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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 29, 2002
Commission File No. 0-17038
Concord Camera Corp.
(Exact name of registrant as specified in its charter)
New Jersey 13-3152196
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) identification no.)
4000 Hollywood Boulevard, Presidential Circle - 6th Floor, North Tower,
Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 331-4200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
(Title of class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the Common Stock (based upon the high and low
trading prices) held by non-affiliates of the Company on August 30, 2002, was
approximately $96,196,371.
As of August 30, 2002, there were 27,825,499 shares of the Company's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
See Exhibit Index -- Page 53
PART I
Unless the context indicates otherwise, when used in this report, "we," "us,"
"our," "Concord" and the "Company" refer to Concord Camera Corp. and its
subsidiaries. Beginning in Fiscal 1999, the Company changed its fiscal year to
end on the Saturday closest to June 30. Fiscal 2002 refers to the Fiscal Year
ended June 29, 2002, Fiscal 2001 refers to the Fiscal Year ended June 30, 2001,
Fiscal 2000 refers to the Fiscal Year ended July 1, 2000, and Fiscal 1999 refers
to the Fiscal Year ended July 3, 1999. Prior to 1999, the Company's fiscal year
was the twelve-month period ended June 30. References to "fiscal year"
incorporate this usage.
All information in this report gives effect to a two-for-one stock split
effective on April 14, 2000 to shareholders of record on March 27, 2000.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report and the documents that are incorporated by reference into this
report contain "forward-looking statements" within the meaning of the safe
harbor provisions of The Private Securities Litigation Reform Act of 1995. Some
of the forward-looking statements can be identified by the use of
forward-looking words such as "believes," "expects," "may," "will," "should,"
"seeks," "intends," "plans," "estimates," or "anticipates" or the negative of
those words or other comparable terminology. Forward-looking statements concern
expectations, beliefs, projections, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that are not
historical facts. They instead represent only our present belief regarding
future events, many of which, by their nature, are inherently uncertain and
involve risks and uncertainties. A number of important factors could cause
actual results to differ, perhaps materially, from the anticipated results
indicated in the forward-looking statements. For a discussion of some of the
factors that could cause actual results to differ, please see the discussion
under "Risk Factors" contained in this report. Any forward-looking statements
contained in this report, or in the documents incorporated by reference into
this report, represent our estimates only as of the date of this report, or as
of such earlier dates as are indicated, and should not be relied upon as
representing our estimates as of any subsequent date. While we may elect to
update forward-looking statements at some point in the future, we specifically
disclaim any obligation to do so, even if our estimates change.
Item 1. The Business.
Photography Market Overview
There are four main categories of cameras within the amateur photography market:
o Digital cameras -- A digital camera uses an electronic sensor (versus
silver halide film) to electronically capture an image, which is then stored
in a memory device. Digital cameras allow for instantaneous viewing, and
images can easily be downloaded to a computer for viewing, manipulation,
reproduction and storage. According to IDC(1), approximately 18 million
consumer digital cameras(2) were shipped worldwide in 2001 (a 180% increase
in the number of units shipped as compared to 1999) generating shipment
values of approximately $8 billion(3).
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(1) IDC (a division of IDG) is a leading provider of industry analysis and
market data.
-2-
o Single use cameras -- Single use cameras are sold preloaded with film and
battery and are designed to be used only once. After use, the consumer
returns the entire camera to the photo processor. The processor then
extracts the film and either disposes of the camera carcass or returns it
for recycling. According to the Photo Marketing Association ("PMA"), on a
unit basis, single use cameras account for approximately 87% of all
non-digital cameras sold worldwide, but we estimate this segment accounts
for less than 30% of amateur non-digital camera industry revenues.
o 35mm and APS cameras -- This category includes essentially all other
(non-single use) cameras that use silver halide film. Film formats include
both 35mm and Advanced Photo System ("APS") (24mm). On a unit basis, 35mm
and APS cameras account for about 11% of all non-digital cameras sold
worldwide and about 57% of worldwide amateur non-digital camera industry
revenues, according to the PMA.
o Instant cameras -- Instant cameras provide the advantage of instant
photographs, but the cost per print is substantially higher than 35mm and
APS cameras. There is also a difference in the quality of prints produced by
instant cameras. On a unit basis, instant cameras account for about 1.5% of
all non-digital cameras sold worldwide and about 2% of worldwide amateur
non-digital camera industry revenues, according to the PMA.
Market Trends
We expect to capitalize on a number of trends within the image capture industry,
including the following:
o Growth of Digital Photography. Digital photography is one of the fastest
growing areas of the photography market. According to IDC, worldwide
consumer digital camera shipments grew at an average rate of approximately
65% per year from 1999 through 2001, and are projected to grow at an average
rate of approximately 17% per year over the next three years with shipments
expected to reach 40.7 million units in 2006. Despite their relatively
recent acceptance in the consumer market, digital camera sales have already
surpassed sales of instant cameras, single lens reflex cameras ("SLRs") and
traditional(4) 35mm and APS cameras. We believe we are well positioned to
address this market, with a design team focused on the development of
digital image capture devices and significant clean room facilities
dedicated to the manufacture and assembly of digital cameras. See
"Manufacturing Facilities" below.
o New Digital Image Capture Devices. In a clear departure from silver halide
photography, digital imaging enables images to be displayed and used in ways
that were previously impossible. Device manufacturers have begun to
incorporate image capture devices into cellular phones, personal digital
assistants, laptop computers and security monitoring devices.
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(2) "Consumer digital cameras" are cameras capturing images in digital format
only, and priced from $49 to $1,500.
(3) According to IDC's initially advertised prices for end-users.
(4) "Traditional" cameras do not include single use or digital cameras.
-3-
o Growth of Single Use Cameras. Single use cameras are inexpensive, easy to
use and deliver high quality photographs. From 1999 through 2001, the number
of single use cameras sold worldwide grew at a compound annual rate of 15%,
according to the PMA, and is forecasted to grow at an average annual rate of
8% through 2005.
Our Company
We design, develop, manufacture and sell on a worldwide basis high quality,
popularly priced, easy-to-use image capture products. Our products include
digital image capture devices, 35mm and APS traditional and single use cameras,
and instant cameras. We believe we are the fourth largest manufacturer of single
use cameras in the world (behind Eastman Kodak Company ("Kodak"), Fuji Photo
Film Co. Ltd. ("Fuji") and Konica Corporation). By investing significant funds
in our design, development, engineering and manufacturing capabilities, we have
positioned ourselves to capitalize on the industry trend to outsource the
design, development and manufacture of all types of image capture devices. As a
consequence, we now develop new products, including digital image capture
devices and innovative electronic, optical and mechanical devices, both for our
own account and in conjunction with our Original Equipment Manufacturer ("OEM")
customers and some of our key retail customers. We serve as a contract
manufacturer of developed and co-developed products for our OEM customers, and
we also sell our own branded and private label versions of many of those
products incorporating certain of the co-developed technology to our retail
customers.
We manufacture products in the People's Republic of China ("PRC"). Our
manufacturing facility, together with several employee dormitories we lease,
comprise in excess of 600,000 square feet. We have operated in the PRC since
1984. Our manufacturing capabilities and facilities in the PRC are key
components of our low cost of production. Our Hong Kong management team, many of
whom live in the PRC, oversees our manufacturing activities. Our products are
conceptualized, designed, developed and engineered principally in design centers
in Hong Kong, the PRC and the United States.
We have evolved from a manufacturer and distributor of cameras to a contract
manufacturer of high quality image capture products with strong retail
distribution. At the same time we have developed and manufacture a full line of
lower priced digital cameras. Average revenue per unit from our digital products
is significantly higher than from our traditional and single use camera
products. In Fiscal 2002, we completed new digital camera development projects
that resulted in the recent introduction to the marketplace of a number of new
products as well as providing a platform for the future development of other
digital products. Our design team is currently engaged in the development of
additional new digital products. See "Products" below. The experience gained
from these development projects should enable us to compete effectively for
supply contracts with companies desiring to offer low cost digital camera
solutions to their customers.
-4-
Our Growth Strategy
We intend to enhance our position as a leader in contract manufacturing while
continuing to expand our retail sales and distribution ("RSD") business. Our
growth strategy includes the following key elements:
o Continue to expand our RSD business. We continue to globally expand our RSD
business by increasing the number of customers, product listings, retail
segments and sales volumes through the continued introduction of new products,
some of which are the result of our development and/or co-development projects
with our OEM customers. Our retail customers include, but are not limited to,
Argos, Boots, CVS, Eckerd, Rite Aid, Target, Walgreens and Wal-Mart. We
continue to invest in our internal sales and marketing capabilities to expand
our retail business.
In August 2002, we entered into two trademark licensing agreements with the
entity that purchased the assets of Polaroid Corporation ("Polaroid") in an
asset purchase transaction approved by the U.S. Bankruptcy Court supervising the
Polaroid reorganization. These licenses enable us to market our single use
(subject to the Japan restriction under the Fuji license)and traditional
film-based cameras (but not instant or digital cameras) worldwide to retailers
under the Polaroid brand name. See "Licensing Activities" below.
o Obtain additional business from our OEM customers. Over the years we have
captured OEM business from several of the world's leading companies including
Kodak, Hewlett-Packard Company ("Hewlett-Packard"), Nokia Mobile Phones Ltd.
("Nokia") and Polaroid. We continue to invest in product development and low
cost manufacturing to increase business from our existing OEM customers.
o Develop new OEM relationships. We intend to leverage our existing
relationships and our strong capabilities in engineering, design and
manufacturing to establish new OEM relationships. We intend to attract new OEM
customers by exploiting our expertise in designing and low cost manufacturing of
digital and film-based image capture devices for leading companies.
o Differentiate ourselves from other contract manufacturers. We will continue to
differentiate ourselves from our competitors by providing OEM customers with the
dedicated design and development expertise at our facilities in Hollywood,
Florida, Hong Kong and the PRC, as well as our advanced, high quality, low cost
manufacturing capabilities.
o Pursue strategic relationships and acquisitions. When appropriate, we intend
to seek strategic relationships with leading companies in our industry, as well
as acquisitions that will help us further expand our customer base, product mix,
and distribution channels thereby enhancing our OEM and retail competitive
position. We recently engaged an investment bank to help us attempt to identify
suitable acquisition targets.
-5-
Products
We design, develop, manufacture and sell image capture products. Our products
include digital image capture devices, 35mm and APS traditional and single use
cameras, and instant cameras. We often serve as a contract manufacturer of
developed and co-developed products for our customers. We also sell to our
retail customers our own branded and private label versions of many of those
products incorporating certain of the developed and co-developed technology.
We manufacture digital image capture devices, 35mm and APS traditional and
single use cameras, and instant cameras. Our Company manufactures and assembles
products in the PRC both as a contract manufacturer on an OEM basis and for
direct sale under our trademarks and brand names, and under private label brand
names. New products are, and we expect they will continue to be, designed and
developed both independently and on a co-development basis with existing and
potential OEM customers.
We offer a wide variety of CMOS(5) and CCD-imager(6) based digital cameras,
ranging from those with VGA(7) resolution up to and including those with
multi-megapixel resolution. Over the next several years, digital cameras are
expected to represent a material portion of our sales as well as an increasing
portion of worldwide camera sales. During Fiscal 2002, we completed the design
and development of distinct new digital still camera platforms and currently
have additional product platforms in the early stages of development. From these
first platforms we have built, and recently began selling, certain new distinct
camera models. These platforms are designed for configuration flexibility so
that features, styles, and user interfaces can be customized quickly, allowing
for the creation of numerous models and appearances using a common base to
accommodate different user and customer preferences.
