fifty percent (50%) of the combined voting power of Company's then outstanding Voting Securities; or (ii) within any 18-month period, the individuals who were directors of the Company as of the date the Board of Directors approved this Agreement (the "Incumbent Directors") ceasing for any reason other than death, disability, retirement or by reason of the plan adopted by the Board of Directors on even date herewith to expand the number of members of the Board to constitute at least a majority of the Board of Directors, provided that any director who was not a director as of the date the Board of Directors approved this Agreement shall be deemed to be an Incumbent Director if such director was appointed or nominated for election to the Board of Directors by, or on the recommendation or approval of, at least a majority of directors who then qualified as Incumbent Directors, provided further that any director appointed or nominated to the Board of Directors to avoid or settle a threatened or actual proxy contest shall in no event be deemed to be an Incumbent Director; or (iii) satisfaction of all conditions to a merger, consolidation, or reorganization involving Company that results or would result in the stockholders of Company immediately before such merger, consolidation or reorganization owning, directly or indirectly, immediately following such merger, consolidation or reorganization, less than fifty percent (50%) of the combined voting power of the corporation which survives such transaction as the ultimate parent entity, unless such merger, consolidation or reorganization is not thereafter consummated. (iv) a sale of all or substantially all of the assets of Company. (b) If, as a result of payments provided for under or pursuant to this Agreement together with all other payments in the nature of compensation provided to or for the benefit of Executive under any other agreement in connection with a Change in Control, Executive becomes subject to taxes of any state, local or federal taxing authority that would not have been imposed on such payments but for the occurrence of a Change in Control, including any excise tax under Section 4999 of the Internal Revenue Code of 1986 (the "Code") and any successor or comparable provision, then, in addition to any other benefits provided under or pursuant to this Agreement or otherwise, Company (including any successor to Company) shall pay to Executive at the time any such payments are made under or pursuant to this or the other agreements, an amount equal to the amount of any such taxes imposed or to be imposed on Executive (the amount of any such payment, the "Parachute Tax Reimbursement"). In addition, Company (including any successor to Company) shall "gross up" such Parachute Tax Reimbursement by paying to Executive at the same time an additional amount equal to the aggregate amount of any additional taxes (whether income taxes, excise taxes, special taxes, employment taxes or otherwise) that are or will be payable by Executive as a result of the Parachute Tax Reimbursement being paid or payable to Executive and/or as a result of the additional amounts paid or payable to Executive pursuant to this sentence, such that after payment of such additional taxes Executive shall have been paid on a net after-tax basis an amount equal to the Parachute Tax Reimbursement. The amount of any Parachute Tax Reimbursement and of any such gross-up amounts shall be determined by Company's independent auditing firm, whose determination, absent manifest error, shall be treated as conclusive and binding absent a binding determination by a governmental taxing authority that a greater amount of taxes is payable by Executive. 10.4. Termination For Cause; Termination By Executive Without Good Reason. (a) Termination for Cause. The Company may terminate the employment of Executive for Cause at any time during the Term. For purposes of this Agreement, Cause shall mean that Executive has committed an act of Misconduct (as defined below) or that there has been a willful and continuing failure of Executive to perform substantially his obligations under this Agreement, other than as a result of Executive's death or Disability. For purposes of this Agreement, "Misconduct" shall mean: (i) embezzlement, fraud, or breach of fiduciary duty by Executive against the Company; (ii) personal dishonesty of Executive materially injurious to Company; (iii) an unauthorized and intentional disclosure of any Proprietary Information in breach of Executive's duty of loyalty; (iv) conviction of, or entering a plea of nolo contendere or guilty to, a felony criminal offense; or (v) competing with the Company while employed by the Company or during the Restricted Period, in contravention of Section 9. (b) Termination By Executive Without Good Reason. Executive may terminate his employment hereunder at any time Without Good Reason (as defined in Section 10.2(b)). (c) In the event Executive's employment with Company is terminated by Company for Cause or by Executive Without Good Reason, Executive shall receive all accrued but unpaid Base Salary, and benefits as of the effective date of Termination. In the event Executive's employment with Company is terminated by the Company for Cause or by Executive during the Term of this Agreement Without Good Reason, Executive shall forfeit all unvested Stock Options granted under this Agreement. 11. Other Agreements. Executive represents and warrants to Company that: (a) There are no restrictions, agreements or understandings whatsoever to which Executive is a party or by which he is bound that would prevent or make unlawful Executive's execution of this Agreement or Executive's employment hereunder, or which is or would be inconsistent or in conflict with this Agreement or Executive's employment hereunder, or would prevent, limit or impair in any way the performance by Executive of his obligations hereunder. (b) Executive shall disclose the existence and terms of the restrictive covenants set forth in this Agreement to any employer by whom Executive may be employed during the Term (which employment is not hereby authorized) or during the Restricted Period as defined in the Agreement Not to Compete by and between Executive and Company set forth in Section 9 hereof. 12. Survival of Provisions. The provisions of this Agreement shall survive the termination of Executive's employment hereunder and the payment of all amounts payable and delivery of all post-termination compensation and benefits pursuant to this Agreement incident to any such termination of employment. 13. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon Company and its successors or permitted assigns and Executive and his executors, administrators or heirs. The Company shall require any successor or successors expressly to assume the obligations of Company under this Agreement. The Company's failure to obtain the agreement of any successor or assign to assume the obligations of this Agreement shall be considered "Good Reason" for purposes of Section 10.2(b). For purposes of this Agreement, the term "successor" shall include the ultimate parent corporation of any corporation involved in a merger, consolidation, or reorganization with or including the Company that results in the stockholders of Company immediately before such merger, consolidation or reorganization owning, directly or indirectly, immediately following such merger, consolidation or reorganization, securities of another corporation, regardless of whether any such merger, consolidation or reorganization is deemed to constitute a Change in Control for purposes of this Agreement. Executive may not assign any obligations or responsibilities under this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of Company. At any time prior to a Change in Control, Company may provide, without the prior written consent of Executive, that Executive shall be employed pursuant to this Agreement by any of its Affiliates or Company, and in such case all references herein to the "Company" shall be deemed to include any such entity, provided that (i) such action shall not relieve Company of its obligation to make or cause an Affiliate to make or provide for any payment to or on behalf of Executive pursuant to this Agreement, and (ii) Executive's duties and responsibilities shall not be significantly diminished as a result thereof. The Board of Directors may not assign any or all of its responsibilities hereunder to any committee of the Board of Directors. 14. Executive Benefits. This Agreement shall not be construed to be in lieu of or to the exclusion of any other rights, benefits and privileges to which Executive may be entitled as an executive of Company under any retirement, pension, profit-sharing, insurance, hospitalization or other plans or benefits which may now be in effect or which may hereafter be adopted. 15. Board of Directors Service. Subject to re-election by a vote of stockholders, Executive shall continue to serve on the Board of Directors through the Term and shall tender his resignation from the Board of Directors upon expiration of the Term, or upon any earlier termination of his employment, which resignation may or may not be accepted. 16. Notices. All notices required to be given to any of the parties of this Agreement shall be in writing and shall be deemed to have been sufficiently given, subject to the further provisions of this Section 16, for all purposes when presented personally to such party, or sent by facsimile transmission, any national overnight delivery service, or certified or registered mail, to such party at its address set forth below: (a) If to Executive: George Off (b) If to Company: Checkpoint Systems, Inc. 101 Wolf Drive Thorofare, NJ 08086 Attn: Vice President and General Counsel Such notice shall be deemed to be received when delivered if delivered personally, upon electronic or other confirmation of receipt if delivered by facsimile transmission, the next business day after the date sent if sent by a national overnight delivery service, or three (3) business days after the date mailed if mailed by certified or registered mail. Any notice of any change in such address shall also be given in the manner set forth above. Whenever the giving of notice is required, the giving of such notice may be waived in writing by the party entitled to receive such notice. 17. Entire Agreement; Amendments. This Agreement and any other documents, instruments or other writings delivered or to be delivered in connection with this Agreement as specified herein constitute the entire agreement among the parties with respect to the subject matter of this Agreement and supersede all prior and contemporaneous agreements, understandings, and negotiations, whether written or oral, with respect to the terms of Executive's employment by Company. This Agreement may be amended or modified only by a written instrument signed by all parties hereto. 18. Waiver. The waiver of the breach of any term or provision of this Agreement shall not operate as or be construed to be a waiver of any other or subsequent breach of this Agreement. 19. Governing Law. This Agreement shall be governed and construed as to its validity, interpretation and effect by the laws of the Commonwealth of Pennsylvania. 20. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or such provisions, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 21. Section Headings. The section headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. 22. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute one and the same instrument. 23. Specific Enforcement; Extension of Period. Executive acknowledges that the restrictions contained in Sections 8 and 9 hereof are reasonable and necessary to protect the legitimate interests of Company and its Affiliates and that Company would not have entered into this Agreement in the absence of such restrictions. Executive also acknowledges that any breach by him of Sections 8 or 9 hereof will cause continuing and irreparable injury to Company for which monetary damages would not be an adequate remedy. Executive shall not, in any action or proceeding by Company to enforce Sections 8 or 9 of this Agreement, assert the claim or defense that an adequate remedy at law exists. In the event of such breach by Executive, Company shall have the right to enforce the provisions of Sections 8 and 9 of this Agreement by seeking injunctive or other relief in any court, and this Agreement shall not in any way limit remedies at law or in equity otherwise available to Company. In the event that the provisions of Sections 8 or 9 hereof should ever be adjudicated to exceed the time, geographic, or other limitations permitted by applicable law in any applicable jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, or other limitations permitted by applicable law. 24. Arbitration. Any dispute or claim other than those referred to in Section 23, arising out of or relating to this Agreement or otherwise relating to the employment relationship between Executive and