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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 28, 2003
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. [ ___ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No ___
---
The aggregate market value of the Common Stock (computed by reference to the
closing sale price) held by non-affiliates of the Company as of the last
business day of the registrant's most recently completed second fiscal quarter,
was $116,126,449.
As of August 29, 2003, there were 28,610,766 shares of the Company's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
See Exhibit Index -- Page 48
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 2003 refers to the Fiscal Year
ended June 28, 2003, 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 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.
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 Advanced Photo System ("APS") (24mm)
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).
We manufacture products in the People's Republic of China ("PRC"). Our
manufacturing facilities, 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.
-2-
We have evolved from a contract manufacturer and distributor of cameras to a
design and development service provider and 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 2003, we completed several
new digital camera development projects. We introduced to the marketplace 17 new
digital products which also provide platforms for the future development of
other digital products. Our design team is currently engaged in the development
of additional 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.
We have two primary channels of distribution, our Design and Manufacturing
Services ("DMS") channel and our Retail Sales and Distribution ("RSD") channel.
Our DMS business is based on us supplying our customers with development,
design, engineering and manufacturing services. Our DMS customers have included
leading film, camera, telecommunication and technology companies. Our RSD
business sells private label and brand name image capture products to retailers
worldwide. We offer product and package design, and customer service to our
retail customers.
General
The mailing address of our headquarters is 4000 Hollywood Boulevard, Sixth
Floor, North Tower, Hollywood, Florida 33021, and our telephone number is (954)
331-4200. Concord was incorporated in New Jersey in 1982. The address of our
website is www.concord-camera.com. Through a link on the Investor Relations
section of our website, we make available the following filings as soon as
reasonably practicable after they are electronically filed with or furnished to
the SEC: Annual Report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All
such filings are available free of charge.
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 with image review capability
allow for instantaneous viewing, and images can easily be downloaded to a
computer for viewing, manipulation, reproduction and storage. According to
IDC(1), approximately 30 million consumer digital cameras(2) were shipped
worldwide in 2002 (a 65% increase in the number of units shipped as
compared to 2001) generating shipment values of approximately $11
billion.(3)
o Single use cameras - Single use cameras are sold preloaded with film and
batteries 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 worldwide 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 APS. On a unit basis, 35mm and APS cameras account for about
11% of all non-digital cameras sold worldwide according to the PMA and we
estimate this segment accounts for about 40% of worldwide amateur
non-digital camera industry revenues.
- ------------
(1) IDC (a division of IDG) is a leading provider of industry analysis and
market data.
(2) "Consumer digital cameras" are cameras capturing images in digital format
only, and exclude digital cameras with interchangeable lenses ("digital
SLR") or cameras that operate only when connected to a PC ("PC cameras").
(3) According to IDC's weighted average of end user minimally advertised price
("MAP"). Source: IDC, Worldwide Digital Still Camera Forecast, 2003-2007,
May 2003.
-3-
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 according to the PMA and we
estimate this segment accounts for about 1 to 2% of worldwide amateur
non-digital camera industry revenues.
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 2002, and are projected to grow at an average
rate of approximately 16% per year over the next three years with shipments
expected to surpass 53 million units in 2007. 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.
o Growth of Single Use Cameras. Single use cameras are inexpensive, easy to
use and deliver high quality photographs. From 1999 through 2002, the number
of single use cameras sold worldwide grew at a compound annual rate of
10.1%, according to the PMA.
Our Growth Strategy
Our strategy is to become the leading producer of digital, single use and
traditional 35 mm and loyalty cameras at the opening price point in the retail
market while continuing to expand our DMS business. Our growth strategy includes
the following key elements:
o Continue to expand our RSD business. We continue to expand our RSD
business by increasing the number of customers, product listings and sales
volumes through the continued introduction of new products, many of which
are the result of our internal product development efforts. Our larger
retail customers include Aldi, Argos, Boots, Carrefour, Comp USA, CVS,
Eckerd, Family Dollar, Dollar General, Metro, Rite Aid, Ritz Camera Shops,
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"). 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.
We intend to capitalize on favorable trends in the digital and single use
camera markets by introducing new high quality cameras at affordable prices
for these targeted markets. The digital still camera and single use camera
markets are expected to offer significant growth potential in the next
several years. We have plans to expand our product offering in these
markets.
- ------------
(4) "Traditional" cameras do not include single use or digital cameras.
-4-
We also intend to explore RSD opportunities worldwide. Since Europe
comprises only 28% of our total RSD net sales, we believe potential
opportunities exist in this geographic region to market products with
well-recognized premium brand names such as Polaroid and to enter into
supply agreements for loyalty programs with the larger retailers. In
addition, we have entered into a distribution agreement to sell our products
in Russia and are pursuing additional opportunities elsewhere in the world.
o Enhance our DMS business. Over the years we have acquired DMS business
from several leading companies including Kodak, Hewlett-Packard Company
("Hewlett-Packard"), Nokia Mobile Phones Ltd. ("Nokia") and Polaroid.
Currently, we are manufacturing two single use camera products for Kodak
under two separate Supply Agreements, the most recent of which was entered
into in September 2002 and has a minimum term of forty-two months. We
continue to invest in product development and low cost manufacturing to
increase business from our existing DMS customers.
o Develop new DMS relationships. We intend to leverage our existing
relationships and our strong capabilities in engineering, design and
manufacturing to establish new DMS relationships. We intend to attract new
DMS 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 DMS
customers with 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 established 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
DMS and RSD businesses.
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 sell to our retail customers our own branded
and private label products, many of which we have developed and manufactured. We
also serve as a contract manufacturer of developed and co-developed products for
our customers.
We manufacture and assemble our products in the PRC both as a contract
manufacturer on a DMS basis and for direct sale under our trademarks and brand
names, and under private label brand names. In addition, we purchase some
products from third parties. 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 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 5.0 megapixels.
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 2003, we completed the design and development of
distinct new digital still camera platforms and currently have additional
product platforms in various stages of development. These new platforms are
significant for several reasons. First, they demonstrate our ability to
internally develop CCD-based platforms. Secondly, the optical modules and
lensing systems for these cameras were designed by Concord and represent
significant technological advances in opto-mechanics, focus and motion control
for higher resolution optical systems used in 3.0 megapixel and higher cameras.
From these platforms we have built, and recently began selling, 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.
- -------------
(5) "CMOS" is the acronym for complementary metal-oxide semiconductor. 6 "CCD"
is the acronym for charge-coupled device.
(6) "CCD" is the acronym for charge-coupled device.
(7) "VGA" is the acronym for video graphics array.