We also offer a complete line of single use cameras using platforms that enable
us to change the optics, flash, encasements, finishes and packaging to
accommodate different user and customer preferences. Our 35mm camera products
range from entry-level to higher-end, fully featured zoom models and include
models used by certain RSD customers to support special promotion and loyalty
programs they offer to their customers.
Concord's expenditures for product design and development increased from $4.9
million in Fiscal 2000 to more than $7.6 million in Fiscal 2002. For additional
information regarding amounts we spent on product development activities, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below. We anticipate product development costs will increase
slightly in Fiscal 2003.
OEM Sales
We have developed products and long-term relationships with some of the world's
largest and most successful film, camera, global communication and technology
companies. Sales to OEM customers are handled by our in-house sales and
marketing personnel.
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(5) "CMOS" is the acronym for complementary metal-oxide semiconductor.
(6) "CCD" is the acronym for charge-coupled device.
(7) "VGA" is the acronym for video graphics array.
-6-
In Fiscal 2002, no single OEM customer's purchases represented more than 10% of
our total net sales. OEM customers accounted for approximately $33.6 million, or
26.0%, of our total net sales in Fiscal 2002.
During Fiscal 2002, our OEM customers included Agfa-Gevaert AG ("Agfa")(8),
Ferrania S.p.A. and Ferrania USA, Inc. (formerly part of Imation, Inc.)
("Ferrania")(9), Hewlett-Packard, Kodak, Nokia and Polaroid. For more
information about certain of these existing and former OEM customers, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below.
Future OEM Relationships
We believe we are positioned to become one of the beneficiaries of an
outsourcing trend in the traditional, single use and digital image capture
device markets, including wireless transmission and Internet connectivity. By
investing significant funds in development, design, engineering and
manufacturing capabilities, we have become a high quality, low cost contract
manufacturer. In addition, OEM customers are increasingly searching for
development and co-development partners that can provide them with value added
assistance in the design, development and testing of innovative technologies.
Our ability to serve not only as a reliable, quality contract manufacturer but
also as a valuable strategic partner positions us for continued growth in our
OEM business.
We are in discussions and/or negotiations with existing and potential OEM
customers for the development, design and production of a number of new
products. Our product development capabilities enable us to offer proprietary
assistance in the development of products for OEM customers. We target potential
OEM customers with: (a) an established brand name; (b) existing channels of
distribution; (c) multiple product outsourcing potential (traditional, single
use and digital cameras); and (d) products complementary to our manufacturing
and value-added skills.
Retail Sales
We make direct sales to retailers on a worldwide basis through offices and/or
representatives in the United States, Latin America and Canada ("Concord
Americas"), offices in the United Kingdom, France and Germany ("Concord
Europe"), and offices in Hong Kong ("Concord Asia"). Concord Asia is also
involved in OEM sales, as well as sales to and sales support for large retail
customers in the Americas, Europe and Asia. We market our products to retailers
on a private label basis and/or under the following brand names:
- ---------------
(8) Although our contract with Agfa expired in January 2002, we continued to
manufacture certain products for Agfa during the remainder of Fiscal 2002.
(9) Although our contract with Ferrania expired in June 2001, we continued to
manufacture certain products for Ferrania during Fiscal 2002.
-7-
o Argus(R) o Goldline(R)
o Apex(R) o Keystone(R)
o Concord(R) o Le Clic(R)
o Concord Eye Q(R) o Polaroid(R)
o Fun Shooter(R)
In August 2002, we entered into two trademark licensing agreements with the
entity that purchased the assets of Polaroid in an asset purchase transaction
approved by the U.S. Bankruptcy Court supervising the Polaroid reorganization.
These licenses enable us to market our single use (subject to the Japan
restriction under the Fuji license) and traditional film-based cameras (but not
instant or digital cameras) worldwide to retailers under the Polaroid brand
name. See "Licensing Activities" below.
Our worldwide retail customers include, but are not limited to, the following
large discount, drug and retail chains: Argos, Boots, CVS, Eckerd, Rite
Aid, Target, Walgreens and Wal-Mart.
We also sell our products to other consumer product companies who use our
products as premiums in connection with their product sales.
We have in-house sales and marketing personnel who make a majority of our direct
sales to OEM and retail customers. To assist our in-house RSD sales staff, we
also have approximately nine non-affiliated sales agents who serve specific
geographic areas. Sales agents generally receive commissions ranging from 1.0%
to 3.0% of net sales to retail customers, depending on the type of customer, and
may act as selling agents for products of other manufacturers.
Our direct sales to retailers represented approximately $95.7 million, or 74.0%
of total net sales in Fiscal 2002, and approximately $83.3 million or 46.3% of
total net sales in Fiscal 2001. This increase was fueled by the introduction of
new products and marketing programs. In Fiscal 2002, we had two retail customers
each of whose purchases represented in excess of 10% of our total net sales: (i)
Walgreens (19.6% of total net sales); and (ii) Wal-Mart (18.6% of total net
sales).
Competition
The image capture industry is highly competitive. As a manufacturer and
distributor of high quality, popularly priced image capture devices, we
encounter substantial competition from a number of firms, many of which have
longer operating histories, more established markets and more extensive
facilities than we have. Many of our competitors have greater resources than we
have or may reasonably be expected to have in the foreseeable future. Our
competitive position is dependent upon our ability to continue to manufacture in
the PRC.
Licensing Activities
In August 2002, we entered into two license agreements with the entity that
purchased the assets of Polaroid on July 31, 2002 in an asset purchase
transaction approved by the U.S. Bankruptcy Court supervising the Polaroid
reorganization. These licenses provide us with the exclusive (with the exception
of products already released by Polaroid into the distribution chain), worldwide
use of the Polaroid brand trademark in connection with the manufacture,
distribution, promotion and sale of 35mm and APS single use cameras, 35mm and
APS manual and motorized cameras, including zoom cameras, and certain related
accessories. The licenses do not include instant or digital cameras. Each
license includes an initial term of three and a half years and may be renewed at
our option for an additional three-year period.
-8-
We are one of a limited number of companies licensed by Fuji to manufacture and
remanufacture single use cameras. Single use cameras accounted for approximately
$90.5 million, or 70% of our Fiscal 2002 net sales. We have a worldwide
(excluding Japan until January 1, 2005) non-exclusive license to use Fuji's
portfolio of patents and patent applications related to single use cameras. The
license extends until the later of February 26, 2021 or the expiration of the
last of the licensed Fuji patents to expire. In June 1999, the International
Trade Commission ("ITC") banned the unlicensed importation into the United
States of new and reloaded single use cameras due to the infringement of such
imports on existing patents held by Fuji. The Court of Appeals for the Federal
Circuit (the "Federal Circuit") recently upheld the ban on new single use
cameras and reversed the ITC's ban on reloaded single use cameras which were
originally sold in the United States by Fuji or its licensees and reloaded in a
prescribed manner. The Federal Circuit's decision opens the United States market
to competition from non-Fuji licensees for single use cameras originally sold in
the United States by Fuji or its licensees and reloaded (either in the United
States or abroad) in the prescribed manner. The Federal Circuit's decision could
have a material adverse impact on our revenues and earnings.
Manufacturing
We conduct all of our manufacturing in the PRC. Our vertically integrated
manufacturing facilities include, but are not limited to, plastic injection
molding of lenses and other parts, stamping and machining of metal parts,
manufacturing of printed circuit boards ("PCBs"), assembly of PCBs using surface
mount technology machinery and manual insertion, application specific integrated
circuit bonding, quality control, quality assurance, painting and final assembly
and testing.
Manufacturing Facilities. We began constructing our current manufacturing
facilities in the PRC in Fiscal 1996. We expanded them in Fiscal 1999 by
increasing our manufacturing and related dormitory facilities to over 600,000
square feet. See "Properties" below.
In February 2000 we opened a new production facility dedicated to digital image
capture devices. Two-thirds of this new facility is comprised of class 10,000
clean rooms where the ambient air particle count is controlled and special gowns
are worn by all personnel to maintain a high level of cleanliness. This
facility, located on the site of our PRC manufacturing operations, has a fully
trained and dedicated on-site staff including operators, engineers (mechanical,
electrical and optical) and production managers and supervisors.
Our PRC manufacturing facilities received the Social Accountability 8000
("SA8000") certification in November 2001. The SA8000 is an international
standard designed to ensure safe working conditions, fair management practices
and the protection of workers' rights. Our PRC manufacturing facilities have
also been ISO9002 accredited by the China Quality Certification Center for
Import & Export since Fiscal 1997.
-9-
Our Hong Kong office has been ISO9001 accredited by Det Norske Veritas since
early 2001. The ISO9001 standard encompasses design, development, purchasing and
order fulfillment functions.
Equipment and Raw Materials. We own the tools and equipment necessary to
manufacture many of the components used in our products. Numerous manufacturers
and suppliers located in the Far East and other parts of the world supply us
with various components and raw materials that we do not manufacture. Raw
materials and components that we purchase include film, batteries, glass lenses,
plastic resins, metal, packaging, electronic components, sensors, digital signal
processors, memory and displays.
Component procurement for digital cameras is more complex than for traditional
and single use cameras. Availability, delays in procuring, and price
fluctuations of the components for digital cameras, which may be outside our
control, could adversely impact our business, results of operations and
financial condition.
PRC Operations. Our operations and profitability are substantially dependent
upon our manufacturing and assembly activities. Our current processing agreement
with the PRC entities expires in October 2006. We intend to continue to expand
our operations in the PRC, but there can be no assurance we will be able to do
so.
We recently established and registered a wholly foreign owned enterprise
("WFOE"), named Concord Camera (Shenzhen) Company Limited ("Concord Shenzhen"),
pursuant to the law of the PRC concerning enterprises with sole foreign
investment. The business license of Concord Shenzhen, which is a wholly-owned
subsidiary of Concord Camera HK Limited ("Concord HK"), permits it to
manufacture and sell a variety of cameras and camera components and will permit
it to make sales both in the PRC and internationally of the products it
manufactures. We expect that Concord Shenzhen will begin operations in the PRC
during Fiscal 2003.
Trademarks and Patents
We own trademarks which include, but are not limited to, the CONCORD(R),
KEYSTONE(R), CONCORD EYE Q(R), FUN SHOOTER(R), LE CLIC(R), GOLDLINE(R) and
APEX(R) names for cameras sold in the United States and numerous foreign
countries and the ARGUS(R) name in numerous foreign countries. We license the
trademark POLAROID(R) for exclusive use worldwide in connection with the
manufacture, distribution, promotion and sale of single use and traditional
film-based cameras (excluding instant and digital cameras). We own numerous
patents, certain of which are used in our current products. We have applied for,
and will continue to apply for, in the United States and foreign countries,
patents to protect the inventions and technology developed by or for the
Company. We do not believe our competitiveness and market share are dependent on
the ultimate disposition of our patent applications.
-10-
Restructuring
Beginning in the fourth quarter of Fiscal 2001, we announced and began
implementing a restructuring and cost containment initiative in an effort to
enhance operating efficiencies and reduce costs through workforce reductions,
facility consolidations and other cost-saving measures. As part of this
initiative, which we completed in the fourth quarter of Fiscal 2002, we reduced
our manufacturing workforce in the PRC from approximately 6,000 to approximately
4,000, and eliminated approximately 70 employees outside the PRC.