Company (including but not limited to any claims under Title VII of the Civil Rights Act of 1964, as amended; the Americans with Disabilities Act; the Age Discrimination in Employment Act; the Family Medical Leave Act; and the Employee Income Retirement Security Act) shall be submitted to Arbitration, in Philadelphia County, Commonwealth of Pennsylvania, and except as otherwise provided in this Agreement shall be conducted in accordance with the rules of, but not under the auspices of, the American Arbitration Association. The arbitration shall be conducted before an arbitration tribunal comprised of three individuals, one selected by Company, one selected by Executive, and the third selected by the first two. The parties and the arbitrators selected by them shall use their best efforts to reach agreement on the identity of the tribunal within ten (10) business days of either party to this Agreement submitting to the other party a written demand for arbitration. The proceedings before the tribunal shall take place within twenty (20) business days of the selection thereof. Executive and Company agree that such arbitration will be confidential and no details, descriptions, settlements or other facts concerning such arbitration shall be disclosed or released to any third party without the specific written consent of the other party, unless required by law or court order or in connection with enforcement of any decision in such arbitration. The parties shall equally divide the costs of the arbitrators, and each party shall bear his or its attorneys' fees and other costs, except that the arbitrators may specifically direct one party to bear a greater portion or the entire cost of the arbitration, including all attorneys fees, if the arbitrators determine that such party acted in bad faith. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed the day and year first written above. Attest: CHECKPOINT SYSTEMS, INC. ________________________ By:____________________________ R. Keith Elliott ____________________________ George Off EX-10.2 EMPLOYMENT A 5 daviesagre.txt J. DAVIES EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT BETWEEN JOHN DAVIES AND CHECKPOINT SYSTEMS, INC. THIS AGREEMENT is made as of the 20th day of March, 2001, by and between CHECKPOINT SYSTEMS, INC. a Pennsylvania corporation ("CSI"), and John Davies ("Executive"). BACKGROUND CSI is involved in providing integrated security and safety solutions for retail, industrial and institutional applications worldwide, both directly and through its affiliates. Executive has agreed to accept employment with CSI as its Vice President, Research and Development and has agreed to furnish his skills to CSI and fulfill the duties of the aforementioned position as outlined in Exhibit "A", attached hereto and made a part hereof, on the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment and Term. CSI hereby employs Executive as its Vice President, Research and Development. Executive agrees to serve CSI in such capacity, subject to the terms and conditions of this Agreement, for a term of two (2) calendar years, commencing on the date hereof (the "Term"). 2. Duties. A. During the Term, Executive shall use his best efforts to perform all duties required in furtherance of his position as outlined in Exhibit "A" or as are assigned to him from time to time by the Executive Vice President of CSI.\ B. Executive shall diligently and faithfully devote his entire time, energy, skill, and best efforts to perform his duties under this Agreement. Executive shall conduct himself at all times so as to advance the best interests of CSI, and shall not undertake or engage in any other business activity or continue or assume any other business affiliations which conflict or interfere with the performance of his services hereunder without the prior written consent of the Chief Executive Officer of CSI. 3. Compensation. CSI shall pay Executive and Executive shall accept, as his base compensation for all services rendered to CSI pursuant hereto: A. During the Term, an annual base salary of $. (the "Base Salary"), payable at regular intervals in accordance with CSI's normal payroll practice, which Base Salary shall be adjusted as of January 1st during the Term hereof, effective as of the aforesaid date. The amount of such adjustment, while in the discretion of the Chief Executive Officer shall reflect Executive's performance; and B. In addition to the Base Salary payable to Executive under Subsection 3A above, upon achieving the certain goals and objectives as defined in CSI's Bonus Pool Plan, attached hereto as Exhibit B, an incentive bonus ("Bonus") shall be paid for each year of the Term in accordance with the terms of said Bonus Pool Plan, which Bonus Pool Plan may be amended or revoked by CSI at any time during the term hereof. 4. Fringe Benefits and Other Compensation. A. During the Term, Executive shall be entitled to participate in and receive the program of fringe benefits applicable to all employees, subject only to Executive's meeting or satisfying the eligibility requirements and standards therefor with regard to health, life and disability insurance benefits. Said program of fringe benefits may be amended or revoked by CSI at any time during the term hereof. 5. Termination. A. Executive's employment and rights to compensation hereunder shall terminate immediately if Executive voluntarily leaves the employment of CSI, except that CSI shall have the obligation to pay Executive such portion of his Base Salary provided for in Subsection 3A hereof as may be accrued but unpaid (including vacation pay) on the date Executive voluntarily leaves the employment of CSI. Executive shall have no right to receive any Bonus payments that have accrued and are payable if Executive voluntarily leaves the employment of CSI, it being the understanding of the parties that in this event, the amount and payment of any accrued Bonus shall be in the sole discretion of the Board of Directors of CSI. In the event that Executive voluntarily leaves the employment of CSI, he shall provide at least thirty (30) days written notice. B. CSI may upon written notice to Executive giving the reasons therefor terminate Executive's employment and his rights to compensation hereunder for cause. As used herein, the term "cause" shall include and be limited to, the following: conviction of Executive for any felony, fraud or embezzlement or crime of moral turpitude; being held liable by a court of competent jurisdiction for sexual harrassment in violation