-5-
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.
Our expenditures for product design and development increased to $8.5 million in
Fiscal 2003 from $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 to increase in Fiscal 2004.
RSD 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 DMS sales, as well as sales to and sales support for large retail
customers in the Americas, Europe and Asia. We have marketed our products to
retailers on a private label basis and/or under the following brand names:
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)
We have established a strong presence with our retail customers by offering
attractive, easy to use and popularly priced digital, APS, and 35mm format
cameras and 35mm and APS format single use cameras. Because of Concord's design
and development capabilities we can offer unique, customized product solutions
to our customers. We sold tens of millions of cameras last year worldwide,
including more than 100 different products sold from over 25,000 outlets.
A primary reason for our success in achieving year over year growth with our
retail customers has been our ability to innovate and customize our popularly
priced imaging products to meet their unique supply chain, product and packaging
requirements. 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 the majority of our
direct sales to DMS and retail customers. To assist our in-house RSD sales
staff, we also have nine independent 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 $145.8 million, or 76.8% of total net
sales in Fiscal 2003, and $95.7 million or 74.0% of total net sales in Fiscal
2002. The year over year increase in sales was fueled by the introduction of new
products and marketing programs. In Fiscal 2003, we had two retail customers
each of whose purchases represented in excess of 10% of our total net sales: (i)
Wal-Mart (19.1% of total net sales); and (ii) Walgreens (17.2% of total net
sales).
-6-
DMS 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. Relationships with our DMS customers are handled by our in-house
sales and marketing personnel.
In Fiscal 2003, sales to Kodak accounted for 15.6% of our total net sales. DMS
customers accounted for $44.0 million, or 23.2%, of our total net sales in
Fiscal 2003.
Future DMS Relationships
We believe we are positioned to continue to benefit from an outsourcing trend in
the traditional, single use and digital image capture device markets, including
wireless transmission. By investing significant funds in development, design,
engineering and manufacturing capabilities, we have become a high quality, low
cost contract manufacturer. In addition, we believe DMS 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 DMS business.
We are in discussions and/or negotiations with existing and potential DMS
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 DMS customers. We target potential
DMS 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.
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 manufacturing in
the PRC.
Licensing Activities
In August 2002, we entered into our two Polaroid license agreements. These
licenses provide for 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.
We are one of a limited number of companies licensed by Fuji to manufacture,
remanufacture and sell single use cameras. Single use cameras accounted for
$101.4 million, or 53.4% of our Fiscal 2003 net sales. We have a worldwide
(excluding Japan until January 1, 2005) non-exclusive license to use certain of
Fuji's 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.
-7-
Manufacturing
We conduct all of our manufacturing in the PRC. Our vertically integrated
manufacturing facilities include 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 are ISO
9000 and 9001 accredited.
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 raw materials and various
components 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 procurement, 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 expect to continue manufacturing in the
PRC after 2006 either under a renewal of our processing agreement or pursuant to
some other form of legal authorization. We intend to continue to expand our
operations in the PRC, but there can be no assurance we will be able to do so.
In April 2002, we 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 its products both in the PRC and internationally. Concord
Shenzhen started operating in September 2002.
-8-
Trademarks and Patents
We own trademarks which include, but are not limited to, the CONCORD(R),
KEYSTONE(R), CONCORD EYE Q(R), GO WIRELESS(TM), 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. We license patents and
patent applications related to single use cameras from Fuji in connection with
the manufacture and sale of single use cameras.
Employees
As of August 1, 2003, we had 236 employees, 55% of them were located in Hong
Kong and the PRC. None of our employees are represented by collective bargaining
agreements.
Pursuant to our agreements with PRC governmental agencies, these agencies
provide us with workers at our PRC manufacturing facilities. During Fiscal 2003,
based upon production demand, we were provided with approximately 3,700 to 5,800
workers. We believe our relationship with these workers is good.
Financial Information about Geographic Areas
For financial information about geographic areas, see Note 22, "Geographic Area
Information", in the Notes to Consolidated Financial Statements.
Item 2. Properties.
In Hollywood, Florida, we lease our principal office space, which consists of
approximately 20,000 square feet. We also lease a domestic warehouse in Fort
Lauderdale, Florida, which consists of approximately 13,700 square feet, of
which about 825 square feet is office space. These leases expire on January 31,
2014 and January 31, 2009, respectively.
In Hong Kong, we lease a total of approximately 33,000 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, which we can extend to July 31,
2006. 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 manufacturing facilities 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.
Item 3. Legal Proceedings.
See Note 16, "Litigation and Settlements", in the accompanying Notes to
Consolidated Financial Statements.
-9-
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-10-
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 2003 and Fiscal 2002, the high and low sales prices per share of our
Common Stock as reported by the Nasdaq National Market.
Quarter Ended High Low
------------- ---- ----
June 28, 2003.......................... $7.35 $4.96
March 29, 2003......................... $6.25 $5.00
December 28, 2002...................... $6.50 $4.28
September 28, 2002..................... $6.00 $3.55
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
The closing price of our Common Stock on the Nasdaq National Market on August
29, 2003 was $11.98 per share. As of August 29, 2003, there were 988
shareholders of record of our Common Stock.
The Company has never paid cash dividends and does not presently intend to pay
cash dividends.
-11-
Item 6. Selected Financial Data.
(Dollars in thousands except per share data)
Fiscal Year Ended
-----------------------------------------------------------------
June 28, June 29, June 30, July 1, July 3,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
STATEMENT OF
OPERATIONS DATA:
Net sales $189,783 $129,317 $180,061 $167,720 $115,386
Cost of products sold 153,532 110,345 152,598 126,148 86,664
-------- -------- -------- -------- --------
Gross profit 36,251 18,972 27,463 41,572 28,722
Operating expenses 31,651(c) 28,683 45,056 25,607 20,561
-------- -------- -------- -------- --------
Operating income (loss) 4,600 (9,711) (17,593) 15,965 8,161
Other (income), net (2,372) (3,060) (4,892) (883) (441)
-------- -------- -------- -------- --------
Income (loss) before taxes 6,972 (6,651) (12,701) 16,848 8,602
Provision (benefit) for taxes 569 (1,403) (931) (2,751) 893
-------- -------- -------- -------- --------
Net income (loss) $ 6,403 $ (5,248) $(11,770) $ 19,599 $ 7,709
======== ======== ======== ======== ========
Basic earnings (loss) per share(a) $ 0.23 $ (0.19) $ (0.45) $ 0.89 $ 0.35
======== ======== ======== ======== ========
Diluted earnings (loss) per share(a) $ 0.22 $ (0.19) $ (0.45) $ 0.81 $ 0.33
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital $121,077 $128,382 $131,003 $ 52,600 $ 37,447
======== ======== ======== ======== ========
Total assets $205,814 $198,076 $213,666 $134,003 $ 96,647
======== ======== ======== ======== ========
Total debt $ --(b) $ 14,934 $ 15,416 $ 19,555 $ 29,735
======== ======== ======== ======== ========
Total stockholders' equity $156,828 $149,156 $154,337 $ 66,290 $ 42,696
======== ======== ======== ======== ========
(a) Per share data for all periods presented has been restated to reflect a
two-for-one stock split in Fiscal 2000.
