-----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, GLi1F9cplNbCFgtoz0qVPJxP9IDZd0dXMN+Ww0IOmHCDGI9A1jQcX7fKnHthLCWF UZBlns825n4hUBx1pqYfcA== 0000215419-03-000064.txt : 20031031 0000215419-03-000064.hdr.sgml : 20031031 20031031164838 ACCESSION NUMBER: 0000215419-03-000064 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030929 FILED AS OF DATE: 20031031 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: 03970365 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 sept03q.txt FORM 10-Q THIRD QUARTER 2003 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 28, 2003 ------------------------------------------------- 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 -- -- Indicate by check mark whether the Registrant is an accelerated filer, (as defined in Rule 12b-2 of the Act). Yes X No -- -- APPLICABLE ONLY TO CORPORATE ISSUERS: As of October 20, 2003, there were 32,888,810 shares of the Common Stock outstanding. CHECKPOINT SYSTEMS, INC. FORM 10-Q INDEX Page No. -------- Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statement of Shareholders' Equity 5 Consolidated Statements of Comprehensive Income/(Loss) 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7-19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20-28 Item 3. Quantitative and Qualitative Disclosures about Market Risk 28 Item 4. Controls and Procedures 28 Part II. OTHER INFORMATION Item 1. Legal Proceedings 29-31 Item 6. Exhibits and Reports on Form 8-K 32 SIGNATURES 33 INDEX TO EXHIBITS 34 CHECKPOINT SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS Sept. 28, Dec. 29, 2003 2002 -------- -------- (Unaudited) ASSETS (Thousands) CURRENT ASSETS Cash and cash equivalents $ 47,157 $ 54,670 Accounts receivable, net of allowances of $14,166 and $14,420 140,808 130,667 Inventories 87,530 80,152 Other current assets 32,557 22,051 Deferred income taxes 10,351 10,326 -------- -------- Total current assets 318,403 297,866 REVENUE EQUIPMENT ON OPERATING LEASE, net 4,155 4,895 PROPERTY, PLANT, AND EQUIPMENT, net 100,983 100,173 GOODWILL 199,540 185,758 OTHER INTANGIBLES, net 52,305 51,611 OTHER ASSETS 37,746 38,079 -------- -------- TOTAL ASSETS $713,132 $678,382 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings and current portion of long-term debt $ 20,299 $ 20,512 Accounts payable 43,920 47,418 Accrued compensation and related taxes 26,949 25,701 Other accrued expenses 32,106 27,969 Income taxes 20,061 17,860 Unearned revenues 31,184 28,493 Restructuring reserve 4,187 5,600 Other current liabilities 12,882 13,126 -------- -------- Total current liabilities 191,588 186,679 LONG-TERM DEBT, LESS CURRENT MATURITIES 44,497 68,813 CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000 ACCRUED PENSIONS 60,650 54,006 OTHER LONG-TERM LIABILITIES 10,825 10,608 DEFERRED INCOME TAXES 14,119 12,189 MINORITY INTEREST 954 841 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock, no par value, authorized 500,000 shares, none issued Common Stock, par value $.10 per share, 3,924 3,904 authorized 100,000,000 shares, issued 39,240,650 and 39,039,506 Additional capital 265,400 263,386 Retained earnings 92,896 67,811 Common stock in treasury, at cost, 6,356,190 shares (64,379) (64,379) Accumulated other comprehensive loss (27,342) (45,476) -------- -------- TOTAL SHAREHOLDERS' EQUITY 270,499 225,246 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $713,132 $678,382 ======== ======== 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. 28, Sept. 29, Sept. 28, Sept. 29, 2003 2002 2003 2002 -------- -------- -------- -------- (Thousands, except per share data) Net revenues $177,229 $158,800 $509,366 $463,178 Cost of revenues 104,039 93,187 297,416 272,051 -------- -------- -------- -------- Gross profit 73,190 65,613 211,950 191,127 Selling, general, and administrative expenses 56,118 53,337 167,638 157,136 Other operating income - 904 - 904 -------- -------- -------- -------- Operating income 17,072 13,180 44,312 34,895 Interest income 307 444 1,031 1,313 Interest expense 2,632 3,836 8,603 11,463 Other gain/(loss), net 271 (366) 810 (466) -------- -------- -------- -------- Earnings before income taxes 15,018 9,422 37,550 24,279 Income taxes 4,956 3,015 12,391 7,769 Minority interest 40 33 74 55 -------- -------- -------- -------- Earnings before cumulative effect of change in accounting principle 10,022 6,374 25,085 16,455 Cumulative effect of change in accounting principle - - - (72,861) -------- -------- -------- -------- Net earnings/(loss) $ 10,022 $ 6,374 $ 25,085 $(56,406) ======== ======== ======== ======== Earnings per share before cumulative effect of change in accounting principle: Basic $ .31 $ .20 $ .77 $ .51 ======== ======== ======== ======== Diluted $ .27 $ .19 $ .70 $ .49 ======== ======== ======== ======== Net earnings/(loss) per share: Basic $ .31 $ .20 $ .77 $ (1.75) ======== ======== ======== ======== Diluted $ .27 $ .19 $ .70 $ (1.36) ======== ======== ======== ======== See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Nine Months (39 weeks) Ended September 28, 2003 ------------------------------------------------------ Accumu- lated Other Addit- Compre- Common ional Retained hensive Treasury Stock Capital Earnings Loss Stock Total ------ ------- -------- ------- -------- ----- (Thousands) Balance, December 29, 2002 $3,904 $263,386 $67,811 $(45,476) $(64,379) $225,246 (Common shares: issued 39,039,506 reacquired 6,356,190) Net earnings 25,085 25,085 Exercise of stock options 20 2,014 2,034 (201,144 shares) Net loss on interest rate swap 9 9 Foreign currency translation adjustment 18,125 18,125 ------ -------- ------- -------- -------- -------- Balance, September 28, 2003 $3,924 $265,400 $92,896 $(27,342) $(64,379) $270,499 ====== ======== ======= ======== ======== ======== (Common shares: issued 39,240,650 reacquired 6,356,190) See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (Unaudited) Quarter Nine Months (13 weeks) Ended (39 weeks) Ended --------------------- -------------------- Sept. 28, Sept. 29, Sept. 28, Sept. 29, 2003 2002 2003 2002 -------- -------- -------- -------- (Thousands) Net earnings/(loss) $ 10,022 $ 6,374 $ 25,085 $(56,406) Net gain/(loss) on interest rate swap, net of tax 70 (473) 6 (684) Foreign currency translation adjustment 1,857 (5,171) 18,125 15,323 -------- -------- -------- -------- Comprehensive income/(loss) $ 11,949 $ 730 $ 43,216 $(41,767) ======== ======== ======== ======== See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months (39 weeks) Ended ---------------------------- Sept. 28, Sept. 29, 2003 2002 -------- -------- (Thousands) Cash flows from operating activities: Net earnings/(loss) $ 25,085 $(56,406) Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of change in accounting principle, net of tax - 72,861 Revenue equipment under operating lease (1,340) (958) Long-term customer contracts 169 1,792 Depreciation and amortization 22,358 23,636 (Gain)/loss on disposal of fixed assets (195) - (Increase)/decrease in current assets, net of the effects of acquired companies: Accounts receivable (1,480) 15,036 Inventories (2,135) 8,572 Other current assets (9,084) (134) Increase/(decrease) in current liabilities, net of the effects of acquired companies: Accounts payable (5,809) (5,135) Income taxes 406 (2,555) Unearned revenues 1,185 6,441 Restructuring reserve (1,659) (9,661) Other current and accrued liabilities 952 5,344 -------- -------- Net cash provided by operating activities $ 28,453 $ 58,833 -------- -------- Cash flows from investing activities: Acquisition of property, plant, and equipment (9,991) (4,559) Acquisitions, net of cash acquired - (681) Other investing activities 590 1,029 -------- -------- Net cash used in investing activities $ (9,401) $ (4,211) -------- -------- Cash flows from financing activities: Proceeds from stock issuances 1,869 7,019 Net change in short-term debt 1,983 754 Payment of long-term debt (33,126) (68,177) -------- -------- Net cash used in financing activities $(29,274) $(60,404) -------- -------- Effect of foreign currency rate fluctuations on cash and cash equivalents 2,709 1,710 -------- -------- Net (decrease)/increase in cash and cash equivalents $ (7,513) $ (4,072) Cash and cash equivalents: Beginning of period 54,670 43,698 -------- -------- End of period $ 47,157 $ 39,626 ======== ======== See accompanying notes to consolidated financial statements. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF ACCOUNTING The consolidated financial statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries ("Company"). All inter-company transactions are eliminated in consolidation. The consolidated financial statements and related notes are unaudited and do not contain all disclosures required by generally accepted accounting principles in annual financial statements. Refer to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2002 for the most recent disclosure of the Company's accounting policies. The consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company's financial position at September 28, 2003 and December 29, 2002 and its results of operations and changes in cash flows for the thirteen and thirty-nine week periods ended September 28, 2003 and September 29, 2002. Certain reclassifications have been made to the 2002 financial statements and related footnotes to conform to the 2003 presentation. 2. INVENTORIES September 28, December 29, 2003 2002 ------------ ----------- (Thousands) Raw materials $ 8,998 $ 8,184 Work in process 4,688 3,387 Finished goods 73,844 68,581 -------- -------- $ 87,530 $ 80,152 ======== ======== Inventories are stated at the lower of cost (first-in, first-out method) or market. 3. GOODWILL AND OTHER INTANGIBLE ASSETS The Company had intangible assets with a net book value of $52.3 million and $51.6 million as of September 28, 2003 and December 29, 2002, respectively. The following table reflects the components of intangible assets as of September 28, 2003 and December 29, 2002: September 28, 2003 December 29, 2002 ---------------------- ---------------------- Amortizable Gross Gross Life Carrying Accumulated Carrying Accumulated (years) Amount Amortization Amount Amortization ----------- -------- ------------ -------- ------------ (Thousands) Customer lists 20 $28,761 $13,236 $26,363 $10,544 Trade name 30 26,387 3,298 24,405 2,440 Patents, license agreements 5 to 14 34,959 21,785 32,364 19,095 Other 3 to 6 810 293 778 220 ------- ------- ------- ------- $90,917 $38,612 $83,910 $32,299 ======= ======= ======= ======= CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Company has determined that the life previously assigned to these finite-lived assets is still appropriate, and has recorded $3.6 million and $3.9 million of amortization expense in the first nine months of fiscal 2003 and 2002, respectively. Estimated amortization expense for 2003 and each of the five succeeding years is: (Thousands) 2003 $4,808 2004 $4,536 2005 $3,987 2006 $3,312 2007 $3,296 2008 $3,281 The changes in the carrying amount of goodwill for the nine months ended September 28, 2003, are as follows: Labeling Retail Security Services Merchandising Total -------- -------- ------------- ------- (Thousands) Balance as of beginning of fiscal year 2003 (December 30, 2002) $91,072 $36,895 $57,791 $185,758 Foreign currency translation adjustment 7,771 795 5,216 13,782 ------- ------- ------- -------- Balance as of September 28, 2003 $98,843 $37,690 $63,007 $199,540 ======= ======= ======= ======== Pursuant to SFAS 142, the Company will perform its annual assessment of goodwill by comparing each individual reporting unit's carrying amount of net assets, including goodwill, to their fair value during the fourth quarter of each fiscal year. Future annual assessments could result in impairment charges, which would be accounted for as an operating expense. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 4. LONG-TERM DEBT Long-term debt at September 28, 2003 and December 29, 2002 consisted of the following: September 28, December 29, 2003 2002 ------------ ----------- (Thousands) Six and one-half year EUR 244 million variable interest rate collateralized term loan maturing in 2006 $ 46,148 $ 64,447 Six and one-half year $25 million variable interest rate collateralized term loan maturing in 2006 - 7,882 Six and one-half year $100 million multi-currency variable interest rate collateralized revolving credit facility maturing in 2006 2,687 2,502 Twenty-two and one-half year EUR 9.5 million capital lease maturing in 2021 9,967 9,267 Eight and one-half year EUR 2.7 million capital lease maturing in 2007 1,657 1,757 Other capital leases with maturities through 2004 38 1,385 -------- -------- Total 60,497 87,240 Less current portion (16,000) (18,427) -------- -------- Total long-term portion (excluding convertible subordinated debentures) 44,497 68,813 Convertible subordinated debentures 120,000 120,000 -------- -------- Total long-term portion $164,497 $188,813 ======== ======== During the third quarter 2003, an unscheduled repayment of $2.0 million was made on the $25 million collateralized term loan to fully satisfy the outstanding balance. At September 28, 2003, EUR 40.3 million (approximately $46.1 million) was outstanding under the multi-currency term loan. The outstanding borrowings under the revolving credit facility were JPY 300 million (approximately $2.7 million). The availability under the $100 million multi-currency revolving credit facility has been reduced by letters of credit totaling $12.3 million, primarily related to the surety bond posted in connection with ID Security Systems Canada Inc. litigation. The Company has called $35.0 million of the convertible subordinated debentures for redemption on November 8, 2003. The called debentures are convertible at any time prior to the close of business on November 3, 2003. Each Note in the denomination of $1,000 is convertible, at the holder's option, into 54.4218 shares of the Company's common stock, which is equivalent to a conversion price of $18.375 per share. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 5. INCOME TAXES Income taxes are provided for on an interim basis at an estimated effective annual tax rate. The Company's net earnings generated by the operations of its Puerto Rico subsidiary are exempt from Federal income taxes under Section 936 of the Internal Revenue Code (as amended under the Small Business Job Protection Act of 1996) and substantially exempt from Puerto Rico income taxes. Under current law, this exemption from Federal income tax is subject to certain limits during the years 2002 through 2005 and will be eliminated thereafter. The Company's exemption was not negatively impacted in 2002. The Company does not expect its exemption to be negatively impacted in the years 2003 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. 6. PER SHARE DATA The following data shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock: Quarter Nine Months (13 weeks) Ended (39 weeks) Ended -------------------- -------------------- Sept. 28, Sept. 29, Sept. 28, Sept. 29, 2003 2002 2003 2002 -------- -------- -------- -------- (Thousands, except per share amounts) Basic earnings/(loss) per share: Earnings before cumulative effect of change in accounting principle $ 10,022 $ 6,374 $ 25,085 $ 16,455 Cumulative effect of change in accounting principle - - - (72,861)(2) -------- -------- -------- -------- Net earnings/(loss) $ 10,022 $ 6,374 $ 25,085 $(56,406) ======== ======== ======== ======== Weighted average common stock outstanding 32,847 32,403 32,777 32,193 ======== ======== ======== ======== Basic earnings per share before cumulative effect of change in accounting principle $ .31 $ .20 $ .77 $ .51 Cumulative effect of change in accounting principle - - - (2.26) -------- -------- -------- -------- Basic earnings/(loss) per share $ .31 $ .20 $ .77 $ (1.75) ======== ======== ======== ======== CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Diluted earnings/(loss) per share: Earnings before cumulative effect of change in accounting principle $ 10,022 $ 6,374 $ 25,085 $ 16,455 Interest on subordinated debentures, net of tax 961 961 2,882 2,882 -------- -------- -------- -------- Net earnings before cumulative effect of change in accounting principle available for dilutive securities 10,983 7,335 27,967 19,337 Cumulative effect of change in accounting principle - - - (72,861)(2) -------- -------- -------- -------- Net earnings/(loss) after cumulative effect of change in accounting principle available for dilutive securities $ 10,983 $ 7,335 $ 27,967 $(53,524) ======== ======== ======== ======== Weighted average common stock outstanding 32,847 32,403 32,777 32,193 Additional common shares resulting from stock options (1) 803 285 465 579 Additional common shares resulting from subordinated debentures 6,528 6,528 6,528 6,528 -------- -------- -------- -------- Weighted average common stock and dilutive stock outstanding 40,178 39,216 39,770 39,300 ======== ======== ======== ======== Diluted earnings per share before cumulative effect of change in accounting principle $ .27 $ .19 $ .70 $ .49 Cumulative effect of change in accounting principle - - - (1.85) -------- -------- -------- -------- Diluted earnings/(loss) per share $ .27 $ .19 $ .70 $ (1.36) ======== ======== ======== ======== (1) Excludes approximately 878, 2,146, 1,779, and 1,267 anti-dilutive outstanding stock options for the third quarters of 2003 and 2002, and the first nine months of 2003 and 2002, respectively. (2) No tax effect as goodwill amortization is non-deductible for tax. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 7. SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest and income taxes for the thirteen and thirty-nine week periods ended September 28, 2003 and September 29, 2002 were as follows: Quarter Nine Months (13 weeks) Ended (39 weeks) Ended -------------------- -------------------- Sept. 28, Sept. 29, Sept. 28, Sept. 29, 2003 2002 2003 2002 -------- -------- -------- -------- (Thousands) Interest $ 1,120 $ 2,248 $ 7,108 $ 9,742 Income tax payments, net $ 10,842 $ 4,234 $ 13,949 $ 7,493 8. PROVISION FOR RESTRUCTURING Accrual Cash Accrual at Payments at Beginning (and Exchange March 30, of 2003 Rate Changes) 2003 --------- ------------ -------- (Thousands) Severance and other employee related charges $ 3,788 $ (639) $ 3,149 Lease termination costs 1,812 (128) 1,684 ------- ------- ------- $ 5,600 $ (767) $ 4,833 ======= ======= ======= Accrual Cash Accrual at Payments at March 30, (and Exchange June 29, 2003 Rate Changes) 2003 --------- ------------ -------- (Thousands) Severance and other employee related charges $ 3,149 $ (263) $ 2,886 Lease termination costs 1,684 (54) 1,630 ------- ------- ------- $ 4,833 $ (317) $ 4,516 ======= ======= ======= CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Accrual Cash Accrual at Payments at June 29, (and Exchange Sept. 28, 2003 Rate Changes) 2003 --------- ------------ -------- (Thousands) Severance and other employee related charges $ 2,886 $ (118) $ 2,768 Lease termination costs 1,630 (211) 1,419 ------- ------- ------- $ 4,516 $ (329) $ 4,187 ======= ======= ======= At the end of the third quarter 2003, 52 of the 61 planned employee terminations, related to the 2002 restructuring, and 294 of the 322 planned employee terminations, related to the 2001 restructuring, had occurred. The Company expects the terminations and restructuring actions to be completed by the first half of 2004. Termination benefits are being paid out over a period of 1 to 24 months after termination. 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 believes it is remotely possible that the ultimate resolution of such matters will have a material adverse effect on the Company's consolidated results of operations and/or financial condition, except as described below. On May 24, 2002, the jury in the Civil Action No. 99-CV-577 in the United States District Court for the Eastern District of Pennsylvania, filed by plaintiff ID Security Systems Canada Inc. against Checkpoint Systems, Inc., held in favor of the Company on the plaintiff's claim for Monopolization of Commerce, but against the Company on claims of Attempted Monopolization and Conspiracy to Monopolize. In addition, the jury held against the Company on two tort claims related to tortious interference and unfair competition. Judgment was entered on the verdict in favor of the plaintiff, after trebling, in the amount of $79.2 million plus attorneys' fees and costs to be determined by the Court. On June 14, 2002, in response to Motions filed by the Company, the Court stayed the execution of the judgments pending disposition of the Company's Motion for Post-Trial Relief and ordered the Company to post a bond in the amount of $26.4 million and to place into escrow 3,179,600 shares of the Company's treasury stock. The Company complied with the Court's order. On March 28, 2003, in response to the Company's Motion for Post-Trial Relief, the Court issued an order which vacated the jury verdict on the antitrust claims and reduced the damages award related to tortious interference and unfair competition from $19 million to $13 million. The Company subsequently CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) filed an additional motion to further reduce the $13 million by $2.1 million based on a prior agreement between the parties and a previous Order by the Court. The Court granted the Company's motion, and on May 20, 2003 further reduced the judgment from $13 million to $10.9 million. On the same date, the Court (1) authorized the release to the Company of the $26.4 million bond and escrowed treasury shares previously posted as security by the Company, (2) directed the Company to post a replacement bond in the reduced amount of $11.3 million, which amount was subsequently amended to $11.4 million, and (3) stayed execution of the judgment upon the posting of said bond by the Company. The Company promptly posted the requisite bond and execution on the judgment in the amount of $10.9 million is now stayed. Both ID Security Systems Canada Inc. and the Company have filed appeals to the Third Circuit Court of Appeals related to the various decisions of the Court. ID Security Systems Canada Inc.'s brief is due by November 17, 2003 and the Company's brief is due 30 days after ID Security Systems Canada Inc.'s brief is filed. Based on input from outside legal counsel, management is of the opinion that the Judge's Order is consistent with the law as it relates to the antitrust issues, and is not consistent with the law as it relates to the tortious interference and unfair competition aspects of the case. Accordingly, no liability has been recorded for this litigation, as management believes that, at this time, it is not probable the remaining judgment will be upheld and that the reasonably possible range of the contingent liability is between zero and $11 million. Management believes it is remotely possible that the Court of Appeals could reverse the decision of the lower Court as it relates to the antitrust claims and reinstate the original judgment of $79.2 million plus attorneys' fees and costs. If the final outcome of this litigation, after all appeals have been exhausted, results in certain of the plaintiff's claims being upheld, the potential damages could be material to the Company's consolidated results of operations and/or financial condition and could cause the Company to be in default of certain bank covenants. Although management expects to be successful in the appeal process, should the appeal be unsuccessful, management anticipates that any final judgment would not be paid prior to the end of 2004 and is of the opinion that the Company will have sufficient financial resources in the form of cash and borrowing capacity, due to the cash flow generated during the intervening period, to satisfy any judgment. A certain number of follow-on purported class action suits have arisen in connection with the jury decision in the ID Security Systems Canada Inc. litigation. The purported class action complaints generally allege a claim of monopolization and are substantially based upon the same allegations as contained in the ID Security Systems Canada Inc. case (Civil Action No. 99-CV-577) as discussed below. On August 1, 2002, a civil action was filed in United States District Court for the Eastern District of Pennsylvania, designated as Civil Action No. 02-6379(ER) by plaintiff Diane Furs, Inc. t/a Diane Furs against Checkpoint Systems, Inc. and served on August 21, 2002. On August 21, 2002, a Notice of Substitution of Plaintiff and Filing of Amended Complaint was filed by the plaintiff, and the named plaintiff was changed to Medi-Care Pharmacy, Inc. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) On August 2, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-3730(JEI) by plaintiff Club Sports International, Inc., d/b/a Soccer CSI against Checkpoint Systems, Inc. and served on August 26, 2002. On October 2, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-4777 (JBS) by plaintiff Baby Mika, Inc. against Checkpoint Systems, Inc. and served on October 7, 2002. On October 23, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5001 (JEI) by plaintiff Washington Square Pharmacy, Inc. against Checkpoint Systems, Inc. and served on November 1, 2002. On October 18, 2002, The United States District, District of New Jersey (Camden) entered an Order staying the proceedings in the Club Sports International, Inc. and Baby Mika, Inc. cases referred to above. In accordance with the Order, the Stay will also apply to the Washington Square Pharmacy, Inc. case referred to above. In addition, the Medi-Care Pharmacy, Inc. case, referred to above, will be voluntarily dismissed, and it has been re-filed in New Jersey and is included in the Stay Order. The Stay is expected to remain in place until such time as the ID Security Systems case, referred to above, is either terminated or any appeals have been exhausted in the Third Circuit Court of Appeals. On November 13, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5319 (JEI) by plaintiff 1700 Pharmacy, Inc. against Checkpoint Systems, Inc. and served on November 15, 2002. On December 30, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-6131 (JEI) by plaintiff Medi-Care Pharmacy, Inc. against Checkpoint Systems, Inc. and served on January 3, 2003. Both the 1700 Pharmacy, Inc. case and the Medi-Care Pharmacy, Inc. case were consolidated with the previously mentioned cases and are included in the October 18, 2002 Stay Order referred to above. No liability has been recorded for any of the purported class action suits as management believes that, based on input from outside legal counsel, it is remotely possible that the Court of Appeals could reverse the decision of the lower Court in the ID Security Systems Canada Inc. litigation as it relates to the antitrust claims. On February 28, 2003 a civil action was filed in the Superior Court of New Jersey, Bergen County, by Franklin Graphics, Inc. against Checkpoint Systems, Inc. and Christopher Clarke, (Docket No. BER-L-1575-03) seeking compensatory damages in excess of $1 million, treble damages, punitive damages, and attorneys' fees. The plaintiff alleges tortious interference with a contractual relationship and prospective economic relations, unfair competition, violation of duty loyalty, breach of contract and consumer fraud. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The factual basis for the suit may be summarized as follows. The Company performed clothing label tag printing services as a subcontractor to the plaintiff for a number of apparel manufacturers who were customers of the plaintiff. Co-defendant Clarke was an employee of the plaintiff who had responsibility for interfacing with apparel manufacturers and the Company. Co-defendant Clarke left the plaintiff's employment early in 2002, establishing his own business. Subsequently, co-defendant Clarke joined the Company as an employee. Certain of the plaintiff's customers ceased doing business with the plaintiff and engaged Checkpoint directly to perform the clothing label tag printing services. The Company disputes any liability to the plaintiff and intends to defend this matter vigorously. The Company filed a motion to dismiss the consumer fraud/treble damage claim, and the Court denied that motion in August 2003. The Company has since filed an answer denying liability, a counterclaim for approximately $0.1 million for goods and services provided, and its own counterclaim under the consumer fraud statute. Management is unable to predict the outcome of this proceeding, but does not believe that the ultimate resolution will have a material adverse affect on the consolidated financial position or results of operations of the Company, however, if such matter were determined adversely to the Company, the ultimate liability arising therefrom should not be material to the financial position of the Company, but could be material to its results of operations in any quarter or annual period. The following table sets forth the movements in the warranty reserve: Quarter Nine Months (13 weeks) Ended (39 weeks) Ended -------------------- -------------------- Sept. 28, Sept. 29, Sept. 28, Sept. 29, 2003 2002 2003 2002 -------- -------- -------- -------- (Thousands) Balance at the beginning of the period $ 4,373 $ 3,613 $ 4,002 $ 3,303 Accruals for warranties issued $ 396 $ 106 $ 892 $ 499 Accruals related to pre-existing warranties, including changes in estimates (27) (2) (27) (88) -------- -------- -------- -------- Total accruals $ 369 $ 104 $ 865 $ 411 Settlements made (271) (134) (656) (397) Foreign currency translation adjustment (15) (38) 245 228 -------- -------- -------- -------- Balance at the end of the period $ 4,456 $ 3,545 $ 4,456 $ 3,545 ======== ======== ======== ======== CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 10. BUSINESS SEGMENTS Quarter Nine Months (13 weeks) Ended (39 weeks) Ended -------------------- -------------------- Sept. 28, Sept. 29, Sept. 28, Sept. 29, 2003 2002 2003 2002 -------- -------- -------- -------- (Thousands) Business segment net revenues: Security $117,104 $102,805 $321,829 $281,089 Labeling Services 36,688 33,152 114,703 106,850 Retail Merchandising 23,437 22,843 72,834 75,239 -------- -------- -------- -------- Total $177,229 $158,800 $509,366 $463,178 ======== ======== ======== ======== Business segment gross profit: Security $ 52,640 $ 45,174 $144,204 $122,993 Labeling Services 9,985 10,147 33,032 32,685 Retail Merchandising 10,565 10,292 34,714 35,449 -------- -------- -------- -------- Total gross profit $ 73,190 $ 65,613 $211,950 $191,127 Operating expenses 56,118 52,433 167,638 156,232 Interest expense, net 2,325 3,392 7,572 10,150 Other gain/(loss) 271 (366) 810 (466) -------- -------- -------- -------- Earnings before income taxes $ 15,018 $ 9,422 $ 37,550 $ 24,279 ======== ======== ======== ======== 11. STOCK OPTIONS At September 28, 2003, the Company has one stock-based employee compensation plan. Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees". Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of grant over the amount an employee must pay to acquire the stock. Since all options were granted at market value, there is no compensation cost to be recognized. CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date using the Black Scholes option pricing model prescribed under SFAS 123, the Company's net earnings/(loss) and net earnings/(loss) per share would approximate the pro-forma amounts as follows: Quarter Nine Months (13 weeks) Ended (39 weeks) Ended -------------------- -------------------- Sept. 28, Sept. 29, Sept. 28, Sept. 29, 2003 2002 2003 2002 -------- -------- -------- -------- (Thousands) Net earnings/(loss), as reported $ 10,022 $ 6,374 $ 25,085 $(56,406) Total stock-based employee compensation expense determined under fair value based method, net of tax (556) (485) (2,228) (2,503) -------- -------- -------- -------- Pro-forma net earnings/(loss) $ 9,466 $ 5,889 $ 22,857 $(58,909) ======== ======== ======== ======== Net earnings/(loss) per share: Basic, as reported $ .31 $ .20 $ .77 $ (1.75) ======== ======== ======== ======== Basic, pro-forma $ .29 $ .18 $ .70 $ (1.83) ======== ======== ======== ======== Diluted, as reported $ .27 $ .19 $ .70 $ (1.36) ======== ======== ======== ======== Diluted, pro-forma $ .26 $ .17 $ .65 $ (1.43) ======== ======== ======== ======== CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 12. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER STANDARDS In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables". The standard provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into by the Company after June 29, 2003. The Company's adoption of EITF Issue No. 00-21 has not significantly impacted its consolidated financial statements. In January 2003, the FASB issued interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51". FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied to the Company's consolidated financial statements for the fourth quarter of 2003. The Company does not expect the adoption of FIN 46 to have a significant impact on its consolidated financial statements. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information relating to Forward-Looking Statements This report includes forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Except for historical matters, the matters discussed are forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, that reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following risk factors, among other possible factors, could cause actual results to differ materially from historical or anticipated results: (1) changes in international business conditions; (2) foreign currency exchange rate and interest rate fluctuations; (3) lower than anticipated demand by retailers and other customers for the Company's products, particularly in the current economic environment; (4) slower commitments of retail customers to chain-wide installations and/or source tagging adoption or expansion; (5) possible increases in per unit product manufacturing costs due to less than full utilization of manufacturing capacity as a result of slowing economic conditions or other factors; (6) the Company's ability to provide and market innovative and cost-effective products; (7) the development of new competitive technologies; (8) the Company's ability to maintain its intellectual property; (9) competitive pricing pressures causing profit erosion; (10) the availability and pricing of component parts and raw materials; (11) possible increases in the payment time for receivables, as a result of economic conditions or other market factors; (12) changes in regulations or standards applicable to the Company's products; (13) unanticipated liabilities or expenses; (14) adverse determinations in the ID Security Systems Canada Inc. litigation and any other pending litigation affecting the Company; and (15) the impact of adverse determinations in the ID Security Systems Canada Inc. litigation on liquidity and debt covenant compliance. More information about potential factors that could affect the Company's business and financial results is included in the Company's Annual Report on Form 10-K for the year ended December 29, 2002, and the Company's other Securities and Exchange Commission filings. Critical Accounting Policies and Estimates - ------------------------------------------ For a discussion of the Company's critical accounting policies and estimates, see Item 7 "Management's Discussion And Analysis Of Financial Condition And Results Of Operations" in the Company's Annual Report on Form 10-K filed for the year ending December 29, 2002. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Third Quarter 2003 Compared to Third Quarter 2002 - --------------------------------------------------- Net Revenues Revenues for the third quarter 2003 compared to the third quarter 2002 increased by $18.4 million or 11.6% from $158.8 million to $177.2 million. Foreign currency translation had a positive impact on revenues of approximately $12.0 million or 7.6% in the third quarter of 2003 as compared to the third quarter of 2002. Security revenues increased by $14.3 million or 13.9% in the third quarter of 2003 as compared to the third quarter of 2002. Foreign currency translation had a positive impact of approximately $7.2 million. The remaining increase was primarily due to growth in the closed-circuit television (CCTV) market in the USA and the UK and in the electronic article surveillance (EAS) market in Asia Pacific, partially offset by a decline in US EAS sales. Labeling services revenues increased by $3.5 million. The increase was due to the positive impact of foreign currency translation of approximately $2.5 million and increased service bureau revenues in Europe and Asia Pacific partially offset by lower barcode printer revenues. Retail merchandising revenues increased by $0.6 million or 2.6%. The positive impact of foreign currency translation of approximately $2.4 million was largely offset by decreases in hand-held labeling systems (HLS) in Europe and the USA and retail display systems (RDS) in Europe. The continuing transition from hand-held price labeling to automated barcoding and scanning by retailers caused the decline in HLS. The RDS decrease was primarily due to weaker economic conditions in Europe resulting in fewer new store openings. Gross Profit Gross profit for the third quarter 2003 was $73.2 million, or 41.3% of revenues, compared to $65.6 million, or 41.3% of revenues, for the third quarter 2002. The benefit of foreign currency translation on gross profit was approximately $4.8 million in the third quarter of 2003 as compared to the third quarter of 2002. Security gross profit, as a percentage of sales, increased from 43.9% in the third quarter of 2002 to 45.0% in the third quarter of 2003, primarily as a result of improved margins in CCTV due to increased volume and higher EAS product margins due to increased volume, improvements in manufacturing efficiencies, and the benefits of the weakening US dollar on products sourced in US dollars but sold in a different currency. The improvement in EAS product margins more than offset an increase in EAS technology spending. Gross profit, as a percentage of net revenues, for labeling services declined to 27.2% in the third quarter of 2003 from 30.6% in the third quarter of 2002. Competitive pricing pressures primarily caused the decline. The retail merchandising gross profit percentage remained constant at 45.1%. Field service and installation costs for the third quarter of 2003 and 2002 were 9.3% and 8.3% of net revenues, respectively. The increase as a percentage of net revenues resulted from an increase in CCTV and EAS installations relative to total net revenues. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Selling, General, and Administrative Expenses SG&A expenses increased $2.8 million over the third quarter of 2002. As a percentage of net revenues, SG&A expenses decreased to 31.7% from 33.6%. Foreign currency translation increased SG&A expenses in the third quarter of 2003 by approximately $3.9 million over the comparable quarter in 2002. The third quarter of 2002 included $2.7 million of compensation costs associated with executive management changes and legal fees for the ID Security Systems Canada Inc. litigation. Other Operating Income Due to changes in management in 2002, the Company reviewed and modified the 2001 restructuring plans in order to reduce the future cash outlays necessary to execute these plans. The principal modification was to move a manufacturing facility to a location closer than originally planned. This, and other modifications, resulted in the retention of certain employees included in the original plan. These changes in estimates 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 income. Interest Expense and Interest Income Interest expense for the third quarter of 2003 decreased $1.2 million from the comparable quarter in 2002 (from $3.8 million to $2.6 million) due to debt repayment over the last twelve months. Interest income for the third quarter of 2003 decreased by $0.1 million from the comparable quarter in 2002 (from $0.4 million to $0.3 million) as a result of lower interest rates on cash investments. Other Gain/(Loss), net Other gain/(loss), net represented a net foreign exchange gain of $0.3 million and a net foreign exchange loss of $0.4 million for the third quarter of 2003 and 2002, respectively. Income Taxes The effective tax rate for the third quarter of 2003 was 33.0%. The effective tax rate for the third quarter of 2002 was 32.0%. The higher tax rate results primarily from foreign income tax rate differentials. Net Earnings/(Loss) The Company's third quarter 2003 net earnings were $10.0 million, or $0.27 per diluted share, compared to $6.4 million, or $0.19 per diluted share, in the third quarter 2002. Exposure to International Operations Approximately 64% 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Restructuring The changes in the provision for restructuring are covered in Note 8 of the Consolidated Financial Statements. First Nine Months 2003 Compared to First Nine Months 2002 - --------------------------------------------------------- Net Revenues Revenues for the nine months of 2003 compared to the same period in the prior year increased by $46.2 million or 10.0% from $463.2 million to $509.4 million. Foreign currency translation had a positive impact on revenues of approximately $45.5 million or 9.8% in the first nine months of 2003 over the comparable period for 2002. Security revenues increased by $40.7 million or 14.5% in the nine months of 2003 as compared to the nine months of 2002. Foreign currency translation had a positive impact of approximately $25.4 million. The remaining increase was primarily due to growth in the US CCTV market as well as growth in the European and Asia Pacific EAS markets, partially offset by a decline in US EAS sales. Labeling services revenues increased by $7.9 million, from $106.8 million to $114.7 million. The increase was due to the positive impact of foreign currency translation of approximately $10.0 million and a $2.2 million increase in RFID library system revenues in the USA, which was partially offset by lower barcode systems revenues in the USA and Europe. Retail merchandising revenues decreased by $2.4 million or 3.2%, despite the positive impact of foreign currency translation of $10.1 million. The lower revenues primarily resulted from the decline of HLS in Europe, due to the continuing transition from hand- held price labeling