Employees
As of August 1, 2002, we had 207 employees, approximately 62% of whom were
located in Hong Kong and the PRC. None of our employees are represented by
collective bargaining agreements.
Pursuant to our agreements with governmental agencies in the PRC, those
governmental agencies provide us with approximately 4,000 workers at our
facilities in the PRC. We believe our ongoing relationship with these workers is
good.
Financial Information about Geographic Areas
For financial information about geographic areas, see Note 22 to the
Consolidated Financial Statements.
Item 2. Properties.
In Hollywood, Florida, we lease our principal office space, which consists of
approximately 15,000 square feet. We also lease a domestic warehouse in Fort
Lauderdale, Florida, which consists of approximately 13,700 square feet, about
825 square feet of which is office space. These leases expire on September 30,
2010 and January 31, 2009, respectively.
In Hong Kong, we lease a total of approximately 32,915 square feet of business
and warehouse space comprised of one floor under a lease expiring in 2047 and
four floors under a lease expiring in July 2004(10). In the United Kingdom, we
own an 11,000 square foot building on a one-half acre parcel. We also lease
warehouse and/or office space in France, Canada and Germany in connection with
the activities of our subsidiaries in these jurisdictions.
In the PRC, we own a manufacturing facility in the Longgang District of
Shenzhen, and we lease several employee dormitories and a cafeteria. Pursuant to
land use agreements entered into with certain PRC governmental agencies, we
obtained the title and rights to use approximately eight acres of land for
factory buildings, dormitories and related ancillary buildings. Under the land
use agreement, we have the right to use the land through the year 2038. At the
end of the term, a PRC governmental agency will own the facilities and we will
have the right to lease the land and improvements thereon at then prevailing
lease terms.
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(10) We have the option to extend the term of this lease to July 31, 2006.
-11-
Item 3. Legal Proceedings.
In July 2002, an amended class action complaint was filed against the Company
and certain of its officers in the United States District Court for the Southern
District of Florida by individuals purporting to be shareholders of the Company.
The lead plaintiffs in the amended complaint seek to act as representatives of a
class consisting of all persons who purchased the Company's Common Stock during
the period from May 1, 2000 through June 22, 2001, inclusive (the "Class
Period"). The complaint asserts, among other things, that the Company made
untrue statements of material fact and omitted to state material facts necessary
to make statements made not misleading in periodic reports it filed with the
Securities and Exchange Commission and in press releases it made to the public
regarding its operations and financial results. The allegations are centered
around claims that at the outset the Company failed to disclose that the
transaction with then customer, KB Gear Interactive, Inc. ("KB Gear"), was a
highly risky transaction, claims that throughout the Class Period the Company
failed to disclose that a large portion of its accounts receivable was
represented by a delinquent and uncollectible balance due from then customer, KB
Gear, and claims that such failure artificially inflated the price of the Common
Stock. The complaint seeks unspecified damages, interest, attorneys' fees, costs
of suit and unspecified other and further relief from the court. The Company
intends vigorously to defend the lawsuit. The lawsuit is in the earliest stage
and discovery has not yet commenced. The Company filed a motion to dismiss on
August 30, 2002. Although the Company believes this lawsuit is without merit,
its outcome cannot be predicted, and if adversely determined, the ultimate
liability of the Company, which could be material, cannot be ascertained.
On September 17, 2002, the Company was advised by the staff of the Securities
and Exchange Commission that it is conducting an informal inquiry related to the
matters described above.
In April 2002, a patent infringement complaint was filed by the Massachusetts
Institute of Technology and Electronics for Imaging, Inc. against 214
defendants, including the Company, in the United States District Court for the
Eastern District of Texas. The complaint asserts that the defendants have
offered for sale and sold products that infringe United States Patent No.
4,500,919, entitled Color Reproduction System, which patent expired on May 4,
2002. The complaint seeks unspecified damages, interest, attorneys' fees, costs
of suit and unspecified other and further relief from the court. Although the
Company believes this lawsuit is without merit, its outcome cannot be predicted,
and if adversely determined, the ultimate liability of the Company, which could
be material, cannot be ascertained.
The Company is involved from time to time in routine legal matters incidental to
its business. In the opinion of our management, the resolution of such matters
will not have a material adverse effect on its financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-12-
PART II
Item 5. Market for Company's Common Equity and Related Shareholder Matters.
Our Common Stock has been quoted on the Nasdaq National Market under the symbol
"LENS" since July 12, 1988. The following table shows, for each quarter in
Fiscal 2001 and Fiscal 2002, the high and low sales prices per share of our
Common Stock as reported by the Nasdaq National Market. All share prices set
forth below have been adjusted to reflect the two-for-one split of our Common
Stock effected on April 14, 2000.
Quarter Ended High Low
June 29, 2002............................... $ 9.15 $ 4.95
March 30, 2002.............................. $ 9.39 $ 6.00
December 29, 2001........................... $ 7.79 $ 3.80
September 29, 2001.......................... $ 6.23 $ 3.80
June 30, 2001............................... $10.07 $ 4.75
March 31, 2001.............................. $20.00 $ 6.38
December 30, 2000........................... $34.50 $13.75
September 30, 2000.......................... $27.88 $18.69
The closing price of our Common Stock on the Nasdaq National Market on August
30, 2002 was $4.70 per share. As of August 30, 2002, there were approximately
1,038 shareholders of record of our Common Stock.
The Company has never paid cash dividends and does not presently intend to pay
cash dividends.
-13-
Item 6. Selected Financial Data.
Fiscal Year Ended
-----------------
June 29, June 30, July 1, July 3, June 30,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands except per share data)
STATEMENT OF
OPERATIONS DATA:
Net sales(a) $129,317 $180,061 $167,720 $115,386 $98,617
Cost of product sold 110,345 152,598 126,148 86,664 74,771
-------- -------- -------- -------- -------
Gross profit(a) 18,972 27,463 41,572 28,722 23,846
Operating expenses(a) 26,161 45,056 25,607 20,567 17,846
-------- -------- -------- -------- -------
Operating (loss) income (7,189) (17,593) 15,965 8,161 6,000
Other (income), net (538) (4,892) (883) (441) (517)
-------- -------- -------- -------- -------
(Loss) income before taxes (6,651) (12,701) 16,848 8,602 6,517
(Benefit) provision for taxes (1,403) (931) (2,751) 893 504
-------- -------- -------- -------- -------
Net (loss) income $ (5,248) $(11,770) $ 19,599 $ 7,709 $ 6,013
======== ======== ======== ======== =======
Basic (loss) earnings per share(b) $ (0.19) $ (0.45) $ 0.89 $ 0.35 $ 0.27
======== ======== ======== ======== =======
Diluted (loss) earnings per share(b) $ (0.19) $ (0.45) $ 0.81 $ 0.33 $ 0.26
======== ======== ======== ======== =======
BALANCE SHEET DATA:
Working capital $128,383 $131,003 $ 52,600 $ 37,447 $20,813
======== ======== ======== ======== =======
Total assets $198,076 $213,666 $134,003 $ 96,647 $72,082
======== ======== ======== ======== =======
Total debt $ 14,934(c) $ 15,416 $ 19,555 $ 29,735 $15,599
======== ======== ======== ======== =======
Total stockholders' equity $149,156 $154,337 $ 66,290 $ 42,696 $36,105
======== ======== ======== ======== =======
(a) All amounts have been presented in accordance with the Emerging Issue Task
Force No. 00-25, Vendor Income Statement Characterization of Consideration
from a Vendor to a Retailer, which requires the reclassification of certain
variable selling expenses from being reported as an operating expense to a
reduction of net sales. For further discussion, see Note 1 to the
Consolidated Financial Statements.
(b) Per share data for all periods presented has been restated to reflect a
two-for-one stock split in Fiscal 2000. For further discussion, see Note 11
to the Consolidated Financial Statements.
(c) This debt was retired in August 2002. For further discussion, see Notes 9
and 24 to the Consolidated Financial Statements.
-14-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis should be read in conjunction with the
Fiscal 2002 consolidated financial statements and the related notes thereto.
Except for historical information contained herein, the matters discussed below
are forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such statements involve
risks and uncertainties, including but not limited to economic, governmental,
political, competitive and technological factors affecting Concord's operations,
markets, products, prices and other factors discussed elsewhere in this report
and the documents filed with the Securities and Exchange Commission ("SEC").
These factors may cause results to differ materially from the statements made in
this report or otherwise made by or on behalf of Concord.
OVERVIEW
We design, develop, manufacture and sell on a worldwide basis high quality,
popularly priced, easy-to-use image capture products. Our products include
digital image capture devices, 35 mm and APS traditional and single use cameras
and instant cameras. We manufacture and assemble our products in the People's
Republic of China ("PRC") for sales to retailers under our brand names, on a
premium and private label basis, and to Original Equipment Manufacturers
("OEM").
Over the last several years, we have evolved from a manufacturer and distributor
of cameras to a contract manufacturer of high quality image capture products
with strong retail distribution. We have improved the quality and capacity of
our manufacturing operations to a world class standard and have acquired
additional core technology, design and engineering expertise which has, in turn,
enabled us to improve product performance and picture quality and to respond
quickly to customer requirements.
We recently established and registered a wholly foreign owned enterprise
("WFOE"), named Concord Camera (Shenzhen) Company Limited ("Concord Shenzhen"),
pursuant to the law of the PRC concerning enterprises with sole foreign
investment. The business license of Concord Shenzhen, which is a wholly-owned
subsidiary of Concord HK, permits it to manufacture and sell a variety of
cameras and camera components and will permit it to make sales both in the PRC
and internationally of the products it manufactures. We expect that Concord
Shenzhen will begin operations in the PRC during Fiscal 2003.
We sell directly to our retail sales and distribution ("RSD") customers on a
worldwide basis through offices and/or representatives in the United States,
Latin America and Canada ("Concord Americas"), offices in the United Kingdom,
France and Germany ("Concord Europe"), and offices in Hong Kong ("Concord
Asia"). Concord Asia is involved in all OEM sales as well as free on board
("FOB") Hong Kong sales to large retail customers in the Americas, Asia, and
Europe. These divisions market our products under the brand names Concord(R),
Polaroid(R), Concord EyeQ(R), Keystone(R), Le Clic(R), Argus(R), Apex(R),
Goldline(R) and Fun Shooter(R).
-15-
As a contract manufacturer, we have also developed products with some of the
world's largest and most successful film, camera, global communication and
technology companies. Our relationships with our OEM customers are handled by
our in-house sales and marketing personnel. In Fiscal 2002, no single OEM
customer's purchases represented more than 10% of our net total sales.
As a result of our strategy over the last several years, our sales mix has
become more diversified. Sales to our RSD customers accounted for approximately
74.0% of total net sales for Fiscal 2002 compared to approximately 32.3% of
total net sales during Fiscal 2000 and sales to our OEM customers represented
26.0% of total net sales in Fiscal 2002 compared to 67.7% of total net sales in
Fiscal 2000. The evolution of our OEM and branded products into digital and
other image capture devices has diversified our product base. In Fiscal 2002,
our second year of selling digital image capture devices, such products
accounted for approximately 10.7% of our total net sales. Net sales of single
use cameras accounted for approximately 70.0% of total net sales in Fiscal 2002,
compared to approximately 48.2% in Fiscal 2000. Although single use camera sales
represented a substantial portion of our total net sales in Fiscal 2002, in the
future we anticipate this percentage to decrease as sales of digital image
capture devices increase.