(b) This debt was retired in August 2002. For further discussion, see Notes 1
and 9 to the Consolidated Financial Statements.
(c) Includes $0.9 million of variable stock-based compensation expense. For
further discussion, see Notes 1 and 12 to the Consolidated Financial
Statements.
-12-
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 2003 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 other reports filed with the Securities and Exchange Commission ("SEC"). See
"Risk Factors" below. 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 PRC for
sales to retailers under our brand names, on a premium and private label basis,
and to DMS customers.
Over the last several years, we have evolved from a contract manufacturer and
distributor of cameras to a design and development service provider and
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 sell directly to our RSD customers on a worldwide basis through offices
and/or representatives in Concord Americas, Concord Europe, and Concord Asia.
Concord Asia is involved in all DMS sales, retail sales in the PRC and Asia as
well as free on board ("FOB") Hong Kong sales to large retail customers in the
Americas, Asia, and Europe. We attribute these FOB sales to the region where our
customer's home office is located. We have marketed our products to retailers on
a private label basis and /or 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).
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 DMS customers are handled by
our in-house sales and marketing personnel. In Fiscal 2003, one DMS customer's
purchases represented more than 10% of our total net sales.
As a result of our strategy over the last several years, our sales and customer
mix has become more diversified. Sales to our RSD customers accounted for 76.7%
of total net sales for Fiscal 2003 compared to 32.3% of total net sales during
Fiscal 2000 and sales to our DMS customers represented 23.3% of total net sales
in Fiscal 2003 compared to 67.7% of total net sales in Fiscal 2000. The
evolution of our DMS and branded products into digital and other image capture
devices has diversified our product base. In Fiscal 2003, our third year of
selling digital image capture devices, such products accounted for 34.1% of our
total net sales as compared to 10.7% in Fiscal 2002. Net sales of single use
cameras accounted for 53.4% of total net sales in Fiscal 2003, compared to 70.1%
in Fiscal 2002.
We intend to continue obtaining additional business from our current customers,
and to establish new DMS and RSD relationships by positioning ourselves as an
innovative designer, developer, manufacturer, and marketer of high quality,
popularly priced image capture products.
-13-
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 reduce our inventory
values resulting from lower of cost or market value adjustments and our gross
profit could be adversely affected. Due to the shorter life cycles of digital
products, the obsolescence risk is more significant as it relates to these
products.
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
and strategies. 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 our 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.
Impairment of Long-lived and Other Assets
Periodically, we review our long-lived assets for impairment. We will record an
impairment loss when indications of impairment are present where undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amounts. For royalty related assets, we will record an impairment loss
if the total expected royalty payments to be made over the life of an agreement,
excluding any minimum required payments, are less than the royalty related
assets' carrying value. The total expected royalty payments to be made over the
life of an agreement are dependent on management's estimates about future sales
volumes. Because judgment is required to estimate future sales volumes, the
estimates are not necessarily indicative of the sales volumes that will be
actually realized in the future. Such assets that are reviewed include patents,
goodwill, licensing and royalty agreements and certain property, plant and
equipment.
-14-
Accounting for Litigation and Settlements
We are involved in various legal proceedings. Due to their nature, such legal
proceedings involve inherent uncertainties including, but not limited to, court
rulings, negotiations between affected parties and the possibility of
governmental intervention. Management assesses the probability of loss for such
contingencies and accrues a liability and/or discloses the relevant
circumstances, as appropriate. Management believes that any liability to the
Company that may arise as a result of currently pending legal proceedings will
not have a material adverse effect on the financial condition of the Company
taken as a whole.
OFF-BALANCE SHEET ARRANGEMENTS
Under SEC regulations, we are required to disclose the following off-balance
sheet arrangements, if applicable:
- Any obligation under certain guarantee contracts;
- Any retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to that entity for such assets;
- Any obligation under certain derivative instruments;
- Any obligation arising out of a material variable interest held by us
in an unconsolidated entity that provides financing, liquidity, market
risk or credit risk support to us, or engages in leasing, hedging or
research and development services with us.
We do not have any off-balance sheet arrangements that we are required to
disclose pursuant to these regulations, other than those described in the Notes
to Consolidated Financial Statements. 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 28, 2003.
In the ordinary course of business, we enter into operating lease commitments,
purchase commitments and other contractual obligations. These transactions are
recognized in our financial statements in accordance with accounting principles
generally accepted in the United States, and are more fully discussed below in
Liquidity and Capital Resources.
CONTRACTUAL OBLIGATIONS AS OF JUNE 28, 2003
(in Millions)
Payments due by period More
Less than than 5
Contractual Obligations Total 1 year 1-3 years 3-5 years years
----------------------- ----- ------ --------- --------- ------
Operating Leases $ 5.2 $ 1.1 $ 1.2 $ 1.0 $ 1.9
Purchase Obligation 2.0 2.0 - - -
Patent, Trademark, Licensing and Royalty Obligations 6.3 1.5 2.0 1.0 1.8
------ ------ ------ ------ -----
Total $ 13.5 $ 4.6 $ 3.2 $ 2.0 $ 3.7
====== ====== ====== ====== =====
-15-
RECENTLY ISSUED ACCOUNTING STANDARDS
For a discussion of recently issued accounting pronouncements, see Note 1,
"Recently Issued Accounting Standards" in the Notes to Consolidated Financial
Statements.
-16-
RESULTS OF OPERATIONS
Fiscal 2003 Compared to Fiscal 2002
Net Sales
Net sales for Fiscal 2003 set a Company record and were $189.8 million, an
increase of $60.5 million, or 46.8%, as compared to net sales for Fiscal 2002.
Sales in both our RSD and DMS businesses increased over last year. For Fiscal
2003, RSD net sales were $145.8 million, an increase of $50.1 million, or 52.3%
over Fiscal 2002. The increase in net sales resulted principally from new
digital camera sales, sales of Polaroid branded single use and traditional
cameras, new accounts and organic growth from existing accounts due to sell
through and new product introductions. DMS net sales were $44.0 million for
Fiscal 2003, an increase of $10.4 million, or 30.9%, as compared to Fiscal 2002.
