Cash Flow

Checkpoint’s Woes Go Beyond U.S. Shores

The security tag company cleans house at its Japanese sales subsidiary, and turns its attention to restatements here in the U.S.
Stephen TaubFebruary 26, 2007

Checkpoint Systems said it will restate its financial results for the 2004 and 2005 fiscal years, and for the first three quarters of 2006, blaming the adjustments on accounting errors. The maker of security tags cited several reasons for the restatement, including “improper activities of certain employees” who worked at the company’s Japanese sales subsidiary, revenue recognition timing errors for certain transactions in its CheckNet business, and income tax adjustments recorded in the fourth quarter of 2005 relating to prior years.

In a regulatory filing, company officials stressed that the improper activities were solely contained within the Japanese sales subsidiary. Checkpoint added that it fired both the chairman and the president of the Japanese sales subsidiary. During the fourth quarter of 2006, the subsidiary dismissed its controller and the general manager of its radio frequency identification (RFID) business.

The adjustments related to CheckNet and income taxes are not linked to the activities of the Japanese sales subsidiary, added the company. Rather, problems stemmed from inadvertent errors recorded in the incorrect period. The CheckNet errors were identified during the process of preparing the 2006 financial statements, and the income tax errors were previously disclosed in the company’s 2005 financial statements as a reduction of tax expense that should have been recorded in periods prior to 2005, according to the company.

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As a result of the errors recorded by the Japanese sales subsidiary, the company said it over-reported revenue by about $2.5 million to $3.5 million in the first nine months of 2006, and about $1.5 million to $2.5 million in fiscal 2005. All together, the Japanese sales subsidiary generated approximately $30 million of revenue in 2005.

The company said it expects the restatement to reduce net earnings for the first nine months of 2006 by about $1 million to $1.4 million; reduce net earnings for 2005 by between $2.7 million and $3.5 million; and to increase net earnings for 2004 by about $1.2 million to $1.6 million. “We are very disappointed to have to restate our prior period financial results,” said George Off, chairman and chief executive officer, in a statement.

The company also said it will delay the filing of its 2006 annual report.