In accordance with Emerging Issues Task Force ("EITF") Issue No. 00-25, Vendor
Income Statement Characterization of Consideration from a Vendor to a Retailer,
which addresses the operating statement classification of consideration between
a vendor and a retailer, we have reclassified certain variable selling expenses
including advertising allowances and other discounts and allowances from being
reported as a selling expense to a reduction of net sales. As a result of
adopting EITF 00-25 in the second quarter of Fiscal 2002 and reclassifying
certain variable selling expenses for all amounts presented, we are reporting
lower net sales, lower gross margins and lower selling expenses for all Fiscal
Years discussed. Approximately $2,561,000, $3,352,000, and $5,439,000 of
variable selling expenses, consisting principally of advertising and promotional
allowances, were reclassified as a reduction of net sales, resulting in a
corresponding reduction of gross profit and selling expenses, with no effect on
net income, for Fiscal 2002, Fiscal 2001, and Fiscal 2000, respectively.
For Fiscal 2002, our RSD and OEM net sales were approximately $95,685,000 and
$33,632,000, respectively. For Fiscal 2002, our RSD net sales include FOB Hong
Kong sales of Concord Asia to its customers in the Americas of approximately
$32,622,000 and to its customers in Europe of approximately $13,812,000.
To the extent possible, we will attempt to continue obtaining additional
business from our current customers, and to establish new OEM and RSD
relationships by positioning ourselves as an innovative designer, developer,
manufacturer, and marketer of high quality, popularly priced image capture
products.
-16-
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the Consolidated Financial Statements and accompanying notes. Our application of
accounting policies affects these estimates and assumptions. Actual results
could differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies affect our more significant
estimates and assumptions used in the preparation of our Consolidated Financial
Statements and accompanying notes:
Provision for Doubtful Accounts
The provision for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts owed to us could be adversely affected.
Inventory
Inventory purchases and commitments are based upon future demand forecasts. If
there is a sudden and significant decrease in demand for our products, or there
is a higher rate of inventory obsolescence because of rapidly changing
technology and customer requirements, we may be required to increase our
inventory allowances resulting from lower of cost or market value adjustments
and our gross profit could be adversely affected.
Deferred Taxes
The deferred tax valuation allowance is based on our assessment of the
realizability of our deferred tax assets on an ongoing basis and may be adjusted
from time to time as necessary. In determining the valuation allowance, we have
considered future taxable income and the feasibility of tax planning
initiatives. Should we determine that it is more likely than not that we will
realize certain of our deferred tax assets in the future, an adjustment would be
required to reduce the existing valuation allowance and increase income. On the
contrary, if we determine that we would not be able to realize our recorded
deferred tax asset, an adjustment to increase the valuation allowance would be
charged to the results of operations in the period such conclusion was made.
Such charge could have an adverse effect on our provision for income taxes
included in our results of operations.
Sales Returns
A provision for sales returns is established based on historical trends in
product returns. If future returns are higher than we predicted based on the
historical data, our net sales could be adversely affected.
-17-
Variable Stock-Based Compensation Accounting for Repriced Stock Options
As a result of an exchange offer for outstanding stock option grants that was
consummated in the Fall of 2001, we are now required to apply variable
stock-based compensation accounting for these grants until the options are
exercised, cancelled or expired. For Fiscal 2002, we did not record any variable
stock-based compensation expense in the consolidated statement of operations
because our closing Common Stock price on June 29, 2002 was below the new
repriced stock options' exercise price of $5.97. Because the determination of
variable stock-based compensation expense associated with the repriced stock
options is significantly dependent upon our closing stock price at the end of
each prospective reporting period, it is not possible to determine its future
impact, either favorable or unfavorable, on our consolidated financial
statements.
RESULTS OF OPERATIONS
Fiscal 2002 Compared to Fiscal 2001
Net Sales
Net sales for Fiscal 2002 were approximately $129,317,000, a decrease of
approximately $50,744,000, or 28.2%, as compared to net sales for Fiscal 2001.
The decrease in net sales resulted principally from decreases in sales to OEM
customers partially offset by an increase in sales to new and existing RSD
customers. On a comparative basis, in Fiscal 2002 the decrease in OEM sales was
attributed to the lack of sales of a certain digital product to a former
customer, significantly lower sales of instant cameras, and decreases in sales
of both digital and film based products. The increase in RSD net sales was
primarily due to increases in sales to leading retailers in the Americas. For
Fiscal 2002, RSD customer net sales were approximately $95,685,000, an increase
of approximately $12,388,000, or 14.9%, as compared to Fiscal 2001. For Fiscal
2002, OEM net sales were approximately $33,632,000, a decrease of approximately
$63,132,000, or 65.2% as compared to Fiscal 2001.
Net sales of Concord Asia for Fiscal 2002, excluding FOB Hong Kong net sales to
its customers in the Americas and Europe of approximately $46,434,000, were
approximately $34,356,000, a decrease of approximately $62,550,000, or 64.5%, as
compared to Fiscal 2001. The decrease was due to lower OEM net sales.
Net sales of Concord Americas for Fiscal 2002, including FOB Hong Kong net sales
to customers in the Americas, were approximately $68,704,000, an increase of
approximately $11,864,000, or 20.9% as compared to Fiscal 2001. The increase was
primarily due to the success of certain new marketing programs, increased
penetration with existing customers, and the positive sell through of certain
new products.
Net sales of Concord Europe for Fiscal 2002, including FOB Hong Kong net sales
to customers in Europe, were approximately $26,257,000, a decrease of
approximately $58,000, or 0.2% as compared to Fiscal 2001.
-18-
Gross Profit
Gross profit for Fiscal 2002 was approximately $18,972,000, a decrease of
approximately $8,491,000, or 30.9% as compared to Fiscal 2001. Gross profit,
expressed as a percentage of net sales, decreased to 14.7% for Fiscal 2002 as
compared to 15.3% for Fiscal 2001. The decrease in gross profit as a percentage
of net sales was attributable to: (i) significantly lower net sales, (ii) a
digital inventory provision of approximately $2,250,000, (iii) competitive price
pressures and unfavorable absorption of manufacturing overhead and labor
utilization, (iv) a provision of approximately $1,011,000 related to specific
product inventory for Polaroid Corporation ("Polaroid") which filed for
bankruptcy in October 2001 and (v) higher product development costs. Included in
gross profit for Fiscal 2001 was approximately $4,714,000 of inventory
provisions and approximately $500,000 associated with a restructuring and cost
containment program ("Restructuring Initiative") that was initiated in June
2001. Product development costs and percentages of net sales for Fiscal 2002 and
2001 were approximately $7,604,000 (5.9%) and $6,413,000 (3.6%), respectively.
We first began selling digital products in Fiscal 2001. Our product mix, which
historically consisted entirely of traditional and single use cameras, is
anticipated to continue changing with the introduction of more digital products
in the future. Digital products, as compared to traditional and single use
cameras, sell at significantly higher unit prices but generate lower gross
margins as a percentage of net sales. However, digital products generate greater
gross profit dollars per unit than traditional and single use cameras.
Consequently, as digital products increase as a percentage of our sales mix, we
expect to experience a lower overall gross profit margin percentage and higher
revenue and gross profit dollars per unit sold.
In addition, as we manufacture more digital products, we increase the risk of
gross profit fluctuations due to digital component availability and increased
costs. Since component availability can fluctuate and is subject to possible
procurement delays and other constraints, it could possibly limit net profit
growth and might have a negative impact on net sales and gross margins. Digital
camera products are also subject to rapid technological changes, price erosion
and obsolescence to a greater extent than traditional camera products. Because
of rapid technological changes, some of our digital camera products became
obsolete and consequently we recorded a significant inventory provision related
to digital inventory during Fiscal 2002.
Operating Expenses
Operating expenses, consisting of selling, general and administrative, recovery
of operating expenses, net, terminated acquisition costs and interest expenses,
decreased by approximately $16,373,000, or 36.3%, to $28,683,000 for Fiscal 2002
from approximately $45,056,000 for Fiscal 2001. Operating expenses, as a
percentage of net sales, decreased to 22.2% in Fiscal 2002 from 25.0% in Fiscal
2001. Included in general and administrative expenses for Fiscal 2002 were
certain amounts aggregating $3,033,000 comprised of (i) a provision related to
an accounts receivable of $1,611,000 associated with Polaroid's bankruptcy
filing; (ii) a net provision related to an accounts receivable of $672,000
associated with Kmart Corporation's bankruptcy filing in January 2002; (iii) a
charitable contribution that the Company made for victims of the September 11,
2001 terrorist attack in the amount of $1,063,000; and (iv) a reversal in June
2002 of an accrual associated with the Restructuring Initiative of approximately
$313,000 which resulted in a reduction of general and administrative expenses
("Restructuring Reversal"). The Restructuring Initiative was completed in June
2002. In Fiscal 2001, general and administrative expenses included an
approximate $15,800,000 provision ("OEM Provision") for doubtful accounts for an
accounts receivable associated with a former OEM customer. Also, as a result of
the Restructuring Initiative, general and administrative expenses included
approximately $900,000 ("Restructuring Charge") of the approximate $1,400,000
restructuring charge that the Company recorded in its fourth quarter of Fiscal
2001. Also, operating expenses for Fiscal 2001 included expenses of
approximately $800,000 incurred in connection with a proposed acquisition that
was not consummated.
-19-
Selling expenses decreased by approximately $1,805,000, or 22.2%, to
approximately $6,343,000 for Fiscal 2002 from approximately $8,149,000 for
Fiscal 2001. The decrease was primarily due to a significant decline in net
sales resulting in lower freight and certain other variable selling expenses, as
well as a decrease in salaries, travel and entertainment and tradeshow expenses.
Selling expenses, as a percentage of net sales, increased to 4.9% for Fiscal
2002 from 4.5% for Fiscal 2001.
General and administrative expenses decreased by approximately $12,348,000, or
37.1%, to approximately $20,967,000 for Fiscal 2002 from approximately
$33,315,000 for Fiscal 2001. As a percentage of net sales, general and
administrative expenses decreased to 16.2% for Fiscal 2002 from 18.5% for Fiscal
2001.
In April 2002, we uncovered a fraudulent scheme including check forgery by a
former employee, which resulted in the embezzlement of approximately $1,250,000
over an eighteen-month period ending in April 2002, the preponderance of which
occurred in Fiscal 2002. To date, our ongoing investigation confirms that the
former employee acted alone and the misappropriated funds have been identified.
We expect to recover the full amount of the embezzlement from a combination of
insurance proceeds and assets secured and to be recovered from the individual.
Accordingly, the recovery of approximately $1,250,000, net of an approximate
$95,000 cash recovery resulting in a net receivable of $1,155,000, has been
recorded as an accrued receivable and is included in prepaid and other current
assets in the accompanying consolidated balance sheet as of June 29, 2002. In
addition, we have recorded under the caption recovery of operating expenses, net
in the accompanying consolidated statement of operations for Fiscal 2002,
approximately $1,150,000 related to the recovery, which is net of approximately
$100,000 of expenses related to the investigation and recovery efforts. The
entire amount of the recovery was recorded in the third quarter of Fiscal 2002
due to the fact that it is impractical to determine the impact on Fiscal 2002
quarterly periods. The embezzled amounts related to the prior fiscal year were
not significant.
