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.
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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
compliance with various multilateral and bilateral agreements. We cannot predict
whether the United States will take future trade actions against the PRC that
may result in increased tariffs against PRC products, including products
imported by us.
OUR OPERATIONS MAY BE IMPAIRED AS A RESULT OF DISASTERS, BUSINESS INTERRUPTIONS
OR SIMILAR EVENTS, INCLUDING THE OUTBREAK OF THE SEVERE ACUTE RESPIRATORY
SYNDROME.
Disasters such as hurricanes, typhoons, earthquakes, or acts of nature or God,
terrorist attacks, water, fire, electricity failure, or accidents affecting our
operating activities, facilities, and employees' and customers' health could
materially and adversely affect our results of operations and financial
condition. In particular, our operations in the PRC, as well as most of our
third-party manufacturers, suppliers and service providers involved in the
manufacturing of components and products are located within a relatively close
proximity of one another in the PRC. Therefore, any disaster that strikes within
close proximity of that geographic area could be exceedingly disruptive to our
business and could materially and adversely affect our results of operations and
financial condition. We do not currently have a disaster recovery plan.
In the event of another outbreak of severe acute respiratory syndrome, or SARS,
or some other disease or health-related issue, our facilities and/or the
facilities of our third-party manufacturers and service providers located in
Hong Kong, the PRC and other parts of the world could be quarantined,
temporarily closed or disrupted. If this occurs, it could delay or prevent us
from developing new products or manufacturing, testing or shipping our current
or future products, and may require us to find other providers of such services
and/or products, which may be unavailable or more expensive. Further, if a SARS
outbreak has an adverse impact on the businesses of our customers, it could
reduce the size and/or frequency of our customers' purchases, which could
adversely impact our results of operations.
30
WE MAY NOT BE ABLE TO IDENTIFY AND INTEGRATE FUTURE ACQUISITIONS.
We intend to pursue strategic acquisitions that we consider reasonable in light
of the revenues and the results of operations we believe we will be able to
achieve, from these acquisitions, once combined and intergrated with the
Company. The cost of acquisitions within the industry has generally increased
over time. Additionally, we compete for acquisitions with certain other industry
competitors, some of which have greater financial and other resources than we
do. Increased demand for acquisitions may result in fewer acquisition
opportunities for us as well as higher acquisition prices. Although we believe
opportunities may exist for us to grow through acquisitions, we may not be able
to identify and consummate acquisitions on acceptable terms. If we do acquire
another company or companies, we may not be able to profitably manage and
successfully integrate the acquired company or companies with our operations,
sales and marketing efforts without substantial costs or delays. Acquisitions
involve a number of potential risks, including the potential loss of customers
and contracts, increased leverage and debt service requirements, combining
disparate company cultures and facilities and operating in geographically
diverse markets. One or more of our future acquisitions may have a material
adverse effect on our financial condition and results of operations.
THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE.
The stock markets, and in particular the Nasdaq National Market, have
experienced extreme price and volume fluctuations that have affected the market
prices of equity securities of many companies and that often have been unrelated
or disproportionate to the operating results of such companies. These broad
market factors may adversely affect the market price of our Common Stock. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation(s) has often been instituted
against a particular company. Such litigations have been instituted against us
and could result in substantial costs and a diversion of management's attention
and resources, which could harm our business. See Note 18, "Litigation and
Settlements" in the accompanying Notes to Consolidated Financial Statements."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a result of our global operating and financial activities, we are exposed to
changes in interest rates and foreign currency exchange rates that may adversely
affect our results of operations and financial condition. In seeking to minimize
the risks and/or costs associated with such activities, we manage exposures to
changes in interest rates and foreign currency exchange rates through our
regular operating and financing activities.
At July 3, 2004, our exposure to changes in interest rates was limited, since we
had no significant debt outstanding. Since we have no significant debt
outstanding, we do not deem interest rate risk to be significant or material to
our financial condition or results of operations. We do not presently use
derivative instruments to adjust our interest rate risk profile. We do not
utilize financial instruments for trading or speculative purposes, nor do we
utilize leveraged financial instruments.
Each of our foreign subsidiaries purchases their inventories in U.S. Dollars and
certain of their sales are in foreign currency, thereby creating an exposure to
fluctuations in foreign currency exchange rates. We have purchased and continue
to purchase in foreign currencies certain components, products, raw materials
and services needed to manufacture and sell our products. The impact of foreign
exchange transactions is reflected in our statements of operations. As of July
3, 2004, we were not engaged in any hedging activities and we had no forward
exchange contracts outstanding. We continue to analyze the benefits and costs
associated with hedging against foreign currency fluctuations.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements listed in Item 15(a)(1) and (2) are included in the
report beginning on page F-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Certifications. The certifications of the principal executive officer and the
principal financial officer (or persons performing similar functions) required
by Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended
(the "Certifications") are filed as exhibits to this report. This section of the
report contains the information concerning the evaluation of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) ("Disclosure Controls") and changes to internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
("Internal Controls") referred to in the Certifications and this information
should be read in conjunction with the Certifications for a more complete
understanding of the topics presented.
Limitations on the Effectiveness of Controls. The Company's management,
including the principal executive officer and the principal financial officer,
do not expect that the Company's Disclosure Controls or Internal Controls will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the limitations in any and
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud or error, if any, within the
Company have been detected. Further, the design of any control system is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Because of these inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Evaluation of Disclosure Controls. Based on our management's evaluation (with
the participation of our principal executive officer and principal financial
officer), as of the end of the period covered by this report, our principal
executive officer and principal financial officer have concluded that, as of the
end of the period covered by this report, except as noted below, our Disclosure
Controls were designed to provide reasonable assurance of achieving their
objectives and, at the "reasonable assurance" level, were effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.
In performing its audit of our Consolidated Financial Statements for Fiscal
2004, our independent auditors, Ernst & Young LLP, notified the Company and the
Audit Committee of the Board of Directors of several reportable conditions in
internal controls under standards established by the American Institute of
Certified Public Accountants. Reportable conditions involve matters coming to
the attention of our auditors 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. Specifically, Ernst &
Young LLP indicated that because there are significant delays in accumulating
data, performing analysis, and evaluating results, the Company's financial
statement closing process does not ensure that on a timely basis employees in
the normal course of their duties will identify all material errors to accounts
that involve significant estimates. Other reportable conditions noted by the
auditors related to the Company's inventory valuation, revenue recognition and
reserves and allowances processes. The Company has assigned a high priority to
the remediation of the reportable conditions.
32
Changes in Internal Controls. While we did not change our Internal Controls
during the fourth fiscal quarter, as a result of the material weaknesses
and reportable conditions indicated herein, we believe the effectiveness of
our Internal Controls declined during the quarter. We intend to immediately
address and remediate the internal control weaknesses noted.
ITEM 9B. OTHER INFORMATION.
None.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their respective ages as of September
20, 2004, are as follows:
Name Age Position
------ --- --------
Ira B. Lampert(3)(4) 59 Chairman, Chief Executive Officer and President (principal
executive officer)
Gerald J. Angeli 51 Vice President of Worldwide Engineering and Technology for
the Company and Co-Managing Director(6)of Concord Camera
HK Limited ("Concord HK")
Keith L. Lampert 34 Executive Vice President and Chief Operating Officer
Joseph Leonardo 58 Vice President and Director of Operations for the Company
and Co-Managing Director of Concord HK
Harlan I. Press 40 Vice President, Treasurer and Assistant Secretary
(principal financial officer)
Alan Schutzman 48 Senior Vice President, General Counsel and Secretary
Urs W. Stampfli 53 Senior Vice President and Director of Global Sales and
Marketing
Blaine A. Robinson 45 Controller (principal accounting officer)
David M. Wand 49 Vice President and Director of Worldwide Supply Chain
Ronald S. Cooper(1)(2) 66 Director
Morris H. Gindi(1)(5) 59 Director
J. David Hakman(3)(4) 63 Director
William J. O'Neill, Jr.(1)(2)(5) 62 Director
-----------------
(1) Member of Audit Committee.
(2) Member of Compensation and Stock Option Committee.
(3) Member of Executive Committee.
(4) Member of Director Affairs Committee.
(5) Member of Marketing and Product Development Committee.
(6) When Mr. Leonardo's employment with the Company ends, effective as of
October 1, 2004, Mr. Angeli will become sole Managing Director of
Concord HK.
Ira B. Lampert has been the Chairman and Chief Executive Officer of the Company
since July 13, 1994. For the calendar year 1995 and again from July 31, 1998
through the present, Mr. Lampert also served as President of the Company. Mr.
Lampert is a member of the Queens College Foundation Board of Trustees (Queens
College is part of the City University system of New York), is a member of the
Advisory Board of the Boys & Girls Republic, a nonprofit organization for
underprivileged children, and serves on the Boards of Trustees of the Mount
Sinai Medical Center Foundation, Inc. and the Mount Sinai Medical Center of
Florida, Inc.
Gerald J. Angeli joined the Company in April 2000 as Vice President, DMS Product
Supply. Since March 2001, he has served as the Company's Vice President of
Worldwide Engineering and Technology. In addition, since June 7, 2004, Mr.
Angeli has been a Co-Managing Director of Concord HK and, effective October 1,
2004, will become its sole Managing Director. From July 1997 to April 2000, Mr.
Angeli was Vice President, Global Manufacturing and Products Supply for NCR
Corporation's Systemedia Group, where he was responsible for manufacturing,
customer service, distribution and logistics. Prior to that, Mr. Angeli was
employed by Eastman Kodak Company for 20 years in various capacities, most
recently as Manager of Worldwide Manufacturing and Supply Chain and Vice
President, Consumer Imaging.
34
Keith L. Lampert, who is a son of Ira B. Lampert, has been Executive Vice
President since February 2002 and Chief Operating Officer since January 1, 2003.
From February 2002 until January 2003, he also served as the Company's Director
of Worldwide Operations and was Managing Director of Concord HK from April 2000
until December 2002. From March 2001 to February 2002, Mr. Lampert also served
as the Company's Vice President of Worldwide Operations. He became a Vice
President of the Company in August 1998, having joined the Company in 1993.
Joseph Leonardo has been Vice President and Director of Operations for the
Company and Managing Director of Concord HK since January 1, 2003. Mr. Leonardo
was Vice President and Director of Manufacturing Operations for the Company and
Deputy Managing Director of Concord HK from February 2002 to December 2002,
having served as Vice President and Director of Operations for Concord HK since
January 2001. From January 1998 to January 2001, Mr. Leonardo was the Company's
Director of Manufacturing. Mr. Leonardo will be leaving the Company, effective
October 1, 2004, to pursue other interests.
Harlan I. Press has been Vice President and Treasurer since April 2000,
Principal Financial Officer since September 20, 2004, and Assistant Secretary of
the Company since October 1996. Mr. Press served as the Corporate Controller of
the Company from October 1996 through April 2000 and as Chief Accounting Officer
from November 1994 to September 20, 2004. Mr. Press is a member of the American
Institute of Certified Public Accountants, the New York State Society of
Certified Public Accountants and the Financial Executives Institute.
Blaine A. Robinson has been Controller of the Company since February 2003 and
Principal Accounting Officer since September 20, 2004. Prior to joining the
Company, from May 2002 to February 2003, Mr. Robinson was employed by Spherion
Corporation and served as a financial and accounting consultant to the Company.
Previously, Mr. Robinson was Chief Financial Officer of Green2go.com, Inc. from
March 2000 to September 2001 and Assistant Corporate Controller of AutoNation,
Inc. from March 1997 to March 2000. Mr. Robinson is a member of the American
Institute of Certified Public Accountants and the Florida Institute of Certified
Public Accountants.
Alan Schutzman joined the Company in September 2003 as Senior Vice President,
General Counsel and Secretary. From January 2001 until joining the Company, Mr.
Schutzman was Associate General Counsel of Jacuzzi Brands, Inc. ("Jacuzzi"), and
Vice President and Associate General Counsel of Jacuzzi since September 2001.
From July 1996 to December 2000, he served as Vice President and General Counsel
of various operating subsidiaries of Jacuzzi, including Ames True Temper and
Keller Ladders, Inc.
Urs W. Stampfli has been Senior Vice President since February 2002 and Director
of Global Sales and Marketing for the Company since April 2000. Mr. Stampfli
joined the Company in May 1998 as Director of Global Sales and Marketing, and
became a Vice President of the Company in April 2000. From 1990 to April 1998,
Mr. Stampfli was Vice President, Marketing, Photo Imaging Systems of Agfa
Division, Bayer Corporation.
David M. Wand has been Vice President and Director of Worldwide Supply Chain for
the Company since February 2002, having served as Vice President and Director of
Worldwide Supply Chain and Information Technology for the Company from February
2002 to March 2003. From January 1999 to February 2002, Mr. Wand was Concord
HK's Director of Supply Chain and Information Systems and from December 1996,
when Mr. Wand first joined the Company, until January 1999, he was Materials
Director of Supply Chain for Concord HK.
Ronald S. Cooper has been a director of the Company since January 2000. Mr.
Cooper is a co-founder and principal of LARC Strategic Concepts, LLC, a
consulting firm focusing on emerging growth companies. Mr. Cooper retired from
Ernst & Young LLP in September 1998, having joined the firm in 1962. He became a
partner in 1973 and was Managing Partner of the firm's Long Island office from
1985 until he retired.
35
Morris H. Gindi has been a director of the Company since 1988. Mr. Gindi has
served as the Chief Executive Officer of Notra Trading Inc., an import agent in
the home textiles industry, since 1983 and as Chief Executive Officer of Morgan
Home Fashions, a manufacturer and distributor of home textiles, since 1995.
These two businesses import and distribute merchandise to all levels of the
retail trade. Mr. Gindi's career in the home textiles industry has spanned four
decades.
J. David Hakman has been a director of the Company since 1993. Mr. Hakman owns
Hakman Capital Corporation, an investment and merchant banking concern, a
subsidiary of which is a member of the National Association of Securities
Dealers, Inc.
William J. O'Neill, Jr. has been a director of the Company since August 2001.
Mr. O'Neill is a founder and principal of O'Neill Group, Inc., a consulting firm
focused on developing business strategies, operational execution, financial
evaluations and fundraising activities. From 1969 to 1999, Mr. O'Neill held
various management positions at Polaroid Corporation, most recently as Executive
Vice President and President, Corporate Business Development. Since July 2001,
he has served as Dean of the Frank Sawyer School of Management at Suffolk
University in Boston, Massachusetts. In addition, Mr. O'Neill is a director of
CardioTech International, Inc., a manufacturer of cardiovascular devices.
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERTISE
The Company has a separately-designated standing Audit Committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the
Audit Committee are Ronald S. Cooper (Chairman), Morris H. Gindi and William J.
O'Neill, Jr.
The Board of Directors has determined that the Company has two "audit committee
financial experts" serving on its Audit Committee, as that term is defined in
Item 401(h)(2) of Regulation S-K, namely Ronald S. Cooper and William J.
O'Neill, Jr. Mr. Cooper has over 35 years of experience in the field of public
accounting, retiring in 1998 from Ernst & Young LLP. Mr. O'Neill was Chief
Financial Officer (and Executive Vice President) of Polaroid from 1990 to 1998,
having held various other positions with Polaroid including that of Corporate
Controller for four years. All of the members of the Audit Committee, including
Messrs. Cooper and O'Neill, are independent, as that term is defined in Item
7(d)(3)(iv) of Schedule 14A under the Exchange Act.
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer and
controller, as well as all other employees and the directors of the Company. The
Code of Ethics, which the Company calls its Code of Conduct, is posted on the
Company's Internet website: www.concord-camera.com, on the Investor Relations
page. If the Company makes any substantive amendments to, or grants a waiver
(including an implicit waiver) from, a provision of its Code of Ethics that
applies to its principal executive officer, principal financial officer,
principal accounting officer or controller, and that relates to any element of
the Code of Ethics definition enumerated in Item 406(b) of Regulation S-K, the
Company will disclose the nature of such amendment or waiver on the
aforementioned website or in a current report on Form 8-K.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
William J. Lloyd, who was a director of the Company until July 31, 2003, was
late in filing a report on Form 4 relating to certain amendments to his stock
options in July 2003.
36
ITEM 11. EXECUTIVE COMPENSATION.
The following table contains certain information regarding aggregate
compensation earned, paid or payable during Fiscal 2004, Fiscal 2003 and Fiscal
2002, for services rendered to the Company during these fiscal years, to: (a)
the Chief Executive Officer; (b) each of the other four most highly compensated
executive officers who were serving as executive officers at the end of Fiscal
2004; and (c) one former executive officer, Brian F. King, who would have been
among the executive officers described in (b) had he still been serving as an
executive officer of the Company at the end of Fiscal 2004 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
---------------------------------------- -------------------------
Shares LTIP
Other Annual Underlying Payouts All Other
Name and Fiscal Salary Bonus(c) Compensation Options (d) Compensation
Principal Position Year ($) ($) ($) (#) ($) ($)
------------------ ------ ----------------------------------------------------------------------------------
Ira B. Lampert(a) 2004 $975,000(1) -- $696,508(2) -- -- $ 54,102(9)
Chairman, Chief 2003 916,667(1) $424,834 715,109(2) -- $235,919 982,595(9)
Executive Officer 2002 920,833(1) -- 681,110(2) 263,004(8) -- 960,447(9)
and President
Brian F. King 2004 450,000 -- 28,000(3) -- -- 529,070(10)
Senior Executive Vice 2003 425,000 212,417 28,000(3) -- 117,959 376,952(10)
President 2002 400,000 -- (7,177)(3) 127,260(8) -- 375,372(10)
Keith L. Lampert 2004 350,000 -- 43,583(4) -- -- 33,136(11)
Executive Vice 2003 317,070 158,762 136,049(4) 100,000 76,674 402,555(11)
President and Chief 2002 225,000 -- 228,968(4) 76,356(8) -- 233,973(11)
Operating Officer
Urs W. Stampfli 2004 257,245 -- 19,310(5) -- -- 10,273(12)
Senior Vice President 2003 264,320(1) 119,685 21,805(5) -- 69,449 48,322(12)
and Director of Global 2002 210,500 -- 12,000(5) 18,665(8) -- 44,276(12)
Sales and Marketing
--
Richard Finkbeiner(b) 2004 262,500 13,391(6) -- -- 29,621(13)
Senior Vice President 2003 243,110 94,459 16,825(6) 75,000 -- 13,643(13)
and Chief Financial 2002 -- -- -- -- -- --
Officer
Alan Schutzman(b) 2004 218,766 -- 19,500(7) 60,000 -- 3,510(14)
Senior Vice President, 2003 -- -- -- -- -- --
General Counsel and 2002 -- -- -- -- -- --
Secretary
-----------------
(a) Ira B. Lampert voluntarily reduced his base salary by $100,000
for the period from July 1, 2004 to June 30, 2005, and the
amount of the annual credit for January 2005 under his
supplemental executive retirement plan and agreement ("SERP")
by $150,000, for a total of $250,000. See "Executive
Employment Contracts, Termination of Employment and Change in
Control Arrangements" below.
37
(b) Mr. Finkbeiner joined the Company in July 2002 (shortly after
the beginning of Fiscal 2003). Mr. Schutzman joined the
Company in September 2003 (shortly after the beginning of
Fiscal 2004).
(c) For Fiscal 2003, represents bonuses awarded on August 6, 2003
under the Annual Incentive Compensation Plan ("AICP") in
effect for Fiscal 2003. No bonuses were awarded under the AICP
in effect for Fiscal 2004 or Fiscal 2002.
(d) Represents payments received in September 2003 under awards
approved on August 6, 2003 under the Company's Amended and
Restated 2002 Long-Term Cash Incentive Plan (the "LTCIP") in
effect for the Fiscal 2002-2003 performance period. The
preponderance of the LTCIP awards made to the Named Executive
Officers for this performance period was in the form of
contingent deferred compensation to be earned over three
years. The contingent deferred portion of these awards will be
included in the Summary Compensation Table, in the future, as
and when the conditions to vesting have been met and the
amounts have been earned. See "Executive Employment Contracts,
Termination of Employment and Change in Control Arrangements -
Deferred Long Term Compensation" below.