to automated barcoding and scanning by retailers, combined with a decrease in RDS revenues caused by weaker economic conditions in Europe. The Company experienced an unusual increase in European HLS revenues in the first quarter of 2002 as a result of the conversion to the Euro currency. Gross Profit Gross profit for the first nine months of 2003 was $212.0 million, or 41.6% of revenues, compared to $191.1 million, or 41.3% of revenues, for the first nine months of 2002. The benefit of foreign currency translation on gross profit was approximately $19.1 million in the nine months of 2003 as compared to the nine months of 2002. Security gross profit, as a percentage of sales, increased from 43.8% in the nine months of 2002 to 44.8% in the comparable period of 2003, primarily as a result of improvements in manufacturing efficiencies and the benefits of the weakening US dollar on products sourced in US dollars but sold in a different currency. Gross profit, as a percentage of net revenues, for labeling services decreased from 30.6% for the nine months of 2002 to 28.8% for the nine months of 2003. The decrease in gross profit percentage was principally due to competitive pricing pressure in the first nine months of 2003. The retail merchandising gross profit percentage increased 0.6% (from 47.1% to 47.7%) in the nine months of 2003 compared to the nine months of 2002. The increase was principally due to an improvement in RDS gross profit in Europe. For the first nine months of 2003 and 2002, field service and installation costs were 9.0% and 8.4% of net revenues, respectively. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Selling, General, and Administrative Expenses SG&A expenses increased $10.5 million over the nine months of 2002 (from $157.1 million to $167.6 million). As a percentage of net revenues, SG&A expenses decreased from 33.9% to 32.9%. Foreign currency translation increased SG&A expenses in the first nine months of 2003 by approximately $15.1 million over the comparable period in 2002. The second and third quarters of 2002 included $5.5 million of compensation costs associated with executive management changes and legal fees for the ID Security Systems Canada Inc. litigation. Other Operating Income Due to changes in management in 2002, the Company reviewed and modified the 2001 restructuring plans in order to reduce the future cash outlays necessary to execute these plans. The principal modification was to move a manufacturing facility to a location closer than originally planned. This, and other modifications, resulted in the retention of certain employees included in the original plan. These changes in estimates 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 income. Other Gain/(Loss), net Other gain/(loss), net represented a net foreign exchange gain of $0.8 million and a net foreign exchange loss of $0.5 million for the nine months of 2003 and 2002, respectively. Interest Expense and Interest Income Interest expense for the nine months of 2003 decreased $2.9 million from the comparable period in 2002 (from $11.5 million to $8.6 million) due to debt repayment in the last twelve months. Interest income for the nine months of 2003 decreased by $0.3 million from the comparable half in 2002 (from $1.3 million to $1.0 million) as a result of lower interest rates on cash investments. Income Taxes The effective tax rate for the first six months of 2003 was 33.0%. The effective tax rate for the nine months of 2002 was 32.0%. The higher tax rate results primarily from foreign income tax rate differentials. Net Earnings/(Loss) The Company's net earnings for the nine months of 2003 were $25.1 million, or $0.70 per diluted share, compared to a net loss of $56.4 million, or $1.36 per diluted share, in the nine months of 2002. Included in the net loss for the first nine months of 2002 is the cumulative effect of the change in accounting principle of $72.9 million, which resulted from the Company's adoption of Statement of Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and Other Intangible Assets." The earnings before cumulative effect of change in accounting principle for the nine months of 2002 was $16.5 million, or $0.49 per diluted share. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Exposure to International Operations Approximately 66% of the Company's sales are made in currencies other than U.S. dollars. Sales denominated in currencies other than U.S. dollars increase the Company's potential exposure to currency fluctuations, which can affect results. Management cannot predict, with any degree of certainty, changes in currency exchange rates and therefore, the future impact that such changes may have on its operations. Restructuring The changes in the provision for restructuring are covered in Note 8 of the consolidated financial statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) FINANCIAL CONDITION - ------------------- Liquidity and Capital Resources The Company's liquidity needs have related to, and are expected to continue to relate to, capital investments, acquisitions, and working capital requirements. The Company has met its liquidity needs over the last three years primarily through funds provided by long-term borrowings and more recently through cash generated from operations. Management believes that its anticipated cash needs for the foreseeable future can be funded from cash and cash equivalents on hand, the availability under the $100 million revolving credit facility, and cash generated from future operations. The Company's operating activities generated approximately $28.5 million during the first nine months of 2003 compared to $58.8 million in the same period in 2002. This change from the prior year was primarily attributable to refundable tax payments made in the third quarter of 2003 and a lower reduction in working capital for the first nine months of 2003 compared to the same period in 2002, particularly in accounts receivable, inventories. During the third quarter 2003, an unscheduled repayment of $2.0 million was made on the $25 million collateralized term loan to fully satisfy the outstanding balance. At September 28, 2003, EUR 40.3 million (approximately $46.1 million) was outstanding under the multi-currency term loan. The outstanding borrowings under the revolving credit facility were JPY 300 million (approximately $2.7 million). The availability under the $100 million multi-currency revolving credit facility has been reduced by letters of credit totaling $12.3 million, primarily related to the surety bond posted in connection with ID Security Systems Canada Inc. litigation. The Company has called $35.0 million of the convertible subordinated debentures for redemption on November 8, 2003. The called debentures are convertible at any time prior to the close of business on November 3, 2003. Each Note in the denomination of $1,000 is convertible, at the holder's option, into 54.4218 shares of the Company's common stock, which is equivalent to a conversion price of $18.375 per share. The Company does not anticipate paying any cash dividend in the near future and is limited by existing covenants in the Company's debt instruments with regard to paying dividends. On May 24, 2002, the jury in the Civil Action No. 99-CV-577 in the United States District Court for the Eastern District of Pennsylvania, filed by plaintiff ID Security Systems Canada Inc. against Checkpoint Systems, Inc., held in favor of the Company on the plaintiff's claim for Monopolization of Commerce, but against the Company on claims of Attempted Monopolization and Conspiracy to Monopolize. In addition, the jury held against the Company on two tort claims related to tortious interference and unfair competition. Judgment was entered on the verdict in favor of the plaintiff, after trebling, in the amount of $79.2 million plus attorneys' fees and costs to be determined by the Court. On March 28, 2003, the Court issued an order which vacated the jury verdict on the antitrust claims and reduced the damages award related to tortious interference and unfair competition from $19 million to $13 million. The Company subsequently filed an additional motion to further reduce the MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) $13 million by $2.1 million based on a prior agreement between the parties and a previous Order by the Court. The Court granted the Company's motion, and on May 20, 2003 further reduced the judgment from $13 million to $10.9 million. On the same date, the Court (1) authorized the release to the