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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 JULY 3, 2004
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 Act). Yes |X| No |_|
The aggregate market value of the Common Stock held by non-affiliates of the
registrant on December 26, 2003 was approximately $266,313,691 million, based on
the price at which the Common Stock was last sold on Nasdaq on such date of
$10.04 per share. Solely for the purpose of this calculation, shares held by
directors, executive officers and 10% shareholders of the registrant have been
excluded. Such exclusion should not be deemed a determination or an admission by
the registrant that these individuals are, in fact, affiliates of the
registrant.
As of September 20, 2004, there were 28,832,199 shares of the Company's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Item Page
1. Business ........................................................................................ 1
2. Properties ...................................................................................... 7
3. Legal Proceedings ............................................................................... 8
4. Submission of Matters to a Vote of Security Holders ............................................. 9
PART II
5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Repurchases
of Equity Securities ............................................................................ 10
6. Selected Financial Data ......................................................................... 11
7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........... 12
7A. Quantitative and Qualitative Disclosures About Market Risk ...................................... 31
8. Financial Statements and Supplementary Data ..................................................... 32
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............ 32
9A. Controls and Procedures ......................................................................... 32
9B. Other Information ............................................................................... 33
PART III
10. Directors and Executive Officers of the Registrant .............................................. 34
11. Executive Compensation .......................................................................... 37
12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters .. 47
13. Certain Relationships and Related Transactions .................................................. 51
14. Principal Accountant Fees and Services .......................................................... 51
PART IV
15. Exhibits and Financial Statement Schedules ...................................................... F-1 to F-38
Signatures ...................................................................................... 60
i
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. The Company's fiscal year ends on the Saturday closest to June 30.
Fiscal 2006 refers to the Fiscal Year ending July 1, 2006; Fiscal 2005 refers to
the Fiscal Year ending July 2, 2005; Fiscal 2004 refers to the Fiscal Year ended
July 3, 2004; 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; and Fiscal 2000 refers to the Fiscal Year ended
July 1, 2000.
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. BUSINESS.
GENERAL
We design, develop, manufacture and sell on a worldwide basis, popularly priced,
easy-to-use image capture products. Image capture products include both digital
and analog products that enable the acquisition or recording of visual images
either digitally (by using an electronic sensor) or through the use of a light
sensitive material (such as silver halide). Recorded images can be viewed and
shared on an LCD display, standard computer monitor, TV or by making hard copy
prints.
Our products include digital, 35mm traditional and single use cameras. 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 management team, many of whom live in the PRC, oversees our
manufacturing activities. Products manufactured by us are conceptualized,
designed, developed and engineered in Hong Kong, the PRC and the United States.
We also purchase a significant amount of digital and 35mm traditional cameras
from third-party manufacturers to ensure that we deliver the optimal product mix
on a timely basis that best meets the needs of consumers and our retail
customers on a global basis and expect that this practice will continue to
increase in Fiscal 2005.
1
The camera business is highly seasonal, with approximately 65% of sales
occurring in the July through December period (of this amount approximately 45%
of sales occur during the period from October through December ). In Fiscal
2004, we completed and introduced several new digital cameras which included 3,
4 and 5 megapixel sensors. Our design team is currently engaged in the
development of additional digital products for introduction late in Fiscal 2005
and in Fiscal 2006.
We have two primary channels of distribution: Retail Sales and Distribution
("RSD") and Design and Manufacturing Services ("DMS"). Our RSD products are
private label and brand name image capture products which we sell to retailers
worldwide. We offer product and package design and customer service to our
retail customers. Our DMS customers are offered and/or provided with
development, design, engineering and manufacturing services.
On May 10, 2004, Concord Camera GmbH ("Concord GmbH"), a wholly-owned subsidiary
of Concord, acquired Jenimage Europe GmbH ("Jenimage") from 4MBO International
Electronic AG ("4MBO"). Jenimage, based in Jena, Germany, is a distributor and
marketer of JENOPTIK branded photographic and imaging products. Digital cameras
account for over 90% of Jenimage's sales. Jenimage sells products to many
significant German and European wholesalers and retailers, including Metro AG
(wholesaler), Plus Warenhandelgesellschaft GmbH (discounter) and Otto GmbH and
Co, KG (mail order). The JENOPTIK brand is recognized in Germany and other
German-speaking countries. The JENOPTIK trademark is licensed from Jenoptik AG
by the Company for a twenty year period. The acquisition is expected to increase
Concord's presence in Germany and facilitate our penetration of other countries
in Europe.
Fiscal 2004 results of operations are discussed in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations. Fiscal
2004 losses were primarily attributable to our digital camera products. We have
initiated a strategic review process to, in part, determine how we may better
compete in the digital camera market. As part of this process, we are evaluating
a number of strategies related to digital cameras. The review process is not
complete and no decision has been made at this time.
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 Securities and Exchange Commission ("SEC"): our 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. We also make available through a link in the
Investor Relations section of our web site Section 16 reports filed with respect
to our securities. All such filings are available free of charge. The
information found on our website is not part of this or any other report we file
with or furnish to the SEC.
PHOTOGRAPHY MARKET OVERVIEW
There are three main categories of cameras within the amateur photography
market:
o DIGITAL CAMERAS - A digital camera uses an electronic sensor and other
components to electronically capture and process an image (versus
silver halide film), which is then stored within memory. Digital
cameras with image review capability allow for instantaneous viewing.
In addition, images can be downloaded to a computer for viewing,
manipulation, reproduction and storage. Based upon available
third-party market research data, approximately 46.5 million consumer
digital cameras1 were sold worldwide in calendar 2003 (a 67% increase
in the number of units sold as compared to calendar 2002) generating
retail sales values of approximately $15.8 billion.
- ------------
1 "Consumer digital cameras" are cameras capturing images in digital format
only, and exclude digital cameras with interchangeable lenses ("digital SLR"),
cameras that operate only when connected to a PC ("PC cameras") and
camera phones.
2
o SINGLE USE CAMERAS - Single use cameras are sold preloaded with film
and batteries and are designed to be used only once by the consumer.
After use, the consumer returns the entire camera to the photo
processor. The processor then extracts the film and either disposes of
the used camera or returns and/or sells it for recycling. According to
third-party market research data, on a unit basis, single use camera
sales grew to approximately 420 million units in calendar 2003 (a 5%
increase over 2002) and accounted for approximately 88% of all
non-digital cameras sold worldwide.
o TRADITIONAL FILM CAMERAS - This category includes essentially all other
(non-single use) cameras that use silver halide film. Film formats
include both 35mm and Advanced Photo System ("APS") cameras. According
to third-party market research, on a unit basis, 35mm and APS cameras
accounted for approximately 57 million or about 12% of all non-digital
cameras sold worldwide in calendar 2003 (a decrease of 10.9% as
compared to 2002).
MARKET TRENDS
Market trends within the image capture industry include the following:
o GROWTH OF DIGITAL PHOTOGRAPHY. Digital photography is one of the
fastest growing areas of the photography market. According to available
third-party market research data, worldwide consumer digital camera
unit sales grew at an average rate of approximately 45% per calendar
year from 2000 through 2003, and are projected to grow at an average
rate of approximately 23% per calendar year with unit sales expected to
surpass 105 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 35mm and APS cameras.
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 2003,
the number of single use cameras sold worldwide grew at a compound
annual rate of 9.4%, according to available third-party market research
data.
PRODUCTS
Our products include digital, 35mm traditional and single use cameras. We sell
to our retail customers our own branded and private label products, a number of
which we have developed and manufactured. We also serve as a contract
manufacturer of developed and co-developed products for our customers.
We offer a variety of CMOS2 and CCD-imager3 based digital cameras, ranging from
VGA4 resolution up to and including 6.0 mega pixels. During Fiscal 2004, we
completed the development of a number of new digital cameras and currently have
additional products in various stages of development. From these products, we
have built and are selling new camera models. These products are designed for
configuration flexibility so that features, styles and user interfaces can be
changed, allowing for other models and appearances using a common base to
accommodate different user and customer preferences.