(1) Includes payment for accrued but unused vacation.
(2) Includes: (a) auto allowances and costs, partial housing costs
and reimbursement of taxes, respectively, of $30,000, $48,000
and $105,114 in Fiscal 2004, $30,000, $48,000 and $120,911 in
Fiscal 2003, and $30,714, $48,000 and $93,789 in Fiscal 2002;
(b) the yearly credit under the Lampert SERP (described below
under "Executive Employment Contracts, Termination of
Employment and Change in Control Arrangements") of $500,000 in
Fiscal 2004, Fiscal 2003 and Fiscal 2002; and (c) for Fiscal
2004 and Fiscal 2003, reimbursements under the Company's
Flexible Perquisite Spending Account Program for Corporate
Officers (the "Flexible Perquisite Spending Account Program").
(3) For Fiscal 2004 and Fiscal 2003, this represents $18,000 in
auto allowance paid, and reimbursements under the Flexible
Perquisite Spending Account Program. For Fiscal 2002, this
represents $18,000 in auto allowance paid, less Hong Kong tax
reimbursements of $25,177 repaid by Mr. King to the Company.
(4) For Fiscal 2004, this represents $18,000 in auto allowance
paid, reimbursement of $15,583 in taxes, and reimbursements
under the Flexible Perquisite Spending Account Program. For
Fiscal 2003 and Fiscal 2002, this includes: (a) amounts paid
pursuant to the Company's Executive Management Tax
Equalization Policy of $23,700 in Fiscal 2003 and $89,519 in
Fiscal 2002; (b) an overseas allowance of $25,000 per annum
for Fiscal 2002, $12,500 of which was received for Fiscal
2003; (c) overseas housing costs of $84,599 in Fiscal 2003 and
$111,826 in Fiscal 2002; and (d) for Fiscal 2003, $5,250 in
auto allowance paid, and reimbursements under the Flexible
Perquisite Spending Account Program.
(5) For Fiscal 2004 and Fiscal 2003, this represents $12,000 in
auto allowance paid, and reimbursements under the Flexible
Perquisite Spending Account Program. For Fiscal 2002, this
represents auto allowances paid.
(6) For Fiscal 2004 and Fiscal 2003, this represents $7,500 and
$6,825 in auto allowance paid, respectively, and
reimbursements under the Flexible Perquisite Spending Account
Program.
(7) Represents $9,500 in auto allowance paid and reimbursements
under the Flexible Perquisites Spending Account Program.
(8) This stock option was granted on October 17, 2001 in
connection with the Company's exchange offer, in exchange for
a stock option granted in Fiscal 2000 which was cancelled.
(9) For Fiscal 2004, this represents payments by the Company for
insurance premiums. For Fiscal 2003 and Fiscal 2002, this
represents: (a) $516,666, the amount of the April 19, 2000
grant of deferred compensation that vested in these fiscal
years (as described under "Executive Employment Contracts,
Termination of Employment and Change in Control Arrangements"
below, this grant vested in three equal annual installments
beginning January 1, 2001); (b) payments by the Company for
insurance premiums of $37,939 and $27,838, respectively; (c)
payments by the Company for companion travel; and (d) $404,883
repaid to Ira B. Lampert in Fiscal 2003 and Fiscal 2002 as
deferred compensation pursuant to the conditional release
program (which, as described under "Transactions under
Management Equity Provisions of 1993 Incentive Plan" below,
began in May 1999 and continued on January 1 each year through
January 1, 2003) because he prepaid the total amount of the
indebtedness before it was scheduled to be forgiven by the
Company.
38
(10) For Fiscal 2004, this represents payments of $519,285 to be
made under Mr. King's separation agreement (described under
"Executive Employment Contracts, Termination of Employment and
Change in Control Arrangements" below), and payments by the
Company for insurance premiums. For Fiscal 2003 and Fiscal
2002, this represents: (a) $250,000, the amount of the April
19, 2000 grant of deferred compensation that vested in the
fiscal year (as described under "Executive Employment
Contracts, Termination of Employment and Change in Control
Arrangements" below, this grant vested in three equal annual
installments beginning January 1, 2001); (b) payments by the
Company for insurance premiums; and (c) $116,140 and $122,714
repaid to Brian F. King in Fiscal 2003 and Fiscal 2002,
respectively, as deferred compensation pursuant to the
conditional release program (which, as described under
"Transactions under Management Equity Provisions of 1993
Incentive Plan" below, began in May 1999 and continued on
January 1 each year through January 1, 2003) because he
prepaid the total amount of the indebtedness before it was
scheduled to be forgiven by the Company.
(11) For Fiscal 2004, this represents $28,878 in housing benefits
received in connection with Mr. Lampert's promotion to Chief
Operating Officer and as an inducement to his repatriation to
the United States, and payments for insurance premiums. For
Fiscal 2003 and Fiscal 2002, this represents: (a) $150,000,
the amount of the April 19, 2000 grant of deferred
compensation that vested in the fiscal year (as described
under "Executive Employment Contracts, Termination of
Employment and Change in Control Arrangements" below, this
grant vested in three equal annual installments beginning
January 1, 2001); (b) payments by the Company for insurance
premiums; (c) $78,857 and $83,321 repaid to Keith L. Lampert
in Fiscal 2003 and Fiscal 2002, respectively, as deferred
compensation pursuant to the conditional release program
(which, as described under "Transactions under Management
Equity Provisions of 1993 Incentive Plan" below, began in May
1999 and continued on January 1 each year through January 1,
2003) because he prepaid the total amount of the indebtedness
before it was scheduled to be forgiven by the Company; and (d)
for Fiscal 2003, a one-time grant of $100,000 in deferred
compensation, a $58,333 relocation payment, and certain
housing benefits, all of which were received in connection
with Mr. Lampert's promotion to Chief Operating Officer and as
an inducement to his repatriation to the United States. See
"Executive Employment Contracts, Termination of Employment and
Change in Control Arrangements" below.
(12) For Fiscal 2004, this represents insurance premiums paid by
the Company. For Fiscal 2003 and Fiscal 2002, this represents
$36,667, the amount of the April 19, 2000 grant of deferred
compensation that vested in the fiscal year (as described
under "Executive Employment Contracts, Termination of
Employment and Change in Control Arrangements" below, this
grant vested in three equal annual installments beginning
January 1, 2001), and insurance premiums paid by the Company.
(13) For Fiscal 2004, this represents $25,000, the amount of the
July 22, 2002 grant of deferred compensation (described under
"Executive Employment Contracts, Termination of Employment and
Change in Control Arrangements" below) that vested in the
fiscal year, and insurance premiums paid by the Company. For
Fiscal 2003, this represents $7,618 of housing benefits
received by Mr. Finkbeiner in connection with his relocation,
and insurance premiums paid by the Company.
(14) Represents insurance premiums paid by the Company.
39
STOCK OPTIONS
The following table sets forth information concerning stock option grants made
during Fiscal 2004 to the Named Executive Officers.
STOCK OPTION GRANTS IN FISCAL 2004
Potential Realizable
Value at Assumed
% of Total Annual Rates of Stock
Number of Options Exercise Price Appreciation
Shares Granted to Price for Option Term
Underlying Employees Per --------------------------
Options in Share Expiration 5% 10%
Name Granted Fiscal 2004 ($) Date ($) ($)
---------------------------------------------------------------------------------------------------------------------
Alan Schutzman 60,000(1) 16.8 $11.87 09/14/13 $447,899 $1,135,063
----------------
(1) This option vested as to 20,000 shares on September 15, 2004, with the
balance to vest in installments of 20,000 shares on each of September
15, 2005 and 2006, or immediately upon a change in control of the
Company.
The following table sets forth information concerning stock option exercises
during Fiscal 2004 by each of the Named Executive Officers and the fiscal
year-end value of unexercised options held by such officers, based on the
closing price of $3.31 for the Common Stock on July 2, 2004.
AGGREGATED STOCK OPTION EXERCISES IN FISCAL 2004
AND FISCAL YEAR-END OPTION VALUES
Shares
Acquired Value Number of Shares Underlying Value of Unexercised
on Realized Unexercised Options at FY End In-the-Money Options at FY End ($)
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ----------- ----------- ------------- ----------- -------------
Ira B. Lampert 570,032(a) $3,940,187(a) 954,972(b) -- $1,574,789 --
Brian F. King 195,000 1,366,225 127,260 -- 90,500 --
Keith L. Lampert -- -- 249,689 66,667 280,325 --
Urs W. Stampfli 15,000 142,500 63,665 -- 25,200 --
Richard Finkbeiner -- -- 18,750 56,250 -- --
Alan Schutzman -- -- -- 60,000 -- --
----------------
(a) None of the shares acquired upon these exercises have been sold.
Ira B. Lampert exercised these options and held the shares so
acquired, and deferred the delivery of 331,011 of these shares
under the Company's Deferred Delivery Plan.
(b) As reported in a Form 4 filed with the Securities and Exchange
Commission ("SEC"), Ira B. Lampert exercised an option for 314,312
shares on August 9, 2004 and deferred the delivery of 178,043 of
those shares under the Company's Deferred Delivery Plan.
40
The following table sets forth information concerning awards made under the
Company's Amended and Restated 2002 Long-Term Cash Incentive Plan (the "2002
LTCIP") during Fiscal 2004 to the Named Executive Officers.
LONG-TERM INCENTIVE PLAN AWARDS IN FISCAL 2004(1)
Amount of
Number of Amount of Cash Deferred Vesting Schedule for
Shares, Units Award(1) Award(1) Deferred Award, in Equal
Name or Other Rights ($) ($) Installments on:
---------------------------------------------------------------------------------------------------------------
Ira B. Lampert N/A $235,919 $670,474 08/06/05(3)
08/06/06(3)
08/06/07(3)
---------------------------------------------------------------------------------------------------------------
Brian F. King N/A 117,959 335,237(2) 08/06/04
08/06/05
08/06/06
---------------------------------------------------------------------------------------------------------------
Keith L. Lampert N/A 76,674 389,629 08/06/04
08/06/05
08/06/06
---------------------------------------------------------------------------------------------------------------
Urs W. Stampfli N/A 69,449 274,021 08/06/04
08/06/05
08/06/06
---------------------------------------------------------------------------------------------------------------
Richard M. Finkbeiner N/A -- 224,722(2) 08/06/04
08/06/05
08/06/06
---------------------------------------------------------------------------------------------------------------
(1) These awards were all granted on August 6, 2003. The cash amount is
included in the Summary Compensation Table under the LTIP Payout
column for Fiscal 2003 since these awards were made with respect to
the Fiscal 2002-2003 performance period. For a description of the
deferred element of these awards, see "Deferred Long Term
Compensation" below.
(2) The amount of the deferred awards to Messrs. King and Finkbeiner were
forfeited in their entirety when their employment terminated.
(3) Ira B. Lampert voluntarily delayed the vesting of his Deferred Award
by one year. See "Deferred Long Term Compensation" below.
EXECUTIVE EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT
AND CHANGE IN CONTROL ARRANGEMENTS
The following is a summary of the employment agreements between the Company and
each of the Named Executive Officers. The employment agreements provide for each
named executive to serve in the respective capacities indicated in the Summary
Compensation Table.
The employment agreement for Ira B. Lampert (the "Lampert Agreement") has a
four-year term that automatically extends each day, by one day, until one party
notifies the other that the term should not be further extended. The term of the
employment agreements for Keith L. Lampert, Urs W. Stampfli and Alan Schutzman
expire on January 1, 2006, January 1, 2006 and September 14, 2006, respectively,
unless renewed by mutual agreement of the parties, and may be terminated by the
Company on thirty (30) days' notice at any time or by the executive after the
expiration of the stated term. The term of the employment agreements for Brian
F. King and Richard M. Finkbeiner terminated effective as of July 1, 2004 and
July 27, 2004, respectively. Their Separation Agreements are described below.
41
The employment agreements provide that the Company will pay Ira B. Lampert and
Keith L. Lampert annual base salaries of $900,000 and $350,000, respectively,
effective as of January 1, 2003, an annual base salary of $250,000 to Urs W.
Stampfli effective as of July 1, 2003, and an annual base salary of $275,000 to
Alan Schutzman effective as of September 15, 2003. Ira B. Lampert voluntarily
reduced his base salary from $900,000 to $800,000 per annum for the period from
July 1, 2004 to June 30, 2005. The employment agreements for Brian F. King and
Richard M. Finkbeiner provided for annual base salaries of $450,000 and
$262,500, respectively; however, as described below, these agreements terminated
effective as of July 1, 2004 and July 27, 2004, respectively.
In connection with Keith L. Lampert's promotion to Chief Operating Officer, the
Board granted him an option to purchase 100,000 shares of the Company's Common
Stock at $5.18 per share (the closing price on the grant date of November 11,
2002) with vesting in equal installments over three years from the grant date,
approved a relocation package, and authorized a one-time grant, effective as of
January 1, 2003, of $100,000 in fully vested deferred compensation as an
inducement for his repatriation to the United States. Mr. Lampert was also
provided with housing at the Company's expense while he was on overseas
assignment and tax equalization in accordance with the Company's Executive
Management Tax Equalization Policy.
Pursuant to their respective employment agreements, Mr. Finkbeiner was also
provided with a relocation package, and Messrs. Finkbeiner and Schutzman were
each provided with a one-time grant of $100,000 in deferred compensation. These
grants of deferred compensation are described below under "Supplemental
Executive Retirement Plans for Named Executive Officers."
The Lampert Agreement provides that if his employment with the Company is
terminated by reason of death or disability, Mr. Lampert, or his legal
representative, would be entitled to receive, in addition to accrued
compensation (including, without limitation, any earned but unpaid bonus or
long-term incentive awards, any amount of base salary accrued or earned but
unpaid, any deferred compensation earned but unpaid, any accrued but unused
vacation pay and unreimbursed business expenses (the "Accrued Amounts")), his
base salary for the scheduled balance of the term (payable in the case of death
in a lump sum), a prorated bonus for the year in which the death or disability
occurred, and any other or additional benefits owed to the executive under the
then applicable employee benefit plans or policies of the Company, subject in
the case of disability to offset against the base salary payment by the amount
of any disability benefits provided to him by the Company or under any
disability insurance provided by or paid for by the Company.
The Lampert Agreement entitles Ira B. Lampert to participate generally in all
pension, retirement, insurance, savings, welfare and other employee benefit
plans and arrangements and fringe benefits and perquisites maintained by the
Company from time to time for senior executives of a comparable level. In
addition to any life insurance provided pursuant to one of the Company's plans,
Mr. Lampert is also provided with term life insurance, for such beneficiaries as
are designated by Mr. Lampert, of $5 million face value, and long-term
disability coverage with a $600,000 annual benefit payable in the event that Mr.
Lampert's employment with the Company is terminated due to his disability (the
"Additional Life and Disability Insurance"). In addition, the Company may
purchase key man life insurance on the life of Mr. Lampert, which may be used to
satisfy the Company's obligations under the Lampert Agreement in the event of
Mr. Lampert's death. The Company currently maintains $5 million in key man life
insurance on the life of Mr. Lampert.
42
If Mr. Lampert's employment is terminated by the Company without cause or if
there is a constructive termination without cause, Mr. Lampert would be entitled
to receive the Accrued Amounts, his base salary and continuation of his benefits
(or the economic equivalent of such benefits), the Additional Life and
Disability Insurance and certain perquisites for the scheduled balance of the
term and for an additional twelve months thereafter, and a prorated bonus for
the year in which the termination occurred. If such termination followed a
change of control of the Company, Mr. Lampert would be entitled to receive the
salary continuation benefit as a lump sum payment without any discount and,
subject to limited exceptions, any benefits, including options, in which he is
not at such time fully vested would become fully vested and any options would
remain exercisable for the full stated term of the option. If the automatic
extensions of the term of the Lampert Agreement are discontinued at the request
of the Company and Mr. Lampert's employment is terminated upon expiration of the
term, Mr. Lampert would be entitled to receive the Accrued Amounts, his base
salary and continuation of his benefits (or the economic equivalent of such
benefits), the Additional Life and Disability Insurance and certain perquisites
for twelve months after the end of the term, and a prorated bonus for the year
in which the termination occurred. In addition, if the severance payments to Mr.
Lampert under the Lampert Agreement follow a change in control and, together
with other amounts paid to Mr. Lampert, exceed certain threshold amounts and are
determined to constitute a parachute payment (as defined in Section 280G(b)(2)
of the Internal Revenue Code), Mr. Lampert is to receive an additional amount to
cover the federal excise tax with respect thereto on a "grossed up" basis. If
Ira B. Lampert is terminated for cause, or he voluntarily resigns, he will only
receive the Accrued Amounts and benefits provided in benefit plans.
Pursuant to the employment agreements for Keith L. Lampert, Urs W. Stampfli,
Alan Schutzman and Brian F. King, if the Company terminates the executive's
employment at any time without cause, or if the executive terminates his
employment after the stated term of his employment agreement, the executive is
entitled to severance payments equal to one year of the executive's then base
salary plus his automobile allowance, payable in installments in accordance with
the normal payroll schedule. Mr. Finkbeiner's employment agreement provided
that, if the Company terminates his employment without cause, Mr. Finkbeiner is
entitled to severance payments equal to twelve months' of his then base salary.
The employment agreement for Keith L. Lampert also provides that if his
employment were to be terminated by the Company without cause, or upon a change
of control, the stock option for 100,000 shares granted to Mr. Lampert on
November 11, 2002 would automatically become exercisable in full.
The employment agreements of all of the Named Executive Officers prohibit them
from competing with the Company for one year following the termination of their
employment with the Company; however, if Ira B. Lampert's employment is
terminated without cause, the duration of his non-compete covenants would extend
throughout the period in which his base salary and other benefits are continued
if such period exceeds twelve months.
The Company and Brian F. King entered into a separation agreement, dated as of
March 29, 2004, pursuant to which Mr. King's employment terminated effective
July 1, 2004. Pursuant to this agreement, in addition to any other benefits he
is entitled to receive under any employee benefit plan or deferred compensation
plan (including his supplemental executive retirement plan and agreement
("SERP"), which is described below), Mr. King is to receive: (a) the equivalent
of his base salary of $450,000 per annum and auto allowance of $18,000 per annum
(in installments in accordance with the normal payroll schedule) through June
30, 2005, in accordance with the severance provisions of his employment
agreement; (b) pay for accrued but unused vacation, accrued as though he had
remained employed through December 31, 2004; (c) reimbursement of premiums for
continuation of his health insurance coverage through June 30, 2005 under COBRA;
and (d) reimbursement of premiums for substantially similar life and disability
insurance coverage through June 30, 2005.
Richard M. Finkbeiner's employment with the Company terminated effective as of
July 27, 2004. Mr. Finkbeiner and the Company entered into a separation
agreement, dated as of August 18, 2004, pursuant to which, in addition to any
other benefits is entitled to receive under the Company's 401(k) plan, he is to
receive: (a) the equivalent of his base salary of $262,500 per annum (in
installments in accordance with the normal payroll schedule) through July 26,
2005, in accordance with the severance provisions of his employment agreement;
(b) a lump sum payment of $12,500; (c) pay for accrued but unused vacation; and
(d) a lump sum payment of $75,000, representing the funds in his SERP that had
vested prior to or as a result of the termination of his employment.
43
Under these separation agreements, Messrs. King and Finkbeiner must not compete
with the Company for one year, must provide the Company with certain cooperation
and assistance (without receiving additional compensation for same during the
period covered by the severance payments), and were required to execute a
release prior to receiving any severance payments.
Supplemental Executive Retirement Plans for Named Executive Officers
Pursuant to the Lampert Agreement, the Company adopted a SERP for the benefit of
Ira B. Lampert (the "Lampert SERP"). A specified amount of deferred
compensation, currently $500,000, is credited to the Lampert SERP account each
year. These yearly credits are 100% vested and not subject to forfeiture. Mr.
Lampert voluntarily reduced the amount of the credit to be made in January 2005
from $500,000 to $350,000.
Effective as of April 19, 2000, in connection with a one-time grant of deferred
compensation to certain executive officers, the Company adopted certain SERPs,
including those with respect to deferred compensation in the following amounts
for the following named executive officers (the "Executive SERPs"): (i) Brian F.