Company of the $26.4 million bond and escrowed treasury shares previously posted as security by the Company, (2) directed the Company to post a replacement bond in the reduced amount of $11.3 million, which amount was subsequently amended to $11.4 million, and (3) stayed execution of the judgment upon the posting of said bond by the Company. The Company promptly posted the requisite bond and execution on the judgment in the amount of $10.9 million is now stayed. Both ID Security Systems Canada Inc. and the Company have filed appeals to the Third Circuit Court of Appeals related to the various decisions of the Court. ID Security Systems Canada Inc.'s brief is due by November 17, 2003 and the Company's brief is due 30 days after ID Security Systems Canada Inc.'s brief is filed. (See Note 9 of the Consolidated Financial Statements.) Although management expects to be successful upon appeal, should the appeal be unsuccessful, management anticipates that the final judgment would not be paid prior to the end of 2004 and is of the opinion that the Company will have sufficient financial resources in the form of cash and borrowing capacity, due to the cash flow generated during the intervening period, to satisfy any judgment. The recording of a liability or a final judgment could cause the Company to be in default of certain bank covenants. In this event, management would pursue various alternatives, which may include, among other things, debt covenant waivers, debt covenant amendments, or refinancing of debt. While management believes it would be successful in pursuing these alternatives, there can be no assurance of success. Capital Expenditures The Company's capital expenditures during the first nine months of fiscal 2003 totaled $10.0 million compared to $4.6 million during the first nine months of fiscal 2002. The increase in 2003 principally resulted from additional manufacturing-related investments. The Company anticipates its capital expenditures to approximate $14 million in 2003. Exposure to International Operations The Company manufactures products in the USA, the Caribbean, Europe, and the Asia Pacific region for both the local marketplace as well as for export to its foreign subsidiaries. The subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations. The Company has been selectively purchasing currency exchange forward contracts on a regular basis to reduce the risks of currency fluctuations on short-term receivables. 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 28, 2003, the Company had currency exchange forward contracts totaling approximately $22.6 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 where it is not economically efficient, specifically for its operations in South America and Asia. The Company has historically not used financial instruments to minimize its exposure to currency fluctuations on its net investments in and cash flows derived from its foreign subsidiaries. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OTHER MATTERS - ------------- New Accounting Pronouncements and Other Standards In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables". The standard provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into by the Company after June 29, 2003. The Company's adoption of EITF Issue No. 00-21 has not significantly impacted its consolidated financial statements. In January 2003, the FASB issued interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51". FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied to the Company's consolidated financial statements for the fourth quarter of 2003. The Company does not expect the adoption of FIN 46 to have a significant impact on its consolidated financial statements. 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 29, 2002. Item 4. DISCLOSURE CONTROLS AND PROCEDURES The Company carried out an evaluation, under the supervision and with the participation of the Company's principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective in alerting them, on a timely basis, to material information required to be included in the Company's periodic SEC reports. 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. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business, except for the matters described in the following paragraphs. Management believes it is remotely possible that the ultimate resolution of such matters will have a material adverse effect on the Company's consolidated results of operations and/or financial condition, except as described below. On May 24, 2002, the jury in the Civil Action No. 99-CV-577 in the United States District Court for the Eastern District of Pennsylvania, filed by plaintiff ID Security Systems Canada Inc. against Checkpoint Systems, Inc., held in favor of the Company on the plaintiff's claim for Monopolization of Commerce, but against the Company on claims of Attempted Monopolization and Conspiracy to Monopolize. In addition, the jury held against the Company on two tort claims related to tortious interference and unfair competition. Judgment was entered on the verdict in favor of the plaintiff, after trebling, in the amount of $79.2 million plus attorneys' fees and costs to be determined by the Court. On June 14, 2002, in response to Motions filed by the Company, the Court stayed the execution of the judgments pending disposition of the Company's Motion for Post-Trial Relief and ordered the Company to post a bond in the amount of $26.4 million and to place into escrow 3,179,600 shares of the Company's treasury stock. The Company complied with the Court's order. On March 28, 2003, in response to the Company's Motion for Post-Trial Relief, the Court issued an order which vacated the jury verdict on the antitrust claims and reduced the damages award related to tortious interference and unfair competition from $19 million to $13 million. The Company subsequently filed an additional motion to further reduce the $13 million by $2.1 million based on a prior agreement between the parties and a previous Order by the Court. The Court granted the Company's motion, and on May 20, 2003 further reduced the judgment from $13 million to $10.9 million. On the same date, the Court (1) authorized the release to the Company of the $26.4 million bond and escrowed treasury shares previously posted as security by the Company, (2) directed the Company to post a replacement bond in the reduced amount of $11.3 million, which amount was subsequently amended to $11.4 million, and (3) stayed execution of the judgment upon the posting of said bond by the Company. The Company promptly posted the requisite bond and execution on the judgment in the amount of $10.9 million is now stayed. Both ID Security Systems Canada Inc. and the Company have filed appeals to the Third Circuit Court of Appeals related to the various decisions of the Court. ID Security Systems Canada Inc.'s brief is due by November 17, 2003 and the Company's brief is due 30 days after ID Security Systems Canada Inc.'s brief is filed. Based on input from outside legal counsel, management is of the opinion that the Judge's Order is consistent with the law as it relates to the antitrust issues, and is not consistent with the law as it relates to the tortious interference and unfair competition aspects of the case. Accordingly, no liability has been recorded for this litigation, as management believes that, at this time, it is not probable the remaining judgment will be upheld and that the reasonably possible range of the contingent liability is between zero and $11 million. Management believes it is remotely possible that the Court of Appeals could reverse the decision of the lower Court as it relates to the antitrust claims and reinstate the original judgment of $79.2 million plus attorneys' fees and costs. If the final outcome of this litigation, after all appeals have been exhausted, results in certain of the plaintiff's claims being upheld, the potential damages could be material to the Company's consolidated results of operations and/or financial condition and could cause the Company to be in default of certain bank covenants. Although management expects to be successful in the appeal process, should the appeal be unsuccessful, management anticipates that any final judgment would not be paid prior to the end of 2004 and is of the opinion that the Company will have sufficient financial resources in the form of cash and borrowing capacity, due to the cash flow generated during the intervening period, to satisfy any judgment. A certain number of follow-on