- ----------
2 "CMOS" is the acronym for complementary metal-oxide semiconductor.
3 "CCD" is the acronym for charge-coupled device.
4 "VGA" is the acronym for video graphics array.
3
We also offer a complete line of single use cameras which has enabled us to
provide encasements, finishes and packaging to accommodate different user and
customer preferences.
Our 35mm camera products range from entry-level to higher priced, 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 $10.5 million
in Fiscal 2004 from $8.5 million in Fiscal 2003 and $7.6 million in Fiscal 2002.
We expect design and product development expense to decrease in Fiscal 2005 as
we increase the percentage of products purchased from third-party manufacturers.
For additional information regarding product development costs, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below.
SALES AND MARKETING
We make direct sales to retailers on a worldwide basis through offices and/or
representatives in the United States, Latin America and Canada ("Americas"),
offices in the United Kingdom, France and Germany ("Europe") and offices in Hong
Kong, China and Japan ("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 o Goldline
o Apex o Go Wireless
o Concord o Jenoptik
o Concord Eye Q o Keystone
o EasyShot o Le Clic
o Fun Shooter o Polaroid
We have established our 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. We produce many different
types of cameras which are sold through thousands of retail outlets.
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 representatives who serve specific
geographic areas. Sales representatives 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 sales representatives for manufacturers of other
non-photographic products. We also sell products to distributors who, in turn,
sell our product to retailers.
COMPETITION
The image capture industry, and particularly digital products which are very
volatile, is highly competitive with over 50 companies marketing products to the
retail market. As a manufacturer and distributor of popularly priced, image
capture devices, we encounter substantial competition from a number of
companies, many of which have longer operating histories, more established
markets and brand recognition, and more extensive research and development and
manufacturing capabilities than we have. Key competitors include: Canon, Fuji,
Hewlett-Packard, Kodak, Olympus, Nikon, Sony, Pentax, Konica/Minolta, Panasonic,
Samsung and Vivitar. Many of these 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 develop and manufacture or
purchase from third-party manufacturers high quality products at the lowest
cost.
4
BACKLOG
Due to the lead time required for production and shipping and the need to build
inventory to meet seasonal demand, we may at times have a backlog of orders for
products. We define backlog as unfulfilled orders supported by signed contracts
or purchase orders for delivery of our products generally within the next six
months. Our backlog at July 3, 2004 was approximately $13.8 million. We
experience fluctuations in our backlog at various times during our fiscal year.
We expect that approximately $13.4 million of the unfulfilled orders at July 3,
2004 will be shipped during the first quarter of Fiscal 2005. Although we
believe that our entire backlog consists of firm orders, our backlog as of any
particular date may not be indicative of actual revenue for any future period
because of the possibility of customer cancellations and order changes and
changes in delivery schedules and delays inherent in the shipments of products.
No assurance can be given that the current backlog will necessarily lead to
revenue in any specific future period.
MAJOR CUSTOMERS
Our RSD sales to retailers represented $156.0 million, or 76.8%, of total net
sales in Fiscal 2004, compared to $145.8 million or 76.8% of total net sales in
Fiscal 2003. The year over year increase in RSD sales was attributable, in part,
to the introduction of new products and marketing programs. In Fiscal 2004, we
had two retail customers each of whose purchases represented in excess of 10% of
our total net sales: (i) Wal-Mart (19.3% of total net sales); and (ii) Walgreens
(11.4% of total net sales).
DMS customers accounted for $47.1 million, or 23.2%, of our total net sales in
Fiscal 2004. In Fiscal 2004, sales to Kodak accounted for 19.6% or $39.8 million
of our total net sales. We manufacture products for Kodak under two DMS
contracts. We have received notification from Kodak that it intends to cease
purchases under our two DMS contracts by the end of the second quarter of Fiscal
2005. We expect sales to Kodak in Fiscal 2005 to be approximately $14.0 million.
SEASONALITY
Sales of our products are linked to the timing of vacations, holidays and other
leisure activities. Sales are normally strongest in the first and second
quarters of our fiscal year as demand is high as retailers prepare for the
holiday season. Sales are also strong in the fourth quarter of our fiscal year
due to demand driven by heavy vacation activity, and events such as weddings and
graduations. Sales are normally lowest in the third quarter of our fiscal year
due to the absence of holidays and fewer people taking vacations during that
time.
LICENSING ACTIVITIES
In August 2002, we entered into two license agreements with Polaroid
Corporation. 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 traditional 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 have a worldwide (excluding Japan until January 1, 2005) non-exclusive
license to use certain of Fuji's single use camera patents and patent
applications in connection with the manufacture, remanufacture and sale of
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. Single use
cameras accounted for $110.0 million, or 54.2%, of our Fiscal 2004 net sales.
5
As part of the acquisition of Jenimage, we entered into a twenty year, worldwide
trademark license agreement with Jenoptik AG for the exclusive use of the
JENOPTIK brand name and trademark on non-professional consumer imaging products
including, but not limited to, digital, single use and traditional cameras, and
other imaging products and related accessories. There are no minimum guaranteed
royalty payments.
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.
Our manufacturing and related dormitory facilities are over 600,000 square feet.
See "Properties" below. 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, COMPONENTS, RAW MATERIALS AND PRODUCTS FROM THIRD-PARTY MANUFACTURERS
We own the tools and equipment necessary to manufacture a number of the products
and 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, components and finished products 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.
Digital camera procurement and component procurement for digital cameras is more
complex than for traditional and single use cameras. Availability, longer
procurement lead times, delays in procurement, and price fluctuations of digital
cameras and the components for digital cameras, which are outside our control,
have adversely impacted and could continue to adversely impact our business,
inventory position, results of operations and financial condition (see Risk
Factors in Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operation below).
PRC OPERATIONS
Our operations 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 October 2006
either under a renewal of our processing agreement or pursuant to some other
form of legal authorization.
In April 2002, we established and registered a wholly foreign owned enterprise
("WFOE"), named Concord Camera (Shenzhen) Company Limited ("Concord Shenzhen"),
pursuant to the laws of the PRC concerning enterprises with a sole foreign
investor. 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.
6
TRADEMARKS AND PATENTS
We own trademarks which include, but are not limited to, CONCORD, CONCORD EYE Q,
GO WIRELESS FUN SHOOTER, LE CLIC and GOLDLINE for cameras sold in the United
States and numerous foreign countries and the ARGUS name in numerous foreign
countries. We license the trademark POLAROID 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
also license the JENOPTIK trademark on a worldwide basis for non-professional
consumer imaging products and accessories (both digital and film-based). 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.
EMPLOYEE RELATIONS
As of September 20, 2004, we had 253 employees, 56% of whom were located in Hong
Kong and the PRC. We currently have one collective bargaining agreement covering
seven employees in France which has no stated expiration date. During Fiscal
2004, pursuant to our agreements with PRC governmental agencies, and based upon
production demand, approximately 5,100 to 7,550 people worked in our PRC
manufacturing facilities. We believe that our relationship with our employees
and workers is satisfactory.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
For financial information about geographic areas, see Note 23, "Geographic Area
Information," in the Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES.
In Hollywood, Florida, we lease approximately 20,000 square feet of office
space. We also lease a 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. The distribution activities previously conducted at the Fort
Lauderdale warehouse have been outsourced to a third-party warehouse and
transportation services facility in California. We plan to sub-lease the Fort
Lauderdale warehouse for the remainder of the lease term.
In Hong Kong, we lease approximately 33,000 square feet of office and warehouse
space comprised of one floor under a lease expiring in 2047 and four floors
under a lease which will expire on July 31, 2006. In the United Kingdom, we own
an 11,000 square foot building on a one-half acre parcel that we have contracted
to sell on or before March 10, 2005. We also lease warehouse and/or office space
in France, Canada, Germany and Japan 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.
7
ITEM 3. LEGAL PROCEEDINGS.