King, $750,000; (ii) Keith L. Lampert, $450,000; and (iii) Urs W. Stampfli,
$110,000. The amounts in the Executive SERP accounts vested in three equal
annual installments on January 1st of 2001, 2002 and 2003. The Company
simultaneously approved a one-time grant of deferred compensation to Ira B.
Lampert in the amount of $1,549,998 with the same vesting schedule as under the
Executive SERPs, and the Lampert SERP was amended to include appropriate terms
to govern this one-time grant of deferred compensation.
In connection with a one-time grant of $100,000 in deferred compensation to
Richard M. Finkbeiner as of July 22, 2002, the Company adopted a SERP for his
benefit. Pursuant to his SERP, the amounts in the SERP accounts vested, so long
as Mr. Finkbeiner continued to be employed by the Company, in four annual
installments of $25,000 each on July 22nd of 2003, 2004, 2005 and 2006, however,
if the Company terminates Mr. Finkbeiner's employment without cause, half of
each year's installment would immediately become vested. When Mr. Finkbeiner's
employment terminated on July 27, 2004, half of the installments scheduled to
vest on July 22, 2005 and July 22, 2006 were forfeited and the other half
immediately vested.
In connection with a one-time grant of $100,000 in deferred compensation to Alan
Schutzman as of September 15, 2003, the Company adopted a SERP for his benefit.
Pursuant to Mr. Schutzman's SERP, the amounts in the SERP accounts vest, so long
as he continues to be employed by the Company, in three equal annual
installments on September 15th of 2004, 2005 and 2006, or immediately upon: (i)
a change in control; or (ii) the termination of his employment as a result of
his death or disability, or by the Company without "cause."
Each time the Company credits an executive's account under a SERP agreement, the
Company simultaneously contributes an equal amount to a trust established for
the purpose of accumulating funds to satisfy the obligations incurred by the
Company pursuant to the SERP.
Deferred Long Term Compensation
On August 6, 2003, Named Executive Officers were awarded the following amounts
of contingent deferred compensation under the 2002 LTCIP with respect to the
Fiscal 2002-2003 performance period (the "Deferred LTCIP Awards"): (i) Ira B.
Lampert, $670,474; (ii) Brian F. King, $335,237; (iii) Keith L. Lampert,
$389,629; (iv) Urs W. Stampfli, $274,021; and (v) Richard M. Finkbeiner,
$224,722. The Deferred LTCIP Awards to Keith L. Lampert and Urs W. Stampfli
vest, so long as the executive continues to be employed by the Company, in three
equal annual installments on August 6, 2004, 2005 and 2006, or immediately upon:
(i) a change of control of the Company; or (ii) the executive's death or
disability. The Deferred LTCIP Awards to Brian King and Rick Finkbeiner were
forfeited when their employment terminated before any vesting had occurred. Ira
B. Lampert voluntarily agreed to delay the vesting of his Deferred LTCIP Award
by one year, such that it vests in three equal installments on August 6, 2005,
2006 and 2007 instead of August 6, 2004, 2005 and 2006. Otherwise, the Deferred
LTCIP Award granted to Ira B. Lampert has substantially the same terms and
conditions as the other Deferred LTCIP Awards, however, in addition to the
events that will accelerate the vesting of the other Deferred LTCIP Awards, it
provides for immediate vesting in the event of termination without cause, a
constructive termination of employment without cause, or the non-renewal of his
employment contract. The Lampert SERP, the Executive SERPs and the Finkbeiner
SERP were all amended to include appropriate terms to govern the Deferred LTCIP
Awards. The Company contributed the foregoing amounts to trusts established for
the purpose of holding funds to satisfy the Company's obligations under the
Deferred LTCIP Awards.
44
TRANSACTIONS UNDER MANAGEMENT EQUITY PROVISIONS OF 1993 INCENTIVE PLAN
On August 23, 1995, the Compensation Committee of the Board approved stock
purchase awards under the Management Equity Provisions ("MEP") of the Company's
1993 Incentive Plan pursuant to which 1,000,000 shares of Common Stock were made
available for purchase by senior management of the Company at a price per share
equal to $2.6875 per share (the closing price of the Common Stock on August 23,
1995, adjusted for the two-for-one stock split effective on April 14, 2000)
pursuant to binding commitments to be made by such persons by August 31, 1995.
The Company received commitments for the purchase of 888,000 shares (the
"Purchased Shares"). Each purchaser was also granted the right to receive a
contingent restricted stock award, that would have vested over a three-year
period, covering a number of shares equal to the number of shares he had
purchased based upon attainment of increases in shareholder value in accordance
with the plan.
In November 1995, members of the Company's senior management entered into
purchase agreements (the "Purchase Agreements") for the Purchased Shares.
Pursuant to the Purchase Agreements, each purchaser executed a full recourse
note for the purchase price of such shares (each a "Note"; collectively, the
"Notes") and pledged the Purchased Shares as security for the payment of the
Note. The Notes bore interest at an annual rate of 6%. Concurrently, each
purchaser entered into a Voting Agreement pursuant to which each purchaser
agreed to vote all of his Purchased Shares and contingent restricted stock in
accordance with the determination of the holders of a majority of all of the
Purchased Shares and contingent restricted stock held by the purchasers. To
effect the foregoing, each of the purchasers delivered an irrevocable proxy to
Ira B. Lampert.
Pursuant to Amendments to each of the Purchase Agreements dated February 28,
1997 (the "Amendments"), the Company was relieved of its obligation to issue any
contingent restricted stock. Instead, each participating member of senior
management received, as of December 22, 1996, options to purchase that number of
shares of Common Stock (the "Option Shares") equal to the number of Purchased
Shares purchased by such person, at an exercise price of $0.9063 per share. The
options vested as to 20% of the Option Shares as of December 22, 1996, and the
balance of the shares covered thereby began vesting December 31, 1996 in equal
monthly installments over a four-year period during the term of employment or
consultancy. The unvested portion became vested on August 19, 1998 when the
average closing price of the Common Stock was at least $2.50 (after adjustment
for the stock split effective on April 14, 2000) for 90 consecutive trading
days. Concurrently with the Amendments, the Voting Agreement and the irrevocable
proxies were amended and restated to include the Option Shares and delete any
mention of the contingent restricted stock.
In April 1999, the Board approved a conditional release program whereby the
Company agreed to forgive a portion of the indebtedness represented by each Note
and concurrently release a proportionate number of Purchased Shares held by the
Company as security for payment of the Notes. The debt forgiveness and share
release program (the "Release Program") began on May 1, 1999 and continued on
January 1 each year through January 1, 2003. The total principal sum subject to
forgiveness under the Release Program was $2,386,500, together with interest
owed under the Notes. The debt forgiveness was conditioned upon the person's
continued employment with the Company.
As contemplated by the MEP, subsequent to 1995 certain Purchased Shares and the
related options were transferred to other eligible members of the Company's
senior management upon their execution of the required agreements and Notes.
Notes previously delivered to secure payment for such shares were canceled upon
delivery of new Notes by such transferees.
45
In January 2000, the Board further provided that a participant in the MEP would
have the right to prepay all or any portion of the indebtedness represented by a
Note, and that the amount so prepaid would be repaid to the participant as
deferred compensation at such time as the amount would otherwise have been
forgiven in accordance with the Release Program.
The Purchased Shares and options awarded pursuant to the MEP are presently held
by Ira B. Lampert, Keith L. Lampert and Arthur Zawodny. Harlan I. Press and
Brian F. King ceased to be members of the MEP Group when they sold all of their
Purchased Shares and Option Shares in August 2003 and August 2004, respectively.
The following were the scheduled release dates, and the total amounts that were
forgiven* on such dates, under the Release Program.
Total Principal
Indebtedness Total Purchased
Releasee Release Dates Forgiven Shares Released
---------------------------- ------------------------------------- -------------------- --------------------
Brian F. King May 1, 1999, and January 1st of $ 430,000* 160,000
2000, 2001, 2002 and 2003
Ira B. Lampert May 1, 1999, and January 1st of $1,612,500* 600,000
2000, 2001, 2002 and 2003
Keith L. Lampert May 1, 1999, and January 1st of $ 295,625* 110,000
2000, 2001, 2002 and 2003
Harlan I. Press January 6, 2000, and January 1st of $ 10,750 4,000
2001, 2002 and 2003
Arthur Zawodny May 1, 1999, and January 1st of $ 37,625* 14,000
2000, 2001, 2002 and 2003
-------------------
* After the January 1, 2000 release date, the balance of these amounts
were repaid in full. Ira B. Lampert, Brian F. King, Keith L. Lampert
and Arthur Zawodny each prepaid in full the balance of the debts
represented by their Notes and, as a result of their continued
employment with the Company, received deferred compensation in lieu of
the amounts scheduled to be forgiven under the Release Program.
DIRECTOR COMPENSATION
During Fiscal 2004, each non-employee member of the Board was paid the
following: (i) an annual fee of $15,000 for serving on the Board; (ii) a $2,500
annual fee for each Board committee on which he served ($3,500 for serving as
Chairman); and (iii) $1,000 for each Board or committee meeting attended.
In addition, pursuant to the formula award provisions of the Company's 1993
Incentive Plan, as amended, prior to January 20, 2003, each non-employee
director automatically received the following options to purchase shares of the
Common Stock. Upon appointment to the Board, each non-employee director
received: (i) an option to purchase up to 40,000 shares, vesting as to 8,000
shares on the following January 1 and on each January 1 thereafter (provided
that, if a director fails to attend at least 75% of the Board meetings in any
calendar year, then the options that would have vested on the next January 1 are
forfeited); and (ii) an immediately exercisable option to purchase 13,000
shares. On each anniversary of his appointment, each non-employee director
received another immediately exercisable option to purchase 13,000 shares. All
of the foregoing options have an exercise price equal to the closing price of
the Common Stock on the date of grant and expire on the earlier of: (i) five
years from the grant date; or (ii) one year after the recipient ceases to be a
member of the Board. On January 20, 2003, the 1993 Incentive Plan was amended to
remove the provisions regarding formula awards to non-employee directors and, in
lieu of the anniversary grant that would have been received in 2003, each
non-employee director was granted an option to purchase 26,000 shares of Common
Stock at an exercise price of $5.52 per share. The foregoing options were
immediately exercisable as to 13,000 shares and vested as to the remaining
13,000 shares on January 20, 2004 provided the director continued to serve on
the Board.
46
Effective July 31, 2003, the Company amended the outstanding options held by
William J. Lloyd, who was a member of the Board until such time, to permit such
options to be exercised until their stated expiration date, and to permit the
continued vesting through January 2005 of 12,000 shares subject to one such
option, in light of the valuable years of advice and service that had been
provided during Mr. Lloyd's tenure as a member of the Board. The foregoing
amendments did not apply to the installment of 13,000 shares that would have
vested on January 20, 2004 under the grant made to him on January 20, 2003,
which installment was forfeited.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS.
The following table sets forth certain information as of August 31, 2004 about
the beneficial ownership of our Common Stock by: (i) each person or group who we
know beneficially owns more than 5% of our Common Stock; (ii) each director;
(iii) each Named Executive Officer; and (iv) all directors and executive
officers as a group:
47
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership(1) of Class(1)
------------------------ ----------------------- -----------
(i) Beneficial Owners of More Than 5% of the Common Stock
MT Trading LLC, Sondra Beit, RH Trading LLC and 1,870,787(2) 6.5%
LTC Racing LLC as a group
c/o MT Trading LLC
530 Silas Deane Highway, Suite 130
Wethersfield, CT 06109
MT Trading LLC 1,654,547(2) 5.7%
530 Silas Deane Highway, Suite 130
Wethersfield, CT 06109
Dimensional Fund Advisors Inc. 1,492,894(2) 5.2%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
"MEP Group" of Company Officers or 2,367,285(3) 7.8%
Employees as described in note (3) below
(ii) Directors
Ira B. Lampert 1,991,846(3)(4) 6.6%
Ronald S. Cooper 95,500(5) *
Morris H. Gindi 95,500(6) *
J. David Hakman 390,000(7) 1.3%
William J. O'Neill, Jr. 76,000(8) *
(iii) Named Executive Officers
Brian F. King 127,260(8) *
Keith L. Lampert 459,689(3)(9) 1.6%
Alan Schutzman 23,000(10) *
Urs W. Stampfli 63,665(8) *
Richard M. Finkbeiner 37,500(8) *
(iv) Directors and executive officers as a group (12 persons)(11) 3,446,814 11.1%
--------------------
* Indicates less than one percent (1%).
(1) For purposes of this table, beneficial ownership was determined in
accordance with Rule 13d-3 under the Exchange Act based upon
information furnished by the persons listed or contained in
filings made by them with the SEC; the inclusion of shares as
beneficially owned should not be construed as an admission that
such shares are beneficially owned for purposes of Section 16 of
the Exchange Act. As of August 31, 2004, the Company had
28,832,219 shares of Common Stock issued and outstanding. All
shares were owned directly with sole voting and investment power
unless otherwise indicated.
(2) Based on information contained in Schedule 13Ds filed September
10, 2004 by each of MT Trading LLC, and MT Trading LLC and the
other members of the group, as to their beneficial ownership at
August 31, 2004, and a Schedule 13G filed February 6, 2004 by
Dimensional Fund Advisors Inc. as to its beneficial ownership at
December 31, 2003. The 1,654,547 shares beneficially owned by MT
Trading LLC at August 31, 2004 constitute the majority of the
1,870,787 shares beneficially owned by MT Trading LLC and the
other members of the group listed first in this table. On
September 27, 2004, MT Trading LLC filed an amendment to its
Schedule 13D indicating that, as of September 27, 2004, it
beneficially owned 2,183,742 shares of the Company's Common Stock.
48
(3) As of August 31, 2004, a group comprised of three officers or
employees of the Company (Messrs. Ira B. Lampert, Keith L. Lampert
and Arthur Zawodny) (collectively, the "MEP Group") beneficially
owned, in the aggregate, 1,451,186 shares and options to purchase
916,099 shares of Common Stock, or 7.8% of 30,257,372 (the number
of shares outstanding on that date plus the number of shares that
would have been outstanding if all options held by the members of
the MEP Group which were exercisable within 60 days of August 31,
2004 were exercised and the 509,054 shares deferred by Ira B.
Lampert were outstanding). Of that total, 550,744 shares and
options to purchase 391,656 shares of Common Stock were purchased
under the Management Equity Provisions ("MEP") of the Company's
1993 Incentive Plan and are subject to the terms of an Amended and
Restated Voting Agreement, dated February 28, 1997, as amended
(the "Voting Agreement") pursuant to which MEP shares are voted in
accordance with the will of the holders of a majority of the
shares governed by the Voting Agreement. The balance of 900,442
shares and options to purchase 524,443 shares of Common Stock were
purchased or held outside the MEP. See "Transactions under
Management Equity Provisions of 1993 Incentive Plan" above. The
MEP Group's address is c/o Concord Camera Corp., 4000 Hollywood
Boulevard, Presidential Circle - 6th Floor, North Tower,
Hollywood, Florida 33021.
(4) Represents: (i) 640,660 shares that may be acquired pursuant to
stock options exercisable within 60 days of August 31, 2004; (ii)
695,732 shares owned, as to all of which Mr. Lampert has sole
dispositive power; (iii) 509,054 shares, the delivery of which was
deferred by Mr. Lampert into future years under the Company's
Deferred Delivery Plan, but which could be acquired by him within
60 days of August 31, 2004 under certain limited circumstances
described in that plan; (iv) 28,000 shares held by a ss.501(c)(3)
charitable trust of which Mr. Lampert is a trustee with voting and
dispositive power; and (v) 118,400 additional MEP shares (550,744
MEP shares, less the 432,344 MEP shares owned directly by Mr.
Lampert) that Mr. Lampert has the right to vote since he currently
owns a majority of the shares governed by the Voting Agreement.
Since Mr. Lampert is part of the MEP Group, the shares
beneficially owned by him are included in footnote (3) above; the
MEP Group is deemed to have acquired the shares beneficially owned
by any member of the MEP Group described in footnote (3) above.
(5) Includes 82,500 shares that may be acquired pursuant to stock
options exercisable within 60 days of August 31, 2004.
(6) Represents 80,500 shares that may be acquired pursuant to stock
options exercisable within 60 days of August 31, 2004, and 15,000
shares held by the Notra Trading Inc. Profit Sharing Plan & Trust,
a retirement plan of which Mr. Gindi is a co-trustee and
participant.
(7) Represents: (i) 80,500 shares that may be acquired pursuant to
stock options exercisable within 60 days of August 31, 2004; and
(ii) 39,500 shares held by the Hakman Family Trust, of which Mr.
Hakman is a trustee and beneficiary, 30,000 shares held by the
Hakman Capital Corporation Profit Sharing Plan and Trust, and
240,000 shares held by a corporation controlled by Mr. Hakman.
(8) Represents shares that may be acquired pursuant to stock
options exercisable within 60 days of August 31, 2004.
(9) Represents 249,689 shares that may be acquired pursuant to stock
options exercisable within 60 days of August 31, 2004 and 210,000
shares owned, as to all of which Keith Lampert has sole
dispositive power. Since Mr. Lampert is part of the MEP Group, the
shares beneficially owned by him are included in footnote (3)
above; the MEP Group is deemed to have acquired the shares
beneficially owned by any member of the MEP Group described in
footnote (3) above.
(10) Represents 20,000 shares that may be acquired pursuant to stock
options exercisable within 60 days of August 31, 2004 and 3,000
shares owned by an IRA account of Mr. Schutzman.
(11) Does not include 5,000 shares beneficially owned by the Company's
Controller, Blaine Robinson, who was appointed as an executive
officer effective as of September 20, 2004, and does not include
any shares beneficially owned by Messrs. Finkbeiner or King.
49
FISCAL YEAR-END EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth aggregated information concerning our equity
compensation plans outstanding at July 3, 2004.
No. of Securities
Remaining Available
for Future Issuance
No. of Securities to be Weighted-Average under Equity
Issued upon Exercise of Exercise Price of Compensation Plans
Options, Warrants and Options, Warrants and (excluding shares
Rights Outstanding Rights Outstanding reflected in
Plan Category at FY End (#) at FY End ($) the 1st column)
------------- ------------------------ ---------------------- --------------------
Equity Compensation Plans
Approved by Shareholders
2,536,694 $4.11 --
Equity Compensation Plans
Not Approved by Shareholders
789,250 $5.92 568,500
--------- ----- -------
Total 3,325,944 $4.54 568,500
========= ===== =======
At July 3, 2004, we had a total of twenty-four (24) compensation plans under
which Common Stock was authorized for issuance that were adopted without
shareholder approval: (i) the 2002 Incentive Plan for Non-Officer Employees, New
Recruits and Consultants (the "First 2002 Incentive Plan") and the 2002
Incentive Plan for New Recruits (the "Second 2002 Incentive Plan", collectively
with the First 2002 Incentive Plan, the "2002 Plans"); and (ii) twenty-two (22)
individual stock option plans, twenty-one (21) of which were issued to employees
(two of whom are executive officers) as an inducement to their employment with
the Company and one (1) of which was issued to a consultant as a retention
inducement. None of the options issued under any of these plans qualifies as an
incentive stock option for federal tax purposes.
At July 3, 2004, 500,000 shares of Common Stock were reserved for issuance
pursuant to outstanding options granted under and options available for grant
under each of the 2002 Plans. New recruits (including officers), non-officer
employees and consultants in our service are eligible to participate in the
First 2002 Incentive Plan. Only new recruits (including officers) are eligible
to participate in the Second 2002 Incentive Plan. The 2002 Plans generally
provide for the granting of stock, stock options, stock appreciation rights,
restricted shares or any combination of the foregoing to eligible participants.
Shares subject to any outstanding options under each of these plans which expire
or otherwise terminate prior to exercise will be available for subsequent
issuance under the plan. Except as otherwise required by law or the plan, the
Compensation and Stock Option Committee or our Board of Directors determine
which eligible individuals are to receive option grants, the number of shares
subject to each such grant, the vesting schedule for the option grant, the
maximum term for which any granted option is to remain outstanding, and the
exercise price. The exercise price may not be less than the fair market value of
the option shares on the grant date.