Terminated acquisition costs of approximately $800,000 in Fiscal 2001 related to
a proposed acquisition that was not consummated. Negotiations regarding this
acquisition were terminated in September 2000.
-20-
Interest expense decreased by approximately $270,000, or 9.7%, to approximately
$2,522,000 for Fiscal 2002 from approximately $2,793,000 for Fiscal 2001. The
lower interest expense in Fiscal 2002 was attributable to the decreased use of
short-term borrowings and the repayment of certain capital leases.
Other (Income), Net
Other (income), net was approximately $3,060,000 and $4,892,000 for Fiscal 2002
and Fiscal 2001, respectively. Other (income), net primarily includes investment
income, foreign exchange gains and losses, directors' fees, and certain public
relations costs. The decrease in Fiscal 2002 was primarily attributable to lower
investment income offset by approximately $1,178,000 of income from an
arbitration award.
Income Taxes
Since July 1998, the annual tax rate of Concord Camera HK Limited ("Concord HK")
has been 8.0%. As a company engaged in processing activities in the PRC, we
currently do not pay taxes or import/export duties in the PRC, but there can be
no assurance that we will not be required to pay such taxes or duties in the
future. Hong Kong is taxed separately from the PRC.
As a company engaged in processing activities in the PRC, we have never paid any
income or turnover tax to the PRC on account of those activities in the PRC.
Existing PRC statutes can be construed as providing for a minimum of 10% to 15%
income tax and a 3% turnover tax on our processing activities; however, the PRC
has never attempted to enforce those statutes. We have been advised that the
PRC's State Tax Bureau is reviewing the applicability of those statutes to
processing activities of the type engaged in by us, but it has not yet announced
any final decisions as to the taxability of those activities. After consultation
with our tax advisors, we do not believe that any tax exposure we may have on
account of our processing operations in the PRC will be material to our
financial statements.
We do not provide for U.S. federal income taxes on undistributed earnings of our
foreign subsidiaries because we intend to permanently reinvest such earnings.
Undistributed earnings of our foreign subsidiaries approximated $41,761,000 as
of June 29, 2002. It is not practicable to estimate the amount of tax that might
be payable on the eventual remittance of such earnings. Upon eventual
remittance, no withholding taxes will be payable. For U.S. federal tax purposes,
as of June 29, 2002, we have net operating loss carryforwards of approximately
$12,630,000, of which approximately $4,257,000 was attributable to deductions
associated with stock option exercises, that expire as follows: $854,000 in
2008, $2,716,000 in 2009, $4,094,000 in 2010, $390,000 in 2014, and the balance
thereafter. For U.S. state tax purposes, we have net operating losses of
approximately $1,705,000 that begin to expire in 2021. Additionally, we have
approximately $19,562,000 of which $16,525,000 relates to Hong Kong, of net
operating loss carryforwards related to our foreign operations which have no
expiration dates.
As of June 29, 2002, and June 30, 2001, we evaluated our deferred tax assets. As
part of assessing the realizability of our deferred tax assets, we evaluated
whether it is more likely than not that some portion, or all of our deferred tax
assets, will be realized. The realization of our deferred tax assets relates
directly to our tax planning strategies and our ability to generate taxable
income for U.S. federal and state and Hong Kong tax purposes. As of June 29,
2002 and June 30, 2001 based on all the available evidence, we determined that
it is more likely than not that our domestic and Hong Kong net deferred tax
assets will be fully realized. Consequently, we did not adjust the valuation
allowance. We also evaluated our European net deferred tax assets and determined
that $1,154,000 and $2,181,000 were to be recorded as a valuation allowance as
of June 29, 2002 and June 30, 2001, respectively. For Fiscal 2002, Fiscal 2001
and Fiscal 2000, our effective tax rates were (21.1%), (7.3%), and (16.3%),
respectively. Our future effective tax rate will depend upon the mix between
foreign and domestic taxable income and losses, and the statutory rates of the
related tax jurisdictions.
-21-
Net Loss
As a result of the matters described above, we reported a net loss of
approximately $5,248,000, or $0.19 per share, for Fiscal 2002 as compared to a
net loss of approximately $11,770,000, or $0.45 per share, for Fiscal 2001.
Fiscal 2001 Compared to Fiscal 2000
Net Sales
Net sales for Fiscal 2001 were approximately $180,061,000, an increase of
approximately $12,341,000, or 7.4%, as compared to net sales for Fiscal 2000.
The increase in net sales resulted principally from increases in sales to new
and existing RSD customers partially offset by a decrease in sales to OEM
customers. RSD net sales increased primarily due to increased sales to new and
existing RSD customers of digital and single use camera products partially
offset by a decrease in sales of other camera products. In Fiscal 2001, RSD net
sales were approximately $83,297,000, an increase of approximately $29,047,000,
or 53.5% as compared to Fiscal 2000. In Fiscal 2001, OEM net sales were
approximately $96,764,000, a decrease of approximately $16,706,000, or 14.7% as
compared to Fiscal 2000.
Net sales of Concord Asia for Fiscal 2001, excluding FOB Hong Kong net sales to
its customers in the Americas and Europe of approximately $47,008,000, were
approximately $96,906,000, a decrease of approximately $16,580,000, or 14.6% as
compared to Fiscal 2000. The decrease resulted from lower sales to existing OEM
customers partially offset by an increase in sales to new OEM customers.
Net sales of Concord Americas for Fiscal 2001, including FOB Hong Kong net sales
to customers in the Americas were approximately $56,840,000, an increase of
approximately $27,892,000, or 96.4% as compared to Fiscal 2000. The increase was
primarily due to the success of certain programs with new and existing
customers, increased penetration with existing customers and the positive sell
through of certain new products.
Net sales of Concord Europe for Fiscal 2001, including FOB Hong Kong net sales
to customers in Europe, were approximately $26,315,000, an increase of
approximately $1,029,000, or 4.1% as compared to Fiscal 2000. This increase
resulted primarily from the successful implementation of new programs with both
existing and new customers.
-22-
Gross Profit
Gross profit for Fiscal 2001 was approximately $27,463,000, a decrease of
approximately $14,108,000, or 33.9% as compared to Fiscal 2000. Gross profit, as
a percentage of net sales, decreased to 15.3% for Fiscal 2001 as compared to
24.8% for Fiscal 2000. The decrease in gross profit as a percentage of net sales
in Fiscal 2001 compared to Fiscal 2000 was attributable to (i) competitive price
pressures and unfavorable absorption of manufacturing overhead and labor
utilization, (ii) nonrecurring charges of approximately $4,714,000 recorded in
the fourth quarter of Fiscal 2001 related to inventory provisions and
approximately $500,000 recorded in the fourth quarter of Fiscal 2001 related to
the Restructuring Initiative, (iii) higher product development costs and (iv)
revenues from the sale of digital products. Of the $4,714,000 inventory
provision, approximately $2,714,000 related to certain specific product
inventory that was intended for a former OEM customer and approximately
$2,000,000 resulted from inventory being written down to lower of cost or market
value. Product development costs and percentages of net sales for Fiscal 2001
and Fiscal 2000 were approximately $6,413,000 (3.6%) and $4,921,000 (2.9%),
respectively.
Operating Expenses
Operating expenses, consisting of selling, general and administrative,
terminated acquisition costs and interest expenses, increased by approximately
$19,450,000, or 76.0%, to $45,056,000 for Fiscal 2001 from approximately
$25,606,000 for Fiscal 2000. Also, for Fiscal 2001, operating expenses included
approximately $800,000 incurred in connection with a proposed acquisition that
was not consummated. Operating expenses, as a percentage of net sales, increased
to 25.0% for Fiscal 2001 from 15.3% for Fiscal 2000.
Selling expenses increased by approximately $2,444,000, or 42.8%, to
approximately $8,149,000 for Fiscal 2001 from approximately $5,705,000 for
Fiscal 2000. The increase was primarily due to higher freight and certain
variable selling expenses, resulting from an increase in net sales, as well as
higher salaries. Selling expenses as a percentage of net sales, increased to
4.5% for Fiscal 2001 from 3.4% for Fiscal 2000.
General and administrative expenses increased by approximately $16,682,000, or
100.3%, to approximately $33,315,000 for Fiscal 2001 from approximately
$16,633,000 for Fiscal 2000. General and administrative expenses as a percentage
of net sales, increased to 18.5% for Fiscal 2001 from 9.9% for Fiscal 2000.
Interest expense decreased by approximately $476,000, or 14.6%, to approximately
$2,793,000 for Fiscal 2001 from approximately $3,269,000 for Fiscal 2000. The
lower interest expense in Fiscal 2001 was attributable to a reduction in
short-term borrowings and the repayment of certain capital leases.
-23-
Other (Income), Net
Other (income), net was approximately $4,892,000 and $882,000 for Fiscal 2001
and Fiscal 2000, respectively. Other (income), net primarily includes investment
income, foreign exchange gains and losses, directors' fees, and certain public
relations costs. The increase in Fiscal 2001 was primarily attributable to
higher investment income resulting from the invested proceeds from our public
equity offering consummated in the Fall of 2000.
Income Taxes
As of July 1, 2000, after assessing the realizability of the domestic net
deferred tax asset, we reversed the existing valuation allowance for the
domestic net deferred tax asset. Accordingly, the valuation allowance was
reversed in full and approximately $4,518,000 was recognized as a deferred tax
asset at July 1, 2000 and a corresponding deferred tax benefit was also
recognized. We recognized a net tax benefit of $2,751,000 for Fiscal 2000, of
which approximately $1,100,000 related to current tax expense for foreign
operations.
Net (Loss) Income
As a result of the matters described above, we reported a net loss of
approximately $11,770,000, or $0.45 per share, for Fiscal 2001 as compared to
net income of approximately $19,599,000, or $0.81 per diluted share, for Fiscal
2000, which included the net deferred tax benefit of approximately $2,751,000,
or $0.11 per diluted share, related to the tax benefit.
Foreign Currency Transactions
We operate on a worldwide basis and our results may be adversely or positively
affected by fluctuations of various foreign currencies against the U.S. Dollar,
specifically, the Canadian Dollar, the European Euro, British Pound Sterling,
PRC Renminbi, Hong Kong Dollar and the Japanese Yen. Our foreign subsidiaries
purchase their inventories in U.S. Dollars and the majority of their sales are
in U.S. Dollars. Accordingly, the U.S. Dollar is the functional currency.
Certain net sales to our customers and purchases of certain components and
services are transacted in local currency including Japanese Yen, thereby
creating an exposure to fluctuations in foreign currency exchange rates. The
translation from the applicable currencies to U.S. Dollars is performed for
balance sheet accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using a weighted average
exchange rate during the period. Gains or losses resulting from foreign currency
transactions and remeasurement are included in "Other (income), net" in the
accompanying consolidated statements of operations.
-24-
LIQUIDITY AND CAPITAL RESOURCES
On January 22, 2002, the Securities and Exchange Commission issued an
interpretive release on disclosures related to liquidity and capital resources.
This release requires us to disclose factors that are likely to affect our
liquidity trends. We are not aware of factors that are reasonably likely to
adversely affect liquidity trends, other than those factors summarized under the
caption "Risk Factors" in this report. We do not have, nor do we engage in,
transactions with any special purpose entities. We are not engaged in hedging
activities and had no forward exchange contracts outstanding at June 29, 2002.