In July 2002, a class action complaint was filed against the Company and certain
of its officers in the United States District Court for the Southern District of
Florida by individuals purporting to be shareholders of the Company. On August
20, 2002, the Company filed a motion to dismiss the complaint and in December
2002, the Company's motion was granted by the court and the complaint was
dismissed. In January 2003, an amended class action complaint (the "Amended
Complaint") was filed adding certain of the Company's current and former
directors as defendants. The lead plaintiffs in the Amended Complaint sought to
act as representatives of a class consisting of all persons who purchased the
Company's Common Stock (i) issued pursuant to the Company's September 26, 2000
secondary offering (the "Secondary Offering") or (ii) during the period from
September 26, 2000 through June 22, 2001, inclusive. On April 18, 2003, the
Company filed a motion to dismiss the Amended Complaint and on August 27, 2004,
the court (i) dismissed all claims against the defendants related to the
Secondary Offering and (ii) dismissed all claims against the defendants related
to allegations of misconduct occurring before February 2001 or after April 2001
(the period February 2001 through April 2001 hereinafter referred to as the
"Shortened Class Period"). The allegations remaining in the Amended Complaint
are centered around claims that the Company failed to disclose, in periodic
reports it filed with the Securities and Exchange Commission ("SEC") and in
press releases it made to the public during the Shortened Class Period regarding
its operations and financial results, that a large portion of its accounts
receivable was represented by a delinquent and uncollectible balance due from
then customer, KB Gear Interactive, Inc ("KB Gear"), and claims that such
failures artificially inflated the price of the Common Stock. The Amended
Complaint seeks unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. The Company intends to
vigorously defend the lawsuit. The lawsuit is in the earliest stage and
discovery has not yet commenced. Although the Company believes this lawsuit is
without merit, its outcome cannot be predicted, and if adversely determined, the
ultimate liability of the Company, which could be material, cannot be
ascertained. On September 17, 2002, the Company was advised by the staff of the
SEC that it is conducting an informal inquiry related to the matters described
above. On October 15, 2002, the staff of Nasdaq requested certain information
and materials related to the matters described above and as to matters related
to the previously reported embezzlement of Company funds by a former employee,
uncovered in April 2002. The Company has not received any further communication
from the SEC with respect to the informal inquiry or from Nasdaq with respect to
their request since the Company last responded in February 2003.
In April 2004, a patent infringement complaint was filed against 28 defendants,
including the Company, in the United States District Court for the Eastern
District of Texas. The complaint asserts that the defendants have conducted
activities which infringe U.S. Patent No. 4,698,672, entitled Coding System for
Reducing Redundancy. The complaint seeks unspecified damages, interest,
attorneys' fees, costs of suit and unspecified other and further relief from the
court. The lawsuit is in the earliest stage and discovery has not yet commenced.
Although the Company believes this lawsuit is without merit, its outcome cannot
be predicted, and if adversely determined, the ultimate liability of the
Company, which could be material, cannot be ascertained.
In August and September 2004, three class action complaints were filed against
the Company in the United States District Court for the Southern District of
Florida by individuals purporting to be shareholders of the Company [Martin
Brustein v. Ira B. Lampert, Harlan Press, Richard M. Finkbeiner and Concord
Camera Corp.; Chalermchai Punya v. Concord Camera Corporation, Ira Lampert,
Harlan Press and Richard Finkbeiner; and Morris Akerman v. Ira B. Lampert,
Harlan Press and Concord Camera Corp.]. The claims in the three class actions
are essentially the same. The Company expects these lawsuits to be consolidated
into one case. The plaintiffs in these complaints seek to act as representatives
of a class consisting of all persons who purchased the Company's Common Stock
during the period from August 14, 2003 through May 10, 2004, inclusive (the
"Class Period"), and who were allegedly damaged thereby. The allegations in the
complaints are centered around claims that the Company failed to disclose, in
periodic reports it filed with the SEC and in press releases it made to the
public during the Class Period regarding its operations and financial results,
the full extent of the Company's excess, obsolete and otherwise impaired
inventory, and claims that such failures artificially inflated the price of the
Common Stock. The complaints seek unspecified damages, interest, attorneys'
fees, costs of suit and unspecified other and further relief from the court. The
Company intends to vigorously defend the lawsuits. The lawsuits are in the
earliest stage and discovery has not yet commenced. Although the Company
believes these lawsuits are without merit, their outcome cannot be predicted,
and if adversely determined, the ultimate liability of the Company, which could
be material, cannot be ascertained.
8
The Company is involved from time to time in routine legal matters incidental to
its business. In the opinion of our management, the resolution of such matters
will not have a material adverse effect on its financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER REPURCHASES OF EQUITY SECURITIES.
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 2004 and Fiscal 2003, the high and low sales prices per share of our
Common Stock as reported by the Nasdaq National Market.
Quarter Ended High Low
- ------------- ---- ---
July 3, 2004............................... $6.46 $2.64
March 27, 2004............................. $10.14 $5.53
December 27, 2003.......................... $14.06 $9.62
September 27, 2003......................... $12.65 $6.84
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
The closing price of our Common Stock on the Nasdaq National Market on September
20, 2004 was $1.82 per share. As of September 20, 2004, there were 969
shareholders of record of our Common Stock.
The Company has never paid cash dividends and does not presently intend to pay
cash dividends.
We did not repurchase any of our shares in the fourth quarter of Fiscal 2004.
10
ITEM 6. SELECTED FINANCIAL DATA.
(Dollars in thousands, except per share data)
Fiscal Year Ended
--------------------------------------------------------------
STATEMENT OF July 3, June 28, June 29, June 30, July 1,
OPERATIONS DATA: 2004 2003 2002 2001 2000
---- ---------- ---------- ----------- -----------
Net sales $ 203,132 $189,783 $ 129,317 $ 180,061 $ 167,720
Cost of products sold 188,954 153,532 110,345 152,598 126,148
---------- ---------- ---------- ----------- -----------
Gross profit 14,178 36,251 18,972 27,463 41,572
Operating expenses 44,141(d) 31,651(c) 28,683 45,056 25,607
---------- ---------- ---------- ----------- -----------
Operating (loss) income (29,963) 4,600 (9,711) (17,593) 15,965
Other income, net (500) (2,372) (3,060) (4,892) (883)
---------- ---------- ---------- ----------- -----------
(Loss) income before taxes and extraordinary gain (29,463) 6,972 (6,651) (12,701) 16,848
Provision (benefit) for taxes 7,537 569 (1,403) (931) (2,751)
Extraordinary gain (e) 5,778 - - - -
---------- ---------- ---------- ---------- ----------
Net (loss) income $ (31,222) $ 6,403 $ (5,248) $ (11,770) $ 19,599
========== ========== ========== =========== ===========
Basic (loss) income per share (a) $ (1.09) $ 0.23 $ (0.19) $ (0.45) $ 0.89
========== ========== =========== =========== ===========
Diluted (loss) income per share (a) $ (1.09) $ 0.22 $ (0.19) $ (0.45) $ 0.81
========== ========== =========== =========== ===========
BALANCE SHEET DATA:
Working capital $ 100,603 $ 121,077 $ 128,382 $ 131,003 $ 52,600
========== ========== ========== =========== ===========
Total assets $ 189,517 $ 205,814 $ 198,076 $ 213,666 $ 134,003
========== ========== ========== =========== ===========
Total debt $ 9,170 $ $ 14,934(b) $ 15,416 $ 19,555
========== ========== ========== =========== ===========
--
Total stockholders' equity $ 127,125 $ 156,828 $ 149,156 $ 154,337 $ 66,290
========== ========== ========== =========== ===========
(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 Note 10
to the Consolidated Financial Statements.
(c) Includes $0.9 million of variable stock-based compensation expense. For
further discussion, see Notes 1 and 14 to the Consolidated Financial
Statements.
(d) Includes $0.7 million of variable stock-based compensation income. For
further discussion, see Notes 1 and 14 to the Consolidated Financial
Statements.
(e) Represents the excess of estimated fair value of net assets acquired
over cost (negative goodwill) for the Jenimage acquisition. For further
discussion, see Note 2 to the Consolidated Financial Statements.
11
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 2004 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 the Company'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 the Company.