purported class action suits have arisen in connection with the jury decision in the ID Security Systems Canada Inc. litigation. The purported class action complaints generally allege a claim of monopolization and are substantially based upon the same allegations as contained in the ID Security Systems Canada Inc. case (Civil Action No. 99-CV-577) as discussed below. On August 1, 2002, a civil action was filed in United States District Court for the Eastern District of Pennsylvania, designated as Civil Action No. 02-6379(ER) by plaintiff Diane Furs, Inc. t/a Diane Furs against Checkpoint Systems, Inc. and served on August 21, 2002. On August 21, 2002, a Notice of Substitution of Plaintiff and Filing of Amended Complaint was filed by the plaintiff, and the named plaintiff was changed to Medi-Care Pharmacy, Inc. On August 2, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-3730(JEI) by plaintiff Club Sports International, Inc., d/b/a Soccer CSI against Checkpoint Systems, Inc. and served on August 26, 2002. On October 2, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-4777 (JBS) by plaintiff Baby Mika, Inc. against Checkpoint Systems, Inc. and served on October 7, 2002. On October 23, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5001 (JEI) by plaintiff Washington Square Pharmacy, Inc. against Checkpoint Systems, Inc. and served on November 1, 2002. On October 18, 2002, The United States District, District of New Jersey (Camden) entered an Order staying the proceedings in the Club Sports International, Inc. and Baby Mika, Inc. cases referred to above. In accordance with the Order, the Stay will also apply to the Washington Square Pharmacy, Inc. case referred to above. In addition, the Medi-Care Pharmacy, Inc. case, referred to above, will be voluntarily dismissed, and it has been re-filed in New Jersey and is included in the Stay Order. The Stay is expected to remain in place until such time as the ID Security Systems case, referred to above, is either terminated or any appeals have been exhausted in the Third Circuit Court of Appeals. On November 13, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5319 (JEI) by plaintiff 1700 Pharmacy, Inc. against Checkpoint Systems, Inc. and served on November 15, 2002. On December 30, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-6131 (JEI) by plaintiff Medi-Care Pharmacy, Inc. against Checkpoint Systems, Inc. and served on January 3, 2003. Both the 1700 Pharmacy, Inc. case and the Medi-Care Pharmacy, Inc. case were consolidated with the previously mentioned cases and are included in the October 18, 2002 Stay Order referred to above. No liability has been recorded for any of the purported class action suits as management believes that, based on input from outside legal counsel, it is remotely possible that the Court of Appeals could reverse the decision of the lower Court in the ID Security Systems Canada Inc. litigation as it relates to the antitrust claims. On February 28, 2003 a civil action was filed in the Superior Court of New Jersey, Bergen County, by Franklin Graphics, Inc. against Checkpoint Systems, Inc. and Christopher Clarke, (Docket No. BER-L-1575-03) seeking compensatory damages in excess of $1 million, treble damages, punitive damages, and attorneys' fees. The plaintiff alleges tortious interference with a contractual relationship and prospective economic relations, unfair competition, violation of duty loyalty, breach of contract and consumer fraud. The factual basis for the suit may be summarized as follows. The Company performed clothing label tag printing services as a subcontractor to the plaintiff for a number of apparel manufacturers who were customers of the plaintiff. Co-defendant Clarke was an employee of the plaintiff who had responsibility for interfacing with apparel manufacturers and the Company. Co-defendant Clarke left the plaintiff's employment early in 2002, establishing his own business. Subsequently, co-defendant Clarke joined the Company as an employee. Certain of the plaintiff's customers ceased doing business with the plaintiff and engaged Checkpoint directly to perform the clothing label tag printing services. The Company disputes any liability to the plaintiff and intends to defend this matter vigorously. The Company filed a motion to dismiss the consumer fraud/treble damage claim, and the Court denied that motion in August 2003. The Company has since filed an answer denying liability, a counterclaim for approximately $0.1 million for goods and services provided, and its own counterclaim under the consumer fraud statute. Management is unable to predict the outcome of this proceeding, but does not believe that the ultimate resolution will have a material adverse affect on the consolidated financial position or results of operations of the Company, however, if such matter were determined adversely to the Company, the ultimate liability arising therefrom should not be material to the financial position of the Company, but could be material to its results of operations in any quarter or annual period. The Company is a plaintiff in a number of patent infringement suits around the world against various defendants in an effort to enforce certain of the Company's intellectual property rights. In each of these proceedings, the defendants have challenged the validity of the Company's patents. In the event the relevant patent were to be modified or invalidated, such action could diminish or eliminate the value to the Company of the relevant patent. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of George W. Off, Chairman of the Board, President and Chief Executive Officer. 99.2 Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of W. Craig Burns, Executive Vice President, Chief Financial Officer and Treasurer. 99.3 Exhibit 32.1 Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On September 24, 2003, the Company filed a Current Report on Form 8-K attaching a press release dated September 23, 2003, announcing that it would redeem $35 million of the aggregate principal amount of its existing 5-1/4% Convertible Subordinated Debentures due 2005. On October 24, 2003, the Company filed a Current Report on Form 8-K attaching a press release dated October 23, 2003, announcing its financial results for the third quarter of 2003. 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 October 31, 2003 - ---------------------------- W. Craig Burns Executive Vice President, Chief Financial Officer and Treasurer /s/Arthur W. Todd October 31, 2003 - ---------------------------- Arthur W. Todd Vice President, Corporate Controller and Chief Accounting Officer INDEX TO EXHIBITS ----------------- Exhibit Description - ------- ----------- 99.1 Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of George W. Off, Chairman of the Board, President and Chief Executive Officer. 99.2 Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of W. Craig Burns, Executive Vice President, Chief Financial Officer and Treasurer. 99.3 Exhibit 32.1 Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-99.1 2 exh311.txt EXHIBIT 31.1 CERTIFICATION Exhibit 31.1 (filed as Edgar Exhibit 99.1) CERTIFICATION I, George W. Off, Chairman of the Board, President 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-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/George W. Off --------------------- Name: George W. Off Title: Chairman of the Board, President and Chief Executive Officer Date: October 31, 2003 EX-99.2 3 exhibit312.txt EXHIBIT 31.2 CERTIFICATOIN Exhibit 31.2 (filed as Edgar Exhibit 99.2) 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-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/W. Craig Burns --------------------- Name: W. Craig Burns Title: Executive Vice President, Chief Financial Officer and Treasurer Date: October 31, 2003 EX-99.3 4 exh322.txt EXHIBIT 32.1CERTIFICATION Exhibit 32.1 (filed as Edgar Exhibit 99.3) 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 28, 2003 (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 W. Off Title: Chairman of the Board, President and Chief Executive Officer By: /s/W. Craig Burns --------------------------- Name: W. Craig Burns Title: Executive Vice President, Chief Financial Officer and Treasurer Date: October 31, 2003 In accordance with clause (ii) of Item 601(b)(32), the above certification (A) shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or other wise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company explicitly incorporates it by reference. -----END PRIVACY-ENHANCED MESSAGE-----