The increase in DMS sales was due primarily to sales of a new single use camera
being manufactured for Kodak under a supply agreement entered into in September
2002, coupled with digital camera sales to a Fuji subsidiary, Legend Group
Limited in the PRC and Visioneer, Inc., and other sales to existing customers,
partially offset by the previously disclosed expiration of certain DMS
contracts.
Net sales of Concord Asia for Fiscal 2003 were $46.2 million, an increase of
$11.8 million, or 34.6%, as compared to Fiscal 2002. The increase was primarily
due to higher DMS net sales to Kodak.
Net sales of Concord Americas for Fiscal 2003 were $101.9 million, an increase
of $33.2 million, or 48.3%, as compared to Fiscal 2002. The increase was
primarily due to new digital camera sales, 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 2003 were $41.7 million, an increase of
$15.4 million, or 58.6%, as compared to Fiscal 2002. This increase was
principally due to new digital camera sales.
Gross Profit
Gross profit for Fiscal 2003 was $36.3 million, an increase of $17.3 million, or
91.1%, as compared to Fiscal 2002. Gross profit margin (gross profit expressed
as a percentage of net sales) increased to 19.1% for Fiscal 2003 as compared to
14.7% for Fiscal 2002. Fiscal 2003 included a $2.2 million pretax benefit
related to a favorable dispute resolution partially offset by $0.8 million of
additional air freight costs due to the West Coast dock worker's labor dispute,
while Fiscal 2002 included $3.1 million of net inventory provisions.
Additionally, Fiscal 2003 gross profit margins were positively impacted by
significantly increased sales accompanied by the related efficiency gains in
manufacturing. Product development costs in dollars and as a percentage of net
sales for Fiscal 2003 and 2002, included in cost of products sold, were $8.5
million (4.5%) and $7.6 million (5.9%), respectively.
Operating Expenses
Selling expenses for Fiscal 2003 were $8.9 million, or 4.7% of net sales. Last
year, selling expenses were $6.3 million, or 4.9% of net sales. The increase was
primarily due to additional sales and marketing personnel, higher freight and
handling costs, and royalties related to the Polaroid brand licenses, all of
which were attributable to the Company's year over year sales growth.
General and administrative expenses were $20.6 million, or 10.9% of net sales
for Fiscal 2003. This compared to $21.0 million, or 16.2% of net sales last
year. Fiscal 2003 general and administrative expenses included a $0.5 million
reduction in expense due to a payment from Polaroid in settlement of Concord's
outstanding Polaroid claims related to the Polaroid bankruptcy filing, while
Fiscal 2002 general and administrative expenses included a $1.6 million accounts
receivable provision due to the Polaroid bankruptcy, a $1.1 million charitable
contribution for victims of the September 11, 2001 terrorist attack, and a net
$0.7 million provision due to the Kmart Corporation bankruptcy. The remaining
elements of general and administrative expenses increased year over year by $3.5
million primarily due to additional staffing, professional and insurance costs,
and other costs associated with the Company's growth.
-17-
In April 2002, we uncovered a fraudulent scheme including check forgery by a
former employee, which resulted in the embezzlement of $1.3 million over an
eighteen-month period ending in April 2002, the preponderance of which occurred
in Fiscal 2002. Our investigation confirmed that the former employee acted alone
and the misappropriated funds have been identified. We have recovered all but
$0.1 million of the embezzlement from a combination of insurance proceeds,
assets secured and amounts recovered from the individual. Accordingly, we have
recorded accrued receivables, net of cash recoveries, of $0.1 million and $1.2
million in prepaid and other current assets in the accompanying consolidated
balance sheets as of June 28, 2003 and June 29, 2002, respectively. In addition,
we have recorded under the caption "(Recovery) of operating expenses, net" in
the accompanying consolidated statement of operations for Fiscal 2002, $1.2
million related to the recovery, which is net of $0.1 million 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 was impractical to determine the impact on Fiscal 2002 quarterly periods. The
embezzled amounts related to the prior fiscal year were not significant.
Variable stock-based compensation expense for Fiscal 2003 was $0.9 million as
compared to no expense in Fiscal 2002, primarily because the Company's Common
Stock price was higher on June 28, 2003 than the October 2001 repriced stock
options' exercise price of $5.97 and on June 29, 2002 was below the repriced
stock options' exercise price of $5.97. See Note 1, "Stock-Based Compensation"
in the Notes to Consolidated Financial Statements for further discussion.
Interest expense decreased by $1.3 million, or 51.2%, to $1.2 million for Fiscal
2003 from $2.5 million for Fiscal 2002. The lower interest expense in Fiscal
2003 was attributable to the repayment of the $15.0 million, 11% Senior Notes
("Senior Notes") in August 2002.
Other (Income), Net
Other (income), net was $(2.4) million and $(3.1) million for Fiscal 2003 and
Fiscal 2002, respectively. Other (income), net primarily includes investment
income, foreign exchange gains and losses, directors' fees, and certain investor
relations costs. Fiscal 2002 included $1.2 million of non-recurring income from
an arbitration award, while Fiscal 2003 included $1.4 million due to foreign
exchange gains. Investment income for Fiscal 2003 was $1.5 million as compared
to $2.4 million for Fiscal 2002. Fiscal 2002 included higher investment income
primarily attributable to higher interest rates.
Income Taxes
As a company engaged in processing activities in the PRC, we currently do not
pay income or turnover taxes in the PRC, but there can be no assurance we will
not be required to pay such taxes in the future. Hong Kong is taxed separately
from the PRC. Concord HK's annual tax rate increased from 8% to 8.75% effective
for Fiscal 2003.
As a company engaged in processing activities in the PRC, we have never paid any
income or turnover tax to the PRC related to 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 any tax exposure we may have on account
of our processing operations in the PRC will be material to our financial
statements.
-18-
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 $49.0 million as
of June 28, 2003. It is not practicable to estimate the amount of tax that might
be payable if such earnings were ever remitted. However, no withholding taxes
would be payable under current law. For U.S. federal tax purposes, as of June
28, 2003, we have net operating loss carryforwards of $7.8 million, of which
$4.3 million was attributable to deductions associated with stock option
exercises, that expire as follows: $2.8 million in 2010 and the balance
thereafter. Additionally, we have $10.6 million of net operating loss
carryforwards related to our foreign operations, $8.2 million of which relates
to Hong Kong, which have no expiration dates.