OVERVIEW
We design, develop, manufacture and sell on a worldwide basis popularly priced,
easy-to-use image capture products. Our products include digital, 35 mm
traditional and single use cameras. We manufacture and assemble products in the
PRC, and purchase a significant amount of products from third-party
manufacturers for sales to our retail customers under our brand names and on a
premium and private label basis to our DMS customers. We expect purchases of
products from third-party manufacturers will continue to increase in Fiscal 2005
and ensuing years to ensure that we deliver the optimal product mix on a timely
basis to our customers.
Fiscal 2004 losses were primarily attributable to our digital camera products.
We have initiated a strategic review process to, in part, determine how we may
better compete in the digital camera market. As part of this process, we are
evaluating a number of strategies related to digital cameras. The review process
is not complete and no decision has been made at this time.
The loss in Fiscal 2004 was higher than expected primarily due to the following
factors:
1. Lower than anticipated net digital camera sales;
2. Higher than expected provisions for digital camera returns and
allowances;
3. Higher digital camera and component inventory provisions;
4. Lower than anticipated digital camera production volumes which
resulted in manufacturing inefficiencies and other costs;
5. Higher selling, general and administrative costs;
6. Impairment of goodwill; and
7. Increased deferred tax asset valuation allowance.
1. Lower Than Anticipated Net Digital Camera Sales
During the second half of Fiscal 2004, the digital camera market in the United
States and Europe faced significant competition primarily due to higher
inventories at our retail customers, competitors and other manufacturers. Higher
inventories led to fierce price competition in digital camera products. While
the aggregate amount of digital camera sales increased over last year due to an
increase in the average selling price of digital cameras, unit volume and
average selling prices were below expectations because of competitive pricing
and weak sell through with several retail customers. We reduced selling prices
of digital camera products to meet significant competition.
12
2. Higher Than Expected Provisions for Digital Camera Returns and
Allowances
Excess retailer inventory and fierce price competition led to significant
increases in our provision for digital camera allowances. In addition,
provisions for digital camera returns provisions significantly increased
primarily as a result of lower than expected sell through activity at our retail
customers.
3. Digital Camera and Component Inventory Provisions
Significant competition resulted in substantial price declines in digital
cameras and led to an $11.1 million inventory charge to lower the carrying
values of certain digital camera components and finished goods inventories below
their cost basis to their estimated net realizable values. We anticipate that in
Fiscal 2005, sales of certain digital cameras whose carrying values were reduced
will result in significantly lower gross profit in both dollars and percentages
of net sales as there will be approximately no margin on the sales of these
products.
4. Lower Than Anticipated Digital Camera Production Volumes Which Resulted
in Manufacturing Inefficiencies and Other Costs
Lower than expected demand and, therefore, lower production volumes in our
manufacturing facilities created significant under absorption of manufacturing
labor and overhead costs. These factors led to significantly lower gross profit
in both dollars and as a percentage of sales.
5. Higher Selling, General and Administrative Costs
These costs have also increased as we have invested in our anticipated future
growth through the addition of personnel. We have incurred higher selling costs
resulting primarily from the cost of additional sales and marketing personnel
and variable costs related to higher sales. General and administrative costs
have increased due to the design and implementation of our new ERP system, and
significant costs associated with implementing measures necessary to comply with
the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") and related regulations.
6. Impairment of Goodwill
We performed an impairment test of our existing goodwill as of July 3, 2004.
Under SFAS No. 142, goodwill impairment exists if the net book value of the
reporting units exceed their fair value. We utilized our market capitalization
at July 3, 2004 to estimate the fair value of our reporting units. As a result
of the impairment test, we recorded a $3.7 million impairment charge for all of
our goodwill.
7. Increased Deferred Income Tax Asset Valuation Allowance
We increased our deferred income tax asset valuation allowance by $11.6 million.
This increase had the impact of increasing our provision for income taxes by
approximately $7.5 million in this fiscal year. We determined that we may not be
able to realize our deferred income tax assets in Hong Kong, Europe and the U.S.
In addition, we did not record the benefit of our current year losses as we have
determined that it is not more likely than not that our deferred tax assets will
be realized.
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:
REVENUE RECOGNITION
The Company recognizes revenue when title and risk of loss are transferred to
the customer, the sales price is fixed or determinable, and collectibility is
probable, which is generally when the product is delivered to the customer.
Revenues are recorded net of anticipated returns which the Company estimates
based on historical rates of return, adjusted for current events as appropriate.
Revenues are also recorded net of certain allowances provided to customers,
including those related to advertising, discounts, and other promotions.
SALES RETURNS
We establish a provision for estimated sales returns based on historical product
return trends. If the actual future returns are higher than we originally
estimated which was based upon historical data, our net sales could be adversely
affected.
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.
INVENTORIES
Inventory purchases and commitments are based upon estimates of future demand
which is difficult to forecast. If (i) there is a sudden and significant
decrease in demand for our products; (ii) there is a higher rate of inventory
obsolescence because of rapidly changing technology and customer requirements;
and/or (iii) the market value and selling prices of our products to our
customers decline or the price at which these customers can purchase similar
products from other manufacturers is lower than ours, we may be required to
reduce our inventory values resulting from lower of cost or market value
adjustments and our gross profit could be significantly adversely affected. The
obsolescence risk related to digital cameras is more significant than
traditional 35 mm and single use cameras due to the shorter life cycles of
digital products (See "Risk Factors" below).
DEFERRED INCOME TAXES
The deferred income tax asset valuation allowance is based on our assessment of
the realizability of our deferred income 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. The Company has a full valuation allowance
on all of its deferred income tax assets as of July 3, 2004. Should we determine
that it is more likely than not that we will realize certain of our deferred
income 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 a recorded deferred income 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.
14
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 and where
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts. Since the Company incurred a significant operating
loss during Fiscal 2004, a potential impairment indicator, it performed an
impairment test of its long-lived and other assets as of July 3, 2004. The
Company performed an impairment test by summarizing the undiscounted cash flows
expected to result from the use and eventual sale of its long-lived and other
assets, excluding goodwill. The sum of the undiscounted cash flows exceeded the
carrying values of these assets and, accordingly, the Company concluded these
carrying values are recoverable. No impairment indicators were identified for
Fiscal 2003 or Fiscal 2002. 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 actually be realized in the future. Such assets that are reviewed
include patents, goodwill, licensing and royalty agreements and certain
property, plant and equipment.
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, in certain circumstances, we are required to make certain
disclosures regarding the following off-balance sheet arrangements, if material:
- - 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 or other derivatives
outstanding at July 3, 2004. 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 generally accepted accounting principles in the United States,
and are more fully discussed below in Liquidity and Capital Resources.
15
CONTRACTUAL OBLIGATIONS AS OF JULY 3, 2004
(IN MILLIONS)
PAYMENTS DUE BY PERIOD
LESS THAN 1-3 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
----- ------ ------ ------ -----
Operating Leases $ 5.0 $1.3 $1.3 $0.9 $1.5
Purchase Obligations 9.1 9.1 - - -
Patent, Trademark, Licensing and Royalty Obligations 4.8 1.5 1.0 0.8 1.5
------ ----- ------ ----- -----
Total $18.9 $11.9 $2.3 $1.7 $3.0
====== ===== ====== ===== =====
RECENTLY ISSUED ACCOUNTING STANDARDS
For a discussion of recently issued accounting pronouncements, see Note 1,
"Recently Issued Accounting Pronouncements" in the Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
FISCAL 2004 COMPARED TO FISCAL 2003
NET SALES
Net sales ("sales") for Fiscal 2004 were $203.1 million, an increase of $13.3
million, or 7.0%, as compared to net sales for Fiscal 2003. The increase in
sales was in large part due to new single use and traditional cameras sold to
our RSD and DMS customers. RSD sales were $156.0 million for Fiscal 2004, an
increase of $10.2 million, or 7.0%, as compared to Fiscal 2003, and accounted
for 76.8% of total net sales. The growth in RSD net sales was mostly due to
sales of private label traditional cameras and Polaroid branded single use
cameras, new customers and organic growth from customers due to sell through and
new product introductions. DMS net sales were $47.3 million in Fiscal 2004, an
increase of $3.1 million, or 7.0%, as compared to the same period last year, and
accounted for 23.3% of total net sales. The increase in DMS net sales was
primarily attributable to sales of single use cameras to Kodak, partially offset
by lower sales to existing customers. In Fiscal 2004, sales to Kodak accounted
for 19.6% of total net sales or $39.8 million. We manufacture products for Kodak
under two DMS contracts. We have received notification from Kodak that they
intend to cease purchases under our two DMS contracts by the end of the second
quarter of Fiscal 2005. We expect sales to Kodak in Fiscal 2005 to be
approximately $14.0 million.