of applicable federal, state or local laws; controlled substance abuse, alcoholism or drug addiction which interferes with or affects Executive's responsibilities to CSI or which reflects negatively upon the integrity or reputation of CSI; or Executive's breach of any of the material covenants contained in this Agreement which breach is not cured within ten (10) days of the receipt of written notice thereof by Executive. If Executive is terminated for cause as provided above, Executive's employment and rights to compensation hereunder shall terminate immediately upon receipt of written notice except that CSI shall have the obligation to pay Executive such portion of his Base Salary as may be accrued but unpaid on the date his employment is terminated. Executive shall have no right to receive any Bonus payments that have accrued and are payable if Executive is terminated for cause as provided above. C. If Executive is terminated by CSI during the Term hereof, for reasons other than those provided in Subsections 5A or 5B above, and provided that Executive is not in violation of the provisions of Section 6 hereof, Executive shall be entitled to receive severance pay for a period of twelve (12) months thereafter consisting of payment of one hundred percent (100%) of Executive's monthly Base Salary payable at regular intervals in accordance with CSI's normal payroll practices, as well as any Bonus payments that are accrued and payable through the date of such termination, and continuation of health insurance benefits contemporaneous with the severance pay. D. Executive shall not be considered to have voluntarily left his employment within the meaning of Section 5A if he leaves for any of the following reasons: (i) The assignment of the Executive to any duties substantially inconsistent with his position, duties, responsibilities or status with CSI as defined herein or a substantial reduction of the aforesaid duties or responsibilities; (ii) In the event of a "Change in Control" as defined herein, any failure of CSI to obtain the assumption of the obligation to perform this Agreement as contemplated. For purposes of this Agreement, a "Change in Control" of CSI shall be deemed to have occurred if (a) any person or entity or group thereof acting in concert (an "Acquiror") acquires from the shareholders of CSI (whether through a merger, a consolidation, or otherwise) and possesses, directly or indirectly, the power to elect or appoint or approve the appointment of a majority of the Board of Directors and does, in fact, elect or appoint or approve the appointment of the majority of the Board; or (b) such Acquiror obtains the right or power to elect a substitute or replacement Board, and does, in fact, exercise such right; or (c) the shareholders of CSI approve an agreement for the sale or disposition by CSI of all or substantially all of CSI's assets to an Acquiror; E. No later than six (6) months prior to the end of the Term of this Agreement, CSI and Executive shall commence negotiations for either an extension of Term or the entering into of a new agreement. In the event that the parties are unable to agree upon an extension or new agreement, and Executive leaves the employ of CSI, Executive shall be entitled to receive severance pay equal to his Base Salary at the end of the Term, for a period of nine (9) months from the date he leaves the employ of CSI. If Executive is employed for the full calendar year, and employment is terminated for any reason, other than cause as defined in Section 5B, Executive shall be entitled to receive payment from the Bonus Plan, even if such payment is payable after Executive's employment has ceased. F. If Executive is terminated by CSI during the Term hereof, for reasons other than those provided in Subsections 5A or 5B above, or if this Agreement is not renewed, CSI shall provide Executive outplacement consulting services comparable to those received by management of similar organizations. G. If Executive becomes unable to perform his duties hereunder due to partial or total disability or incapacity resulting from a mental or physical illness, injury or any similar cause, CSI will continue the payment of Executive's total compensation at his then current rate for a period of six (6) months following the date Executive is first unable to perform his duties due to such disability or incapacity. Thereafter, CSI shall have no obligation for the Base Salary or other compensation payments to Executive during the continuance of such disability or incapacity, except that CSI shall pay to Executive, based upon the portion of the calendar year that Executive was able to perform his duties prior to the disability, the pro rata portion of the Bonus that Executive would have earned if he had remained in the employ of CSI for the full calendar year (payable at such time that Executive would have received such Bonus). Executive shall receive CSI's standard disability coverage. H. If Executive dies, all payments hereunder shall continue for a period of two (2) months after the end of the week in which Executive's death shall occur, at which point such payments shall cease and CSI shall have no further obligations or liabilities hereunder to Executive's estate or legal representative or otherwise, except that CSI shall pay to Executive's estate or legal representation, based upon the portion of the calendar year that Executive was employed by CSI prior to his death, the prorated portion of the Bonus Executive would have earned if he had remained in the employ of CSI for the full calendar year (payable at such time that Executive would have received such Bonus). I. CSI's obligation to make payments hereunder is purely contractual and a general obligation of CSI and the amounts payable hereunder shall not be held by CSI in a trust or segregated fund for Employee nor shall Employee have any right against CSI or any director, officer or employee of CSI, in respect of any payment hereunder other than as a general creditor of CSI. J. Upon termination of employment, all vested stock options granted under the CSI Stock Option Plan (1992) will be treated in accordance with the terms of the CSI Stock Option Plan (1992). 