At July 3, 2004, 359,750 shares of Common Stock in the aggregate were reserved
for issuance under individual stock option plans that were issued to employees
(two of whom are executive officers) as an inducement to their becoming employed
by the Company, and to a consultant as an inducement for his continued services,
or were subsequently received by the employee or consultant, in exchange for
their inducement option, in connection with a stock option repricing program.
These plans were adopted for inducement of new employees and consultants and
have substantially the same terms and conditions as options issued under the
2002 Plans. These stock options generally vest in three annual installments
beginning on the first anniversary of the employee's start date or the grant
date, have an exercise price equal to the closing price of the Common Stock on
the date of grant, and expire ten years after the grant date. For those stock
options that were received in exchange for the person's inducement option, the
vesting schedule and expiration date of the inducement option were carried
forward into the person's repriced stock option. The consultant's stock option
began vesting on the date of grant, continued vesting in annual installments and
became vested in full on April 24, 2004 since the consultant continued to make
his services available to the Company.
50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Employment of Christopher Lampert
Another son of Ira B. Lampert, Christopher Lampert, worked for the Company in
Hong Kong and the PRC as a project analyst and product operations manager until
December 12, 2003. In Fiscal 2004, we paid a total of $51,649 for his salary and
his housing in Hong Kong. Housing is customarily provided to our employees on
foreign assignment and stationed by the Company in Hong Kong and/or the PRC.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Fees for professional services provided by Ernst & Young LLP to the Company
during Fiscal 2004 and Fiscal 2003 are:
FY 2004 FY 2003
(in thousands) (in thousands)
--------------- ---------------
Audit Fees $ 1,367 $ 420
Audit-Related Fees 421 66
Tax Fees -- --
All Other Fees -- --
--------------- ---------------
Total $ 1,787 $ 486
=============== ===============
Audit Fees include fees for services rendered for the audit of the Company's
annual financial statements, reviews of financial statements included in the
Company's quarterly reports on Form 10-Q, and consents and other services
normally provided in connection with statutory and regulatory filings or
engagements for those fiscal years.
Audit-Related Fees principally include fees for advisory services related to
Section 404 of the Sarbanes-Oxley Act, due diligence in connection with the
Jenimage acquisition and other possible transactions, and accounting
consultations.
Tax Fees would include fees for services rendered for tax compliance, tax advice
and tax planning. The Company obtains these types of services from an accounting
firm other than Ernst & Young LLP.
All Other Fees would include fees for all other services rendered to the Company
that do not constitute Audit Fees, Audit-Related Fees or Tax Fees.
In considering the nature of the services provided by Ernst & Young LLP, the
Audit Committee determined that such services are compatible with the provision
of independent audit services. The Audit Committee discussed these services with
Ernst & Young LLP and management to determine that they are permitted under the
rules and regulations concerning auditor independence promulgated by the SEC to
implement the Sarbanes-Oxley Act of 2002, as well as the American Institute of
Certified Public Accountants.
51
APPROVAL POLICY
All services rendered by Ernst & Young LLP are pre-approved by the Audit
Committee in accordance with the Company's Audit and Non-Audit Pre-Approval
Policy for independent auditor services and are monitored both as to spending
level and work content by the Audit Committee to maintain the appropriate
objectivity and independence of Ernst & Young LLP's core service, which is the
audit of the Company's consolidated financial statements. Under the policy, the
terms and fees of annual audit services, and any changes thereto, must be
approved by the Audit Committee. The policy also sets forth detailed
pre-approved categories of other audit, audit-related and other non-audit
services that may be performed by the Company's independent auditors during the
fiscal year, subject to the dollar limitations set by the Committee. The Audit
Committee may, in accordance with the policy, delegate to any member of the
Audit Committee the authority to approve audit and non-audit services to be
performed by the independent auditors. Any Audit Committee member who exercises
this delegated authority must report any approval decisions to the Audit
Committee at its next scheduled meeting. The foregoing pre-approval requirements
are subject to the de minimis exceptions for non-audit services described in
Section 10A(i)(1)(B) of the Exchange Act which are approved by the Audit
Committee prior to completion of the audit.
All of the services described above were approved by the Audit Committee in
accordance with its approval policy.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) (1) and (2) Financial Statements and Financial Statement Schedule
The following consolidated financial statements of the Company and the notes
thereto, the related reports thereon of the independent registered public
accounting firm and financial statement schedule are filed under Item 8 of this
report:
(a)(1) Financial Statements Page
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets at July 3, 2004 and June 28, 2003 F-2
Consolidated Statements of Operations for the years ended F-3
July 3, 2004, June 28, 2003 and June 29, 2002
Consolidated Statements of Stockholders' Equity for the years
ended July 3, 2004, June 28, 2003 and June 29, 2002 F-4
Consolidated Statements of Cash Flows for the years
ended July 3, 2004, June 28, 2003 and June 29, 2002 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts and Reserves F-38
All other financial statement schedules for which provision is made in the
applicable accounting regulations of the SEC are not required under the
instructions to Item 8 or are inapplicable and therefore have been omitted.
52
(A)(3) EXHIBITS
No. Description Method of Filing
2.1 Purchase of Share and Claims and Transfer Incorporated by reference to the Company's
Agreement, dated May 10, 2004, by and between current report on Form 8-K filed on May
Concord Camera GmbH and 4MBO International 25, 2004.
Electronic AG for the purchase of Jenimage
Europe GmbH and Jenimage UK Limited
3.1 Certificate of Incorporation, as amended Incorporated by reference to the Company's
through May 9, 2000 annual report on Form 10-K ("10-K") for
the year ended July 1, 2000.
3.2 Restated By-Laws, as amended through July Filed herewith.
12, 2004
4.1 Form of Common Stock Certificate Incorporated by reference to the Company's
registration statement on Form 8-A filed
September 20, 2000.
9.1* Amended and Restated Voting Agreement, Incorporated by reference to the Company's
dated February 28, 1997, among the parties 10-K for the year ended July 1, 2000.
signatory thereto, including among others,
Ira B. Lampert, Brian King and Arthur
Zawodny, as amended on various dates in
1998 to add certain additional shares of
the Company's Common Stock owned by Ira B.
Lampert, Brian King and Keith Lampert and
as further amended on January 6, 2000
10.1 Settlement Agreement between the Company Incorporated by reference to the Company's
and the Commission effective September 1, 10-K for the year ended June 28, 2003.
1994
10.2 Second renewal agreement of Master Incorporated by reference to the Company's
Processing Contract No. (86)507, dated quarterly report on Form 10-Q ("10-Q") for
March 15, 1996, and approval notice issued the quarter ended September 30, 2000.
by the Longgang Economic Development Bureau
(English translations)
10.3 Contract for Grant of State-Owned Land Use Right, Incorporated by reference to the Company's
dated November 8, 1994, with the Shenzhen Land 10-Q for the quarter ended September 30, 2000.
Bureau (English translation)
53
10.4 Hong Kong Credit Facility and Factoring Incorporated by reference to the Company's 10-Q
Agreement, dated September 8, 1999, between for the quarter ended January 1, 2000.
The Hongkong and Shanghai Banking Corporation
Limited ("HSBC") and Concord HK
10.5 Letter agreements between HSBC and Concord Incorporated by reference to the Company's
HK dated June 1, 2002 and June 4, 2002, 10-K for the year ended June 29, 2002.
relating to and amending the Hong Kong
Credit Facility and Factoring Agreement
10.6 Letter agreement between HSBC and Concord Filed herewith.
HK dated December 13, 2003, relating to
cancellation of Hong Kong Factoring
Facility
10.7 Letter agreement between HSBC and Concord HK, Incorporated by reference to the Company's
dated as of November 7, 2003, relating to the 10-Q for the quarter ended December 27, 2003.
provision of certain banking facilities and the
guarantee of same by the Company
10.8 Letter agreement between HSBC and Concord HK, Filed herewith.
dated as of April 23, 2004, relating to the
provision of certain banking facilities and the
guarantee of same by the Company
10.9 Debenture, dated June 10, 2004, by Concord HK in Filed herewith.
favor of HSBC
10.10 Form of Guarantee from the Company to HSBC in Filed herewith.
connection with the Hong Kong credit facilities,
with schedule of outstanding Guarantees
10.11 Renewal of Business License of Concord Filed herewith.
Camera (Shenzhen) Company Limited, issued
by the Shenzhen Municipal Administration
for Industry and Commerce on May 17, 2004
(English translation)
10.12* Incentive Plan (1993), as amended through Incorporated by reference to the Company's
April 24, 2000 10-K for the year ended July 1, 2000.
10.13* Amendments to Incentive Plan (1993) dated Incorporated by reference to the Company's
as of April 19, 2001 and August 2, 2001 Schedule TO/A-1 filed August 28, 2001
54
10.14* Amendment to Incentive Plan (1993) dated as Incorporated by reference to the Company's
of January 20, 2003 10-Q for the quarter ended March 29, 2003.
10.15* Amendments to Incentive Plan (1993) dated Incorporated by reference to the Company's
as of February 10, 2003 and June 2, 2003 10-K for the year ended June 28, 2003.
10.16* 2002 Incentive Plan for Non-Officer Incorporated by reference to the Company's
Employees, New Recruits and Consultants, 10-K for the year ended June 29, 2002.
and Amendment No. 1 to same dated September
4, 2002
10.17* Amendment No. 2 dated as of June 2, 2003 to Incorporated by reference to the Company's
2002 Incentive Plan for Non-Officer 10-K for the year ended June 28, 2003.
Employees, New Recruits and Consultants
10.18* 2002 Incentive Plan for New Recruits, and Incorporated by reference to the Company's
Amendment No. 1 to same dated as of June 2, 10-K for the year ended June 28, 2003.
2003
10.19* Stock Option (Plan and) Agreement, dated as Incorporated by reference to the Company's
of May 15, 1998, between Urs W. Stampfli 10-K for the year ended June 29, 2002.
and the Company
10.20* Amendment, effective as of February 11, Incorporated by reference to the Company's
2003, to Stock Option (Plan and) Agreement, 10-K for the year ended June 28, 2003.
dated as of May 15, 1998, between Urs W.
Stampfli and the Company
10.21* Amended and Restated Deferred Delivery Filed herewith.
Plan, as amended through June 30, 2004
10.22* Amended and Restated Annual Incentive Filed herewith.
Compensation Plan, as amended through June
30, 2004
10.23* Amended and Restated Long Term Incentive Filed herewith.
Plan Commencing Fiscal 2004, as amended
through June 30, 2004, and 2004-2006
Performance Criteria
10.24* Restated Flexible Perquisite Spending Filed herewith.
Account Program for Corporate Officers, as
amended through July 12, 2004
55
10.25* Appendix A, dated June 6, 2002, to Flexible Incorporated by reference to the Company's
Perquisite Spending Account Program quarterly report on Form 10-Q for the
quarter ended December 28, 2002.
10.26* Amended and Restated Employment Agreement, Filed herewith.
dated as of May 1, 1997, between the
Company and Ira B. Lampert
10.27* Amendment No. 1 dated as of August 25, Incorporated by reference to the Company's
1998, Amendment No. 3 dated as of April 19, 10-K for the year ended June 30, 2001.
2000, and Amendment No. 4 dated as of
January 1, 2001, to Amended and Restated
Employment Agreement dated as of May 1, 1997,
between Ira B. Lampert and the Company
10.28* Amendment No. 2, dated as of January 1, Incorporated by reference to the Company's
1999, to Amended and Restated Employment 10-Q for the quarter ended January 2, 1999.
Agreement dated as of May 1, 1997, between
Ira B. Lampert and the Company
10.29* Amendment No. 5, dated as of December 2, Incorporated by reference to the Company's
2002, to Amended and Restated Employment 10-Q for the quarter ended December 28, 2002.
Agreement dated as of May 1, 1997, between
Ira B. Lampert and the Company
10.30* Amendment No. 6, dated February 10, 2003, Incorporated by reference to the Company's
to Amended and Restated Employment 10-Q for the quarter ended March 29, 2003.
Agreement dated as of May 1, 1997, between
Ira B. Lampert and the Company
10.31* Memorandum from Ira B. Lampert dated July Filed herewith.
28, 2004 to the Company regarding the
waiver of certain compensation and
modification to vesting dates, along with
releases signed by Ira B. Lampert
10.32* Amended and Restated Supplemental Executive Filed herewith.
Retirement Plan and Agreement ("SERP") for
Ira B. Lampert, dated as of August 18,
2004, between Ira B. Lampert and the Company
56
10.33* Amended and Restated SERP for Keith L. Filed herewith.
Lampert, dated as of August 18, 2004,
between Keith L. Lampert and the Company
10.34* Terms of Employment between Brian F. King Incorporated by reference to the Company's
and the Company, effective as of January 1, 10-K for the year ended June 30, 2001.
2000
10.35* Amendment, dated as of November 20, 2002, Incorporated by reference to the Company's
to Terms of Employment dated as of January 10-Q for the quarter ended December 28,
1, 2000, between Brian F. King and the 2002.
Company
10.36* Amendment No. 2 dated as of February 26, Incorporated by reference to the Company's
2003, and Amendment No. 3 dated as of March 10-Q for the quarter ended March 29, 2003.
30, 2003, to Terms of Employment dated as
of January 1, 2000, between Brian F. King
and the Company
10.37* Separation Agreement dated as of March 29, Filed herewith.
2004 between Brian F. King and the Company
10.38* Terms of Employment between Urs W. Stampfli Incorporated by reference to the Company's
and the Company, effective as of January 1, 10-K for the year ended June 30, 2001.
2000
10.39* Amendment, dated as of November 20, 2002, Incorporated by reference to the Company's
to Terms of Employment dated as of January 10-Q for the quarter ended December 28,
1, 2000, between Urs W. Stampfli and the 2002.
Company
10.40* Amendment No. 2 dated as of February 26, Incorporated by reference to the Company's
2003, and Amendment No. 3 dated as of March 10-Q for the quarter ended March 29, 2003.
30, 2003, to Terms of Employment dated as
of January 1, 2000, between Urs W. Stampfli
and the Company
10.41* Terms of Employment between Keith L. Incorporated by reference to the Company's
Lampert and the Company, effective as of 10-Q for the quarter ended December 28,
November 11, 2002 2002.
10.42* Amendment No. 1, dated as of March 2, 2004, Incorporated by reference to the Company's
to Terms of Employment effective as of 10-Q for quarter ended March 27, 2004.
November 11, 2002, between Keith Lampert
and the Company
57
10.43* Terms of Employment between Richard Incorporated by reference to the Company's
Finkbeiner and the Company, effective as of 10-K for the year ended June 28, 2003.
July 22, 2002, and Amendment No. 1 to same
dated as of January 1, 2003
10.44* Separation Agreement dated as of August 18, Filed herewith.
2004 between Richard Finkbeiner and the
Company
10.45* Terms of Employment between Alan Schutzman Filed herewith.
and the Company, effective as of September
15, 2003, and Amendment No. 1 to same dated
January 23, 2004
10.46* Form of SERP, dated as of April 19, 2000, Incorporated by reference to the Company's
between the Company and each of certain 10-K for the year ended July 1, 2000.
executive officers
10.47* Form of Amendment to the SERP, dated as of Incorporated by reference to the Company's
April 19, 2000, between the Company and 10-K for the year ended June 30, 2001.
each of certain executive officers
10.48* Form of Amendment No. 2, dated as of June Incorporated by reference to the Company's
1, 2002, to the SERP between the Company 10-K for the year ended June 29, 2002.
and each of Brian King, Urs Stampfli and
Harlan Press
10.49* Form of Amendment No. 3, dated as of August Incorporated by reference to the Company's
6, 2003, to the SERP between the Company 10-Q for quarter ended March 27, 2004.
and each of Brian King, and Urs Stampfli
10.50* SERP, dated as of July 22, 2002, between Incorporated by reference to the Company's
the Company and Richard M. Finkbeiner 10-K for the year ended June 28, 2003.
10.51* Amendment No. 1, dated as of August 6, Incorporated by reference to the Company's
2003, to SERP dated as of July 22, 2002, 10-Q for quarter ended March 27, 2004.
between Richard Finkbeiner and the Company
10.52* SERP, dated as of September 15, 2003, Filed herewith.
between the Company and Alan Schutzman
10.53* Concord Camera Corp. Executive Management Incorporated by reference to the Company's
Tax Equalization Policy 10-K for the year ended June 29, 2002.
58
10.54 Lease Agreement, undated between Prologis Incorporated by reference to the Company's
Trust, a Maryland real estate investment 10-Q for the quarter ended January 2,
trust, and the Company 1999.
10.55 Lease Agreement, dated as of August 12, Incorporated by reference to the Company's
1998, between CarrAmerica Realty Corp. and 10-Q for the quarter ended January 2,
the Company 1999.
10.56 First Amendment, dated October 12, 1999, to Incorporated by reference to the Company's
Lease dated as of August 12, 1998, between 10-Q for the quarter ended October 2, 1999.
CarrAmerica Realty Corp. and the Company
10.57 Second Amendment, dated January 3, 2000, to Incorporated by reference to the Company's
Lease dated as of August 12, 1998, between 10-K for the year ended July 1, 2000.
CarrAmerica Realty Corp. and the Company
10.58 Third Amendment, dated January 6, 2003, to Incorporated by reference to the Company's
Lease dated as of August 12, 1998, between 10-Q for the quarter ended December 28, 2002.
CRD Presidential, LLC and the Company
10.59 Tenancy Agreement, dated September 18, Incorporated by reference to the Company's
2002, between Southnice Investments Limited 10-Q for the quarter ended December 28, 2002.
and Concord Camera HK Limited
21 Subsidiaries of the Company Filed herewith.
23 Consent of Independent Registered Public Filed herewith.
Accounting Firm
31.1 Certification of Principal Executive Filed herewith.
Officer pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Principal Financial Filed herewith.
Officer pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of Principal Executive Filed herewith.
Officer pursuant to 18 U.S.C. ss.1350
32.2 Certification of Principal Financial Filed herewith.
Officer pursuant to 18 U.S.C. ss.1350
--------------
* Management contract or compensatory plan or arrangement.
The Financial Statement Schedules required to be filed pursuant to this Item
15(c) are listed above.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONCORD CAMERA CORP.
Date: October 1, 2004 By: /s/ Ira B. Lampert
--------------------------------
Ira B. Lampert, Chairman, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, and on the date set forth above.
Signature Title
/s/ Ira B. Lampert Chairman of the Board, Chief
------------------------------ Executive Officer and President
Ira B. Lampert (Principal Executive Officer)
/s/ Harlan I. Press Vice President and Treasurer
------------------------------ (Principal Financial Officer)
Harlan I. Press
/s/ Blaine A. Robinson Controller
------------------------------ (Principal Accounting Officer)
Blaine A. Robinson
/s/ Ronald S. Cooper Director
------------------------------
Ronald S. Cooper
/s/ William J. O'Neill, Jr. Director
---------------------------
William J. O'Neill, Jr.
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Concord Camera Corp.
We have audited the accompanying consolidated balance sheets of Concord Camera
Corp. and subsidiaries as of July 3, 2004 and June 28, 2003, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended July 3, 2004. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Concord
Camera Corp. and subsidiaries as of July 3, 2004 and June 28, 2003, and the
consolidated results of operations and cash flows for each of the three years in
the period ended July 3, 2004, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 5 to the consolidated financial statements, in the year
ended July 3, 2004 the Company changed its method of accounting with respect to
the allocation of manufacturing labor and overhead costs to inventories.