Each year we evaluate our deferred tax assets. As part of assessing the
realizability of our deferred tax assets, we evaluate 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
initiatives and strategies for U.S. federal and state and Hong Kong tax
purposes. As of June 28, 2003 and June 29, 2002 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, except for $0.2 million related solely to
the utilization of a potential capital loss associated with the Company's
short-term investments. We also evaluated our European net deferred tax assets
and determined that $0.4 million and $1.2 million were to remain recorded as a
valuation allowance as of June 28, 2003 and June 29, 2002, respectively. For
Fiscal 2003, Fiscal 2002 and Fiscal 2001, our effective tax rates were 8.2%,
(21.1%), and (7.3%), respectively. Our future effective tax rate will depend
upon the apportionment between foreign and domestic taxable income and losses,
and the statutory rates of the related tax jurisdictions.
Net Income (Loss)
As a result of the matters described above, we reported net income of $6.4
million, or $0.22 per diluted share, for Fiscal 2003 as compared to a net loss
of $(5.2) million, or $(0.19) per share, for Fiscal 2002.
Fiscal 2002 Compared to Fiscal 2001
Net Sales
Net sales for Fiscal 2002 were $129.3 million, a decrease of $50.7 million, or
28.2%, as compared to net sales for Fiscal 2001. The decrease in net sales
resulted principally from decreases in sales to DMS customers partially offset
by an increase in sales to new and existing RSD customers. On a comparative
basis, in Fiscal 2002 the decrease in DMS 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 net sales were $95.7
million, an increase of $12.4 million, or 14.9%, as compared to Fiscal 2001. For
Fiscal 2002, DMS net sales were $33.6 million, a decrease of $63.1 million, or
65.2% as compared to Fiscal 2001.
Net sales of Concord Asia for Fiscal 2002 were $34.4 million, a decrease of
$62.5 million, or 64.5%, as compared to Fiscal 2001. The decrease was due to
lower DMS net sales.
Net sales of Concord Americas for Fiscal 2002, were $68.7 million, an increase
of $11.9, 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 were $26.2 million, a decrease of
$0.1 million, or 0.2% as compared to Fiscal 2001.
-19-
Gross Profit
Gross profit for Fiscal 2002 was $19.0 million, a decrease of $8.5 million, or
30.9% as compared to Fiscal 2001. Gross profit margin decreased to 14.7% for
Fiscal 2002 as compared to 15.3% for Fiscal 2001. The decrease in gross profit
margin was attributable to: (i) significantly lower net sales, (ii) a digital
inventory provision of $2.3 million, (iii) competitive price pressures and
unfavorable absorption of manufacturing overhead and labor utilization, (iv) a
provision of $1.0 million related to specific product inventory for Polaroid
which filed for bankruptcy in October 2001 and (v) higher product development
costs. Included in gross profit for Fiscal 2001 were $4.7 million of inventory
provisions and $0.5 million associated with a restructuring and cost containment
program ("Restructuring Initiative") that was initiated in June 2001. Product
development costs in dollars and as a percentage of net sales for Fiscal 2002
and 2001, included in the cost of products sold, were $7.6 million (5.9%) and
$6.4 million (3.6%), respectively.
Operating Expenses
Selling expenses decreased by $1.8 million, or 22.2%, to $6.3 million for Fiscal
2002 from $8.1 million 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 $12.3 million, or 37.1%, to
$21.0 million for Fiscal 2002 from $33.3 million 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. Included in general and
administrative expenses for Fiscal 2002 were certain amounts aggregating $3.0
million comprised of (i) a provision related to an account receivable of $1.6
million associated with Polaroid's bankruptcy filing; (ii) a net provision
related to an account receivable of $0.7 million associated with Kmart'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 $1.1 million; and (iv) a reversal in June 2002 of an accrual
associated with the Restructuring Initiative of $0.3 million which resulted in a
reduction of general and administrative expenses. The Restructuring Initiative
was completed in June 2002. In Fiscal 2001, general and administrative expenses
included a $15.8 million provision for doubtful accounts for an account
receivable associated with a former DMS customer. Also, as a result of the
Restructuring Initiative, general and administrative expenses included $0.9
million of the $1.4 million restructuring charge that the Company recorded in
its fourth quarter of Fiscal 2001.
Terminated acquisition costs of $0.8 million in Fiscal 2001 related to a
proposed acquisition that was not consummated. Negotiations regarding this
acquisition were terminated in September 2000.
Interest expense decreased by $0.3 million, or 9.7%, to $2.5 million for Fiscal
2002 from $2.8 million 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 $(3.1) million and $(4.9) million 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 $1.2 million of income from an arbitration award.
-20-
Income Taxes
Income tax (benefit) was $(1.4) million and $(0.9) million for Fiscal 2002 and
Fiscal 2001, respectively. The increase in the income tax (benefit) is primarily
due to the utilization of $1.1 million of European valuation allowances in
Fiscal 2002. See "Income Taxes" under the "Fiscal 2003 Compared to Fiscal 2002"
discussion for additional income tax information.
Net Loss
As a result of the matters described above, we reported a net loss of $(5.2)
million, or $(0.19) per share, for Fiscal 2002 as compared to a net loss of
$(11.8) million, or $(0.45) per share, for Fiscal 2001.
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, European Euro, British Pound Sterling, PRC
Renminbi, Hong Kong Dollar and Japanese Yen. Our foreign subsidiaries purchase
the majority of their finished goods inventories 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.
LIQUIDITY AND CAPITAL RESOURCES
A recent SEC 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 28, 2003.
In the ordinary course of business, we enter into operating lease commitments,
purchase commitments and other contractual obligations. These transactions are
recognized in our financial statements in accordance with accounting principles
generally accepted 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 Fiscal 2003 year end, working capital was $121.1 million as
compared to Fiscal 2002 year end working capital of $128.4 million, a decline of
$7.3 million. Cash and investments decreased by $15.6 million from $103.9
million at June 29, 2002 to $88.3 million at June 28, 2003 primarily as the
result of the repurchase of the $15.0 million Senior Notes and payment of $5.8
million for fixed asset expenditures. These two uses of cash, totaling $20.8
million, were partially offset by a total of $5.5 million of positive cash flow
from operations and proceeds received from Common Stock issuance resulting from
stock option and warrant exercises. Accounts receivable and inventory increased
by $9.5 and $9.8 million, respectively, during Fiscal 2003 as a result of our
significant sales growth.