In the ordinary course of business, we enter into operating lease commitments,
purchase commitments and other contractual obligations. These transactions are
recognized in the our financial statements in accordance with generally accepted
accounting principles in the United States, and are more fully discussed below.
We believe that our cash and cash equivalents, short-term investments,
anticipated cash flow from operations, and amounts available under our credit
facilities provide sufficient liquidity and capital resources for our
anticipated short-term working capital and capital expenditure requirements as
well as our anticipated long-term working capital and capital expenditure
requirements for the foreseeable future.
Working Capital - At June 29, 2002, we had working capital of approximately
$128,383,000 compared to approximately $131,003,000 at June 30, 2001. Total cash
and cash equivalents and short-term investment amounts included in working
capital at June 29, 2002 and June 30, 2001 were approximately $103,868,000 and
$107,344,000, respectively. In August 2002, we repurchased our $15,000,000
Senior Notes at slightly below par, without penalty, and retired all of our
outstanding long-term debt. This transaction reduced our cash and cash
equivalents, working capital, and long-term debt amounts as well as our future
cash interest costs.
Cash Provided by Operations - Cash used in operations in Fiscal 2002 was
approximately $1,134,000, which compared favorably to cash used in operations of
approximately $3,441,000 for Fiscal 2001 and unfavorably to cash provided by
operations of approximately $9,661,000 for Fiscal 2000. The changes in cash
provided by operating activities for the respective Fiscal Years were primarily
attributable to changes in accounts receivable, inventories and accounts
payable.
Cash Used in Investing Activities - Capital expenditures for Fiscal 2002, Fiscal
2001 and Fiscal 2000 were approximately $2,141,000, $7,488,000, and $7,792,000,
respectively, and related primarily to expenditures on plant and equipment
purchased for our manufacturing facility in the PRC. The decrease in Fiscal 2002
was primarily the result of significantly lower expenditures on plant and
equipment purchases for our manufacturing facility in the PRC due to the decline
in sales. We anticipate capital expenditures will increase substantially over
those in Fiscal 2002 due to increased investments in plant and equipment at our
manufacturing facility in the PRC in anticipation for increased revenue,
primarily from OEM sales. For Fiscal 2002, the increase in cash from investing
activities related to the maturity of certain short-term investments made in
Fiscal 2001.
-25-
Cash Used in Financing Activities - Cash used in financing activities in Fiscal
2002 was approximately $202,000. This resulted from repayments of capital lease
obligations partially offset by proceeds received from the exercise of stock
options. Cash provided by financing activities in Fiscal 2001 was approximately
$93,883,000, which was primarily attributable to our public equity offering
(described more fully below) in the Fall of 2000. This compared to Cash used in
financing activities in Fiscal 2000 of approximately $8,185,000. In Fiscal 2000,
we refinanced certain short-term debt borrowed under our Hong Kong Financing and
United Kingdom Credit Facilities (each facility is described more fully below)
and paid off certain other high interest cost obligations including certain
leases.
Operating Leases- We entered into operating leases in the ordinary course of
business (e.g., warehouse facilities, office space and equipment) where the
economic profile was favorable. The effects of outstanding leases are not
material to us in terms of either annual cash flow or total future minimum
payments. See Note 15, Commitments and Contingencies, to the consolidated
financial statements.
Purchase Commitments - As part of the ordinary course of our business, we enter
into and have purchase commitments for materials, supplies, services, and
property, plant and equipment. In the aggregate, such commitments are not at
prices in excess of current market and typically do not exceed one year.
Related Party Transactions- We entered into related party transactions as
discussed in Note 17, Related Party Transactions, to the consolidated financial
statements. These transactions do not materially affect our results of
operations, cash flows or financial condition.
Other Contractual Obligations - We do not have any material financial guarantees
or other contractual commitments that are reasonably likely to adversely affect
liquidity. See Hong Kong Financing Facilities for information about our
financial guarantees.
Hong Kong Financing Facilities - Concord HK has various financing and revolving
credit facilities in place providing an aggregate of approximately $23,500,000
in borrowing capacity. Certain of the revolving credit facilities are
denominated in Hong Kong dollars. Since 1983 the Hong Kong dollar has been
pegged to the United States dollar. The revolving credit facilities are
comprised of 1) an approximately $11,000,000 Import Facility, 2) an
approximately $2,600,000 Packing Credit and Export Facility, 3) an approximately
$1,900,000 Foreign Exchange Facility and 4) an $8,000,000 Accounts Receivable
Financing Facility (collectively the "Hong Kong Financing Facilities"). The
$8,000,000 Accounts Receivable Financing Facility is secured by certain accounts
receivable of Concord HK and guaranteed by us. We also guarantee the remaining
amount of approximately $15,500,000 under the Hong Kong Financing Facilities.
Availability under the Accounts Receivable Financing Facility is subject to
advance formulas based on Eligible Accounts Receivable and all the credit
facilities are subject to certain financial ratios and covenants. The revolving
credit facilities bear interest at variable rates. At June 29, 2002, there were
no amounts outstanding under the Hong Kong Financing Facilities.
-26-
United Kingdom Credit Facility - In November 1999, our United Kingdom subsidiary
obtained a United Kingdom credit facility (the "UK Facility") that is secured by
substantially all of our United Kingdom subsidiary's assets. The UK Facility
bears interest at 1.5% above the UK prime lending rate and was principally
utilized for working capital needs and allows borrowings of up to approximately
$1,100,000. At June 29, 2002, there were no amounts outstanding under the UK
Facility.
United States Credit Facility - In June 2000, one of the Company's subsidiaries
entered into a credit facility (the "US Facility") with a lender to provide up
to $5,000,000 of unsecured working capital. The US Facility bore interest at
1.75% above the London Interbank Offer Rate and expired in June 2002. No amounts
were outstanding under the US Facility at June 29, 2002.
Exchange Offer - On August 28, 2001, we launched an offer to exchange
outstanding stock options that had an exercise price of more than $7.00 per
share for new options to purchase 75% of the shares subject to the outstanding
options at an exercise price of $5.97 per share (the closing price of the Common
Stock reported on the Nasdaq National Market on the date the Board of Directors
approved the exchange offer.) The exchange offer expired on October 16, 2001.
Options to purchase 1,375,876 shares of Common Stock were tendered in the
exchange offer and accepted by us and cancelled and new options to purchase
1,031,908 shares of Common Stock were issued in exchange for the cancelled
options. As a result of the exchange offer, we are now required to apply
variable accounting to these stock option grants until the options are
exercised, cancelled or expire. For Fiscal 2002, we did not record any variable
stock-based compensation expense in the consolidated statement of operations
because our closing Common Stock price on June 29, 2002 was below the exercise
price of $5.97. Because the determination of variable accounting expense
associated with the repriced stock options is dependent, in part, on our closing
stock price at the end of each prospective reporting period, it is not possible
to determine its future impact, either favorable or unfavorable, on our
financial statements.
Common Stock Buy-Back Programs - In Fiscal 2000, we purchased 190,888 shares of
our Common Stock on the open market for approximately $759,000 as part of a
Board of Directors approved Common Stock buy-back program. In February 2001, we
adopted an additional share repurchase program pursuant to which the Board of
Directors allocated up to $10,000,000 for the repurchase of shares of our Common
Stock. We have not repurchased any shares pending completion of a review of our
other capital investment opportunities but continue to believe that our Common
Stock is significantly undervalued at current prices.
Public Equity Offering - On September 26, 2000, pursuant to an underwritten
public offering, we sold 3,900,000 shares of our Common Stock at $23.00 per
share. On October 2, 2000, pursuant to an over-allotment option granted to the
underwriters, we sold an additional 585,000 shares of our Common Stock at a
price of $23.00 per share. We received net proceeds of approximately $96,881,000
from the offering, after deducting offering costs and underwriting fees of
approximately $6,274,000 from the gross proceeds of $103,155,000. The use of the
offering proceeds was intended for the repayment of outstanding indebtedness
including capital leases, for capital expenditures and for general corporate and
strategic purposes, including working capital and investments in new
technologies, product lines and complementary businesses.
-27-
Stock Split - On April 14, 2000, we effected a two-for-one stock split of our
Common Stock through a stock dividend to shareholders of record on March 27,
2000. Accordingly, share and per-share data for all periods presented in this
report have been restated to reflect the stock split.
Senior Notes - On July 30, 1998, we consummated a private placement of
$15,000,000 of unsecured senior notes that bore interest at 11%. In August 2002,
we repurchased all of these senior notes at slightly below par.
License Agreement - On August 26, 2002, our Company announced it entered into
two trademark licensing agreements, with the entity that purchased the assets of
Polaroid in an asset purchase transaction approved by the U.S. Bankruptcy Court
supervising the Polaroid reorganization. The two license agreements provide the
Company with the exclusive, worldwide use of the Polaroid brand trademark in
connection with the manufacture, distribution, promotion and sale of single-use
cameras and traditional film based cameras, including zoom cameras, and certain
related accessories. The licenses do not include instant or digital cameras.
Each license includes an initial term of three and a half years and may be
renewed, at our option, for an additional three-year period. Each license
agreement includes provisions for the payment of $3,000,000 of minimum
royalties, which will be fully credited against percentage royalties. In August
2002, we paid a total of $4,000,000, which represented $2,000,000 for each
license agreement, as partial payment of the minimum royalties.
Growth Opportunities - We are evaluating various growth opportunities that could
require significant funding commitments. We have from time to time held, and
will continue to hold, discussions and negotiations with (i) companies that
represent potential acquisition or investment opportunities, (ii) potential
strategic and financial investors who have expressed an interest in making an
investment in or acquiring us, (iii) potential joint venture partners looking
toward formation of strategic alliances that would broaden our product base or
enable us to enter new lines of business and (iv) potential new and existing OEM
customers where the design, development and production of new products,
including certain new technologies, would enable us to expand our existing
business, and enter new markets including new ventures focusing on wireless
connectivity and other new communication technologies. We recently engaged an
investment bank to help us attempt to identify suitable acquisition targets.
However, there can be no assurance that any definitive agreement will be reached
regarding any of the foregoing, nor does management believe that such agreements
are necessary for the successful implementation of our strategic plans.
-28-
RISK FACTORS
You should carefully consider the following risks regarding our Company. These
and other risks could materially and adversely affect our business, operating
results or financial condition. You should also refer to the other information
contained or incorporated by reference in this report.
Most of our operations are subject to control by the People's Republic of China
(PRC) and several of its local governmental agencies.
The continuing viability of our PRC agreements is crucial to our business
operations in the PRC. We manufacture a majority of the components used in our
cameras and assemble all of our manufactured finished products in the PRC. Our
agreements with various PRC government or quasi-government agencies currently
provide us with approximately 4,000 workers. We are responsible for their wages,
food and housing and must comply with a variety of local labor and employee
benefit laws covering these workers. While we believe we are in substantial
compliance with applicable laws as currently enforced, these laws are subject to
modification and interpretation by the applicable governmental authorities. We
cannot predict the impact of any future modifications to or strict enforcement
of the existing laws. In addition, the termination or material modification of
any of our agreements with the PRC government and quasi-government agencies
could have a material adverse impact on our revenues and earnings.
Political and economic uncertainties in the PRC could affect our business.
Our business could be adversely affected by the imposition in the PRC of
austerity measures intended to reduce inflation, which could result in the
inadequate development or maintenance of infrastructure, the unavailability of
adequate power and water supplies, transportation, raw material and parts, or a
deterioration of the general political, economic or social environment in the
PRC.