RSD net sales of our operations in the Americas for Fiscal 2004 were $106.0
million, an increase of $4.1 million, or 4.0%, as compared to Fiscal 2003. The
increase in RSD net sales was due to sales of Polaroid branded and other single
use and traditional cameras to new and existing customers resulting in increased
market penetration, new digital camera product sales and organic growth from
existing customers due to sell through and new product introductions.
RSD net sales of our operations in Europe for Fiscal 2004 were $47.4 million, an
increase of $5.7 million, or 13.7%, as compared to Fiscal 2003. This increase
was primarily attributable to offering new digital products to new and existing
customers and the inclusion of sales to customers of Jenimage for the last eight
weeks of Fiscal 2004.
16
Net sales of our operations in Asia for Fiscal 2004 were $49.7 million, an
increase of $3.5 million, or 7.6%, as compared to Fiscal 2003. The increase was
attributable primarily to growth in sales to our DMS customers and establishment
and opening of our new subsidiary in Japan.
GROSS PROFIT
Gross profit for Fiscal 2004 was $14.2 million, or 7.0% of net sales, versus
$36.3 million, or 19.1% of net sales, in Fiscal 2003. During Fiscal 2004, gross
profit was negatively affected by an $11.1 million pre-tax charge to cost of
products sold to lower the carrying value of certain digital camera and
component inventories below their cost basis to their estimated net realizable
value and increased depreciation expense by $1.8 million related to the
reduction of the remaining useful lives of molds and tooling related to certain
digital cameras. This resulted from the negative impact of a decline in the
digital camera market, competitive pricing pressure and excess customer
inventory levels. In addition, higher manufacturing costs mainly resulting from
production inefficiencies related to the production of digital camera products
contributed to the decrease in gross profit, in dollars and as a percentage of
sales. Incremental overhead costs associated with the costs incurred in
implementing our new ERP system also contributed to lower gross profit in Fiscal
2004. The effect of changing its method of applying manufacturing labor and
overhead costs to inventories during the first quarter of Fiscal 2004, then cost
of products sold and net loss in Fiscal 2004 each being approximately $1.7
million higher ($0.06 per diluted share) than under the prior method. The
comparable prior year period included a $2.2 million benefit resulting from the
favorable resolution of a previously disclosed disputed claim with a DMS
customer in the third quarter of Fiscal 2003 partially offset by $0.8 million of
additional air freight costs due to the West Coast dock worker's labor dispute.
Product engineering, design and development costs for Fiscal 2004 and Fiscal
2003, in dollars and as a percentage of net sales, were $10.5 million (5.2 %)
and $8.5 million (4.5%), respectively. We expect design and product development
expenses to decrease in Fiscal 2005 as we increase our purchase of products from
third-party manufacturers. For further discussion, see "Inventories" in the
Critical Accounting Policies above.
OPERATING EXPENSES
Selling expenses for Fiscal 2004 were $13.5 million, or 6.6% of net sales. In
Fiscal 2003, selling expenses were $8.9 million, or 4.7% of net sales. The
increase was primarily due to the cost of additional sales and marketing
personnel, royalties related to the Polaroid brand licenses, tradeshows, and
higher variable costs including freight and handling, all of which are
attributable to the year over year increase in sales. Selling expenses in Fiscal
2004 included costs incurred by Jenimage during the period May 10, 2004 through
July 3, 2004.
General and administrative ("G&A") expenses were $26.8 million, or 13.2% of net
sales, for Fiscal 2004. This compared to $20.6 million, or 10.9% of net sales,
for the prior year. The increase in G&A expenses was primarily due to increases
in personnel, severance costs, professional fees associated with designing and
installing an ERP system, costs associated with implementing measures necessary
to comply with Sarbanes-Oxley, and additional costs associated with our
anticipated sales growth. G&A expenses in Fiscal 2004 include costs incurred by
Jenimage during the period May 10, 2004 through July 3, 2004. During Fiscal
2003, G&A expenses included a $0.5 million recovery from Polaroid Corporation
resulting in a reduction of expenses.
Variable stock-based compensation income for Fiscal 2004 was $0.7 million
because the Common Stock price on July 3, 2004, was below the new repriced stock
options' exercise price of $5.97. Variable stock-based compensation income
cannot exceed the cumulative expense recorded to date of $0.9 million for
remaining outstanding repriced options. For Fiscal 2003, the Company recorded
$0.9 million of variable stock-based compensation expense in the consolidated
statement of operations because its Common Stock price on June 28, 2003 was
higher than the new repriced stock options' exercise price of $5.97. See Note 1,
"Stock-Based Compensation" in the Notes to Consolidated Financial Statements for
further discussion.
17
Interest expense for Fiscal 2004 was $0.7 million, compared to $1.2 million for
Fiscal 2003. The decrease of $0.5 million was attributable to the reduction in
interest expense related to the repurchase of Senior Notes in August 2002 and
the related non-recurring write-off of deferred finance costs of $0.3 million
recorded in Fiscal 2003. See Note 10, "Senior Notes," in the Notes to the
Consolidated Financial Statements for further discussion.
GOODWILL IMPAIRMENT
Goodwill impairment was $3.7 million for Fiscal 2004 compared to no expense for
Fiscal 2003. Under FAS 142, goodwill impairment exists if the carrying value of
the reporting unit exceeds its fair value. We utilized our market capitalization
at July 3, 2004 to estimate the fair value of our reporting units. As a result
of the impairment tests, we recorded a $3.7 million impairment charge for all of
our goodwill.
OTHER INCOME, NET
Other income, net was $0.5 million and $2.4 million for Fiscal 2004 and Fiscal
2003, respectively. The decrease of $1.9 million related primarily to the loss
of $0.9 million recorded in the Second Quarter Fiscal 2004 as a result of the
sale of short-term investments. Over the holding period of the short-term
investments, we realized a net positive return of $0.6 million after giving
effect to the dividend income received which more than offset the loss. See Note
1, "Description of Business and Summary of Significant Accounting Policies," in
the Notes to the Consolidated Financial Statements.
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. Since 2003 Concord HK's annual tax rate has been 8.75%.
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
position and results of operations.
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 $20.6 million as
of July 3, 2004. 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 July 3,
2004, we had net operating loss carryforwards of $2.2 million, which expire in
2016. Additionally, we have $36.0 million of net operating loss carryforwards
related to our foreign operations, $34.3 million of which relates to Hong Kong,
which have no expiration dates.
In the year ended July 3, 2004, management evaluated the Company's deferred
income tax assets. As part of assessing the realizability of its deferred income
tax assets, management evaluated whether it is more likely than not that some
portion or all of its deferred income tax assets will be realized. The
realization of its U.S., Europe and Hong Kong deferred income tax assets relates
directly to the Company's tax planning initiatives and strategies for U.S.
federal and state, Europe and Hong Kong income tax. In the year ended July 3,
2004, based on all the available evidence, management determined that it is not
more likely than not that its deferred income tax assets will be realized.
Accordingly, a full $12.1 million valuation allowance was recorded against all
of the Company's deferred income tax assets as of July 3, 2004. For Fiscal 2004,
Fiscal 2003, and Fiscal 2002, the Company's effective tax rate was 25.3%, 8.2%,
and (21.1%), respectively. The Company's future effective tax rate will depend
on the apportionment between foreign and domestic taxable income and losses, and
the statutory rates of the related tax jurisdictions.
