Trouble Looms for Checkpoint Systems

Shares of Checkpoint Systems (CKP ), which makes electronic anti-theft tags used by retailers, have dropped from 18 in April to 12.50 lately, in part because of an unseasonably warm winter, which dampened apparel sales. But don't expect the stock to rebound soon, say some pros: The stock may well keep tumbling, because of an antitrust lawsuit that Checkpoint lost.

The suit, brought by ID Security Systems of Canada, claimed that Checkpoint interfered with ID's contracts to sell its own anti-shoplifting tags and that Checkpoint used its clout to delay ID's launch. In late May, a U.S. District Court in Pennsylvania assessed damages of $26 million. Jeffrey Kessler of Lehman Brothers, however, says total damages, including legal fees, will balloon to $79 million. In 2001, Checkpoint's net income was $21.5 million. He has downgraded the stock from buy to a neutral rating.

The verdict could put Checkpoint in violation of bank covenants on 1999 bank loans, he says. Even if Checkpoint appeals and puts off paying damages, accountants may require it to acknowledge the potential damages in its financial statement. Therein lies the problem: It had borrowed $273.9 million from banks. Those loans have covenants that might be violated, says Kessler, such as putting any new debt on its balance sheet. The covenants also require Checkpoint to have a net worth of $200 million.

Its current net worth, he figures, is $240 million, and the damages it will have to pay will bring it below required levels. Kessler thinks the banks won't call in the loan, since Checkpoint is up-to-date in its payments. Kessler's concern: Checkpoint has to renegotiate terms with lenders, which will probably mean higher rates. One fund manager, who is shorting Checkpoint shares, sees the stock falling to 6 or 7. Checkpoint didn't return calls.

By Gene G. Marcial

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