Relocation time and expenses could result in substantial losses.
If we determine it is necessary to relocate our manufacturing facilities from
the PRC, due to confiscation, expropriation, nationalization, embargoes, or
other governmental restrictions, we would incur substantial operating and
capital losses including losses resulting from business interruption and delays
in production. In addition, as a result of a relocation of our manufacturing
equipment and other assets, we would likely incur relatively higher
manufacturing costs, which could reduce sales and decrease the current margin on
the products we previously manufactured in the PRC. Relocation of our
manufacturing operations would also result in disruption in the delivery of our
products, which could, in turn, reduce demand for our products in the future.
There is also a risk of business interruption as a result of political events,
the costs of which may exceed our insurance coverage.
The PRC has experienced political disruptions in the past. We maintain political
risk insurance up to $15 million on equipment and business interruption
insurance up to $15 million, but it is possible that political events may cause
an interruption of our manufacturing operations, the cost of which might exceed
our insurance coverage.
-29-
We are dependent on certain large customers.
In Fiscal 2002, we had two customers (Walgreens and Wal-Mart) each of whose
purchases represented in excess of 10% of our total net sales and whose
purchases in the aggregate represented over 38% of our total net sales.
The loss of any of our large customers could have a material adverse impact on
our revenues and profits.
We are exposed to credit risk associated with sales to our customers.
In Fiscal 2002, two of our customers, Polaroid and Kmart, filed for protection
from their creditors under Chapter 11 of the U.S. Bankruptcy Code. As a result,
during Fiscal 2002 we recognized provisions related to Polaroid accounts
receivable and inventory and Kmart accounts receivable. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" above.
Polaroid's purchases represented approximately 3.6% and Kmart's purchases
represented less than 1%, respectively, of our total Fiscal 2002 net sales.
The reversal of the International Trade Commission ban on importation of
re-loaded single use cameras could adversely affect our business.
In June 1999, the International Trade Commission ("ITC") banned the unlicensed
importation into the United States of new and reloaded single use cameras due to
the infringement of such imports on existing patents held by Fuji. The Court of
Appeals for the Federal Circuit (the "Federal Circuit") recently upheld the ban
on new single use cameras and reversed the ITC's ban on reloaded single use
cameras which were originally sold in the United States by Fuji or its licensees
and reloaded in a prescribed manner. The Federal Circuit's decision opens the
United States market to competition from non-Fuji licensees for single use
cameras originally sold in the United States by Fuji or its licensees and
reloaded (either in the United States or abroad) in the prescribed manner. The
Federal Circuit's decision could have a material adverse impact on our revenues
and earnings.
-30-
We are dependent on a small group of key personnel.
Our business is managed by a small number of key management and operating
personnel. In particular, we rely on the continued services of Ira B. Lampert,
our Chairman, Chief Executive Officer and President. The loss of this or any
other key employee could have a material adverse impact on our business. We
believe our future success will depend in large part on our continued ability to
attract highly skilled and qualified personnel. Competition for such personnel
is intense. We may not be able to hire the necessary personnel to implement our
business strategy, or we may need to pay higher compensation for employees than
currently budgeted. Our inability to attract and retain such personnel could
limit our growth and affect our profits.
Our digital camera products involve a more complex development process, which we
may not be able to successfully integrate into our operations.
Digital cameras involve a more complex development process and component
procurement process than our traditional and single use cameras. Manufacturing
delays, including component procurement delays or shortages and the timely
introduction and delivery of new components, which may be outside our control,
could adversely impact our business, results of operations and financial
condition.
Digital camera products are subject to rapid technological changes, price
erosion and obsolescence.
Digital camera products are subject to rapid technological changes, price
erosion and obsolescence to a greater extent than traditional camera products.
Because of rapid technological changes, some of our digital camera products
became obsolete and, consequently, we recorded significant inventory provisions
related to digital inventory during Fiscal 2002. To be successful in the
development, manufacture and sale of digital camera products, we have to react
quickly to technological advances and manage our inventory effectively to
accommodate price competition and the short life span of such products.
To achieve our operating and financial objectives, we must manage our
anticipated growth effectively.
We anticipate that our business will grow. Our future success depends in large
part on our ability to manage our anticipated growth. To manage this growth, we
will need to hire additional experienced, skilled personnel and to train, manage
and retain key employees. These activities may strain our management resources.
If we were unable to manage growth effectively, our profits would be adversely
affected.
-31-
The camera and photographic products industry is highly competitive.
As a manufacturer and distributor of low cost, popularly priced image capture
products, we encounter substantial competition from a number of firms, many of
which have longer operating histories, more established markets, more extensive
facilities and, in some cases, greater resources.
We are exposed to risks associated with intellectual property used in image
capture devices.
Image capture devices use technology which may be protected by unknown United
States or foreign patents. The right to use such intellectual property is
subject to the availability of suitable license conditions from the patent
holders which could have a material adverse effect on our business and financial
condition. A claim of infringement by such a patent holder could be
time-consuming and costly to defend. A lawsuit alleging patent infringement was
filed by the Massachusetts Institute of Technology and Electronics for Imaging,
Inc. in April 2002 against 214 defendants, including the Company. See "Legal
Proceedings" above.
We face certain foreign currency risks as a result of conducting a substantial
portion of our business activities in Hong Kong.
Since 1983 the Hong Kong Dollar has been pegged to the United States Dollar, but
the exchange rate of the Hong Kong Dollar may fluctuate in the future. Although
our OEM and major retail business is conducted in U.S. Dollars, certain of our
obligations under agreements in the PRC and with our Hong Kong suppliers are
paid in Hong Kong Dollars. We are also exposed to currency risks in Japan and
other countries where we purchase materials for our products or sell those
products. We generally do not engage in currency hedging activities.
We also face political risks as a result of conducting administrative, sales,
engineering and design activities in Hong Kong and the PRC.
In July 1997, the exercise of sovereignty over Hong Kong was transferred from
the United Kingdom to the PRC and Hong Kong became a Special Administrative
Region of the PRC. We cannot predict how the PRC will interpret and implement
the basic law that provides, in part, for the capitalist system and way of life
to remain unchanged for 50 years. We also cannot predict the effect of any such
action on our business activities in Hong Kong or our operations or financial
condition in general. Any significant changes affecting our operations or
financial condition in the PRC or Hong Kong could have a material adverse effect
on our business and financial condition.
The importation of products into the United States and other countries in which
our products are sold is subject to various other risks.
The United States, the PRC, Hong Kong, the European Union or other countries may
impose trade restrictions that could adversely affect our operations. In
addition, the United States is currently monitoring various PRC practices,
including trade, investment and government procurement, as well as the PRC's
compliance with various multilateral and bilateral agreements. We cannot predict
whether the United States will take future trade actions against the PRC that
may result in increased tariffs against PRC products, including products
imported by us.
-32-
The market price of our Common Stock may fluctuate.
The stock markets, and in particular the Nasdaq National Market, have
experienced extreme price and volume fluctuations that have affected the market
prices of equity securities of many companies and that often have been unrelated
or disproportionate to the operating performance of such companies. These broad
market factors may adversely affect the market price of our Common Stock. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
that company. Such a lawsuit was recently instituted against us and could result
in substantial costs and a diversion of management's attention and resources,
which could harm our business. See "Legal Proceedings."
We may not be able to identify and integrate future acquisitions.
We intend to pursue strategic acquisitions that we consider reasonable in light
of the revenues and profits we believe we will be able to generate from these
acquisitions. The cost of acquisitions within the industry has generally
increased over time. Additionally, we compete for acquisitions with certain
other industry competitors, some of which have greater financial and other
resources than we do. Increased demand for acquisitions may result in fewer
acquisition opportunities for us as well as higher acquisition prices. Although
we believe opportunities may exist for us to grow through acquisitions, we may
not be able to identify and consummate acquisitions on acceptable terms. If we
do acquire other companies, we may not be able to profitably manage and
successfully integrate them with our operations and sales and marketing efforts
without substantial costs or delays. Acquisitions involve a number of potential
risks, including the potential loss of customers, increased leverage and debt
service requirements, combining disparate company cultures and facilities and
operating in geographically diverse markets. One or more of our future
acquisitions may have a material adverse effect on our financial condition and
results of operations.
We are unable to predict the effect of terrorist acts on commerce.
Terrorist attacks in New York and Washington, D.C. in September of 2001 have
disrupted commerce throughout the United States and other parts of the world.
The continued threat of terrorism within the United States and abroad and the
potential for military action and heightened security measures in response to
such threat may cause significant disruption to commerce throughout the world.
To the extent that such disruptions result in delays or cancellations of
customer orders, a general decrease in consumer spending, or our inability to
effectively market and sell our products, our business and results of operations
could be materially and adversely affected. We are unable to predict whether the
threat of terrorism or the responses thereto will result in any long-term
commercial disruptions or if such activities or responses will have a long-term
material adverse effect on our business, results of operations or financial
condition.
-33-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a result of our global operating and financial activities, we are exposed to
changes in interest rates and foreign currency exchange rates that may adversely
affect our results of operations and financial position. In seeking to minimize
the risks and/or costs associated with such activities, we manage exposures to
changes in interest rates and foreign currency exchange rates through our
regular operating and financing activities.
At June 29, 2002, our exposure to changes in interest rates was minimal, since
our long-term debt of $15,000,000 had a fixed interest rate. In August 2002, we
retired all of our long-term debt. We had no short-term borrowings outstanding
as of June 29, 2002 but we do borrow from time to time under our credit
facilities. These borrowings are of a short-term nature typically subject to
variable interest rates based on a prime rate or LIBOR plus or minus a margin.
Since we have no debt outstanding, we do not deem interest rate risk to be
significant or material to our financial position or results of operations. We
do not presently use derivative instruments to adjust our interest rate risk
profile. We do not utilize financial instruments for trading or speculative
purposes, nor do we utilize leveraged financial instruments.
Each of the our foreign subsidiaries purchases their inventories in U.S. Dollars
and certain of their sales are in foreign currency, thereby creating an exposure
to fluctuations in foreign currency exchange rates. We purchase certain
components, raw materials and services needed to manufacture our products in
foreign currencies including Japanese Yen. The impact of foreign exchange
transactions is reflected in our statements of operations. As of June 29, 2002,
we were not engaged in any hedging activities and we had no forward exchange
contracts outstanding. We continue to analyze the benefits and costs associated
with hedging against foreign currency fluctuations.
Item 8. Financial Statements and Supplementary Data.
The financial statements listed in Item 15(a) (1) and (2) are included in this
report beginning on page F-2.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
-34-
PART III
Item 10. Directors and Executive Officers of the Company.
Executive Officers and Directors
Our executive officers and directors, and their respective ages as of August 15,
2002, are as follows:
Name Age Position
Ira B. Lampert(3)(4) 57 Chairman, Chief Executive Officer and President
Brian F. King 49 Senior Executive Vice President, Chief Operating
Officer and Secretary
Richard M. Finkbeiner 55 Senior Vice President and Chief Financial Officer
Keith L. Lampert 32 Executive Vice President and Director of Worldwide
Operations of the Company;
Managing Director of Concord HK
Gerald J. Angeli 49 Vice President of Worldwide Engineering and Technology
Harlan I. Press 38 Vice President, Treasurer and Assistant Secretary
Urs W. Stampfli 51 Senior Vice President and Director of Global Sales and
Marketing
Ronald S. Cooper(1)(2) 64 Director
Morris H. Gindi(1)(5) 57 Director
J. David Hakman(3)(4) 60 Director
William J. Lloyd(5) 63 Director
William J. O'Neill, Jr.(1)(2) 60 Director
-----------------
(1) Member of Audit Committee.