18
EXTRAORDINARY GAIN - ACQUIRED NET ASSETS IN EXCESS OF COST
On May 10, 2004, the Company completed the acquisition of Jenimage Europe GmbH
("Jenimage"), a German corporation. The acquisition, recorded under the purchase
method of accounting, included the purchase of 100% of the outstanding stock of
Jenimage for $13.4 million in cash, excluding any related acquisitions costs. A
portion of the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair market value at the date of
acquisition. The $20.3 million of net assets acquired exceeded the total
purchase price of $14.5 million and, as a result, $5.8 million was recorded as
an extraordinary gain.
NET (LOSS) INCOME
As a result of the matters described above, we reported a net loss of ($31.2)
million, or ($1.09) per diluted share, for Fiscal 2004 as compared to net income
of $6.4 million, or $0.22 per diluted share, for Fiscal 2003.
FISCAL 2003 COMPARED TO FISCAL 2002
NET SALES
Net sales for Fiscal 2003 were $189.8 million, an increase of $60.5 million, or
46.8%, as compared to net sales for Fiscal 2002. The increased sales were driven
by increased sales of digital cameras, single use cameras and traditional
cameras from new accounts and organic growth from existing accounts from sell
through and new product introductions. Sales in Fiscal 2003 to our RSD and DMS
customers increased over Fiscal 2002. 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 for 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 for the 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 for 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.
19
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. Fiscal
2002 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 increased sales.
G&A 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 in Fiscal 2002. Fiscal 2003 G&A
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 G&A 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 G&A expenses increased year over year by
$3.5 million primarily due to the costs of additional staffing, professional and
insurance costs, and other costs associated with the Company's growth.
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 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").
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.
20
INCOME TAXES
Income tax provision (benefit) was $0.6 million and $(1.4) million for Fiscal
2003 and Fiscal 2002, respectively. The increase in the income tax (benefit) is
primarily due to the increase in net income for Fiscal 2003, which was
significantly attributable to income generated from our foreign operations. See
"Income Taxes" under the "Fiscal 2004 Compared to Fiscal 2003" discussion for
additional income tax information.
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.
LIQUIDITY AND CAPITAL RESOURCES
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 July 3, 2004. 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 generally accepted accounting
principles in the United States, and are more fully discussed below.
We believe that our cash and cash equivalents, short-term investments,
anticipated cash flow from operations, and amounts available under our credit
facilities provide sufficient liquidity and capital resources for our
anticipated short-term working capital and capital expenditure requirements as
well as our anticipated long-term working capital and capital expenditure
requirements for the foreseeable future.
Working Capital - At Fiscal 2004 year end, working capital was $100.6 million as
compared to Fiscal 2003 year end working capital of $121.1 million, a decline of
$20.5 million. Cash and short-term investments decreased by $30.4 million from
$88.3 million at June 28, 2003 to $57.9 million at July 3, 2004, primarily as
the result of cash used in operations of $25.1 million, a $9.1 million (net of
cash acquired) utilization of cash in the Jenimage Acquisition and payment of
$6.8 million for fixed asset expenditures. These uses of cash, totaling $41.0
million, were partially offset by $10.8 million of cash provided by the sale of
short-term investments; and $2.0 million of proceeds received from Common Stock
issuance resulting from stock option exercises. Accounts receivable decreased by
$11.6 million and inventories increased by $23.0 million during Fiscal 2004 as a
result of our sales growth.
Cash (Used in) Provided by Operating Activities - Cash used in operations in
Fiscal 2004 was ($23.3) million, which compared unfavorably to cash provided by
operations of $5.0 million for Fiscal 2003 and cash used in operations of $(1.1)
million for Fiscal 2002. 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 Provided by (Used in) Investing Activities - Capital expenditures for
Fiscal 2004, Fiscal 2003 and Fiscal 2002 were $6.8 million, $5.8 million, and
$2.1 million, respectively, and related primarily to expenditures on plant and
equipment for our manufacturing facilities in the PRC. The increase in Fiscal
2004 was primarily the result of expenditures for a new ERP software package and
equipment and expenditures primarily related to digital camera production
tooling and other plant and equipment at our manufacturing facilities in the
PRC. For Fiscal 2004, the increase in cash from investing activities related to
proceeds received from sale of short-term investments, offset by the cash used
in the Jenimage acquisition net of cash received. (See "Working Capital" for
additional information.)
21
Cash Provided by (Used in) Financing Activities - Cash flow from financing
activity in Fiscal 2004 was $11.1 million. This resulted from proceeds received
from borrowing under short-term credit facilities of $9.2 million and Common
Stock issuances resulting from stock option exercises of $2.0 million. Cash used
in financing activities in Fiscal 2003 was $14.4 million resulting from the
repayment of the Senior Notes and from repayments of capital lease obligations.
In Fiscal 2002, cash used in financing activities of $0.2 million was
attributable to the repayment of a capital lease obligation.
Operating Leases - We enter into operating leases in the ordinary course of
business (e.g., warehouse facilities, office space and equipment) where the
economic profile is favorable. The effects of outstanding leases are not
material to us either in terms of annual cash flow or in total future minimum
payments. See Note 17, "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 components, raw materials, supplies,
services, finished camera products, and property, plant and equipment. In the
aggregate, such commitments are not at prices in excess of current market
(except for those wherein the cost basis has been lowered to net realizable
value) and typically do not exceed one year.
Related Party Transactions - We engaged in related party transactions as
discussed in Note 19, "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 Credit Facilities below for information about our
financial guarantees.
Hong Kong Credit Facilities - Concord HK has various demand revolving credit
facilities in place providing an aggregate of approximately $38.3 million in
borrowing capacity ("facilities"). These facilities include a new $12.3 million
revolving loan facility denominated in European Central Bank Euros that was
entered into on June 10, 2004 by Concord HK. The remaining $26.0 million of
facilities are denominated in Hong Kong dollars. Since 1983, the Hong Kong
Dollar has been pegged to the United States Dollar. These remaining facilities
are comprised of 1) an approximate $24.0 million Import Facility with an
approximate $2.6 million Packing Credit and Export sub-limit Facility, and 2) an
approximate $1.9 million Foreign Exchange Facility. The previous $8.0 million
Accounts Receivable Factoring Facility expired in November 2003 and was not
renewed. The Company guarantees all of the amounts under the facilities. The
facilities bear interest at variable rates. At June 28, 2003, there were no
amounts outstanding under the facilities. At July 3, 2004, the Company had $6.2
million outstanding under the Euro facility and $3.0 million outstanding under
the Import Facility. All of the facilities are subject to certain covenants and
all were in compliance as of July 3, 2004.
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
2004, we recorded $0.7 million of variable stock-based compensation income in
the consolidated statement of operations because our Common Stock price on July
3, 2004, was below the exercise price of $5.97. For Fiscal 2003, we did not
record any variable stock-based compensation expense in the consolidated
statements of operations because the Company's stock price on June 28, 2003 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 results of operations.
22
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. The 2001 program has been terminated.
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 - In Fiscal 1999, we consummated a private placement of $15.0
million of unsecured Senior Notes that bore interest at 11%. During Fiscal 2003,
we repurchased all of these Senior Notes at slightly below par.
On May 10, 2004, the Company has entered into a twenty (20) year, worldwide
trademark license agreement with Jenoptik AG for the exclusive use of the
JENOPTIK brand name and trademark on non-professional consumer imaging products
including, but not limited to, digital, single use and traditional cameras, and
other imaging products and related accessories. The acquisition cost of the
license was $1.8 million and is not a prepayment of royalties. The license
agreement provides for a royalty of one-half of one percent (0.5%) of net sales
of non-professional consumer imaging products bearing the JENOPTIK brand name
for the first ten (10) years of the license and a royalty fee of six-tenths of
one percent (0.6%) for the second ten (10) years of the license. There are no
minimum guaranteed royalty payments.
License Agreements - In Fiscal 2003, we entered into 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. Pursuant to the terms of the
license agreements, as of August 2004, we have paid a total of $6.0 million,
which represented $3.0 million for each license agreement, as payment of the
minimum royalties which will be fully credited against percentage royalties.