-21-
Cash Provided by Operations - Cash provided by operations in Fiscal 2003 was
$5.0 million, which compared favorably to cash used in operations of $(1.1)
million for Fiscal 2002 and favorably to cash used in operations of $(3.4)
million for Fiscal 2001. The changes in cash provided by operating activities
for the respective Fiscal Years were primarily attributable to net income and
changes in accounts receivable, inventories and accounts payable.
Cash Used in Investing Activities - Capital expenditures for Fiscal 2003, Fiscal
2002 and Fiscal 2001 were $5.8 million, $2.1 million, and $7.5 million,
respectively, and related primarily to expenditures on plant and equipment
purchased for our manufacturing facilities in the PRC. The increase in Fiscal
2003 was primarily the result of higher expenditures on plant and equipment
purchases primarily related to digital camera production at our manufacturing
facilities in the PRC. We anticipate capital expenditures will increase
substantially in Fiscal 2004 due to increased investments in plant and equipment
at our manufacturing facilities in the PRC in anticipation of increased revenue,
as well as investment in a new Enterprise Resource Planning software package for
worldwide operations. For Fiscal 2003, the decrease in cash from investing
activities related to certain short-term investments made in Fiscal 2003.
Cash Used in Financing Activities - Cash used in financing activities in Fiscal
2003 was $14.4 million. This resulted from the repayment of the Senior Notes
partially offset by proceeds received from Common Stock issuances resulting from
stock option and warrant exercises. Cash used in financing activities in Fiscal
2002 was $0.2 million, which was primarily attributable to repayments of capital
lease obligations. In Fiscal 2001, cash provided by financing activities of
$93.9 million was primarily attributable to our public equity offering
(described more fully below) in the Fall of 2000.
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," in the Notes to
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 engaged in related party transactions as
discussed in Note 17, "Related Party Transactions," in the Notes to 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 below 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 $23.5 million
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 $11.0 million Import Facility, 2) an
approximately $2.6 million Packing Credit and Export Facility, 3) an
approximately $1.9 million Foreign Exchange Facility and 4) an $8.0 million
Accounts Receivable Financing Facility (collectively the "Hong Kong Financing
Facilities"). The $8.0 million 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 $15.5 million 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 Hong Kong Financing Facilities bear interest at variable rates.
At June 28, 2003, there were no amounts outstanding under the Hong Kong
Financing Facilities.
-22-
United Kingdom Credit Facility - In November 1999, our United Kingdom subsidiary
obtained a United Kingdom credit facility (the "UK Facility") that was secured
by substantially all of our United Kingdom subsidiary's assets. The UK Facility
bore interest at 1.5% above the UK prime lending rate and was principally
utilized for working capital needs and allowed borrowings of up to approximately
$1.2 million. At June 28, 2003, there were no amounts outstanding under the UK
Facility. The facility expired in August 2003.
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. We
accepted for exchange and cancelled options to purchase a total of 1,375,876
shares of Common Stock and issued new options to purchase a total of 1,031,908
shares of Common Stock in exchange for the cancelled options. As a result of the
exchange offer, we are now required to apply variable accounting to these new
stock options until the options are exercised, cancelled or expired. For Fiscal
2003, we recorded $0.9 million of variable stock-based compensation expense in
the consolidated statement of operations because our Common Stock price on June
28, 2003 was above the exercise price of $5.97. For Fiscal 2002, we did not
record any variable stock-based compensation expense in the consolidated
statements of operations because the Company's 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 $0.8 million as part of a Board of
Directors (the "Board") approved Common Stock buy-back program. In February
2001, we adopted an additional share repurchase program pursuant to which the
Board allocated up to $10.0 million 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.
Public Equity Offering - On September 26, 2000, pursuant to an underwritten
public offering, we sold 3.9 million 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 $96.9 million from the
offering, after deducting offering costs and underwriting fees of $6.3 million
from the gross proceeds of $103.2 million. 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.
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 $15.0
million 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, we entered into our two Polaroid
licensing agreements. The two license agreements provide for 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 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 $3.0 million of minimum royalties, which
will be fully credited against percentage royalties. Through August 2003, we
have paid a total of $5.0 million, which represented $2.5 million for each
license agreement, as partial payment of the minimum royalties.
-23-
Litigation Settlements - On July 24, 2003, the Company entered into a settlement
agreement to dismiss a patent infringement complaint filed by the Massachusetts
Institute of Technology and Electronic for Imaging, Inc. against the Company and
to release the Company from any and all claims of infringement of the patent at
issue. The Company recorded the settlement amount under the caption "Accrued
Expenses" in the Consolidated Balance Sheet as of June 28, 2003. The settlement
is not material and does not have a material adverse effect on our financial
position or results of operations.
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 DMS
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. 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.
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 in the People's Republic of China (PRC) are subject to
administration 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. We
currently have approximately 6,200 workers in the PRC either employed by our PRC
subsidiaries or through our agreements with various PRC government or
quasi-government agencies. We are responsible for their wages 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 local 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 quasi-government agencies could have a material
adverse impact on our revenues and earnings.
We are exposed to political, economic and other risks that arise from operating
a multinational business.
We have significant operations outside the United States. We currently have
operations in Hong Kong, the PRC, Canada, the United Kingdom, France and
Germany. Further, we obtain raw materials, components and finished goods from
foreign suppliers. Accordingly, our business is subject to the political,
economic and other risks that are inherent in operating in foreign countries.
These risks include:
o the difficulty of enforcing agreements and collecting receivables
through foreign legal systems;
o trade protection measures and import or export licensing
requirements;
o the imposition of tariffs, exchange controls or other restrictions;
-24-
o difficulty in staffing and managing widespread operations and the
application of foreign labor regulations;
o required compliance with a variety of foreign laws and regulations;
and
o changes in the general political and economic conditions in the
countries where we operate, particularly in emerging markets.
Our business success depends in part on our ability to successfully anticipate
and effectively manage these and other risks. No assurance can be given that
such risks will not have a material adverse effect on the Company's business,
financial condition and results of operations.
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 may 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.
We are dependent on certain large customers.
In Fiscal 2003, we had three customers (Wal-Mart, Walgreens and Kodak) each of
whose purchases represented in excess of 10% of our total net sales and whose
purchases in the aggregate represented over 51% of our total net sales. The loss
of any of our large customers could have a material adverse impact on our
revenues and profits.
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 and single use
camera products. Because of rapid technological changes, some of our digital
camera products became obsolete and, consequently, we recorded significant lower
of cost or market value adjustments related to digital inventory during Fiscal
2002. Average selling prices for our products decline over relatively short time
periods. Many of our manufacturing costs are fixed. When our average selling
prices decline, our revenues decline unless we sell more units, and our gross
margins decline unless we are able to reduce our product costs by a commensurate
amount. Our operating results suffer when gross margins decline. 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.