/s/Ernst & Young LLP
Certified Public Accountants
Fort Lauderdale, Florida
September 28, 2004
F-1
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
JULY 3, JUNE 28,
2004 2003
-------------------- ------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 18,323 $ 14,071
Short-term investments 39,600 74,185
Accounts receivable, net 29,367 32,494
Inventories 52,418 32,317
Prepaid expenses and other current assets 11,563 5,122
---------------- -----------------
Total current assets 151,271 158,189
Property, plant and equipment, net 20,597 21,328
Goodwill, net - 3,721
Other assets 17,649 22,576
---------------- -----------------
Total current assets $ 189,517 $ 205,814
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings under credit facilities $ 9,170 $ --
Accounts payable 18,783 22,105
Accrued expenses 16,395 13,023
Other current liabilities 6,320 1,984
---------------- -----------------
Total current liabilities 50,668 37,112
Other long-term liabilities 11,724 11,874
---------------- -----------------
Total liabilities 62,392 48,986
Commitments and contingencies
Stockholders' equity:
Blank check preferred stock, no par value,
1,000 shares authorized, none issued -- --
Common stock, no par value, 100,000 shares
authorized; 30,572 and 29,464 shares issued
as of July 3, 2004 and June 28, 2003, respectively 143,073 141,109
Additional paid-in capital 4,853 5,407
Deferred stock-based compensation (29) (190)
Deferred share arrangement 413 --
(Accumulated deficit) retained earnings (16,152) 15,070
Accumulated other comprehensive loss -- (431)
---------------- -----------------
132,158 160,965
Less: treasury stock, at cost, 1,599 and 1,543 shares as
of July 3, 2004 and June 28, 2003, respectively (4,620) (4,137)
Less: common stock held in trust, 331 shares as
of July 3, 2004 (413) --
---------------- -----------------
Total stockholders' equity 127,125 156,828
---------------- -----------------
Total liabilities and stockholders' equity $ 189,517 $ 205,814
================ =================
See accompanying notes.
F-2
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Fiscal Year Ended
----------------------------------------------------------------
July 3, June 28, June 29,
2004 2003 2002
--------------- --------------- --------------
Net sales $ 203,132 $ 189,783 $ 129,317
Cost of products sold 188,954 153,532 110,345
--------------- --------------- --------------
Gross profit 14,178 36,251 18,972
Selling expenses 13,522 8,905 6,343
General and administrative expenses 26,842 20,616 20,968
Goodwill impairment 3,721 -- --
Variable stock-based compensation
(income) expense (659) 900 --
Recovery of operating expenses, net -- -- (1,150)
Interest expense 715 1,230 2,522
Other income, net (500) (2,372) (3,060)
--------------- --------------- --------------
(Loss) income before income taxes (29,463) 6,972 (6,651)
Provision (benefit) for income taxes 7,537 569 (1,403)
--------------- --------------- --------------
(Loss) income before extraordinary item (37,000) 6,403 (5,248)
Extraordinary gain - acquired net assets in
excess of cost 5,778 -- --
--------------- --------------- --------------
Net (loss) income $ (31,222) $ 6,403 $ (5,248)
=============== =============== ==============
Net (loss) income per common share:
Basic:
(Loss) income before extraordinary item $ (1.29) $ 0.23 $ (0.19)
Extraordinary gain 0.20 -- --
--------------- --------------- --------------
Basic (loss) income per common share $ (1.09) $ 0.23 $ (0.19)
=============== =============== ==============
Diluted:
(Loss) income before extraordinary item $ (1.29) $ 0.22 $ (0.19)
Extraordinary gain 0.20 -- --
--------------- --------------- --------------
Diluted (loss) income per common share $ (1.09) $ 0.22 $ (0.19)
=============== =============== ==============
Weighted average
common shares outstanding - basic 28,716 27,874 27,438
Dilutive effect of common stock options -- 1,571 --
--------------- --------------- --------------
Weighted average common shares outstanding - diluted 28,716 29,445 27,438
=============== =============== ==============
See accompanying notes.
F-3
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Notes
Receivable
arising
from
Common Stock (Accumulated Common
---------------- Additional Deferred Deferred Deficit) Stock Treasury Stock
Issued Stated Paid-in Stock-Based Share Retained Purchase -----------------
Shares Value Capital Compensation Agreement Earnings Agreements Shares Cost
------ -------- ---------- ------------ --------- --------- ---------- ------ --------
Balance as of June 30,
2001 28,912 $140,254 $ 4,322 $ -- $ -- $ 13,915 $ (17) 1,543 $(4,137)
Exercise of stock options 117 293 -- -- -- -- -- -- --
Deferred stock-based
compensation -- -- -- (332) -- -- -- -- --
Interest on notes
receivable
from common stock
purchase agreements -- -- -- -- -- -- (1) -- --
Officers' notes forgiven
on stock purchases -- -- -- -- -- -- 8 -- --
Officers' notes paid on
stock purchase -- -- -- -- -- -- 9 -- --
Stock-based compensation -- -- 90 -- -- -- -- -- --
Net loss and comprehensive
loss -- -- -- -- -- (5,248) -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Balance as of June 29,
2002 29,029 140,547 4,412 (332) -- 8,667 (1) 1,543 (4,137)
Exercise of stock options
and warrants 435 562 -- -- -- -- -- -- --
Deferred stock-based
compensation -- -- -- 142 -- -- -- -- --
Officers' notes forgiven
on stock purchases -- -- -- -- -- -- 1 -- --
Stock-based compensation -- -- 995 -- -- -- -- -- --
Net income -- -- -- -- -- 6,403 -- -- --
Unrealized loss on
securities -- -- -- -- -- -- -- -- --
Comprehensive income -- -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Balance as of June 28,
2003 29,464 141,109 5,407 (190) -- 15,070 -- 1,543 (4,137)
Exercise of stock options
and warrants 1,108 1,964 -- -- -- -- -- --
Deferred stock-based --
compensation -- -- -- 161 -- -- -- -- --
Purchase of treasury stock -- -- -- -- -- -- -- 56 (483)
Common stock held in Trust -- -- -- -- -- -- -- -- --
Deferred share arrangement -- -- -- -- 413 -- -- -- --
Stock-based compensation -- -- (554) -- -- -- -- -- --
Net loss -- -- -- -- -- (31,222) -- -- --
Realized loss on
securities -- -- -- -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Balance as of July 3, 2004 30,572 $143,073 $4,853 $(29) $413 $(16,152) $ -- 1,599 $(4,620)
========================================================================================================
Common Stock Accumulated
Held in Trust Other
------------- Comprehensive
Shares Cost Loss Total
------ ---- ----- --------
Balance as of June 30,
2001 -- $ -- $ -- $154,337
Exercise of stock options -- -- -- 293
Deferred stock-based
compensation -- -- -- (332)
Interest on notes
receivable
from common stock
purchase agreements -- -- -- (1)
Officers' notes forgiven
on stock purchases -- -- -- 8
Officers' notes paid on
stock purchase -- -- -- 9
Stock-based compensation -- -- -- 90
Net loss -- -- -- (5,248)
--------------------------------------------------------------------------------
Balance as of June 29, -- -- -- 149,156
2002
Exercise of stock options
and warrants -- -- -- 562
Deferred stock-based
compensation -- -- -- 142
Officers' notes forgiven
on stock purchases -- -- -- 1
Stock-based compensation -- -- -- 995
Net income -- -- -- 6,403
Unrealized loss on securities -- -- (431) (431)
Comprehensive income -- -- -- 5,972
--------------------------------------------------------------------------------
Balance as of June 28, -- -- (431) 156,828
2003
Exercise of stock options 1,964
and warrants -- -- --
Deferred stock-based 161
compensation -- -- --
Purchase of treasury stock -- -- -- (483)
Common stock held in Trust (331) (413) -- (413)
Deferred share arrangement -- -- -- 413
Stock-based compensation -- -- -- (554)
Net loss -- -- -- (31,222)
Realized loss on
securities -- -- 431 431
Comprehensive loss -- -- -- (30,791)
--------------------------------------------------------------------------------
Balance as of July 3, 2004 (331) $(413) $ -- $127,125
====================================================
See accompanying notes.
F-4
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended
---------------------------------------------------------------------
July 3, June 28, June 29,
2004 2003 2002
--------------- ----------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (31,222) $ 6,403 $ (5,248)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 7,872 6,068 6,260
Deferred income taxes 7,204 340 (1,403)
Extraordinary gain (5,778) -- --
Goodwill impairment 3,721 -- --
Loss on sale of short-term investments 916 -- --
Variable stock-based compensation(income) expense (659) 900 --
Settlement of net accrued product costs -- (2,234) --
Provision for specific inventory obsolescence 11,100 22 3,261
Changes in operating assets and liabilities:
Accounts receivable 11,643 (9,510) 2,268
Inventories (23,021) (9,854) 5,020
Prepaid expenses and other current assets (6,310) 73 163
Other assets 287 (2,461) (1,651)
Accounts payable (3,694) 9,603 (5,489)
Accrued expenses 1,159 3,249 (3,320)
Other current liabilities 1,893 351 (1,914)
Other liabilities (189) 2,036 919
--------------- ----------------- -------------------
Net cash (used in) provided by operating activities (25,078) 4,986 (1,134)
--------------- ----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash received (9,097) -- --
Purchases of property, plant and equipment (6,806) (5,795) (2,141)
Proceeds from sale (purchases) of
short-term investments, net 34,099 (74,616) --
Proceeds from maturities of held-to-maturity
investments -- -- 49,870
--------------- ----------------- -------------------
Net cash provided by (used in) investing activities 18,196 (80,411) 47,729
--------------- ----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings under credit facilities 9,170 -- --
Net proceeds from issuance of common stock 1,964 562 293
Repayments of Senior Notes -- (14,934) --
Principal repayments under capital lease
obligations -- -- (504)
Proceeds from notes receivable arising from
common stock purchase agreements -- -- 9
--------------- ----------------- -------------------
Net cash provided by (used in) financing
activities 11,134 (14,372) (202)
--------------- ----------------- -------------------
Net increase (decrease) in cash and cash
equivalents 4,252 (89,797) 46,393
Cash and cash equivalents at beginning of the year 14,071 103,868 57,475
--------------- ----------------- -------------------
Cash and cash equivalents at end of the year $ 18,323 $ 14,071 $ 103,868
=============== ================= ===================
See Note 3, "Supplemental Cash Flow Information," and accompanying notes.
F-5
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Concord Camera Corp., a New Jersey corporation, and its consolidated
subsidiaries (collectively referred to as the "Company") designs, develops,
manufactures and sells, popularly priced, easy-to-use image capture products on
a worldwide basis. The Company manufacturers and assembles products in its
manufacturing facilities in the People's Republic of China ("PRC"). In addition,
the Company purchases a number of products from third parties. The Company's
products include digital image capture devices, 35mm, traditional and single use
cameras. The Company also serves as a contract manufacturer of developed and
co-developed products for its Design and Manufacturing Services ("DMS")
customers, and also sells its own branded and private label versions of many of
those products to its Retail Sales and Distribution ("RSD") customers.
During the fiscal years ended July 3, 2004 ("Fiscal 2004"), June 28, 2003
("Fiscal 2003"), and June 29, 2002 ("Fiscal 2002"), net sales and percentages of
total net sales of the Company's three largest customers collectively amounted
to $101.9 million (50.1%), $98.7 million (52.0%), and $61.9 million (47.9%),
respectively. See Note 23, "Geographic Area Information," for further
information about significant customers.
FISCAL PERIODS
The Company's fiscal year is comprised of 52 or 53 weeks, ending on the Saturday
closest to June 30. Fiscal 2004 is comprised of 53 weeks whereas Fiscal 2003 and
Fiscal 2002 are each comprised of 52 weeks.
For reference purposes, the Company's fiscal 2004 quarters are defined as the
quarter ended: September 27, 2003 ("First Quarter Fiscal 2004"), December 27,
2003 ("Second Quarter Fiscal 2004"), March 27, 2004 ("Third Quarter Fiscal
2004"), and July 3, 2004 ("Fourth Quarter Fiscal 2004").
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States
and include the accounts of the Company. All significant intercompany balances
and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The more significant of the
Company's estimates includes sales returns and other allowances, provision for
bad debts, inventory valuation charges, realizability of intangibles including
goodwill, realizability of deferred tax assets, and accounting for litigation
and settlements, among others.
F-6
FOREIGN CURRENCY TRANSACTIONS
The Company operates on a worldwide basis and its results may be adversely or
positively affected by fluctuations of various foreign currencies against the
U.S. Dollar, specifically, the Canadian Dollar, European Euro, British Pound
Sterling, PRC Renminbi, Hong Kong Dollar and the Japanese Yen. Although certain
net sales to customers and purchases of certain components and services are
transacted in local currencies, each of the Company's foreign subsidiaries
purchases substantially all of its finished goods inventories in U.S. Dollars.
Accordingly, the Company has determined the U.S. Dollar is the functional
currency for all of its subsidiaries. The accounting records for subsidiaries
that are maintained in a local currency are remeasured into the U.S. Dollar.
Accordingly, most non-monetary balance sheet items and related income statement
accounts are remeasured from the applicable local currency to the U.S. Dollar
using average historical exchange rates, producing substantially the same result
as if the entity's accounting records had been maintained in the U.S. Dollar.
Adjustments resulting from the remeasurement process are recorded into earnings.
Gains or losses resulting from foreign currency transactions and remeasurement
are included in "Other income, net" in the accompanying consolidated statements
of operations. For Fiscal 2004, Fiscal 2003 and Fiscal 2002 included in "Other
income, net" in the accompanying consolidated statements of operations are
approximately $0.7 million, $1.4 million, and $0.2 million, respectively, of net
foreign currency gains.
HEDGING ACTIVITIES
During Fiscal 2004, Fiscal 2003 and Fiscal 2002 the Company had no forward
exchange contracts or other derivatives outstanding and did not participate in
any other type of hedging activities.
CONCENTRATION OF CREDIT RISK
The Company sells a significant percentage of its products to a relatively small
number of customers. These customers operate in markets located principally in
the United States, the United Kingdom, Germany, France, Canada, Latin America,
PRC, Hong Kong, and Japan. Receivables arising from these sales are generally
not collateralized. The Company's credit terms extended to customers are
generally 60 days or less. The Company does not charge interest on amounts
outstanding. The Company monitors the credit-worthiness of its customers and
reviews outstanding receivable balances for collectibility on a regular basis
and records allowances for doubtful accounts, sales returns, and other
allowances, as necessary. Customers that individually account for greater than
10% of the Company's total net sales create a concentration of credit risk.
During Fiscal 2004, there were three such customers. See Note 23, "Geographic
Area Information," for further discussion of significant customers.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents; short-term investments;
accounts receivable, net; accounts payable; and accrued expenses approximate
fair value because of their liquidity or short duration to maturity. The fair
value of debt is estimated based on the quoted market prices for the same issues
or on current rates offered to the Company for debt with the same remaining
maturities. Because judgment is required in interpreting market data to develop
estimates of fair value, the estimates are not necessarily indicative of the
amounts that could be realized or would be paid in a current market exchange.
The effect of using different market assumptions or estimation methodologies may
be material to the estimated fair value amounts.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
F-7
INVESTMENTS
At July 3, 2004, the Company's "Short-term investments" as classified in the
accompanying consolidated balance sheet consisted of auction rate debt
securities and are considered available for-sale securities. At June 28, 2003,
the Company's "Short-term investments" as classified in the accompanying
consolidated balance sheet consisted of fixed income funds that invest in debt
securities and are considered available-for-sale securities. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported as a component of accumulated other comprehensive loss reported
in the stockholders' equity section in the accompanying consolidated balance
sheet as of June 28, 2003, unless the loss is other than temporary, and then it
would be recorded as an expense. Realized gains and losses, interest and
dividends are classified as investment income in "Other income, net" in the
accompanying consolidated statement of operations. The Company sold the balance
of the short-term investments on December 30, 2003 at a loss of $0.9 million.
Therefore, during the Second Quarter Fiscal 2004 the Company recorded a $0.9
million loss as a result of the sale of its short-term investments. The loss on
the short-term investments is included in "Other income, net" in the
accompanying consolidated statement of operations. Dividend income of $1.3
million and $1.5 million related to the short-term investments is included in
"Other income, net" for Fiscal 2004 and Fiscal 2003, respectively. See
"Comprehensive Income (Loss)" below for further discussion of unrealized losses
related to available-for-sale securities. Investments held in deferred
compensation rabbi trusts directed by participants are classified as trading and
changes in the fair value of such investments are recorded in earnings.
INVENTORIES
Inventories, consisting of raw materials, components, work-in-progress and
finished goods, are stated at the lower of cost or market value and are
determined on a first-in, first-out basis. Work-in-process and component
inventory costs include materials, labor, and manufacturing overhead. The
Company records lower of cost or market value adjustments based upon changes in
market pricing, customer demand, technological developments or other economic
factors and for on hand excess, obsolete or slow-moving inventory.
See Note 5 for discussion of the change in the method of applying manufacturing
labor and overhead costs charged to inventory.
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net are carried at cost less accumulated
depreciation and amortization. Depreciation is computed by use of the
straight-line method over the estimated useful lives of the respective assets.
Small tools and accessories used in production in the PRC are charged to
operations when purchased. Leasehold costs and improvements are amortized on a
straight-line basis over the term of the lease or their estimated useful lives,
whichever is shorter. Depreciation expense for Fiscal 2004, Fiscal 2003 and
Fiscal 2002 was approximately $7.5 million, $5.4 million and $5.4 million,
respectively. Depreciation expense for Fiscal 2004 includes $1.8 million related
to the shortened useful lives of certain molds and tooling. See Note 6 for
further discussion.
Useful Lives
Asset Class (in years)
----------- ------------
Buildings 30-50
Equipment 1-10
Office furniture and equipment 3-7
Automobiles 5-7
Leasehold improvements 3-11
F-8
INTANGIBLE ASSETS, NET
Goodwill represents the excess of purchase price over the fair value of net
assets acquired. Effective July 1, 2001, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, ("SFAS No. 142") and ceased amortizing its remaining goodwill balances.
Under SFAS No. 142, the Company's goodwill is subject to an impairment test, at
least annually. The Company has determined its remaining goodwill of $3.7
million at July 3, 2004 was impaired and, accordingly, has recorded a charge to
reduce its carrying value to $0. Identifiable intangible assets that have finite
useful lives will continue to be amortized over their useful lives. The
Company's amortizable intangible assets include patents, trademarks and licenses
and their respective costs are amortized on a straight-line basis over their
estimated useful lives. See Note 7, "Goodwill, Net," and Note 8, "Other Assets".
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company records impairment losses when indications of
impairment are present and the 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 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 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, the Company amortizes these assets based upon
percentages applied to single use and traditional film based camera sales. The
total expected royalty payments to be made over the life of an agreement are
dependent on management's estimates about future sales volumes. Because judgment
is required to estimate future sales volumes, the estimates are not necessarily
indicative of the sales volumes that will be actually realized in the future.
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. Title and risk of loss transfer generally when the product is
delivered to the customer or upon shipment, depending upon negotiated
contractual arrangements. Revenues are recorded net of anticipated returns which
the Company estimates based on historical rates of return, adjusted for current
events as appropriate, in accordance with Statement of Financial Accounting
Standard No. 48, Revenue Recognition When Right of Return Exists ("SFAS No.
48"). If actual future returns are higher than estimated, then net sales could
be adversely affected. During Fiscal 2004, sales activity increased gradually
throughout the fiscal year with certain new customers. As the sales activity
became more significant, management assessed the appropriateness of the timing
of revenue recognition for these certain customers. After considering the
requirements of SFAS No. 48, the Company concluded it would delay recognition of
revenue from those customers until the transactions meet all of the requirements
of SFAS No. 48.
The Company may enter into arrangements to provide for free goods or offer
certain pricing discounts and allowances that do not provide an identifiable
separate benefactor service. In accordance with Emerging Issues Task Force
("EITF") Issue No. 01-09, Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products), the Company recognizes the cost
of free goods ratably into cost of products sold based upon the underlying
revenue transaction and records the pricing discounts and allowances as a
reduction of revenue.
Net sales included reimbursements of $0, $1.7 million, and $1.3 million, for
certain development costs incurred in connection with joint development
agreements with third parties during Fiscal 2004, Fiscal 2003 and Fiscal 2002,
respectively. Revenue is recognized on these arrangements as contractual
milestones are achieved.
SHIPPING AND HANDLING COSTS
The Company incurred shipping and handling costs of approximately $2.4 million,
$2.1 million and $1.3 million during Fiscal 2004, Fiscal 2003 and Fiscal 2002,
respectively, which are included in the accompanying consolidated statements of
operations under the caption "Selling expenses". Costs incurred by the Company
related to shipping and handling that ready products for sale (i.e., freight
charges incurred to deliver products to the Company's manufacturing facilities
and warehouses) are included in the accompanying consolidated statements of
operations under the caption "Cost of products sold."
