SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

Revision of Previously Issued Consolidated Financial Statements

Checkpoint Systems, Inc. (the "Company") is revising herein its historical financial statements for the three and six months ended June 26, 2011. As previously disclosed in our Annual Report on Form 10-K for the year ended December 25, 2011, the revision is the result of the Company making corrections for the combined effect of financial statement errors attributable to the intentional misstatement of expenses due to the improper and fraudulent activities of a certain former employee of the Company's Canada sales subsidiary. The Company assessed the impact of these errors on its prior interim financial statements and concluded that these errors were not material, individually or in the aggregate to those financial statements. Although the effect of these errors was not material to any previously issued financial statements, the cumulative effect of correcting the newly identified errors in the prior year would have been material for the fiscal year 2011. Consequently, the Company has revised its prior period financial statements. All amounts in this Quarterly Report on Form 10-Q affected by the revision adjustments reflect such amounts as revised.

Description of Revision Adjustments

Set forth below is a description of the revision adjustments reflected in the revision of previously issued financial statements.

Overstatement of expenses due to the improper and fraudulent activities of a certain former employee of the Company’s Canada sales subsidiary - In December of 2011, we identified errors in our financial statements resulting from improper and fraudulent activities of a certain former employee of our Canada sales subsidiary as part of the transition of our Canadian operations into our shared service environment in North America. Subsequent to the discovery of such errors, we retained outside counsel to undertake an investigation with the assistance of forensic accountants and internal auditors. The results of this investigation concluded that in the period from 2005 through the fourth quarter of 2011, the then Controller of our Canadian operations was able to misappropriate cash through various schemes. The defalcation of cash was concealed by overriding internal controls at the subsidiary which had the effect of misstating certain accounts including cash, accounts receivable, and inventories as well as income taxes and non-income taxes payable and operating expenses. Based on this investigation, it was determined that improper and fraudulent activities by a certain employee of the subsidiary affected the financial reporting of the subsidiary and that the improper and fraudulent activities were contained within the Canada sales subsidiary.

The total cumulative gross financial statement impact of the improper and fraudulent activities was approximately $5.2 million and impacted fiscal years 2005 through 2011 of which $1.1 million was recovered by the Company from the perpetrator during the fourth quarter of 2011, resulting in a net cumulative financial statement impact of $4.1 million. The fiscal year 2011 financial statement impact was $0.2 million income due to the recovery of $1.1 million offset by expense of $0.9 million. The financial statement impacts of the improper and fraudulent Canadian activities have been included in other expense in the Consolidated Statements of Operations. We filed a claim during the second quarter of 2012 with our insurance provider for the unrecovered amount of the loss.

The improper and fraudulent activities by a certain former employee of the subsidiary included (i) the misappropriation of cash including cash payments to improper vendors; (ii) the intentional overstatement of cash balances; (iii) the intentional understatement of accounts receivable and inventory reserve accounts; (iv) the intentional understatement of income taxes and non-income taxes payable; and (v) recording arbitrary balance sheet adjustments to increase cash and liabilities.

In addition to the revisions described above, the effects of discontinued operations presentation on previously reported amounts have been included in order to reconcile between previously reported amounts and the final amounts as revised in this Quarterly Report on Form 10-Q.

The following tables summarize the effects of the adjustments on basic (loss) earnings per share, diluted (loss) earnings per share, operating (loss) income, income taxes, (loss) earnings from continuing operations before income taxes, and net (loss) earnings attributable to Checkpoint Systems, Inc. for the three and six months ended June 26, 2011.



	Quarter						Six Months
	(13 weeks) Ended						(26 weeks) Ended
	June 26, 2011						June 26, 2011
Earnings (loss) attributable to Checkpoint Systems, Inc. per share	Basic EPS			Diluted EPS			Basic EPS			Diluted EPS
As Previously Reported	$	0.23		$	0.23		$	0.01		$	0.01
Revision Adjustments:
Canada Adjustments	0.02			0.02			0.04			0.04
As Revised for Revision Adjustments	$	0.25		$	0.25		$	0.05		$	0.05
Discontinued Operations Adjustments	(0.01		)	(0.01		)	(0.02		)	(0.02		)
As Revised in this Quarterly Report on Form 10-Q	$	0.24		$	0.24		$	0.03		$	0.03