6. Confidentiality and Covenant Not to Compete. A. Executive covenants and agrees that he will at all times keep confidential and will not at any time, except with the prior written consent of CSI, directly or indirectly, communicate or disclose or use for his benefit or the benefit of any Person (as defined in subsection 9E hereof) except CSI, any trade secrets or confidential or proprietary information of CSI or any of its affiliates including, but not limited to, strategic planning documents, data, reports, records, plans, policies, applications, and other documents, and Executive will also use his best efforts to prevent unauthorized disclosure by others. B. Executive agrees not to compete with CSI in any manner whatsoever, as an employee, shareholder, director, creditor, joint venturer, consultant, or otherwise, or any currently existing or hereinafter created subsidiary, joint venture, or business line of CSI, at any time during this Agreement, and for a period of two years following the date of termination of employment in the area constituting the United States, Puerto Rico and Europe. C. The parties agree that any breach by Executive of the covenants contained in this Section 6 will result in irreparable injury to CSI for which money damages could not adequately compensate CSI, and therefore, in the event of any such breach, CSI shall be entitled (in addition to any other rights and remedies which it may have at law or in equity) to have an injunction issued by any competent court of equity enjoining and restraining Executive and/or any other Person involved therein from continuing such breach. The covenants contained in this Section 6 are independent of all other covenants between Executive and CSI. D. If any portion of the covenants or agreements contained herein, or the application thereof, is construed to be invalid or unenforceable, then the other portions of such covenant(s) or agreement(s) or the application thereof shall not be affected and shall be given full force and effect without regard to the invalid or unenforceable portions. E. All information, lists, data, reports, records, plans, policies, applications, and other papers, articles, and materials of any kind relating to CSI's business and obtained by Executive in the course of his association with CSI, whether developed by him or not, shall be and remain CSI's property and will be returned to CSI along with any and all copies thereof, at such time as Executive ceases to be an employee of CSI. 7. Conflict of Interest. A. Executive represents and warrants that he is not subject to any restrictions or prohibitions whatsoever, and has no interest whatsoever, contractual or otherwise, which would in any way prevent, restrict or interfere with his right and/or ability to enter into this Agreement and perform hereunder, or which would create a conflict of interest for him or for CSI. B. Executive covenants that, during the Term, he will disclose to CSI, in writing, any and all interests he may have, whether for profit or compensation or not, in any venture or activity which could interfere with his ability to perform under this Agreement or create a conflict of interest for him or for CSI. 8. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, at the following addresses or to such other address as either party may designate by like notice: A. If to Executive, to: John Davies B. If to CSI, to: Checkpoint Systems, Inc. 101 Wolf Drive Thorofare, NJ 08086 Attn: Chairman of the Board of Directors C. In all cases, copies to: Stradley, Ronon, Stevens & Young 2600 One Commerce Square Philadelphia, Pennsylvania 19103 Attn: William R. Sasso, Esquire 9. Additional Provisions. A. This Agreement shall inure to the benefit of and be binding upon CSI and its successors and assigns and Executive, his heirs, executors, administrators and legal representatives. B. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and cannot be changed or terminated orally. This Agreement supersedes all prior and contemporaneous written or oral agreements between the parties relating to the subject matter hereof. No modification or waiver of any of the provisions hereof shall be effective unless in writing and signed by the party against whom it is sought to be enforced. C. If any provision of this Agreement shall be or shall become illegal or unenforceable in whole or in part, for any reason whatsoever, the remaining provisions shall nevertheless be deemed valid, binding and subsisting. D. No failure on the part of any party hereto to exercise and no delay in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. E. "Person" as used herein shall mean a natural person, joint venture, corporation, partnership, trust, estate, sole proprietorship, governmental agency or authority or other juridical entity. F. This is a personal service contract and may not be assigned by Executive. This Agreement may not be assigned by CSI to any affiliate of CSI which accedes to or otherwise carries on the business of CSI, whether by merger, liquidation, consolidation or otherwise, unless the duties and responsibilities of Executive remain substantially unchanged after such assignment. G. The headings of the several sections of this Agreement have been inserted for convenience of reference only and shall in no way restrict or modify any of the terms or provisions hereof. H. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New Jersey, without regard to its conflicts of laws principles. Subject to the provisions of Subsection 6C hereof, all unresolved claims, demands or disputes between Executive and CSI arising out of or relating to this Agreement, or the parties' respective performances hereunder, shall be subject to binding arbitration in the local Chapter in Philadelphia, Pennsylvania pursuant to the Rules of the American Arbitration Association. The prevailing party shall be entitled to reimbursement for all costs, including reasonable attorneys' fees, associated with such arbitration. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the date first above written. ATTEST: CHECKPOINT SYSTEMS, INC. _________________________ By:________________________________ Michael E. Smith WITNESS: _________________________ By: ________________________________ John Davies EX-10.3 FIRST AMENDM 6 davies1st.txt FIRST AMENDMENT TO J. DAVIES AGREEMENT FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This First Amendment to Employment Agreement is made as of this 4th day of March, 2002, by and between Checkpoint Systems, Inc. ("CSI") and John Davies ("Executive"). WHEREAS, CSI and Executive are parties to an Employment Agreement dated March 20, 2001 ("Agreement"); and WHEREAS, the parties wish to amend such Agreement as set forth herein; NOW THEREFORE, in consideration of the premises and mutual promises and covenants contained herein and intending to be legally bound thereby, the parties agree as follows: 1. Article 1. Employment and Term is hereby amended by changing the Executive's title to Executive Vice President. 