F-9
PRODUCT DESIGN AND DEVELOPMENT COSTS
Product design and development costs, which include costs in connection with new
product development, product design, fundamental and exploratory research,
process improvement, product use technology, and product quality assurance, are
part of the production process and are expensed as incurred. Certain of the
Company's products are developed, designed and engineered by its own engineers
in the Company's facilities located in the U.S., Hong Kong and the PRC. The
Company incurred $10.5 million, $8.5 million and $7.6 million during Fiscal
2004, Fiscal 2003 and Fiscal 2002, respectively, for product design and
development. These costs are included in the accompanying consolidated
statements of operations under the caption, "Cost of products sold."
ADVERTISING AND PROMOTIONAL ALLOWANCES
Advertising and promotional costs, which include advertising allowances and
other discounts, have been expensed as incurred. In accordance with EITF Issue
No. 01-09, Consideration Given by a Vendor to a Customer (Including a Reseller
of the Vendor's Products), which addresses the statement of operations
classification of consideration between a vendor and a retailer, the Company has
recorded certain revenue net of certain allowances provided to customers,
including those related to advertising, discounts, and other promotions.
STOCK-BASED COMPENSATION
As currently permitted by SFAS No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123"), as amended by SFAS No. 148, Accounting for Stock-Based
Compensation and Disclosure ("SFAS No. 148"), the Company has elected to follow
Accounting Principles Board Opinion ("APB Opinion") No. 25, Accounting for Stock
Issued to Employees ("APB No. 25"), using the intrinsic value method and related
interpretations in accounting for its employee stock-based transactions and has
complied with the disclosure requirement of SFAS No. 148. See Note 12,
"Stockholders' Equity" and Note 4, "Stock Option Plans". Under APB No. 25,
compensation expense is calculated at the time of option grant, based upon the
difference between the exercise price of the option and the fair market value of
the Company's no par value common stock ("Common Stock"). Compensation expense
is recognized over the option's vesting period. No compensation expense for
stock options is recognized for stock option awards granted at or above fair
market value.
In Fiscal 2002, the Company consummated an exchange offer for certain
outstanding stock options and, as a result, is required to apply variable
stock-based compensation accounting for the new options issued in the exchange
until they are exercised, cancelled or expired. For the repriced options, the
Company is only subject to variable stock-based compensation expense when the
Company's stock price is greater than $5.97. For Fiscal 2004, the Company
recorded $0.7 million in variable stock-based compensation income in the
consolidated statement of operations because its Common Stock price on July 3,
2004 was below the new repriced stock options' exercise price of $5.97. 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. For Fiscal 2002, the Company did not record
any variable stock-based compensation expense in the consolidated statement of
operations because its Common Stock price on June 29, 2002 was below the new
repriced stock options' exercise price of $5.97. Because the determination of
variable stock-based compensation expense or income associated with the repriced
stock options is significantly dependent upon the market price of the Common
Stock price at the end of the applicable reporting period, it is not possible to
determine its future impact, either favorable or unfavorable, on the Company's
consolidated financial statements for prospective reporting periods. The Company
considers all of its variable stock-based compensation expense or income as a
component of general and administrative expenses.
F-10
Effective July 19, 2001, the Company amended the outstanding fully vested
options held by certain former directors to permit such options to be exercised
until their stated expiration dates.
Effective July 31, 2003, the Company amended the outstanding options held by
William J. Lloyd, who was a member of the Board until such time, to permit such
options to be exercised until their stated expiration date, and to permit the
continued vesting through January 2005 of 12,000 shares subject to one such
option. These amendments did not apply to the installment of 13,000 shares that
would have vested on January 20, 2004 under the grant made to him on January 20,
2003, which installment was forfeited. The modification of the options' terms
resulted in a non-recurring charge of $105,000 to compensation expense recorded
in Fiscal 2004 but did not result in the application of variable accounting to
these options.
Pro forma information regarding net (loss) income and (loss) income per share is
required by SFAS No. 123, as amended by SFAS No. 148, has been determined as if
the Company had accounted for its employee stock options under the fair value
method. The effects of applying SFAS No. 148 for either recognizing compensation
expense or providing pro forma disclosures are not likely to be representative
of the effects on reported net income or loss for future years. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted average assumptions for the
three years ended July 3, 2004:
Fiscal Year
---------------------------------------------------------
2004 2003 2002
---------------------------------------------------------
Risk-Free Interest Rate 2.8% 2.5% 3.3%
Expected Option Lives 3-5 years 3-5 years 3-5 years
Expected Volatilities 75.6 84.9 88.3
Expected Dividend Yields 0% 0% 0%
Weighted Average Fair Value
of Options Granted $5.82 $3.39 $1.85
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
For purposes of pro forma disclosures under SFAS No. 123, as amended by SFAS No.
148, the estimated fair value of the equity awards is amortized to expense over
the options' vesting period. The following table illustrates the effect on net
(loss) income and (loss) income per share if the fair value based method had
been applied to all outstanding and unvested awards in each period (in
thousands, except per share amounts):
F-11
Fiscal Year
---------------------------------------------------
2004 2003 2002
---------------------------------------------------
Net (loss) income, as reported $ (31,222) $ 6,403 $ (5,248)
Deduct/Add: variable stock-based compensation (income)
expense, net of related tax effects, included in the
determination of net (loss) income as reported (659) 743 ---
Deduct: total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects (1,319) (1,712) (3,711)
----------- -------------- ----------
Pro forma net (loss) income $ (33,200) $ 5,434 $ (8,959)
=========== ============== ==========
(Loss) income per share:
Basic - as reported $ (1.09) $ 0.23 $ (0.19)
=========== ============== ==========
Basic - pro forma $ (1.16) $ 0.19 $ (0.33)
=========== ============== ==========
Diluted - as reported $ (1.09) $ 0.22 $ (0.19)
=========== ============== ==========
Diluted - pro forma $ (1.16) $ 0.18 $ (0.33)
=========== ============== ==========
INCOME TAXES
The provision (benefit) for income taxes is based on the consolidated United
States entities' and individual foreign companies' estimated tax rates for the
applicable year. Deferred taxes are determined utilizing the asset and liability
method based on the difference between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Deferred
income tax provisions and benefits are based on the changes in the net deferred
tax asset or liability from period to period. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. See Note 16, "Income Taxes."
COMPREHENSIVE INCOME (LOSS)
Comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive
Income, ("SFAS No. 130") includes net (loss) income adjusted for certain
revenues, expenses, gains and losses that are excluded from net (loss) income
under accounting principles generally accepted in the U.S. Unrealized gains and
losses related to the Company's available-for-sale investments are included as a
component of "Accumulated other comprehensive loss" reported in the accompanying
consolidated balance sheet as of June 28, 2003. Such gains and losses are
excluded from net (loss) income. During the Second Quarter Fiscal 2004, the
Company recorded a realized loss of $0.9 million related to the sale of its
available-for-sale securities by reclassifying an unrealized loss of $0.9
million into expense previously classified within "Accumulated other
comprehensive loss" in the accompanying consolidated balance sheet. See
Investments above for a further discussion of available-for-sale securities.
(LOSS) INCOME PER SHARE
Basic and diluted (loss) income per share are calculated in accordance with SFAS
No. 128, Earnings per Share ("SFAS No. 128"). All applicable (loss) income per
share amounts have been presented in conformity with SFAS No. 128 requirements.
During the past three fiscal years, the Company has issued shares of Common
Stock upon the exercise of stock options as follows: Fiscal 2004 (1,107,697
shares), Fiscal 2003 (434,665 shares), and Fiscal 2002 (117,625 shares). In
Fiscal 2004, the Company issued 331,011 shares of Common Stock, the delivery of
which was deferred under the Company's Deferred Delivery Plan but the weighted
average effect of those shares was included in the denominator of both basic and
diluted loss per share calculations for Fiscal 2004. See Note 13, "Deferred
Share Arrangement." In Fiscal 2004, Fiscal 2003 and Fiscal 2002, potentially
dilutive securities comprised of options to purchase 3,325,944, 120,000 and
4,367,508 shares of Common Stock, respectively, were not included in the
calculation of diluted loss per share because their impact was antidilutive.
F-12
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, ("SFAS No. 150"). The statement established standards
for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). The statement was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of the first interim period beginning after June 15,
2003. The Company does not have any financial instruments falling within the
scope of this statement and, therefore, no additional disclosures are required
and the adoption of SFAS No. 150 had no impact on the Company's consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, as amended by Interpretation No. 46R. FASB
Interpretation No. 46R requires consolidation of a variable interest entity if a
company's variable interest absorbs a majority of the entity's losses or
receives a majority of the entity's expected residual returns, or both. The
Company does not have any significant interests in any variable interest
entities and, therefore, the adoption of FASB Interpretation No. 46R in Fiscal
2004 had no impact on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which amends SFAS No. 123, Accounting
for Stock-Based Compensation, to provide for alternative methods of transition
for an entity that changes to the fair value method of accounting for employee
stock-based compensation. In addition, SFAS No. 148 amends the disclosure
provisions of SFAS No. 123 to require expanded disclosure of the effects of an
entity's accounting policy with respect to employee stock-based compensation.
SFAS No. 148, which became effective in the Third Quarter Fiscal 2003, did not
have an impact on the consolidated financial statements as the Company has not
adopted the fair value method for employee stock-based compensation. See Note
14, "Stock Option Plans."
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to the current
year presentation. As of July 3, 2004, the Company reviewed the classification
of its investment in certain auction rate debt securities and concluded they
should be classified as short-term investments as compared to their prior
classification as cash equivalents. As of June 28, 2003, similar securities
totaling $24.2 million have been reclassified from cash equivalents to
short-term investments in the accompanying Fiscal 2003 consolidated balance
sheet and the related effect has now been reflected in the Fiscal 2003 and
Fiscal 2002 consolidated statements of cash flows. See "Investments" in Note 1.
F-13
NOTE 2 - ACQUISITION
(tables in thousands)
On May 10, 2004, the Company completed its acquisition of Jenimage Europe GmbH
("Jenimage"), a German corporation. Jenimage, based in Jena, Germany, is a
distributor and marketer of JENOPTIK branded photographic and imaging products
including digital cameras, APS and 35mm cameras, binoculars and accessories. The
acquisition is expected to expand the Company's retail sales and distribution
business in Germany and other parts of Europe. The acquisition, recorded under
the purchase method of accounting, included the purchase of 100% of the
outstanding stock of Jenimage plus acquisition costs together totaling
approximately $14.5 million in an all cash transaction. The assets acquired and
liabilities assumed are recorded at estimated fair market value at the date of
acquisition which resulted in an excess of estimated fair value of net assets
acquired over cost, or negative goodwill, of $5.8 million, which was recorded as
an extraordinary gain. As the negative goodwill is a permanent income tax
difference, no income taxes have been provided relating to the extraordinary
gain.
The operating results of Jenimage have been included in the accompanying
consolidated statement of operations beginning on its date of acquisition.
The components of the purchase price and its preliminary allocation are as
follows:
Consideration and Acquisition Costs:
Cash paid for Jenimage common stock $ 13,382
Acquisition costs 1,162
-----------
$ 14,544
===========
Preliminary Allocation of purchase price:
Current assets, including cash of $4,285 $ 25,499
Liabilities assumed (5,177)
Excess of estimated fair value of net assets
acquired over cost (5,778)
------------
$ 14,544
============
Pro forma amounts as if the acquisition had occurred at the beginning of the
earliest period presented are not required as the acquisition is not material.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:
(in thousands)
Fiscal Year
------------------------------------
2004 2003 2002
------------------------------------
Cash paid for interest $ 6 $ 212 $ 1,841
========= ========= =========
Cash paid for income taxes $ 353 $ - $ 494
========= ========= =========
NOTE 4 - ACCOUNTS RECEIVABLE, NET:
(in thousands)
Accounts receivable, net consist of the following:
July 3, June 28,
2004 2003
---------- -----------
Trade accounts receivable $ 39,098 $ 35,605
Less: allowances for doubtful accounts,
discounts, sales returns and allowances (9,731) (3,111)
---------- -----------
Total accounts receivable, net $ 29,367 $ 32,494
========== ===========
F-14
NOTE 5 - INVENTORIES:
(tables in thousands)
Inventories consist of the following:
July 3, June 28,
2004 2003
---------- ------------
Raw material, components and work-in-process $ 12,378 $ 19,345
Finished goods 40,040 12,972
---------- ------------
Total inventories $ 52,418 $ 32,317
========== ===========
During Fiscal 2004, the Company recorded inventory related pre-tax charges of
approximately $11.1 million, primarily attributable to recent price declines in
the digital camera market, increased competitive pricing pressures and excess
customer inventory levels which have negatively impacted the value of the
Company's digital camera finished goods, components, work-in-process, and raw
material inventories. The Company reduced the carrying value of certain digital
camera finished goods, components, work-in-process, and raw material inventories
below their cost basis to their estimated net realizable value at July 3, 2004.
For Fiscal 2004, the inventory related pre-tax charges had the effect of
decreasing inventory by $11.1 million and increasing cost of products sold by
$11.1 million.
During the First Quarter Fiscal 2004, the Company changed its method of applying
manufacturing labor and overhead costs to inventories. Previously, the Company
used the ratio of labor and overhead costs compared to material costs incurred
during a twelve-month period to estimate labor and overhead costs to be applied
to material costs in inventories at the end of the period. Under the new method,
manufacturing labor and overhead costs are applied to inventories using a
standard cost approach to estimate the costs incurred during the procurement and
production processes.
The new standard cost approach was made possible by the Company's efforts to
update its information systems and capture additional information related to its
standard costs of manufacturing. Management believes the new method of applying
manufacturing labor and overhead costs to inventories improves the matching of
costs incurred to manufacture the product with their flow through the production
process. Under APB Opinion No. 20, Accounting Changes, this accounting change is
considered to be a change in accounting estimate inseparable from a change in
accounting method. The effect of changing its method of applying manufacturing
labor and overhead costs to inventories during the Fiscal 2004, resulted in cost
of products sold and net loss in Fiscal 2004 each being approximately $1.7
million higher ($0.06 per diluted common share) than under the prior method.
F-15
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET:
(in thousands)
Property, plant and equipment, net consists of the following:
July 3, June 28,
2004 2003
---------- -----------
Buildings $ 7,385 $ 7,385
Equipment 35,884 32,951
Office furniture and equipment 12,621 11,245
Transportation equipment 688 599
Leasehold improvements 6,538 5,116
---------- -----------
63,116 57,296
Less: accumulated depreciation and amortization (42,519) (35,968)
---------- -----------
Total property, plant and equipment, net $ 20,597 $ 21,328
========== ===========
During Fiscal 2004, the Company reduced the carrying value and the remaining
useful lives of certain molds and tooling used in the production of certain
digital cameras since the Company believed these products had a shortened
product life due to market conditions and these specific molds and tooling did
not have alternative production uses. In Fiscal 2004, the reduction of the
remaining useful lives of the molds and tooling made throughout the fiscal year
had the effect of decreasing property, plant and equipment, net by $1.8 million
and increasing depreciation expense, which is included in the cost of products
sold.
NOTE 7 - GOODWILL, NET
(tables in thousands)
Effective July 1, 2001, the Company adopted the provisions of SFAS No. 142,
which eliminates the amortization of goodwill and indefinite-lived intangible
assets, and initiates at least an annual review of these assets for impairment.
In accordance with SFAS No. 142, the Company ceased amortization of its goodwill
balances. The Company currently does not have any indefinite-lived intangible
assets. Intangible assets that have finite useful lives will continue to be
amortized over their useful lives. In accordance with SFAS No. 142, the Company
performed its annual impairment test of its existing goodwill as of the first
day of the fourth quarter, March 28, 2004, and concluded that no impairment
existed at that date. Subsequent to that date, the Company's stock price
experienced a significant decline in market value indicating the possible
existence of impairment. Since the Company evaluates goodwill impairment at the
entity level utilizing a single segment approach, it used the market value of
its common stock as the basis to compute the fair value of the entity.
Accordingly, the Company reassessed the realizability of goodwill as of July 3,
2004 and concluded its goodwill was impaired. As a result, the Company recorded
an impairment charge in the amount of $3.7 million.
Goodwill, net consists of the following:
July 3, June 28,
2004 2003
---------- ----------
Goodwill $ --- $ 6,401
Less: accumulated amortization --- (2,680)
---------- ----------
Goodwill, net $ --- $ 3,721
========== ==========
F-16
NOTE 8 - OTHER ASSETS:
(tables in thousands)
Other assets consists of:
July 3, June 28,
2004 2003
-------------- --------------
Patents, trademarks and licenses, net $ 5,863 $ 4,643
Deferred compensation 10,555 8,349
Deferred income tax assets, net --- 5,837
Prepaid royalties 1,174 3,412
Other 57 335
-------------- --------------
$ 17,649 $ 22,576
============== ==============
Patents, trademarks, and licenses, net consist of the Useful Lives July 3, June 28,
following: (in Years) 2004 2003
---------------- --------------- --------------
Patents, trademarks and licenses 5 - 20 $ 10,486 $ 8,932
Less: accumulated amortization (4,623) (4,289)
--------------- --------------
Patents, trademarks and licenses, net $ 5,863 $ 4,643
=============== ==============
As of July 3, 2004, the aggregate weighted average amortization period for
patents, trademarks, and licenses was approximately 18 years. For Fiscal 2004
and Fiscal 2003, intangible asset amortization expense was $0.3 million and $0.6
million, respectively. Estimated future aggregate annual amortization expense is
as follows:
Estimated Aggregate
Fiscal Year Amortization Expense
---------- ---------------------
2005 $427
2006 427
2007 391
2008 364
2009 361
See Note 11, "Other Liabilities," for a description of deferred compensation,
Note 16, "Income Taxes," for a description of deferred income tax assets, and
Note 17, "Commitments and Contingencies," for a description of license and
royalty agreements.
NOTE 9 - SHORT-TERM BORROWINGS AND FINANCING FACILITIES:
HONG KONG FINANCING FACILITIES
The Company's Hong Kong subsidiary has various revolving demand credit
facilities providing an aggregate of approximately $38.3 million in borrowing
capacity. The revolving credit 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, 2) an approximate $1.9 million Foreign Exchange
Facility, and 3) a $12.3 million Euro Facility (collectively, the "Hong Kong
Financing Facilities"). The $12.3 million Euro Facility is denominated in
European Central Bank Euros, whereas the other facilities are denominated in
Hong Kong dollars. Since 1983 the Hong Kong Dollar has been pegged to the United
States Dollar. 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 Hong Kong Financing Facilities. All of the Hong Kong Financing
Facilities were in compliance as of July 3, 2004. The Hong Kong Financing
Facilities bear interest at variable rates. At July 3, 2004, the Company had
$6.2 million and $3.0 million in short-term borrowings outstanding under the
Euro Dollar Facility and Import Facilities, respectively. The weighted average
borrowing rate on the short-term borrowings as of July 3, 2004, was 3.44%. The
Company had no short term borrowings outstanding as of June 28, 2003.
F-17
NOTE 10 - SENIOR NOTES:
On July 30, 1998, the Company consummated a private placement of $15.0 million
of unsecured senior notes ("Senior Notes"). The notes bore interest at 11%,
payable quarter, and the maturity date was July 15, 2005. The amortization of
the deferred costs associated with the Senior Notes was included in interest
expense in the accompanying consolidated statements of operations.
During the first quarter of Fiscal 2003, the Company repurchased the Senior
Notes. The Company paid slightly below par to repurchase and canceled the Senior
Notes. At the time of repurchase, the Company incurred $0.3 million of expenses
associated with the write-off of deferred finance costs related to the Senior
Notes, which was included in interest expense in the accompanying consolidated
statement of operations for Fiscal 2003.
There was no balance outstanding related to the Senior Notes at either July 3,
2004, or June 28, 2003.