	Quarter				Six Months
	(13 weeks) Ended				(26 weeks) Ended
	June 26, 2011				June 26, 2011
(amounts in thousands)	Net Earnings Attributable to Checkpoint Systems, Inc.		Income from Continuing Operations Before Income Taxes		Net Earnings Attributable to Checkpoint Systems, Inc.		(Loss) Income from Continuing Operations Before Income Taxes
As Previously Reported	$	9,520	$	11,043	$	209	$	(104	)
Revision Adjustments:
Canada Adjustments	322		430		938		1,253
As Revised for Revision Adjustments	$	9,842	$	11,473	$	1,147	$	1,149
Discontinued Operations Adjustments	—		511		—		1,238
As Revised in this Quarterly Report on Form 10-Q	$	9,842	$	11,984	$	1,147	$	2,387



	Quarter				Six Months
	(13 weeks) Ended				(26 weeks) Ended
	June 26, 2011				June 26, 2011
(amounts in thousands)	Income Tax Expense		Operating Income		Income Tax (Benefit) Expense			Operating Income
As Previously Reported	$	1,521	$	12,610	$	(315	)	$	2,029
Revision Adjustments:
Canada Adjustments	108		430		315			1,253
As Revised for Revision Adjustments	$	1,629	$	13,040	$	—		$	3,282
Discontinued Operations Adjustments	179		511		433			1,238
As Revised in this Quarterly Report on Form 10-Q	$	1,808	$	13,551	$	433		$	4,520

Comparison of revised financial statements to financial statements as originally reported

The following tables compare our previously reported Consolidated Statements of Operations, Stockholders’ Equity, Comprehensive Income, and Cash Flows for the three and six months ended June 26, 2011 to the corresponding financial statements for those years As Revised.

CONSOLIDATED STATEMENTS OF OPERATIONS



	Quarter
	(13 weeks) Ended
	June 26, 2011
(amounts in thousands, except per share data)	As Previously Reported			As Revised for Revision Adjustments			As Revised in this Quarterly Report on Form 10-Q
Net revenues	$	219,931		$	219,931		$	216,810
Cost of revenues	134,439			134,439			131,826
Gross profit	85,492			85,492			84,984
Selling, general, and administrative expenses	80,695			80,214			79,195
Research and development	5,347			5,347			5,347
Restructuring expenses	1,495			1,495			1,495
Acquisition costs	2,017			2,017			2,017
Other expense	—			51			51
Other operating income	16,672			16,672			16,672
Operating income	12,610			13,040			13,551
Interest income	727			727			727
Interest expense	1,918			1,918			1,918
Other gain (loss), net	(376		)	(376		)	(376		)
Earnings from continuing operations before income taxes	11,043			11,473			11,984
Income taxes	1,521			1,629			1,808
Net income from continuing operations	9,522			9,844			10,176
Loss from discontinued operations, net of tax benefit of $0, $0, and $179	—			—			(332		)
Net earnings	9,522			9,844			9,844
Less: income attributable to non-controlling interests	2			2			2
Net earnings attributable to Checkpoint Systems, Inc.	$	9,520		$	9,842		$	9,842
Basic earnings attributable to Checkpoint Systems, Inc. per share:
Earnings from continuing operations	$	0.23		$	0.25		$	0.25
Loss from discontinued operations, net of tax	—			—			(0.01		)
Basic earnings attributable to Checkpoint Systems, Inc. per share	$	0.23		$	0.25		$	0.24
Diluted earnings attributable to Checkpoint Systems, Inc. per share:
Earnings from continuing operations	$	0.23		$	0.25		$	0.25
Loss from discontinued operations, net of tax	—			—			(0.01		)
Diluted earnings attributable to Checkpoint Systems, Inc. per share	$	0.23		$	0.25		$	0.24

The As Revised in this Quarterly Report on Form 10-Q amounts include the effects of discontinued operations presentation on previously reported amounts. Refer to Note 14 to the Consolidated Financial Statements for discontinued operations presentation adjustments to previously reported amounts.