2. Article 3.A Compensation is hereby amended by changing the "Base Salary" to $250,000. 3. Article 5. Termination is hereby amended by changing Article 5C and 5E so that the twelve (12) month period contained therein shall now be read as eighteen (18) months. 4. All other terms of the Agreement shall remain the same. IN WITNESS WHEREOF, the parties have caused this First Amendment to be executed as of the date first above written. CHECKPOINT SYSTEMS, INC. BY: /s/ Michael E. Smith BY: /s/ John Davies, Jr. -------------------- -------------------- President and Chief John Davies Executive Officer EX-10.4 EMPLOYENT AG 7 levinagre.txt P. LEVIN EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT BETWEEN PER LEVIN AND CHECKPOINT SYSTEMS, INC. THIS AGREEMENT is made as of July, 19, 2001, by and between CHECKPOINT SYSTEMS, INC. a Pennsylvania corporation ("CSI"), and PER LEVIN ("Executive"). BACKGROUND CSI is involved in providing integrated security and safety and identification solutions for retail, industrial and institutional applications world-wide, both directly and through its affiliates. Executive has agreed to accept employment with CSI as its Vice President and General Manager-Europe and has agreed to furnish his skills to CSI and fulfill the duties of the aforementioned position as outlined in Exhibit "A". attached hereto and made a part hereof, on the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment and Term CSI hereby employs Executive as its Vice President and General Manager-Europe. Executive agrees to serve CSI in such capacity, subject to the terms and conditions of this Agreement, for a term of two (2) calendar years, commencing on the date hereof (the "Term"). The Executive's period of continuous employment will begin on February 1, 1995. 2. Duties A. During the Term, Executive shall use his best efforts to perform all duties required in furtherance of his position as outlined in Exhibit "A" or as are assigned to him from time to time by the Chief Operating Officer of CSI. B. Executive shall diligently and faithfully devote his entire time, energy, skill, and best efforts to perform his duties under this Agreement. Executive shall conduct himself at all times so as to advance the best interests of CSI, and shall not undertake or engage in any other business activity or continue or assume any other business affiliations which conflict or interfere with the performance of his services hereunder without the prior written consent of the Chief Executive Officer of CSI. 3. Compensation CSI shall pay Executive and Executive shall accept, as his base compensation for all services rendered to CSI pursuant hereto: A. During the Term, an annual base salary of $237,500 USD (the "Base Salary"), payable at regular monthly intervals in accordance with CSI's normal payroll practice, which Base Salary shall be adjusted as of January lst during the Term hereof, effective as of the aforesaid date. The amount of such adjustment, while in the discretion of the Chief Executive Officer shall reflect Executive's performance; and B. In addition to the Base Salary payable to Executive under Subsection 3A above, upon achieving the certain goals and objectives as defined in CSI's Bonus Plan, attached hereto as Exhibit B, an incentive bonus "Bonus") (up to 30% max) shall be paid for each year of the Term in accordance with the terms of said Bonus Plan, which Bonus Pool Plan may be amended by CSI at any time during the term hereof For the year 2001 only, you will receive a guaranteed minimum bonus of $30,000 USD under the terms of the Plan payable on or about the earnings release date for the year 2001 results. C. In addition to the standard bonus in (B) above, an incremental bonus based upon exceeding quarterly cash flow and operating income objectives (as set by the Company) will be payable to Executive. There is no cap on this aspect of the bonus. This payment shall be payable on a quarterly basis. Details of the 2001 Bonus Scheme is attached and is controlling as to targets and payments. D. You will be paid a housing allowance of $15,000 USD payable on the commencement of employment. E. The Company will make a $35,000 USD contribution to your pension plan for each full year you are in this position. This shall be payable on a monthly basis. 4. Fringe Benefits and Other Compensation A. During the Term, Executive shall be entitled to participate in and receive the program of fringe benefits applicable to all employees of CSI, subject only to Executive's meeting or satisfying the eligibility requirements and standards therefor with regard to health, life and disability insurance benefits. Said program of fringe benefits may be amended or revoked by CSI at any time during the term hereof B. CSI shall reimburse to Executive all reasonable business expenses properly incurred and defrayed by him in the course of employment with CSI. C. The Executive shall be entitled to receive his normal compensation for all Bank and Public Holidays observed in England and a further 30 working days vacation in each calendar year. 5. Termination A. Executive's employment and rights to compensation hereunder shall terminate immediately if Executive voluntarily leaves the employment of CSI without giving the notice set out in this Section 5A, except that CSI shall have the obligation to pay Executive such portion of his Base Salary provided for in Subsection 3A hereof as may be accrued but unpaid (including vacation pay) on the date Executive voluntarily leaves the employment of CSI. Executive shall have no right to receive any Bonus payments that have accrued and are payable if Executive voluntarily leaves the employment of CSI without giving the notice set out in this Section 5A, it being the understanding of the parties that in this event, the amount and payment of any accrued Bonus shall be in the sole discretion of the Board of Directors of CSI. In the event that Executive voluntarily leaves the employment of CSI, he shall provide at least thirty (30) days written notice. B. CSI may upon written notice to Executive giving the reasons therefor terminate Executive's employment and his rights to compensation hereunder for cause. As used herein, the term "cause" shall include and be limited to, the following: conviction of Executive for any indictable offence (excluding motoring offences), fraud or embezzlement or crime of