NOTE 11 - OTHER LIABILITIES:
(tables in thousands)
Other liabilities consist of the following:
July 3, June 28,
2004 2003
---------- ----------
Deferred compensation obligations $ 9,317 $ 8,285
Licensing and royalty related obligations 2,170 3,425
Other 237 164
---------- ----------
Total other liabilities $ 11,724 $ 11,874
========== ==========
Deferred compensation obligations represent the total vested account balances
for all participants included in the Company's Supplemental executive retirement
plans ("SERPS") and for those participants who have individual deferred
compensation arrangements under SERPs between the Company and certain of its
executive officers. An asset associated with such deferred compensation
arrangements was also recorded in "Other assets" in the accompanying balance
sheets as of July 3, 2004, and June 28, 2003, respectively. In connection with
the SERPs, the Company contributed funds into separate trusts established for
the purpose of satisfying the Company's obligations under each SERP. The
underlying assets are recorded at fair value and primarily represent cash,
marketable equity and fixed income securities invested at the participants'
direction. Changes in the vested account balances of the deferred compensation
obligations as well as changes in the fair value of the underlying assets are
recorded in earnings. Licensing and royalty related obligations represent the
total of future minimum royalty payment amounts and an amount equal to the
present value of future payments related to various licensing agreements. See
Note 17, "Commitments and Contingencies."
NOTE 12 - STOCKHOLDERS' EQUITY:
In the fourth quarter of Fiscal 2000, the shareholders authorized the Company to
issue up to 1.0 million shares of blank check preferred stock, with such rights
and preferences as may be determined by the Board from time to time. No
preferred stock has been issued to date.
F-18
The Company has not declared or paid any cash dividends for any of the fiscal
years presented in the accompanying consolidated financial statements.
NOTE 13 - DEFERRED SHARE ARRANGEMENT:
With the approval of the Compensation Committee of the Company's Board of
Directors, the Company's Deferred Delivery Plan allows designated executive
officers to elect to defer the gains on certain stock option exercises by
deferring delivery of the "profit" shares to be received upon exercise.
Pursuant to the Deferred Delivery Plan and an election previously made
thereunder, on July 14, 2003, the Company's Chairman, Chief Executive Officer
and President ("Chairman") tendered 55,989 fully paid and owned shares of Common
Stock to the Company in payment of the exercise price (the "Payment Shares") of
his option to purchase 387,000 shares of Common Stock ("2003 Delivery Plan
Transaction"). Upon the 2003 Delivery Plan Transaction, the 55,989 Payment
Shares were classified as "Treasury stock" and recorded at a cost of $482,625.
The Company issued 387,000 new shares of Common Stock and classified them as
"Common stock" at a cost of $482,625, of which 55,989 shares were issued to the
Chairman in exchange for the Payment Shares. The remaining 331,011 shares, the
delivery of which was deferred by the Chairman, were issued to a rabbi trust.
The 331,011 shares held in the rabbi trust have been recorded at a cost of
$412,825 and are classified as "Common stock held in trust." The corresponding
liability to the Chairman has been recorded at $412,825 and is classified as
"Deferred share arrangement" in the stockholders' equity section of the
consolidated balance sheet.
Pursuant to another election previously made under the Deferred Delivery Plan,
on August 9, 2004 the Chairman exercised an option to purchase 314,312 shares of
Common Stock and tendered an additional 136,269 fully paid and owned shares of
Common Stock to the Company in payment of the exercise price ("2004 Delivery
Plan Transaction"). Upon the 2004 Delivery Plan Transaction, the 136,269 Payment
Shares were classified as "Treasury stock." The Company issued 314,312 new
shares of Common Stock and classified them as "Common stock," of which 136,269
shares were issued to the Chairman in exchange for the Payment Shares. The
remaining 178,043 shares, the delivery of which was deferred by the Chairman,
were issued to a rabbi trust. The 178,043 shares held in the rabbi trust have
been classified as "Common stock held in trust."
F-19
NOTE 14 - STOCK OPTION PLANS:
On September 4, 2002, the Company adopted a non-qualified stock option plan that
provides for a maximum number of 500,000 shares of Common Stock for awards
issuable to new employees ("SEP 2002 Plan"). The SEP 2002 Plan permits the
Company's Compensation Committee or Board to grant, at their discretion, a
variety of Common Stock awards on a stand-alone, combination, or tandem basis.
The SEP 2002 Plan expires in September 2012.
On April 26, 2002, the Company adopted a non-qualified stock option plan that
provides for a maximum number of 500,000 shares of Common Stock for awards
issuable to non-officer employees, new employees, and consultants ("APR 2002
Plan"). The APR 2002 Plan permits the Company's Compensation Committee or Board
to grant, at their discretion, a variety of Common Stock awards on a
stand-alone, combination, or tandem basis. The APR 2002 Plan expires in April
2013.
On August 28, 2001, the Company launched an offer to exchange outstanding stock
options with 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 as reported on
the NASDAQ National Market System on the date the Board of Directors approved
the exchange offer). The exchange offer expired on October 16, 2001. The Company
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, the Company is required to apply variable accounting for these
new stock options until the options are exercised, cancelled or expired. See
"Stock-Based Compensation" in Note 1.
The Company's 1993 Incentive Plan permitted the Compensation Committee of the
Company's Board to grant a variety of Common Stock awards. As amended, as of
July 3, 2004, 2,536,694 shares of Common Stock were subject to the 1993
Incentive Plan. The 1993 Incentive Plan expired on December 1, 2003.
In addition, the Company, from time to time, has granted stock options to
certain individuals as part of an "individual employee stock option plan" as an
inducement to employment.
For all plans, options granted have a maximum term of ten years. The options
generally vest annually over a three- to five-year period as the employee
provides full-time service.
F-20
Stock option activity was as follows:
1993 Plan APR 2002 Plan
----------------------------- -----------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
----------- -------------- ----------- --------------
Outstanding at June 30, 2001 3,243,548 $7.55 --- ---
Canceled (1,090,965) $20.82 --- ---
Granted 1,101,884 $6.06 6,000 $5.35
Exercised (43,125) $1.66 --- ---
------------ -------------- ------------ --------------
Outstanding at June 29, 2002 3,211,342 $3.18 6,000 $5.35
Canceled (23,300) $3.63 (40,000) $4.65
Granted 309,999 $5.30 143,000 $4.45
Exercised (348,665) $0.99 --- ---
------------ -------------- ------------ --------------
Outstanding at June 28, 2003 3,149,376 $3.59 109,000 $4.43
Canceled (79,169) $6.48 --- ---
Granted 63,000 $10.49 24,000 $7.52
Exercised (596,513) $1.71 (2,000) $4.87
------------ -------------- ------------- --------------
Outstanding at July 3, 2004 2,536,694 $4.11 131,000 $4.99
============ ============== ============= ==============
Exercisable at July 3, 2004 2,366,694 $3.93 40,334 $4.59
============ ============== ============= ==============
Exercisable at June 28, 2003 2,780,927 $3.33 1,000 $5.35
============ ============== ============= ==============
Exercisable at June 29, 2002 2,707,810 $2.72 --- ---
============ ============== ============= ==============
SEP 2002 Plan Individual Plans
----------------------------- -------------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
------------ -------------- ------------ ----------------
Outstanding at June 30, 2001 --- --- 1,261,498 $7.07
Canceled --- --- (403,832) $17.13
Granted --- --- 367,000 $6.11
Exercised --- --- (74,500) $2.97
------------ -------------- ------------ ----------------
Outstanding at June 29, 2002 --- --- 1,150,166 $3.44
Canceled --- --- (147,916) $2.46
Granted 42,000 $5.24 --- ---
Exercised --- --- (86,000) $1.52
------------ -------------- ------------ ----------------
Outstanding at June 28, 2003 42,000 $5.24 916,250 $4.13
Canceled (14,500) $5.93 (47,334) $6.58
Granted 271,000 $6.76 --- ---
Exercised --- --- (509,166) $2.78
------------ -------------- ------------ ----------------
Outstanding at July 3, 2004 298,500 $6.58 359,750 $5.71
============ ============== ============ ================
Exercisable at July 3, 2004 13,334 $5.24 335,349 $5.68
============ ============== ============ ================
Exercisable at June 28, 2003 --- --- 790,314 $3.77
============ ============== ============ ================
Exercisable at June 29, 2002 --- --- 733,698 $2.55
============ ============== ============ ================
F-21
1993 Plan Options Outstanding Options Exercisable
--------- -------------------------------------------------- ---------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Exercise Prices Outstanding Contractual Average Outstanding Average
At Least Less Than July 3, 2004 Life Exercise Price July 3, 2004 Exercise Price
-------- --------- --------------- -------------- ----------------- --------------- ----------------
$0.50 $1.00 419,656 2.5 $0.91 419,656 $0.91
$1.00 $2.00 509,112 1.1 $1.29 509,112 $1.29
$2.00 $4.00 135,666 4.3 $2.55 135,666 $2.55
$4.00 $6.00 1,133,260 4.3 $5.78 1,015,260 $5.83
$6.00 $8.00 254,000 5.2 $6.74 244,000 $6.75
$8.00 $9.00 45,000 3.4 $8.23 43,000 $8.23
$9.00 $11.00 40,000 9.4 $10.49 -- --
--------------- --------------------------------- --------------- ----------------
$0.50 $11.00 2,536,694 3.5 $4.11 2,366,694 $3.93
=============== ================================= =============== ================
F-22
APR 2002 Plan Options Outstanding Options Exercisable
------------- -------------------------------------------------- ---------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Exercise Prices Outstanding Contractual Average Outstanding Average
At Least Less Than July 3, 2004 Life Exercise Price July 3, 2004 Exercise Price
-------- --------- --------------- -------------- ----------------- --------------- ----------------
$2.00 $4.00 5,000 10.0 $3.16 -- --
$4.00 $6.00 107,000 8.1 $4.43 40,334 $4.59
$6.00 $9.00 19,000 9.1 $8.67 -- --
--------------- -------------- ----------------- --------------- ----------------
$2.00 $9.00 131,000 8.3 $4.99 40,334 $4.59
=============== ============== ================= =============== ================
SEP 2002 Plan Options Outstanding Options Exercisable
------------- -------------------------------------------------- ---------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Exercise Prices Outstanding Contractual Average Outstanding Average
At Least Less Than July 3, 2004 Life Exercise Price July 3, 2004 Exercise Price
-------- --------- --------------- -------------- ----------------- --------------- ----------------
$0.50 $4.00 98,000 9.9 $3.09 -- --
$4.00 $6.00 48,500 8.8 $5.36 13,334 $5.24
$6.00 $8.00 52,000 9.6 $6.66 -- --
$8.00 $10.00 40,000 9.1 $8.61 -- --
$10.00 $12.00 60,000 9.2 $11.87 -- --
--------------- -------------- ----------------- --------------- ----------------
$0.50 $12.00 298,500 9.4 $6.58 13,334 $5.24
=============== ============== ================= =============== ================
Individual Plans Options Outstanding Options Exercisable
---------------- -------------------------------------------------- ---------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Exercise Prices Outstanding Contractual Average Outstanding Average
At Least Less Than July 3, 2004 Life Exercise Price July 3, 2004 Exercise Price
-------- --------- --------------- -------------- ----------------- --------------- ----------------
$2.00 $4.00 45,000 3.8 $2.75 45,000 $2.75
$4.00 $6.00 209,084 6.0 $5.66 196,350 $5.73
$6.00 $8.00 96,000 6.6 $6.94 86,000 $6.83
$8.00 $9.00 9,666 7.8 $8.31 7,999 $8.31
--------------- -------------- ----------------- --------------- ----------------
$2.00 $9.00 359,750 5.9 $5.71 335,349 $5.68
=============== ============== ================= =============== ================
1993 APR 2002 SEP 2002 Individual
At July 3, 2004: Plan Plan Plan Plans Total
---------------- ------------- --------------- -------------- -------------- ---------------
Shares of Common Stock
available for future grants -- 367,000 201,500 -- 568,500
Shares of Common Stock
reserved for future issuances 2,536,694 131,000 298,500 359,750 3,325,944
F-23
NOTE 15 - DEFINED CONTRIBUTION PLAN:
The Company maintains a defined contribution plan ("401(k)") that covers
substantially all employees meeting certain service requirements. The Company,
at its sole discretion, makes matching cash contributions up to specified
percentages of employees' contributions and makes additional discretionary
contributions if the Company achieves certain profitability requirements.
For Fiscal 2004, the Company did not make any contribution to the 401(k). For
Fiscal 2003 and Fiscal 2002, the Company's expenses related to the 401(k) were
$268,000, and $235,000, respectively.
NOTE 16 -- INCOME TAXES:
(in thousands)
(Loss) income before income taxes in the accompanying consolidated statements of
operations consists of the following:
Fiscal Year
-----------------------------------------------------
2004 2003 2002
-----------------------------------------------------
United States $ (1,138) $ (241) $ (3,105)
Foreign (28,325) 7,213 (3,546)
-------------- -------------- --------------
$ (29,463) $ 6,972 $ (6,651)
============== ============== ==============
The provision (benefit) for income taxes is comprised of the following:
Fiscal Year
-----------------------------------------------------
2004 2003 2002
-----------------------------------------------------
Current:
United States $ 293 $ 61 $ --
Foreign 40 168 --
Deferred
United States 7,298 (149) (1,121)
Foreign (94) 489 (282)
-------------- -------------- -------------
$ 7,537 $ 569 $ (1,403)
============== ============== =============
Deferred income tax assets and liabilities reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
(b) operating loss carry forwards. The tax effects of significant items
comprising the Company's deferred income tax assets and liabilities as of July
3, 2004, are as follows:
F-24
UNITED STATES FOREIGN
---------------------------- ------------------------------
FEDERAL STATE HONG KONG EUROPE TOTAL
----------- -------------- ------------ --------------- -----------
DEFERRED INCOME TAX ASSETS:
---------------------------
Operating loss carryforwards $ 778 $ -- $ 2,088 $ 156 $ 3,022
Reserves not currently deductible 1,787 136 -- -- 1,923
Alternative minimum tax 255 -- -- 255
Depreciation 277 21 -- -- 298
Compensation accruals 3,978 299 -- -- 4,277
Difference between book and tax
basis of property 749 56 -- -- 805
Amortization 950 45 -- -- 995
Capital loss carryforwards 321 24 -- -- 345
Contributions carryover 57 23 -- 80
Other deferred income tax assets 15 4 -- 123 142
------------ -------------- ------------ --------------- -----------
Total deferred income tax assets 9,167 608 2,088 279 12,142
Less: valuation allowance (9,167) (608) (2,088) (279) (12,142)
------------ -------------- ------------ --------------- -----------
Net deferred income tax assets $ -- $ -- $ -- $ -- $ --
============ ============== ============ =============== ===========
The Company has no deferred income tax liabilities as of July 3, 2004.
F-25
The tax effects of significant items comprising the Company's deferred income
tax assets and liabilities as of June 28, 2003, are as follows:
UNITED STATES FOREIGN
---------------------------- ------------------------------
FEDERAL STATE HONG KONG EUROPE TOTAL
DEFERRED INCOME TAX LIABILITIES: ----------- -------------- ------------ --------------- -----------
--------------------------------
Difference between book and tax
basis of property $ -- $ -- $ (852) $ -- $ (852)
Other deferred liabilities (65) -- -- -- (65)
------------ -------------- ------------ --------------- -----------
Total deferred income tax
liabilities $ (65) $ -- $ (852) $ -- $ (917)
------------ -------------- ------------ --------------- -----------
DEFERRED INCOME TAX ASSETS:
---------------------------
Operating loss carryforwards $ 941 $ -- $ 804 $ 235 $ 1,980
Reserves not currently deductible 495 45 -- -- 540
Unrealized loss on investment 151 11 -- -- 162
Depreciation 207 14 -- -- 221
Compensation accruals 3,638 284 -- -- 3,922
Difference between book and tax
basis of property 347 26 -- -- 373
Tax credits 211 -- -- -- 211
Amortization 777 32 -- -- 809
Contributions carryover 294 22 -- -- 316
Other deferred income tax assets 35 6 -- 129 170
------------ -------------- ------------ --------------- -----------
Total deferred income tax assets 7,096 440 804 364 8,704
Less: valuation allowance (151) (11) -- (364) (526)
------------ -------------- ------------ --------------- -----------
Net deferred income tax assets $ 6,880 $ 429 $ (48) $ -- $ 7,261
============ ============== ============ =============== ===========
The net deferred income tax assets included in "Prepaid expenses and other
current assets" in the accompanying consolidated balance sheet at June 28, 2003,
was $1.5 million and the net deferred tax assets included in "Other assets" in
the accompanying consolidated balance sheet at June 28, 2003, was $5.8 million.
Income derived from Hong Kong business activities is taxed separately from the
PRC. The Company's Hong Kong subsidiary's annual tax rate is 8.75%.
The Company has never paid any income or turnover tax to the PRC related to its
processing activities in the PRC, but there can be no assurance that the Company
will not be required to pay such taxes in the future. Existing PRC statutes can
be construed as providing for a minimum of 10% to 15% income tax and a 3%
turnover tax on the Company's business activities; however, the PRC has never
attempted to enforce those statutes. The Company has 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 the Company, but it has not yet announced
any final decisions as to the taxability of those activities. After consultation
with its tax advisors, the Company does not believe that any tax exposure it may
have on account of its operations in the PRC will be material to the Company's
financial position or results of operations.
F-26
The Company does not provide for U.S. federal income taxes on undistributed
earnings of its foreign subsidiaries as it intends to permanently reinvest such
earnings. Undistributed earnings of its 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. As of July 3, 2004,
Concord had net operating loss carryforwards for U.S. tax purposes of
approximately $2.2 million. The net operating loss carryforwards expire in 2016.
Additionally, the Company has approximately $25.6 million, of which $23.9
million relates to Hong Kong, of net operating loss carryforwards related to its
foreign operations which have no expiration dates.
In the year ended July 3, 2004, management evaluated the realizability of 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 tax purposes 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 fully
realized. Accordingly, a full valuation allowance was recorded against all of
the Company's deferred income tax assets in the year ended July 3, 2004. For
Fiscal 2004, Fiscal 2003 and Fiscal 2002, the Company's effective tax rate was
25.6%, 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, the statutory rates of the related tax jurisdictions and any changes to
the valuation allowance.
A reconciliation of income tax expense computed at the statutory U.S. federal
rate to the actual provision (benefit) for income taxes is as follows:
Fiscal
--------------------------------------------------------------
2004 2003 2002
--------------------------------------------------------------
Computed (benefit) tax at statutory U.S. federal
tax rate of 35% $ (10,312) $ 2,440 $ (2,328)
Increase in valuation allowance 11,616 -- --
Income (loss) of foreign subsidiaries subject to
a different tax rate 6,653 (1,752) 2,057
Tax effect of adjustment to U.S. net operating loss
carryforwards (1,825) - --
Permanent differences 1,183 100 44
Utilization of European valuation allowance -- (283) (1,123)
State income tax, net of federal benefit (14) 40 (78)
Other 236 24 25
--------------- -------------- -------------
Provision (benefit) for income taxes $ 7,537 $ 569 $ (1,403)
=============== ============== =============
In Fiscal 2004, the Company identified an adjustment to its U.S. net operating
loss carryforwards with a tax effect of $1.8 million related to prior years. The
amount was fully offset by a valuation allowance in Fiscal 2004 and would have
been similarly offset by a valuation allowance had it been reflected in the
appropriate prior periods, which, accordingly, have not been reclassified.
As the negative goodwill relating to the Jenimage acquisition is a permanent
income tax difference, no income taxes have been provided relating to the
extraordinary gain.
F-27
NOTE 17 - COMMITMENTS AND CONTINGENCIES:
OFFICES AND WAREHOUSES
UNITED STATES
The Company leases approximately 20,000 square feet of office space at 4000
Hollywood Boulevard, Hollywood, Florida. The Company leases, but no longer uses,
a warehouse of approximately 13,700 square feet, including 825 square feet of
office space, in Fort Lauderdale, Florida. The Company's leases for these
facilities provide for rent of approximately $25,800 and $7,700 per month,
respectively, with annual increases ranging from 2-3% and 3%, respectively, and
expire on January 31, 2014, and January 31, 2009, respectively. As of July 3,
2004, the Company ceased operations in the Fort Lauderdale warehouse facility.