	Six Months
	(26 weeks) Ended
	June 26, 2011
(amounts in thousands, except per share data)	As Previously Reported			As Revised for Revision Adjustments			As Revised in this Quarterly Report on Form 10-Q
Net revenues	$	404,604		$	404,604		$	398,696
Cost of revenues	248,738			248,738			243,627
Gross profit	155,866			155,866			155,069
Selling, general, and administrative expenses	155,078			153,527			151,492
Research and development	10,136			10,136			10,136
Restructuring expenses	3,092			3,092			3,092
Acquisition costs	2,203			2,203			2,203
Other expense	—			298			298
Other operating income	16,672			16,672			16,672
Operating income	2,029			3,282			4,520
Interest income	1,693			1,693			1,693
Interest expense	3,560			3,560			3,560
Other gain (loss), net	(266		)	(266		)	(266		)
(Loss) earnings from continuing operations before income taxes	(104		)	1,149			2,387
Income taxes (benefit) expense	(315		)	—			433
Net earnings from continuing operations	211			1,149			1,954
Loss from discontinued operations, net of tax benefit of $0, $0, and $433	—			—			(805		)
Net earnings	211			1,149			1,149
Less: income attributable to non-controlling interests	2			2			2
Net earnings attributable to Checkpoint Systems, Inc.	$	209		$	1,147		$	1,147
Basic earnings attributable to Checkpoint Systems, Inc. per share:
Earnings from continuing operations	$	0.01		$	0.05		$	0.05
Loss from discontinued operations, net of tax	—			—			(0.02		)
Basic earnings attributable to Checkpoint Systems, Inc. per share	$	0.01		$	0.05		$	0.03
Diluted earnings attributable to Checkpoint Systems, Inc. per share:
Earnings from continuing operations	$	0.01		$	0.05		$	0.05
Loss from discontinued operations, net of tax	—			—			(0.02		)
Diluted earnings attributable to Checkpoint Systems, Inc. per share	$	0.01		$	0.05		$	0.03

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Quarter				Six Months
	(13 weeks) Ended				(26 weeks) Ended
	June 26, 2011				June 26, 2011
(amounts in thousands)	As Previously Reported		As Revised in this Quarterly Report on Form 10-Q		As Previously Reported			As Revised in this Quarterly Report on Form 10-Q
Net earnings	$	9,522	$	9,844	$	211		$	1,149
Amortization of pension plan actuarial losses (gains), net of tax	12		12		(244		)	(244		)
Change in realized and unrealized losses on derivative hedges, net of tax	57		57		(1,762		)	(1,762		)
Foreign currency translation adjustment	3,490		3,497		22,085			22,017
Comprehensive income	13,081		13,410		20,290			21,160
Less: comprehensive income attributable to non-controlling interests	2		2		2			2
Comprehensive income attributable to Checkpoint Systems, Inc.	$	13,079	$	13,408	$	20,288		$	21,158

There is no discontinued operations impact on the presentation of the As Revised in this Quarterly Report on Form 10-Q amounts.

CONSOLIDATED STATEMENTS OF CASH FLOWS



(amounts in thousands)	June 26, 2011
Six months (26 weeks) ended	As Previously Reported			As Revised in this Quarterly Report on Form 10-Q
Cash flows from operating activities:
Net earnings	$	211		$	1,149
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	17,861			17,861
Deferred taxes	1,812			2,127
Stock-based compensation	4,779			4,779
Provision for losses on accounts receivable	889			889
Excess tax benefit on stock compensation	(594		)	(594		)
Loss on disposal of fixed assets	5			5
(Increase) decrease in current assets, net of the effects of acquired companies:
Accounts receivable	(3,043		)	(3,056		)
Inventories	(21,245		)	(21,352		)
Other current assets	(10,894		)	(11,011		)
Increase (decrease) in current liabilities, net of the effects of acquired companies:
Accounts payable	4,526			4,300
Income taxes	(5,331		)	(5,348		)
Unearned revenues	16,163			16,163
Restructuring reserve	(62		)	(62		)
Other current and accrued liabilities	28,152			28,498
Net cash provided by operating activities	33,229			34,348
Cash flows from investing activities:
Acquisition of property, plant, and equipment and intangibles	(9,416		)	(9,416		)
Acquisition of businesses, net of cash acquired	(48,937		)	(48,937		)
Change in restricted cash	(355		)	(355		)
Other investing activities	192			192
Net cash used in investing activities	(58,516		)	(58,516		)
Cash flows from financing activities:
Proceeds from stock issuances	1,569			1,569
Excess tax benefit on stock compensation	594			594
Proceeds from short-term debt	196			196
Payment of short-term debt	(877		)	(877		)
Net change in factoring and bank overdrafts	47			47
Proceeds from long-term debt	31,117			31,117
Payment of long-term debt	(5,310		)	(5,310		)
Net cash provided by financing activities	27,336			27,336
Effect of foreign currency rate fluctuations on cash and cash equivalents	7,980			7,940
Net increase in cash and cash equivalents	10,029			11,108
Cash and cash equivalents:
Beginning of period	173,802			172,473
End of period	$	183,831		$	183,581