Growth Opportunities - We are evaluating various growth opportunities that could
require significant funding commitments. We have from time to time held, and
will continue to hold, discussions and negotiations with (i) companies that
represent potential acquisition or investment opportunities, (ii) potential
strategic and financial investors who have expressed an interest in making an
investment in or acquiring us, (iii) potential joint venture partners looking
toward formation of strategic alliances that would broaden our product base or
enable us to enter new lines of business and (iv) potential new and existing 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. However, there can be no assurance that any
definitive agreement, will be reached regarding any of the foregoing.
23
RISK FACTORS
You should carefully consider the following risks regarding our Company. These
and other risks could materially and adversely affect our business, results of
operations or financial condition. You should also refer to the other
information contained or incorporated by reference in this report.
DIGITAL CAMERA PRODUCTS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGES, PRICE
EROSION, OBSOLESCENCE AND HIGHER RATES OF RETURNS AND ALLOWANCES.
Digital camera products are subject to rapid technological changes, price
erosion, obsolescence and rates of returns and allowances to a greater extent
than traditional and single use camera products. Because of declines in pricing
and rapid technological changes, some of our digital camera products became
obsolete and/or their values decreased and, consequently, we recorded
significant lower of cost or market valuation adjustments related to digital
inventory during Fiscal 2004. Similar charges related to lowering the carrying
values and inventory provisions due to price erosion may be required in future
periods. 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 profits and margins decline unless we are able to reduce our product costs
by commensurate amounts and percentages. Our operating results suffer when gross
profits and margins decline. To be successful in the development, manufacture
and sale of digital camera products, we have to react quickly to technological
advances and market conditions and manage our inventory effectively to
accommodate price declines and erosion resulting from competition and other
factors and the short life span of such products. Due to severe pricing
competition, allowances for digital cameras are considerably higher than those
provided to customers for traditional and single use cameras.
OUR DIGITAL CAMERA PRODUCTS INVOLVE MORE COMPLEX DESIGN, DEVELOPMENT AND
MANUFACTURING PROCESSES, WHICH WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE INTO
OUR OPERATIONS, AND WE ARE DEPENDENT UPON THE CONTINUED AVAILABILITY OF KEY
COMPONENTS AND FINISHED DIGITAL CAMERA PRODUCTS ("PRODUCTS").
Digital cameras involve more complex design, development, manufacturing and
product procurement processes and component procurement processes than our
traditional 35 mm and single use cameras. Manufacturing delays, including
product and 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
products 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 experience
a short supply of certain components and/or products as a result of strong
demand in the industry for them or problems experienced by our suppliers of
components and/or products. If shortages or delays persist, the price of
components and/or products may increase, components and/or products may not be
available, and we may be exposed to component and/or product quality issues. We
may not be able to secure sufficient components at reasonable prices or of
acceptable quality to build new products and/or products at reasonable prices or
acceptable quality in a timely manner in the quantities needed. Accordingly, our
revenue, gross profits, margins and market share could suffer until other
sources can be developed.
24
WE DEPEND ON THIRD PARTY SUPPLIERS, AND OUR REVENUE, GROSS PROFITS AND MARGINS
COULD SUFFER IF WE FAIL TO MANAGE SUPPLIER ISSUES PROPERLY.
Our manufacturing, sales and distribution operations, depend on our ability to
anticipate our needs for components and products and our suppliers' ability to
deliver sufficient quantities of quality components and products at reasonable
prices in time to meet critical manufacturing, sales and distribution schedules.
Given the variety of products that we offer, the large number of our suppliers
and contract manufacturers that are dispersed across the globe, and the long
lead times that are required to manufacture, assemble and deliver certain
components and products, adverse circumstances, issues and problems could arise
in planning production, procurement and managing inventory levels that could
negatively impact our business and increase our financial exposure and risk.
Other supplier problems that we could face include component and product
shortages, excess supply and risks related to fixed-price contracts that would
require us to pay more than the open market price, as more fully described
below.
o Supply shortages. We may experience a short supply of, or a delay in
receiving, certain components and products as a result of strong demand,
capacity constraints or other problems experienced by suppliers. If
shortages or delays persist, the price of these components and products may
increase, we may be exposed to quality issues or the components and
products may not be available at all. We may not be able to secure enough
components and/or products at reasonable prices or of acceptable quality to
build, sell and distribute new products in a timely manner in the
quantities or configurations needed. Accordingly, our revenue, gross
profits and margins could suffer as we could lose time-sensitive sales,
incur additional freight costs or be unable to pass on price increases to
our customers. If we cannot adequately address supply issues, we may have
to reengineer and/or source some components and products, resulting in
further costs and delays.
o Oversupply. In order to secure products or components for the production
of new products, at times we may make advance payments to suppliers, or we
may enter into non-cancelable commitments with suppliers. If we fail to
adequately anticipate customer demand properly, an oversupply of products
and/or components could result in excess or obsolete inventory, which could
adversely affect our gross profits and margins as a result of the financial
exposure related to additional inventory.
o Long-term pricing commitments. As a result of binding price or purchase
commitments with suppliers, we may be obligated to purchase components
and/or products at prices that are higher than those available in the
current market and be limited in our ability to respond to changing market
conditions. In the event that we become committed to purchase components
and/or products for prices in excess of the current market price, we may be
at a disadvantage to competitors who have access to components and/or
products at lower prices, and our gross profits and margins could suffer.
In addition, we may have to lower the carrying value of these components
and/or products by taking a charge.
In many instances we rely on offshore suppliers, including, but not limited to,
manufacturers in the Republic of China ("ROC") for the production of cameras and
other suppliers in Asia for product assembly and manufacture. Regional economic,
business, environmental, political, medical, or military conditions or events,
as discussed elsewhere in these Risk Factors, could disrupt supplies in foreign
locations.
We expect to continue to increase the purchase of products from third-party
manufacturers in Fiscal 2005. The risks identified above will continue to
increase as our purchases of products from these manufacturers increase.
25
OUR BUSINESS STRATEGIES MAY NOT SUCCEED.
During the normal course of our business, we evaluate, develop and implement
various short-term and long-term business strategies. Some of these strategies,
if implemented, may require significant financial and human resources. There can
be no assurance that any such strategies, if implemented, will be successful. If
such strategies do not succeed, it could have a material adverse affect on our
business.
WE HAVE BEEN ADVISED OF A MATERIAL WEAKNESS AS WELL AS SEVERAL REPORTABLE
CONDITIONS IN OUR FINANCIAL CONTROLS RELATING TO THE ACCURACY AND TIMELINESS OF
OUR FINANCIAL REPORTING.
In connection with its Fiscal 2004 audit of our financial statements, the
Company's auditors communicated to the Company's Management and the Audit
Committee of the Board of Directors several reportable conditions involving the
Company's internal financial controls. Reportable conditions involve matters
coming to the attention of our accountants relating to significant deficiencies
in the design or operation of internal controls that, in their judgment, could
adversely affect our ability to record, process, summarize, and report financial
data consistent with the assertions of management in the consolidated financial
statements. The auditors also noted one reportable condition which they
considered to be a material weakness in the Company's internal controls. A
material weakness is defined as a reportable condition in which the design or
operation of one or more of the internal control components does not reduce to a
relatively low level the risk that misstatements caused by error or fraud in
amounts that would be material in relation to the financial statements being
audited may occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions.
The material weakness noted by the auditors is that the Company's financial
statement close process does not ensure that all material errors in accounts
that involve significant estimation will be identified on a timely basis by
employees in the normal course of their duties. Specifically, the auditors noted
that there were significant delays in accumulating data, performing analysis,
and evaluating results. Other reportable conditions noted by the auditors
related to the Company's inventory valuation, revenue recognition and reserves
and allowances processes.
RISK OF NON-COMPLIANCE WITH THE SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002.