Our digital camera products involve a more complex development process, which we
may not be able to successfully integrate into our operations, and we are
dependent upon the continued availability of products and key components.
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 and products, which may be outside
our control, could adversely impact our business, results of operations and
financial condition. Any disruption in the availability of key components or our
suppliers' ability to deliver quality components and products in time to meet
critical manufacturing and distribution schedules could negatively impact our
ability to achieve our growth and sales objectives. We may occasionally
experience a short supply of certain component parts as a result of strong
demand in the industry for those parts or problems experienced by suppliers. If
shortages or delays persist, the price of these components may increase, we may
be exposed to product quality issues or the components may not be available at
all. We may not be able to secure enough components at reasonable prices or of
acceptable quality to build new products in a timely manner in the quantities
needed. Accordingly, our revenue and gross margins and market share could suffer
until other sources can be developed.
-25-
We are exposed to risks associated with intellectual property used in image
capture devices.
Image capture devices use technology which may be protected by United States or
foreign patents. The right to use such intellectual property is subject to the
availability of licenses from the patent holders. If licenses are not available
or are only available on onerous terms, the Company's business could be
materially and adversely affected. In addition, the defense of patent
infringement claims could be time consuming and costly.
From time to time the Company receives patent infringement claims which it
analyzes and, if appropriate, may either take action to avoid infringement or
negotiate a license. In at least two such cases, one of which involves one of
the Company's largest customers, the Company is engaged in discussions looking
toward licensing of certain digital image capture technology.
We face a risk of business interruption as a result of political events in Hong
Kong and the PRC.
We conduct a substantial part of our business in Hong Kong and the PRC, such as
manufacturing, administration, sales, engineering and design. 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 the PRC, or on our operations or financial
condition in general. Any significant changes affecting our operations or
financial condition in Hong Kong or the PRC could have a material adverse effect
on our business and financial condition.
We are exposed to credit risk associated with sales to our customers.
The Company sells a significant number of its products to a relatively small
number of customers. Receivables arising from these sales are generally not
collateralized. The Company monitors the credit worthiness of its customers and
reviews outstanding receivable balances for collectibility on a regular basis
and records provisions for doubtful accounts as necessary. In the past we have
had customers file for protection from their creditors under Chapter 11 of the
U.S. Bankruptcy Code. As a result, we have recognized provisions related to
accounts receivable and inventory. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" above.
-26-
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 his or any
other key employee services 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.
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.
To achieve our operating and financial objectives, we must manage our
anticipated growth effectively.
We anticipate that our business will continue to 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.
We face certain foreign currency risks as a result of conducting a substantial
portion of our business activities in Hong Kong and the PRC.
Since 1983 and 1998 the Hong Kong Dollar and the PRC Renminbi, respectively,
have been pegged to the United States Dollar, but the exchange rate of these
currencies may fluctuate in the future. Although our DMS 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 and PRC Renminbi. There is increasing international pressure on the PRC
to appreciate its currency. We are also exposed to currency risks in Japan and
other countries where we purchase materials for our products or sell those
products. If there is a significant devaluation of the currency in a specific
country, the prices of our products will increase relative to that country's
currency and our products may be less competitive in that country. Also, if our
international customers become unwilling to place orders denominated in U.S.
Dollars, our revenue and operating results will be subject to foreign exchange
fluctuations. We generally do not engage in currency hedging activities.
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 continued 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.
-27-
Our future tax rates could increase.
A number of factors will affect our tax rate in the future, and the combined
effect of these factors could result in an increase in our effective tax rate as
compared to our effective tax rate in Fiscal 2003. This would adversely affect
our net income. We operate in different countries that have different income tax
rates. Based upon our apportionment of income, our effective tax rate could
fluctuate. A key factor that could cause our tax rate to increase would be
increasing the valuation allowance offsetting part, or all, of our net deferred
tax assets. Changes in tax laws in the United States may further limit our
ability to utilize our net operating losses. Any further limitation on our
ability to utilize our net operating losses could adversely affect our operating
results.
The implementation of a new enterprise resource planning system presents certain
risks.
In July 2003, we began implementing a new Enterprise Resource Planning, or ERP,
system which will become an important element of the Company's accounting,
financial and operating functions. There are significant costs associated with
implementing the new ERP system, in terms of both financial outlay and the human
resources to be incurred and expended in connection with its implementation. In
addition, there are certain risks associated with the related conversion to a
new computer system, including a potential disruption in our accounting and
operational controls and the possibility of problems associated with the
conversion of electronic data. If these issues are not properly and adequately
addressed, it could result in the diversion of management's and other
personnel's attention and resources, and could materially adversely affect our
operating results and impact our ability to manage our business and anticipated
growth.
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.
Our operations may be impaired as a result of disasters, business interruptions
or similar events, including the outbreak of the Severe Acute Respiratory
Syndrome.
Disasters such as earthquakes, water, fire, electricity failure, or accidents
affecting our operating activities, major facilities, and employees'/customers'
health could materially and adversely affect our operating results and financial
condition. In particular, our operations in the PRC, as well as most of our
third party manufacturers and service providers involved in the manufacturing of
our products, are located within a relatively close proximity of one another in
the PRC. Therefore, any disaster that strikes within close proximity of that
geographic area could be exceedingly disruptive to our business and could
materially and adversely affect our operating results and financial condition.
We do not currently have a disaster recovery plan.
-28-
In the event of another outbreak of severe acute respiratory syndrome, or SARS,
our facilities and/or the facilities of our third party manufacturers and
service providers located in Hong Kong, the PRC and other parts of Southeast
Asia could be quarantined or temporarily closed. If this occurs, it could delay
or prevent us from developing new products or manufacturing, testing or shipping
our current products, and may require us to find other providers of such
services, which may be unavailable or more expensive. Further, if a SARS
outbreak has an adverse impact on the businesses of our customers, it could
reduce the size and/or frequency of our customers' purchases, which could
adversely impact our operating results.
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.
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 has been 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."
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 28, 2003, our exposure to changes in interest rates was minimal, since
we had no long-term or short-term debt outstanding. 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 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 28, 2003, 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.
-29-
Item 8. Financial Statements and Supplementary Data.
The financial statements listed in Item 15(a)(1) and (2) are included in the
report beginning on page F-2.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
CEO and CFO Certifications. The certifications of the CEO and the CFO required
by Rules 13a-14 and 15d-14 the Securities Exchange Act of 1934, as amended (the
"Certifications") are filed as exhibits to this report. This section of the
report contains the information concerning the evaluation of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) ("Disclosure Controls") and changes to internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
("Internal Controls") referred to in the Certifications and this information
should be read in conjunction with the Certifications for a more complete
understanding of the topics presented.