The Consolidated Financial Statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries (collectively, the “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 our Annual Report on Form 10-K for the fiscal year ended December 25, 2011 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 state fairly our financial position at June 24, 2012 and December 25, 2011 and our results of operations for the thirteen and twenty-six weeks ended June 24, 2012 and June 26, 2011 and changes in cash flows for the twenty-six weeks ended June 24, 2012 and June 26, 2011. The results of operations for the interim period should not be considered indicative of results to be expected for the full year.

Restricted Cash

We classify restricted cash as cash that cannot be made readily available for use. Restrictions may include legally restricted deposits held as compensating balances against short-term borrowing arrangements, contracts entered into with others, or company statements of intention with regard to particular deposits. As of June 24, 2012, the unused portion of a grant from the Chinese government of $0.3 million (RMB 1.6 million) was recorded within restricted cash in the accompanying Consolidated Balance Sheets.

Accounts Receivable

At June 26, 2011, proceeds from the sale of accounts receivable related to a sales-type lease extension with a customer to a third party financial institution totaled $30.9 million. Proceeds from the initial sale of the accounts receivable are used to fund operations. This transaction meets the criteria for sale treatment in accordance with ASC 860 "Accounting for Transfers and Servicing of Financial Assets". We have presented the earnings recognized on the sale of the receivables separately under the line item captioned other operating income on our Consolidated Statements of Operations for the three and six months ended June 26, 2011. There is no comparable amount for the three and six months ended June 24, 2012.

Internal-Use Software

Included in fixed assets is the capitalized cost of internal-use software. We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over their estimated useful lives, which generally range from three to five years. Costs incurred related to design or maintenance of internal-use software is expensed as incurred.

During 2009, we announced that we are in the initial stages of implementing a company-wide ERP system to handle the business and finance processes within our operations and corporate functions. The total amount of internal-use software costs capitalized since the beginning of the ERP implementation as of June 24, 2012 and December 25, 2011 were $22.3 million and $21.4 million, respectively. As of June 24, 2012, $18.1 million was recorded in machinery and equipment related to supporting software packages that were placed in service. The remaining costs of $4.2 million and $6.0 million as of June 24, 2012 and December 25, 2011, respectively, are capitalized as construction-in-progress until such time as the ERP system has been placed in service.

Assets Held For Sale

As a result of our restructuring plans, certain long-lived assets of our manufacturing facilities met held for sale criteria during the second quarter ended June 24, 2012 and $3.7 million of property, plant, and equipment, net has been reclassified into other current assets on the Consolidated Balance Sheet. The assets associated with these facilities have been adjusted to fair value, less costs to sell.

Non-controlling Interests

On May 16, 2011, Checkpoint Holland Holding B.V., a wholly-owned subsidiary of the Company, acquired 51% of the outstanding voting shares of Shore to Shore PVT Ltd. (Sri Lanka) in exchange for $1.7 million in cash. The fair value of the non-controlling interest was estimated by applying a market approach. Key assumptions include control premiums associated with guideline transactions of entities deemed to be similar to Shore to Shore PVT Ltd. (Sri Lanka), and adjustments because of the lack of control that market participants would consider when measuring the fair value of the non-controlling interest.

We have classified non-controlling interests as equity on our Consolidated Balance Sheets as of June 24, 2012 and December 25, 2011 and presented net income attributable to non-controlling interests separately on our Consolidated Statements of Operations for the three and six months ended June 24, 2012 and June 26, 2011.