(2) Member of Compensation and Stock Option Committee.
(3) Member of Executive Committee.
(4) Member of Director Affairs Committee.
(5) Member of Marketing and Product Development Committee.
Ira B. Lampert has been the Chairman and Chief Executive Officer of the Company
since July 13, 1994. For the calendar year 1995 and again from July 31, 1998
through the present, Mr. Lampert also served as President of the Company. Mr.
Lampert is a member of the Board of the Queens College Foundation of the City
University of New York and is the Treasurer of the Boys & Girls Republic, a
nonprofit organization for underprivileged children.
Brian F. King has been Senior Executive Vice President and Chief Operating
Officer of the Company since February 2002, having served as Senior Vice
President of the Company from August 1998 to February 2002. In addition, Mr.
King has served as Secretary of the Company since August 1996 and served as
Managing Director of Concord HK from August 1996 through April 2000. Mr. King
served as the Company's Vice President of Corporate and Strategic Development
from June 1996 to August 1998.
-35-
Richard M. Finkbeiner joined the Company in July 2002 as Senior Vice President
and Chief Financial Officer. Prior to joining the Company, Mr. Finkbeiner was
Corporate Vice President and Chief Financial Officer of Menasha Corporation, a
$1 billion privately owned manufacturing and services company. He was Executive
Vice President and Chief Financial Officer of Creative Computers, Inc., a
publicly-traded reseller of computer equipment, from 1996 until he joined
Menasha in 1998. Mr. Finkbeiner has been Chief Financial Officer for several
other companies and spent 12 years with Hallmark Cards. He has an M.S. degree in
Applied Math, an M.B.A., and a C.P.A. certificate.
Keith L. Lampert, who is a son of Ira B. Lampert, has been Executive Vice
President and Director of Worldwide Operations of the Company since February
2002 and Managing Director of Concord HK since April 2000. From March 2001 to
February 2002, Mr. Lampert also served as the Company's Vice President of
Worldwide Operations. He became a Vice President of the Company in August 1998,
having joined the Company in 1993. Among other things, Mr. Lampert is
responsible for the Company's operations in Hong Kong and the People's Republic
of China.
Gerald J. Angeli joined the Company in April 2000 as Vice President, OEM Product
Supply. Since March 2001, he has served as the Company's Vice President of
Worldwide Engineering and Technology. From July 1997 to April 2000, Mr. Angeli
was Vice President, Global Manufacturing and Products Supply for NCR
Corporation's Systemedia Group, where he was responsible for manufacturing,
customer service, distribution and logistics. Before that, Mr. Angeli was
employed by Kodak for 20 years in various capacities, most recently as Manager
of Worldwide Manufacturing and Supply Chain and Vice President, Consumer
Imaging.
Harlan I. Press has been Vice President and Treasurer since April 2000, Chief
Accounting Officer since November 1994, and Assistant Secretary of the Company
since October 1996. Mr. Press served as the Corporate Controller of the Company
from October 1996 through April 2000. Mr. Press is a member of the American
Institute of Certified Public Accountants, the New York State Society of
Certified Public Accountants and the Financial Executives Institute.
Urs W. Stampfli has been Senior Vice President since February 2002 and Director
of Global Sales and Marketing for the Company since April 2000. Mr. Stampfli
joined the Company in May 1998, as Director of Global Sales and Marketing, and
became a Vice President of the Company in April 2000. From 1990 to April 1998,
Mr. Stampfli was Vice President, Marketing, Photo Imaging Systems of Agfa
Division, Bayer Corporation.
Ronald S. Cooper has been a director of the Company since January 2000. Mr.
Cooper is a co-founder and principal of LARC Strategic Concepts, LLC, a
consulting firm focusing on emerging growth companies. Mr. Cooper retired from
Ernst & Young LLP in September 1998, having joined the firm in 1962. He became a
partner in 1973 and was Managing Partner of the firm's Long Island office from
1985 until he retired. He is also a director of Frontline Capital Group, a
publicly traded e-commerce company.
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Morris H. Gindi has been a director of the Company since 1988. Mr. Gindi has
served as the Chief Executive Officer of Notra Trading Inc., an import agent in
the home textiles industry, since 1983 and as Chief Executive Officer of Morgan
Home Fashions, a manufacturer and distributor of home textiles, since 1995.
J. David Hakman has been a director of the Company since 1993. Mr. Hakman owns
Hakman Capital Corporation, an investment and merchant banking concern, a
subsidiary of which is a member of the National Association of Securities
Dealers, Inc. In addition, Mr. Hakman is a director of Hanover Direct, Inc., a
direct marketing business.
William J. Lloyd has been a director of the Company since May 2000. Mr. Lloyd is
founder and President of Inwit, Inc., a technology consulting firm. He has been
working with a law firm and other clients in the San Diego, California area,
primarily with respect to patents and other technical matters, since March 2002.
From November 2000 to February 2002, he was Executive Vice President and Chief
Technology Officer of Gemplus International, a leading smart card solutions
provider for telecommunications, financial services and e-business security.
Prior to joining Gemplus, Mr. Lloyd was Co-Chief Executive Officer of Phogenix
Imaging, LLC, a Hewlett-Packard/Kodak joint venture. From 1969 to 2000, Mr.
Lloyd held various management positions at Hewlett-Packard, most recently as
Vice President, Chief Technology Officer for its Digital Media Solutions and
Personal Appliances and Services.
William J. O'Neill, Jr. has been a director of the Company since August 2001.
Mr. O'Neill is a founder and principal of O'Neill Group, Inc., a consulting firm
focused on developing business strategies, operational execution, financial
evaluations and fundraising activities. From 1969 to 1999, Mr. O'Neill held
various management positions at Polaroid, most recently as Executive Vice
President and President, Corporate Business Development. In July 2001, he was
appointed as Dean of the Frank Sawyer School of Management at Suffolk University
in Boston, Massachusetts.
Audit Committee Financial Expertise
Two members of the Audit Committee of our Board of Directors, namely Ronald S.
Cooper and William J. O'Neill, Jr., have significant financial expertise. Ronald
S. Cooper has over 35 years of experience in the field of public accounting,
retiring in 1998 from Ernst & Young LLP. During that time, Mr. Cooper was
involved in the audits of numerous public companies and gained broad experience
with SEC filings. William J. O'Neill, Jr. was Chief Financial Officer (and
Executive Vice President) of Polaroid from 1990 to 1998, having held various
other positions with Polaroid including that of Corporate Controller for four
years. As a result of the foregoing, both of these members of the Audit
Committee have: (i) an understanding of generally accepted accounting principles
and financial statements; (ii) experience in the preparation or auditing of
financial statements of generally comparable issuers and the application of such
principles in connection with the accounting for estimates, accruals and
reserves; (iii) experience with internal accounting controls; and (iv) an
understanding of audit committee functions.
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Section 16 Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires our directors, executive officers and ten percent (10%)
shareholders ("Reporting Persons") to file initial reports of ownership and
reports of changes in ownership of the Common Stock and any other equity
securities with the SEC. Reporting Persons are required to furnish us with
copies of all Section 16(a) reports they file. Based on a review of the copies
of the reports furnished to us and written representations from our directors
and executive officers that no other reports were required, we believe that the
Reporting Persons complied with all Section 16(a) filing requirements applicable
to them with respect to Fiscal 2002.
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Item 11. Executive Compensation.
SUMMARY COMPENSATION TABLE
The following table contains certain information regarding aggregate
compensation paid or accrued by the Company during Fiscal 2002 to the Chief
Executive Officer and to each of the other four highest paid executive officers.
Long-Term
Annual Compensation
Compensation Awards
------------------------------------------- ------------
Shares
Other Annual Underlying All Other
Name and Fiscal Salary Bonus** Compensation Options Compensation
Principal Position Year ($) ($) ($) (#) ($)
- ------------------ ------------ ----------------------------------------------------------------------------
Ira B. Lampert 2002 $920,833* -- $681,110(1) 263,004(6) $960,447(8)
Chairman, Chief 2001 969,444 860,686 686,555(1) -- 961,524(8)
Executive Officer 2000 704,167 400,000 596,586(1) 350,672(7) 487,267(9)
and President
Brian F. King 2002 400,000* -- 7,177(2) 127,260(6) 375,372(10)
Senior Executive Vice 2001 425,000 444,809 132,970(2) -- 385,807(10)
President and Chief 2000 327,147 175,000 95,249(2) 169,680(7) 123,148(11)
Operating Officer
Keith L. Lampert 2002 225,000* -- 228,968(3) 76,356(6) 170,973(12)
Executive Vice President 2001 240,000 281,639 214,908(3) -- 229,868(12)
and Director of Worldwide 2000 204,601 100,000 144,174(3) 101,808(7) 83,520(11)
Operations;
Managing Director
of Concord HK
Urs W. Stampfli 2002 210,500* -- 12,000(4) 18,665(6) 44,276(13)
Senior Vice President and 2001 223,650 155,282 12,000(4) -- 44,647(13)
Director of Global 2000 192,500 45,000 12,000(4) 24,886(7) 7,245(14)
Sales and Marketing
Gerald J. Angeli 2002 190,000 -- 37,000(5) 67,500(6) 22,051(15)
Vice President of 2001 190,000 20,000 12,000(4) -- 10,000(16)
Worldwide Engineering and 2000 47,500 -- 3,000(4) 90,000(7) --
Technology
- -----------------
(*) In light of the cost-cutting measures recently undertaken by the
Company, these executive officers all voluntarily agreed, on a verbal
basis, to a decrease in their base salaries of approximately 11%
effective as of July 1, 2001 (the beginning of Fiscal 2002). Keith
Lampert and Urs Stampfli subsequently received salary increases
effective as of their promotions on February 25, 2002. See "Executive
Employment Contracts, Termination of Employment and Change in Control
Arrangements" below.
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(**) Represents bonuses determined and paid by the Company in the fiscal
year, based on the Company's and the executive's performance in the
previous fiscal year. No bonuses were awarded with respect to Fiscal
2002 or Fiscal 2001.
(1) Includes: (a) auto allowances and costs, partial housing costs and
reimbursement of taxes, respectively, of $30,714, $48,000 and $93,789
in Fiscal 2002, $30,808, $47,797 and $99,325 in Fiscal 2001, and
$35,911, $48,000 and $99,430 for Fiscal 2000; and (b) the yearly credit
under the Lampert SERP (described below under "Executive Employment
Contracts, Termination of Employment and Change in Control
Arrangements") of $500,000 in Fiscal 2002 and 2001, and $400,000 in
Fiscal 2000.
(2) For Fiscal 2002, this represents $18,000 in auto allowance paid, less
Hong Kong tax reimbursements of $25,177 repaid by Mr. King to the
Company. For Fiscal 2001, this represents $108,142 paid by the Company
pursuant to the Company's Executive Management Tax Equalization Policy
for executives stationed overseas, $18,000 in auto allowance, and
$6,828 in overseas housing costs. For Fiscal 2000, this includes
$71,367 in overseas housing costs and $18,000 in auto allowance paid by
the Company.
(3) Includes: (a) amounts paid pursuant to the Company's Executive
Management Tax Equaliza