moral turpitude; being held liable by a court of competent jurisdiction for sexual harassment in violation of applicable local laws; controlled substance abuse, alcoholism or drug addiction which interferes with or affects Executive's responsibilities to CSI or which reflects negatively upon the integrity or reputation of CSI; or Executive's breach of any of the material covenants contained in this Agreement which breach is not cured within ten (10) days of the receipt of written notice thereof by Executive. If Executive is terminated for cause as provided above, Executive's employment and rights to compensation hereunder shall terminate immediately upon receipt of written notice except that CSI shall have the obligation to pay Executive such portion of his Base Salary and vacation as may be accrued but unpaid on the date his employment is terminated. C. If Executive is terminated by CSI during the Term hereof, for reasons other than those provided in Subsections above, and provided that Executive is not in violation of the provisions of Section 6 hereof, Executive shall be entitled to receive severance pay for a period of eighteen (18) months, and, up to an additional six (6) months severance pay, (provided the Executive is not employed during each month of the six month period thereafter). The severance pay shall consist of payment of one hundred percent (100%) of Executive's monthly Base Salary payable at regular monthly intervals in accordance with CSI's normal payroll practices, as well as any bonus payments that are accrued and payable through the date of such termination, and continuation of health insurance benefits contemporaneous with the severance pay. D. Executive shall not be considered to have voluntarily left his employment within the meaning of Section 5A if he leaves for any of the following reasons: (i) The assignment of the Executive to any duties substantially inconsistent with his position, duties, responsibilities or status with CSI as defined herein or a substantial reduction of the aforesaid duties, responsibilities or compensation; (ii) In the event of a "Change in Control" as defined herein, any failure of CSI to obtain the assumption of the obligation to perform this Agreement as contemplated. For purposes of this Agreement, a "Change in Control" of CSI shall be deemed to have occurred if (a) any person or entity or group thereof acting in concert (an "Acquiror") acquires from the shareholders of CSI (whether through a merger, a consolidation, or otherwise) and possesses, directly or indirectly, the power to elect or appoint or approve the appointment of a majority of the Board of Directors and does, in fact, elect or appoint or approve the appointment of the majority of the Board; or (b) such Acquiror obtains the right or power to elect a substitute or replacement Board, and does, in fact, exercise such right; or (c) the shareholders of CSI approve an agreement for the sale or disposition by CSI of all or substantially all of CSI's assets to an Acquiror; E. No later than six (6) months prior to the end of the Term of this Agreement, CSI and Executive shall commence negotiations for either an extension of Term or the entering into of a new agreement. In the event that the parties are unable to agree upon an extension or new agreement, and Executive leaves the employ of CSI, Executive shall be entitled to receive severance pay equal to his Base Salary at the end of the Term, for a period of one (1) year from the date he leaves the employ of CSI. If Executive is employed for a full calendar year from the date hereof, and employment is terminated for any reason, other than cause as defined in Section 5B, Executive shall be entitled to receive payment from the Bonus Plan, even if such payment is payable after Executive's employment has ceased. F. If Executive is terminated by CSI during the Term hereof, for reasons other than those provided in Subsections 5A or 5B above, or if this Agreement is not renewed, CSI shall provide Executive outplacement consulting services comparable to those received by management of similar organizations. G. If Executive becomes unable to perform his duties hereunder due to partial or total disability or incapacity resulting from a mental or physical illness, injury or any similar cause, CSI will continue the payment of Executive's total compensation (including all bonuses) at his then current rate for a period of six (6) months following the date Executive is first unable to perform his duties due to such disability or incapacity. Thereafter, CSI shall have no obligation for the Base Salary or other compensation payments to Executive during the continuance of such disability or incapacity, except that CSI shall pay to Executive, based upon the portion of the calendar year that Executive was able to perform his duties prior to the disability, the pro rata portion of the Bonus that Executive would have earned if he had remained in the employ of CSI for the full calendar year (payable at such time that Executive would have received such Bonus). 44e Executive shall receive CSI's standard disability coverage. H. If Executive dies, all payments hereunder shall continue for a period of two (2) months after the end of the week in which Executive's death shall occur, at which point such payments shall cease and CSI shall have no further obligations or liabilities hereunder to Executive's estate or legal representative or otherwise, except that CSI shall pay to Executive's estate or legal representation, based upon the portion of the calendar year that Executive was employed by CSI prior to his death, the prorated portion of the Bonus Executive would have earned if he had remained in the employ of CSI for the full calendar year (payable at such time that Executive would have received such Bonus). I. CSIs obligation to make payments hereunder is purely contractual and a general obligation of CSI and the amounts payable hereunder shall not be held by CSI in a trust or segregated fund for Employee nor shall Employee have any right against CSI or any director, officer or employee of CSI, in respect of any payment hereunder other than as a general creditor of CSI but subject to any payment that is deemed otherwise by virtue of law. J. Upon termination of employment, all vested stock options granted under the CSI Stock Option Plan (1992) will be treated in accordance with the terms of the CSI Stock Option Plan (1992). 