Warranty Reserves

We provide product warranties for our various products. These warranties vary in length depending on product and geographical region. We establish our warranty reserves based on historical data of warranty transactions.

The following table sets forth the movement in the warranty reserve which is located in the Other Accrued Expenses section of our Consolidated Balance Sheets:



(amounts in thousands)
Six months ended	June 24, 2012
Balance at beginning of year	$	5,857
Accruals for warranties issued, net	2,613
Settlements made	(2,730		)
Foreign currency translation adjustment	(87		)
Balance at end of period	$	5,653

Recently Adopted Accounting Standards

In April 2011, the FASB issued ASU 2011-03 “Reconsideration of Effective Control for Repurchase Agreements” (ASU 2011-03). The amendments to Topic 860 (Transfers and Servicing) affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments do not affect other transfers of financial assets. The amendments remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 is effective for the first interim or annual periods beginning on or after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. This amendment should be applied prospectively to transactions or modifications of existing transactions that occur on or after December 26, 2011. The adoption of the standard did not have a material impact on our Consolidated Results of Operations and Financial Condition.

In May 2011, the FASB issued ASU 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). The amendments to Topic 820 (Fair Value Measurement) establish common requirements for measuring fair value and related disclosures in accordance with accounting principles generally accepted in the United Sates and international financial reporting standards. This amendment did not require additional fair value measurements. ASU 2011-04 is effective for the first interim and annual periods beginning after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. This amendment should be applied prospectively. The adoption of the standard did not have a material effect on our Consolidated Results of Operations and Financial Condition.

In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income” (ASU 2011-05). The amendments to Topic 220 (Comprehensive Income) eliminate the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders' equity, require consecutive presentation of the statement of net income and other comprehensive income and require reclassification adjustments from other comprehensive income to net income to be shown on the financial statements. In December 2011, the FASB issued ASU 2011-12, "Comprehensive Income -- Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in ASU 2011-05," to defer the effective date of the provision requiring entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. However, the remaining requirements of ASU 2011-05 are effective for the first interim and annual periods beginning after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. Any required changes in presentation requirements and disclosures have been included in our Consolidated Financial Statements beginning with the first quarter ended March 25, 2012. The adoption of the standard did not have a material effect on our Consolidated Results of Operations and Financial Condition.

In September 2011, the FASB issued ASU 2011-08, "Intangibles – Goodwill and Other," (ASU 2011-08), which amends current guidance to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which for us was December 26, 2011, the first day of our 2012 fiscal year. The adoption of the standard did not have a material effect on our Consolidated Results of Operations and Financial Condition.

In September 2011, the FASB issued ASU 2011-09, "Compensation – Retirement Benefits – Multiemployer Plans (Subtopic 715-80)," (ASU 2011-09). ASU 2011-09 requires that employers provide additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. The additional quantitative and qualitative disclosures will provide users with more detailed information about an employer's involvement in multiemployer pension plans. ASU 2011-09 is effective for fiscal years ending after December 15, 2011. The adoption of this standard did not have a material effect on our Consolidated Results of Operations and Financial Condition.

New Accounting Pronouncements and Other Standards

In December 2011, the FASB issued ASU 2011-11, "Balance Sheet – Disclosures about Offsetting Assets and Liabilities (Topic 210-20)," (ASU 2011-11). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for fiscal years beginning on or after January 1, 2013, with retrospective application for all comparable periods presented. The adoption of this standard will not have a material effect on our Consolidated Results of Operations and Financial Condition.

In July 2012, the FASB issued ASU 2012-02, "Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment," (ASU 2012-02). ASU 2012-02 amends the guidance in ASC 350-302 on testing indefinite-lived intangible assets, other than goodwill, for impairment by allowing an entity to perform a qualitative impairment assessment before proceeding to the two-step impairment test. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e., a likelihood of more than 50 percent) impaired, the entity would not need to calculate the fair value of the asset. In addition, the ASU does not amend the requirement to test these assets for impairment between annual tests if there is a change in events or circumstances; however, it does revise the examples of events and circumstances that an entity should consider in interim periods. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption being permitted. The adoption of this standard will not have a material effect on our Consolidated Results of Operations and Financial Condition.