Beginning in Fiscal 2005, Section 404 of the Sarbanes-Oxley Act of 2002 ("the
Act") will require the Company to include an internal control report of
management in its Annual Report on Form 10-K. The internal control report must
contain (i) a statement of management's responsibility for establishing and
maintaining adequate internal control over financial reporting, (ii) a statement
identifying the framework used by management to conduct the required evaluation
of the effectiveness of our internal control over financial reporting, (iii)
management's assessment of the effectiveness of our internal control over
financial reporting as of the end of our most recent fiscal year, including a
statement as to whether or not internal control over financial reporting is
effective, and (iv) a statement that the Company's independent auditors have
issued an attestation report on management's assessment of internal control over
financial reporting.
Management acknowledges its responsibility for internal controls over financial
reporting and seeks to continually improve those controls. In addition, in order
to achieve compliance with Section 404 of the Act within the prescribed period,
beginning in Fiscal 2004, the Company engaged in a process to document and
evaluate its internal controls over financial reporting. In this regard,
management dedicated internal resources, engaged outside consultants and adopted
a detailed work plan to (i) assess and document the adequacy of internal control
over financial reporting, (ii) take steps to improve control processes where
appropriate, (iii) validate through testing that controls are functioning as
documented and (iv) implement a continuous reporting and improvement process for
internal control over financial reporting. The Company believes the process it
began in Fiscal 2004 and is continuing in Fiscal 2005 for documenting,
evaluating and monitoring its internal control over financial reporting is
consistent with the objectives of Section 404 of the Act. In addition, due to
the Company's implementation of a new ERP system, in Fiscal 2005, it will again
begin the process of documenting, evaluating and monitoring its internal control
over financial reporting. The Company's documentation and testing to date have
identified certain gaps in the design and effectiveness of internal controls
over financial reporting that the Company will need to remediate. In addition,
the Company will have to improve its financial controls as they relate to the
matters described in the immediately preceding risk factor. The Company can
provide no assurance as to its, or its independent auditors, conclusions at July
2, 2005 with respect to the effectiveness of its internal control over financial
reporting under Section 404 of the Act.
26
The existence of the above factors and circumstances create a risk that the
Company, or its independent auditors, will not be able to conclude at July 2,
2005 that the Company's internal controls over financial reporting are effective
as required by Section 404 of the Act.
RISKS RELATED TO DIGITAL, 35 MM TRADITIONAL AND SINGLE USE CAMERA MARKETS.
Based upon available third-party market research data, the digital camera market
is expected to continue to grow in the United States and Europe for a number of
years but then flatten, the 35 mm traditional camera market has been in decline
and is expected to continue to decline, and the single use camera market is
expected to grow slightly through calendar 2004 but then flatten and decline.
There is no assurance that our digital and single use camera sales will continue
to increase, or that, even if they continue to increase, they will be profitable
or that we will be able to maintain our digital, 35 mm traditional and single
use camera market shares.
WE ARE EXPOSED TO CREDIT RISK ASSOCIATED WITH SALES TO OUR CUSTOMERS.
We sell a significant number of imaging and other products to a relatively small
number of customers. Receivables arising from these sales are generally not
collateralized. We monitor the creditworthiness of our customers and review
outstanding receivable balances for collectibility on a regular basis and record
provisions for doubtful accounts, allowances and returns, 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.
WE ARE DEPENDENT ON CERTAIN IMPORTANT CUSTOMERS.
We have a number of customers that are very important to our business. Our
products are sold in very competitive markets. Our competitors may adopt more
aggressive policies and devote greater resources to the development, promotion
and sale of their products, which could result in a loss of sales or of
customers. The loss of sales or of one or more of these important customers
could have a material adverse effect on our business, results of operations and
financial condition.
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 our 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 we receive patent infringement claims which we analyze and, if
appropriate, may either take action to avoid infringement or negotiate a
license. In at least two such instances, one of which involves one of our
largest customers, we engaged in discussions looking toward licensing of certain
digital image capture technology. In a third instance, a patent infringement
suit has been filed against the Company.
27
RELOCATION TIME AND EXPENSES COULD RESULT IN SUBSTANTIAL LOSSES.
If we determine it is necessary to relocate our manufacturing facilities from
the People's Republic of China ("PRC"), or to another location within the PRC,
due to confiscation, expropriation, nationalization, embargoes, governmental
restrictions or for other regulatory, business and/or financial reasons, 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 gross profits and margins on the products we manufacture. 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.
MOST OF OUR OPERATIONS IN THE 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 large number of the components used in
our cameras and assemble all of our own manufactured finished products at our
facilities in the PRC. During Fiscal 2004, based upon production demand, we had
approximately 5,100 to 7,500 workers at our manufacturing facilities 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,
food and housing and must comply with a variety of local labor and employee
benefit laws covering these workers. While we believe we are in substantial
compliance with applicable laws as currently enforced, these laws are subject to
modification and interpretation by the applicable 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 results of
operations.
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, Japan, the PRC, Canada, the United Kingdom, France and
Germany. Further, we obtain raw materials, components and finished camera
products 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, but are not limited to:
o the difficulty of enforcing agreements, collecting receivables and
protecting assets through foreign legal systems;
o trade protection measures and import or export licensing requirements;
o the imposition of tariffs, exchange controls or other restrictions;
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;
o changes in the general political and economic conditions in
the countries where we operate, particularly in emerging markets;
and
o Increased costs and risks of doing business in a number of foreign
jurisdictions.
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.
28
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, products, components, raw
material and parts, or a deterioration of the general political, economic or
social environment in the PRC in addition to the availability of workers at
reasonable costs.
THE IMPLEMENTATION OF A NEW ENTERPRISE RESOURCE PLANNING SYSTEM PRESENTS CERTAIN
RISKS.
During August 2004, we converted from our existing legacy systems to a new ERP
system. This design and implementation project began in July 2003 and now
provides an important element of our accounting, financial and operating
functions and systems, including sales, supply chain and manufacturing
("operating systems"). There continue to be significant costs associated with
implementing the new ERP system, in terms of both financial and the human
resources to be incurred and expended. In addition, there are certain risks
associated with any conversion to a new information technology system (which
includes software, hardware and human resources), including a potential
disruption in our operating systems and controls and the possibility of adverse
circumstances, issues and 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 results of operations and impact our
ability to manage our business.
INTEREST RATE AND EXCHANGE RATE RISK
As a result of our global operating and financing activities, we are exposed to
changes in currency exchange rates and interest rates, which may adversely
affect our results of operations and financial position. Exchange rates and
interest rates in certain markets in which we do business tend to be more
volatile than those in the United States and Western Europe. 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. We generally do not engage in currency
hedging activities.
The interest rate related to our credit facilities in Hong Kong is based on a
spread over the SIBOR ("Singapore Interbank Offered Rate"). A significant change
in the SIBOR rate could have an adverse effect on our business, financial
condition and results of operations. Currently we are not utilizing any interest
rate protection agreements to limit our exposure to this risk.
EFFECT OF LOSSES AND INDEBTEDNESS ON CASH FLOW
Our primary source of liquidity has been provided by our short-term investments,
reductions in working capital balances and borrowing availability under our
$38.3 million credit facility in Hong Kong. Due to recent losses, the level of
reliance on our credit facility could increase and, as a result, create
liquidity issues for the Company due to funding and debt service requirements.
Increased indebtedness could interfere with our ability to effectively operate
our business.
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 key management
and operating personnel 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 strategies, or we may need to pay higher compensation for employees
than currently budgeted and/or anticipated in the future. Our inability to
attract and retain such personnel could limit our growth and affect our results
of operations.
29
THE CAMERA AND PHOTOGRAPHIC PRODUCTS INDUSTRY IS HIGHLY COMPETITIVE.
As a manufacturer, marketer and distributor of low cost, popularly priced image
capture products, we encounter intense competition from a number of companies,
many of which have longer operating histories, more established markets, better
brand recognition, more extensive facilities and, in some cases, greater
resources. These competitive pressures may result in decreased sales volumes,
price reductions, and/or increased operating costs, such as for marketing and
sales incentives, resulting in lower revenues, gross margins and income.
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 2004. This would adversely affect
net income in future periods. We operate in different countries that have
different income tax rates. Based upon our apportionment of income, our
effective tax rate could fluctuate. 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 results of operations.
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
complian