6. Confidentiality and Covenant Not to Compete A. Executive covenants and agrees that he will at all times keep confidential and will not at any time, except with the prior written consent of CSI, directly or indirectly, communicate or disclose or use for his benefit or the benefit of any Person (as defined in subsection 9E hereof) except CSI, any trade secrets or confidential or proprietary information of CSI or any of its affiliates including, but not limited to, strategic planning documents, data, reports, records, plans, policies, applications, and other documents, and Executive will also use his best efforts to prevent unauthorized disclosure by others. This section shall not apply to any information that is in the public domain (other than by way of unauthorized disclosure) or required to be disclosed by virtue of any statutory provision. B. Executive agrees not to compete with CSI in any product or service supply by CSI during the six months immediately preceding the date of termination in any manner whatsoever, as an employee, shareholder, director, creditor, joint venturer, consultant, or otherwise, or any currently existing or hereinafter created subsidiary, joint venture, or business line of CSI, at any time during this Agreement, and for a period of two years following the date 'of termination of employment in the area constituting the United States, Puerto Rico and Europe. C. The parties agree that any breach by Executive of the covenants contained in this Section 6 will result in irreparable injury to CSI for which money damages could not adequately compensate CSI, and therefore, in the event of any such breach, CSI shall be entitled (in addition to any other rights and remedies which it may have at law or in equity) to have an injunction issued by any competent court of equity enjoining and restraining Executive and/or any other Person involved therein from continuing such breach. The covenants contained in this Section 6 are independent of all other covenants between Executive and CSI. D. If any portion of the covenants or agreements contained herein, or the application thereof, is construed to be invalid or unenforceable, then the other portions of such covenant(s) or agreement(s) or the application thereof shall not be affected and shall be given full force and effect without regard to the invalid or unenforceable portions. E. All information, lists, data, reports, records, plans, policies, applications, and other papers, articles, and materials of any kind relating to CSI's business and obtained by Executive in the course of his association with CSI, whether developed by him or not, shall be and remain CSI's property and will be returned to CSI along with any and all copies thereof, at such time as Executive ceases to be an employee of CSI. 7. Conflict of Interest A. Executive represents and warrants that he is not subject to any restrictions or prohibitions whatsoever, and has no interest whatsoever, contractual or otherwise, which would in any way prevent, restrict or interfere with his right and/or ability to enter into this Agreement and perform hereunder, or which would create a conflict of interest for him or for CSI. B. Executive covenants that, during the Term, he will disclose to CSI, in writing, any and all interests he may have, whether for profit or compensation or not, in any venture or activity which could interfere with his ability to perform under this Agreement or create a conflict of interest for him or for CSI. 8. Notices All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, at the following addresses or to such other address as either party may designate by like notice: A. If to Executive, to: Per Levin B. If to CSI, to: Checkpoint Systems, Inc. 101 Wolf Drive Thorofare, NJ 08086 Attn: Chairman of the Board of Directors C. In all cases, copies to: Stradley, Ronon, Stevens & Young 2600 One Commerce Square Philadelphia, Pennsylvania 19103 Attn: William R. Sasso, Esquire 9. Additional Provisions A. This Agreement shall inure to the benefit of and be binding upon CSI and its successors and assigns and Executive, his heirs, executors, administrators and legal representatives. B. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and cannot be changed or terminated orally. This Agreement supersedes all prior and contemporaneous written or oral agreements between the parties relating to the subject matter hereof. No modification or waiver of any of the provisions hereof shall be effective unless in writing and signed by the party against whom it is sought to be enforced. C. If any provision of this Agreement shall be or shall become illegal or unenforceable in whole or in part, for any reason whatsoever, the remaining provisions shall nevertheless be deemed valid, binding and subsisting. D. No failure on the part of any party hereto to exercise and no delay in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. E. "Person" as used herein shall mean a natural person, joint venture, corporation, partnership, trust, estate, sole proprietorship, governmental agency or authority or other juridical entity. F. This is a personal service contract and may not be assigned by Executive. This Agreement may not be assigned by CSI to any affiliate of CSI which accedes to or otherwise carries on the business of CSI, whether by merger, liquidation, consolidation or otherwise, unless the duties and responsibilities of Executive remain substantially unchanged after such assignment. G. The headings of the several sections of this Agreement have been inserted for convenience of reference only and shall in no way restrict or modify any of the terms or provisions hereof. H. This Agreement shall be governed by and construed and enforced in accordance with the laws of the United Kingdom without regard to its conflicts of laws principles. Subject to the provisions of Subsection 6C hereof, all unresolved claims, demands or disputes between Executive and CSI arising out of or relating to this Agreement, or the parties' respective performances hereunder, shall be subject to binding arbitration in the local Chapter in London, England pursuant to the Rules of the International Arbitration Association. The prevailing party shall be entitled to reimbursement for all costs, including reasonable attorneys' fees, associated with such arbitration. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the date first above written. ATTEST: CHECKPOINT SYSTEMS, INC. _______________ BY: -------------------------------- William J. Reilly, Jr. WITNESS: ________________ -------------------------------- Per Levin -----END PRIVACY-ENHANCED MESSAGE-----