Limitations on the Effectiveness of Controls. The Company's management,
including the principal executive officer and principal financial officer, does
not expect that the Company's Disclosure Controls or Internal Controls will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the limitations in any and
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company have
been detected. Further, the design of any control system is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
Evaluation of Disclosure Controls. Based on our management's evaluation (with
the participation of our principal executive officer and principal financial
officer), as of the end of the period covered by this report, our principal
executive officer and principal financial officer have concluded that our
Disclosure Controls are designed to provide reasonable assurance of achieving
their objectives and, at the "reasonable assurance" level, are effective to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.
Changes in Internal Controls. There was no change in our Internal Controls
during our fourth fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our Internal Controls.
-30-
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 31,
2003) are as follows:
Name Age Position
---- --- --------
Ira B. Lampert(3)(4) 58 Chairman, Chief Executive Officer and President
Gerald J. Angeli 50 Vice President of Worldwide Engineering and Technology
Richard M. Finkbeiner 57 Senior Vice President and Chief Financial Officer
Brian F. King 50 Senior Executive Vice President and Assistant Secretary
Keith L. Lampert 33 Executive Vice President and Chief Operating Officer
Joseph Leonardo 57 Vice President and Director of Operations for the
Company and Managing Director of Concord HK
Harlan I. Press 39 Vice President, Treasurer and Assistant Secretary
Alan Schutzman 47 Senior Vice President, General Counsel and Secretary
Urs W. Stampfli 52 Senior Vice President and Director of Global Sales and Marketing
David M. Wand 48 Vice President and Director of Worldwide Supply Chain
Ronald S. Cooper(1)(2) 65 Director
Morris H. Gindi(1)(5) 58 Director
J. David Hakman(3)(4) 61 Director
William J. O'Neill, Jr.(1)(2) 61 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 Queens College Foundation Board of Trustees (Queens
College is part of the City University system of New York), is a member of the
Advisory Board of the Boys & Girls Republic, a nonprofit organization for
underprivileged children, and serves on the Boards of Trustees of the Mount
Sinai Medical Center Foundation, Inc. and the Mount Sinai Medical Center of
Florida, Inc.
Gerald J. Angeli joined the Company in April 2000 as Vice President, DMS 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.
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.
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Brian F. King has been Senior Executive Vice President of the Company since
February 2002 and an Assistant Secretary of the Company since September 15,
2003. Mr. King served as Senior Vice President of the Company from August 1998
to February 2002 and as Chief Operating Officer from February 2002 to December
2002. In addition, he served as Secretary of the Company from August 1996 to
September 14, 2003, 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.
Keith L. Lampert, who is a son of Ira B. Lampert, has been Executive Vice
President since February 2002 and Chief Operating Officer since January 1, 2003.
From February 2002 until January 2003, he also served as the Company's Director
of Worldwide Operations and was Managing Director of Concord HK from April 2000
until December 2002. 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.
Joseph Leonardo has been Vice President and Director of Operations for the
Company and Managing Director of Concord HK since January 1, 2003. Mr. Leonardo
was Vice President and Director of Manufacturing Operations for the Company and
Deputy Managing Director of Concord HK from February 2002 to December 2002,
having served as Vice President and Director of Operations for Concord HK since
January 2001. From January 1998 to January 2001, Mr. Leonardo was the Company's
Director of Manufacturing. Prior to joining the Company, he was Vice President
of Manufacturing for MicroE, Inc. from February 1996 to November 1997. Mr.
Leonardo has over 30 years of experience in manufacturing, having held
manufacturing-related management positions at companies such as Polaroid and
Bausch & Lomb Incorporated.
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.
Alan Schutzman joined the Company on September 15, 2003 as Senior Vice
President, General Counsel and Secretary. From January 2001 until joining the
Company, Mr. Schutzman was Associate General Counsel of Jacuzzi Brands, Inc.
("Jacuzzi"), and Vice President and Associate General Counsel of Jacuzzi since
September 2001. From July 1996 to December 2000, he served as Vice President and
General Counsel of various operating subsidiaries of Jacuzzi, including Ames
True Temper and Keller Ladders, Inc.
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.
David M. Wand has been Vice President and Director of Worldwide Supply Chain for
the Company since February 2002, having served as Vice President and Director of
Worldwide Supply Chain and Information Technology for the Company from February
2002 to March 2003. From January 1999 to February 2002, Mr. Wand was Concord
HK's Director of Supply Chain and Information Systems and from December 1996,
when Mr. Wand first joined the Company, until January 1999, he was Materials
Director of Supply Chain for Concord HK. Prior to joining the Company, Mr. Wand
was with Andersen Consulting for two years, and EDS for ten years, where he was
responsible for implementing reengineering projects associated with the supply
chain and information technology functions.
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.
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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.
These two businesses import and distribute merchandise to all levels of the
retail trade. Mr. Gindi's career in the home textiles industry has spanned four
decades.
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.
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 Corporation, most recently as Executive
Vice President and President, Corporate Business Development. Since July 2001,
he has served as Dean of the Frank Sawyer School of Management at Suffolk
University in Boston, Massachusetts.
Audit Committee and Audit Committee Financial Expertise
The Company has a separately-designated standing Audit Committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the
Audit Committee are Ronald S. Cooper (Chairman), Morris H. Gindi and William J.
O'Neill, Jr.
The Board of Directors has determined that the Company has two "audit committee
financial experts" serving on its Audit Committee, as that term is defined in
Item 401(h)(2) of Regulation S-K, namely Ronald S. Cooper and William J.
O'Neill, Jr. Mr. Cooper has over 35 years of experience in the field of public
accounting, retiring in 1998 from Ernst & Young LLP. Mr. O'Neill 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. All of the members of the Audit Committee, including
Messrs. Cooper and O'Neill are independent, as that term is defined in Item
7(d)(3)(iv) of Schedule 14A under the Exchange Act.
Code of Ethics
The Company has adopted a Code of Ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer and
controller, as well as all other employees and the directors of the Company. The
Code of Ethics, which the Company calls its Code of Conduct, is posted on the
Company's website: www.concord-camera.com, on the Investor Relations page. The
Company intends to satisfy the disclosure requirements under Item 10 of Form 8-K
regarding an amendment to, or a waiver from, a provision of its Code of Ethics
that applies to the Company's principal executive officer, principal financial
officer, pri