The Company believes it can sublease these premises at the prevailing market
rate which is currently lower than the existing contractual rate. Accordingly,
at July 3, 2004, the Company recorded an accrued loss in the accompanying
consolidated statement of operations related to the present value of unfavorable
rent differential between the total future lease expenses offset by the
estimated total future sublease income.
HONG KONG
The Company leases a total of approximately 33,000 square feet of office,
business and warehouse space comprised of one floor under a lease expiring in
2047, and four floors under a lease expiring in July 2006, at Concord Technology
Centre, Texaco Road, Tsuen Wan, New Territories, Hong Kong at a cost of
approximately $16,200 per month including rent and maintenance.
PRC OPERATIONS
The Company manufactures its products at its manufacturing facilities located in
the Longgang District of Shenzhen, PRC (the "Company Facility"). The Company
leases three employee dormitories and a canteen (the "Dormitories") at a cost of
approximately $46,000 per month. The aggregate square footage of the Company
Facility and the Dormitories is in excess of 600,000 square feet.
In Fiscal 2000, the Company completed an expansion to increase the aggregate
size of the Company Facility. The Company also opened a new production facility
dedicated to digital image capture device manufacturing. In connection with
these construction activities, the Company incurred costs of approximately $4
million. Such costs are being amortized over the expected useful life of the
expanded facilities. The current processing agreement with the PRC expires in
October 2006. The Company fully expects to renew its agreement and intends to
continue to expand its operations in the PRC, but there can be no assurance that
the processing agreement will be extended or renewed and the Company will be
able to continue to operate in the PRC. Pursuant to a land use agreement, the
Company has the title and right to use the land upon which the Company Facility
sits through the year 2038. At the end of the term, title and ownership to the
land and Company Facility transfer to a PRC governmental agency. At that time,
the Company expects to be able to lease the PRC land and improvements thereon at
then prevailing rates.
OTHER JURISDICTIONS
The Company owns an 11,000 square foot building on a one-half acre parcel in
Coalville, England that is used in connection with its operations in the UK. The
Company has agreed to sell the Coalville property for GBP 500,000 (10% of which
has already been received as a deposit) and to close the sale on or before March
10, 2005. The Company also leases warehouse and/or office space in France,
Canada and Germany in connection with the activities of its subsidiaries in
those jurisdictions.
F-28
LEASES
During Fiscal 2002, the Company made principal payments under capital lease
obligations related to various fixed assets that were classified as capital
leases. The initial terms of such capital leases ranged from three to five years
and expired at various times through June 29, 2002. Monthly payments on those
leases ranged from approximately $300 to $45,000. During Fiscal 2002, the
Company repaid in full the remaining balance of its capital lease obligations.
Future minimum rental payments for operating leases are as follows:
(in thousands)
Fiscal Year
-----------
2005 $ 1,259
2006 806
2007 501
2008 484
2009 414
Thereafter 1,490
------------
Total minimum payments $ 4,954
============
Rental expense for operating leases of approximately $2.6 million, $1.6 million
and $1.6 million was incurred for Fiscal 2004, Fiscal 2003 and Fiscal 2002,
respectively.
EMPLOYMENT AGREEMENTS AND EXECUTIVE SERPS
The employment agreement for Ira B. Lampert (the "Lampert Agreement") has a
four-year term that automatically extends each day, by one day, until one party
notifies the other that the term should not be further extended. The Lampert
Agreement provides for an annual base salary of $900,000. Effective as of
January 1, 2003, Mr. Lampert voluntarily reduced his base salary from $900,000
to $800,000 per annum for the period from July 1, 2004 to June 30, 2005.
The Lampert Agreement provides that if his employment with the Company is
terminated by reason of death or disability, Mr. Lampert or his legal
representative would be entitled to receive, in addition to accrued compensation
(including, without limitation, any earned but unpaid bonus or long-term
incentive awards, any amount of base salary accrued or earned but unpaid, any
deferred compensation earned but unpaid, any accrued but unused vacation pay and
unreimbursed business expenses (the "Accrued Amounts")), his base salary for the
scheduled balance of the term (payable in the case of death in a lump sum), a
prorated bonus for the year in which the death or disability occurred, and any
other or additional benefits owed to the executive under the then applicable
employee benefit plans or policies of the Company, subject in the case of
disability to offset against the base salary payment by the amount of any
disability benefits provided to him by the Company or under any disability
insurance provided by or paid for by the Company.
The Lampert Agreement entitles Ira B. Lampert to participate generally in all
pension, retirement, insurance, savings, welfare and other employee benefit
plans and arrangements and fringe benefits and perquisites maintained by the
Company from time to time for senior executives of a comparable level. In
addition to any life insurance provided pursuant to one of the Company's plans,
Mr. Lampert is also provided with term life insurance, for such beneficiaries as
are designated by Mr. Lampert, of $5 million face value, and long-term
disability coverage with a $600,000 annual benefit payable in the event that Mr.
Lampert's employment with the Company is terminated due to his disability (the
"Additional Life and Disability Insurance"). In addition, the Company may
purchase key man life insurance on the life of Mr. Lampert, which may be used to
satisfy the Company's obligations under the Lampert Agreement in the event of
Mr. Lampert's death. The Company currently maintains $5 million in key life
insurance on the life of Mr. Lampert.
F-29
If Mr. Lampert's employment is terminated by the Company without cause or if
there is a constructive termination without cause, Mr. Lampert would be entitled
to receive the Accrued Amounts, his base salary and continuation of his benefits
(or the economic equivalent of such benefits), the Additional Life and
Disability Insurance and certain perquisites for the scheduled balance of the
term and for an additional twelve months thereafter, and a prorated bonus for
the year in which the termination occurred. If such termination followed a
change of control of the Company, Mr. Lampert would be entitled to receive the
salary continuation benefit as a lump sum payment without any discount and,
subject to limited exceptions, any benefits, including options, in which he is
not at such time fully vested would become fully vested and any options would
remain exercisable for the full stated term of the option. If the automatic
extensions of the term of the Lampert Agreement are discontinued at the request
of the Company and Mr. Lampert's employment is terminated upon expiration of the
term, Mr. Lampert would be entitled to receive the Accrued Amounts, his base
salary and continuation of his benefits (or the economic equivalent of such
benefits), the Additional Life and Disability Insurance and certain perquisites
for twelve months after the end of the term, and a prorated bonus for the year
in which the termination occurred. In addition, if the severance payments to Mr.
Lampert under the Lampert Agreement follow a change in control and, together
with other amounts paid to Mr. Lampert, exceed certain threshold amounts and are
determined to constitute a parachute payment (as defined in Section 280G(b)(2)
of the Internal Revenue Code), Mr. Lampert is to receive an additional amount to
cover the federal excise tax with respect thereto on a "grossed up" basis.
If Ira B. Lampert is terminated for cause, or he voluntarily resigns, he will
only receive the Accrued Amounts and benefits provided in benefit plans.
The Company also has employment agreements with its other executive officers
that provide for annual salaries ranging from approximately $159,000 to
$350,000, plus certain other fringe benefits. These agreements prohibit the
executives from competing with the Company for one year following termination of
employment with the Company. Most of these agreements contain, among other
things, termination provisions that may result in the Company being obligated to
make severance payments equal to one year's base salary plus certain other
fringe benefits.
Pursuant to the Lampert Agreement, the Company adopted a supplemental executive
retirement plan and agreement (a "SERP") for the benefit of Ira B. Lampert (the
"Lampert SERP"). A specified amount, currently $500,000, is credited to the
Lampert SERP account each year. These yearly credits are 100% vested and not
subject to forfeiture. Mr. Lampert voluntarily reduced the amount of the credit
to be made in January 2005 from $500,000 to $350,000. Pursuant to a one-time
grant to Mr. Lampert of $1,549,998 in deferred compensation, made as of April
19, 2000, an additional $1,549,998 was credited to the Lampert SERP. It vested
in three equal annual installments beginning January 1, 2001 and, as such,
became fully vested on January 1, 2003. Additional credits were made to the
Lampert SERP for the Deferred LTCIP Award of August 6, 2003 (described below
under "Deferred Long Term Compensation") and the deferred compensation awarded
to him pursuant to the conditional release program because he prepaid the total
amount of the indebtedness before it was scheduled to be forgiven by the
Company.
In addition to the Lampert SERP, in connection with grants of deferred
compensation to its executive officers, the Company has adopted various SERPs
for the benefit of those executives. A total of $1,915,000 has been contributed
to rabbi trusts established by the Company in connection with the executive
SERPs (other than the Lampert SERP), which range from $100,000 to $750,000 per
executive, before giving effect to the Deferred LTCIP Awards added to the
SERPs of those executive officers who were granted a Deferred LTCIP Award on
August 6, 2003. Generally, the amounts in the executive SERPs vest in
installments over a period of not less than three years, subject to the
executive's continued employment, and many provide for accelerated vesting, in
whole or in part, if the executive's employment is terminated by the Company
without cause. Additionally, Mr. Lampert and another executive officer have
elected to defer compensation from time to time, pursuant to their respective
SERP agreements with the Company.
F-30
Each time the Company makes an initial credit to an executive's account under a
SERP agreement, the Company simultaneously contributes an equal amount to a
trust established for the purpose of accumulating funds to satisfy the
obligations incurred by the Company pursuant to the SERP.
SERP and other deferred compensation account balances, including investment
earnings, are recorded as a deferred compensation asset and the related vested
balances are recorded as a deferred compensation liability. See Note 8, "Other
Assets," and Note 11, "Other Liabilities."
EXECUTIVE SEPARATION AGREEMENTS
The Company and Brian F. King entered into a separation agreement, dated as of
March 29, 2004, pursuant to which Mr. King's employment terminated effective
July 1, 2004. Pursuant to this agreement, in addition to any other benefits he
is entitled to receive under any employee benefit plan or deferred compensation
plan (including his supplemental executive retirement plan and agreement
("SERP"), which is described below), Mr. King is to receive: (a) the equivalent
of his base salary of $450,000 per annum and auto allowance of $18,000 per annum
(in installments in accordance with the normal payroll schedule) through June
30, 2005, in accordance with the severance provisions of his employment
agreement; (b) pay for accrued but unused vacation, accrued as though he had
remained employed through December 31, 2004; (c) reimbursement of premiums for
continuation of his health insurance coverage through June 30, 2005 under COBRA;
and (d) reimbursement of premiums for substantially similar life and disability
insurance coverage through June 30, 2005.
Richard M. Finkbeiner's employment with the Company terminated effective as of
July 27, 2004. Mr. Finkbeiner and the Company entered into a separation
agreement, dated as of August 18, 2004, pursuant to which, in addition to any
other benefits is entitled to receive under the Company's 401(k) plan, he is to
receive: (a) the equivalent of his base salary of $262,500 per annum (in
installments in accordance with the normal payroll schedule) through July 26,
2005, in accordance with the severance provisions of his employment agreement;
(b) a lump sum payment of $12,500; (c) pay for accrued but unused vacation; and
(d) a lump sum payment of $75,000, representing the funds in his SERP that had
vested prior to or as a result of the termination of his employment.
Under these separation agreements, Messrs. King and Finkbeiner must not compete
with the Company for one year, must provide the Company with certain cooperation
and assistance (without receiving additional compensation for same during the
period covered by the severance payments), and were required to execute a
release prior to receiving any severance payments.
DEFERRED LONG TERM COMPENSATION
On August 6, 2003, the following executive officers were awarded the following
amounts of contingent deferred compensation under the Company's Amended and
Restated 2002 Long Term Cash Incentive Plan ("2002 LTCIP") with respect to the
Fiscal 2002-2003 performance period (the "Deferred LTCIP Awards"): (i) Ira B.
Lampert, $670,474; (ii) Brian F. King, $335,237; (iii) Keith L. Lampert,
$389,629; (iv) Urs W. Stampfli, $274,021; and (v) Richard M. Finkbeiner,
$224,722. The Deferred LTCIP Awards to Keith L. Lampert and Urs W. Stampfli
vest, so long as the executive continues to be employed by the Company, in three
equal annual installments on August 6, 2004, 2005 and 2006, or immediately upon:
(i) a change of control of the Company; or (ii) the executive's death or
disability. The Deferred LTCIP Awards to Brian King and Rick Finkbeiner were
forfeited when their employment terminated before any vesting had occurred. Ira
B. Lampert voluntarily agreed to delay the vesting of his Deferred LTCIP Award
by one year, such that it vests in three equal installments on August 6, 2005,
2006 and 2007 instead of August 6, 2004, 2005 and 2006. Otherwise, the Deferred
LTCIP Award granted to Ira B. Lampert has substantially the same terms and
conditions as the other Deferred LTCIP Awards, however, in addition to the
events that will accelerate the vesting of the other Deferred LTCIP Awards, it
provides for immediate vesting in the event of termination without cause, a
constructive termination of employment without cause, or the non-renewal of his
employment contract. The Lampert SERP, the Executive SERPs and the Finkbeiner
SERP were all amended to include appropriate terms to govern the Deferred LTCIP
Awards. The Company contributed the foregoing amounts to trusts established for
the purpose of holding funds to satisfy the Company's obligations under the
Deferred LTCIP Awards.
F-31
LICENSE AND ROYALTY AGREEMENTS
On May 10, 2004, the Company 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. 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.
On August 26, 2002, the Company 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 by the Company 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
under the same economic terms at the Company's option, for an additional
three-year period. Each license agreement provides for the payment by the
Company of $3.0 million of minimum royalties, or $6.0 million in total, which
will be fully credited against percentage royalties. Pursuant to the terms of
the license agreements, as of August 2004, the Company paid a total of $6.0
million, which represented $3.0 million for each license agreement, as payment
of the minimum royalties and has recorded these payments as prepaid assets.
These assets are amortized based on a percentage of sales.
Effective January 1, 2001, the Company entered into a new twenty-year license
agreement with Fuji Photo Film Ltd ("Fuji"). Under the new license agreement,
Fuji granted to the Company a worldwide (excluding Japan until January 1, 2005)
non-exclusive license to use certain of Fuji's patents and patent applications
related to single-use cameras. In consideration of the license, the Company
agreed to pay a license fee and certain royalty payments to Fuji. Accordingly, a
significant portion of the balance for patents, trademarks and licenses, net in
"Other assets" in the accompanying consolidated balance sheets at July 3, 2004
and June 28, 2003, was an asset associated with the Fuji license. The Company
has also recorded as a liability a corresponding amount that was included in
licensing related obligations in "Other liabilities" in the accompanying
consolidated balance sheets at July 3, 2004 and June 28, 2003 which was equal to
the present value of future license fee payments These assets are amortized
based on quantities of units produced.
Additionally, the Company has other license and royalty agreements that require
the payment of royalties based on the manufacture and/or sale of certain
products. The Company's license and royalty agreements expire at various dates
through Fiscal 2021. Total amortization and royalty expense for all licensing
and royalty agreements for Fiscal 2004, Fiscal 2003 and Fiscal 2002 was $5.6
million, $4.5 million and $4.2 million, respectively.
INTELLECTUAL PROPERTY CLAIMS
From time to time, the Company receives patent infringement claims which it
analyzes and, if appropriate, may either take action to avoid infringement,
settle the claim or negotiate a license. In addition to the patent infringement
suit discussed in Note 18, the Company has received notifications from two other
entities, one of which is a significant customer of the Company, alleging that
certain of the Company's digital products infringe upon those entities'
respective patents. The Company is analyzing the validity of the claims and is
engaged in discussions with these parties to resolve their claims. The
resolution of the claims may involve licensing and payments by the Company, the
terms or amounts of which cannot be determined or reasonably estimated at this
time. With respect to these two claims, the Company has asserted claims for
indemnity against several third parties.
F-32
PURCHASE COMMITMENTS
At July 3, 2004, the Company has $9.1 million in non-cancelable purchase
commitments relating to the procurement of raw materials, components, and
finished goods inventory from various suppliers.
INDEMNIFICATION
Pursuant to an indemnification agreement with certain third parties, the Company
had been reimbursing such parties for legal costs incurred by them in connection
with a securities class action suit initially filed against the Company in July
2002. Pursuant to a court order dated March 16, 2004, the claims against these
certain third parties in connection with the suit have been dismissed and
accordingly, no further legal costs are anticipated to be incurred by them in
connection with the first securities class action suit. As of July 3, 2004,
there were no amounts accrued relating to such indemnification.
NOTE 18 - LITIGATION AND SETTLEMENTS:
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.
F-33
On August 27, 2004, and September 17, 2004, class action complaint were filed
against the Company and certain of its officers in the United States District
Court for the Southern District of Florida by individuals purporting to be
shareholders of the Company. The 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 the lawsuits are without merit, the outcome cannot
be predicted, and if adversely determined, the ultimate liability of the
Company, which could be material, cannot be ascertained.
On July 24, 2003, the Company entered into a settlement agreement to dismiss a
patent infringement complaint filed by the Massachusetts Institute of Technology
and Electronic for Imaging Inc. against the Company and to release the Company
from any and all claims of infringement of the patent at issue. The settlement
is not material and therefore does not have a material adverse effect on the
Company's financial position or results of operations.
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.
NOTE 19 - RELATED PARTY TRANSACTIONS:
From May 1, 2002 through June 15, 2003, William J. Lloyd, who was a member of
the Company's Board of Directors during that time, provided consulting services
to the Company on an as needed basis. As compensation for these consulting
services, the Company paid a corporation controlled by Mr. Lloyd a retainer of
$5,000 per month and reimbursed his reasonable business expenses. The Company
accepted Mr. Lloyd's resignation from the Board of Directors effective July 31,
2003, and the consulting relationship was terminated effective June 15, 2003.
See "Stock-Based Compensation" in Note 1 above.
NOTE 20 - OTHER ITEMS
During the third quarter of Fiscal 2002, the Company recognized a provision for
inventories of approximately $2.3 million principally related to the
rationalization of sub-one megapixel digital inventories comprised of components
and finished goods. The Company recorded the provision for inventories in cost
of products sold in the accompanying consolidated statement of operations for
Fiscal 2002.
F-34
During the second quarter of Fiscal 2002, the Company recorded a $1.0 million
accounts receivable provision related to Kmart Corporation which filed for
protection under Chapter 11 of the U.S. Bankruptcy Code on January 22, 2002. In
the third quarter of Fiscal 2002, the Company recorded a recovery of
approximately $0.3 million associated with the sale to a third party of the
Kmart Corporation accounts receivable. The initial provision for doubtful
accounts recorded in the second quarter of Fiscal 2002 and subsequent recovery
in the third quarter of Fiscal 2002 were included in general and administrative
expenses in the accompanying statement of operations for Fiscal 2002.
During the first quarter of Fiscal 2002, the Company recognized a provision
related to accounts receivable of $1.6 million, and a provision related to
inventory of $1.8 million. Both of these provisions related to Polaroid
Corporation ("Polaroid"), which filed for protection under Chapter 11 of the
U.S. Bankruptcy Code on October 12, 2001, and were included in general and
administrative expenses and cost of products sold, respectively, in the
accompanying consolidated statement of operations for Fiscal 2002. As a result
of inventory sales to Polaroid, in the third quarter of Fiscal 2002, the Company
recorded approximately $0.8 million of income by reducing part of the $1.8
million provision. In the first quarter of Fiscal 2003, in settlement of
Concord's outstanding claims related to the Polaroid bankruptcy, the Company
recorded as a reduction of general and administrative expenses a $0.5 million
payment.
NOTE 21 - RECOVERY OF OPERATING EXPENSES, NET:
In April 2002, the Company uncovered a fraudulent scheme including check forgery
by a former employee, which resulted in the embezzlement of approximately $1.3
million over an eighteen-month period ending in April 2002, the preponderance of
which occurred in Fiscal 2002. The Company's investigation confirmed that the
former employee acted alone and the misappropriated funds have been identified.
The Company has recovered all but $0.1 million of the approximately $1.3 million
from a combination of insurance proceeds, assets secured and assets to be
recovered from the individual. In addition, the Company recorded under the
caption "(Recovery) of operating expenses, net" in the accompanying consolidated
statement of operations for Fiscal 2002, $1.2 million related to the recovery,
which is net of $0.1 million of expenses related to the investigation and
recovery efforts. The entire amount of the recovery was recorded in the third
quarter of Fiscal 2002 due to the fact that it was impractical to determine the
impact on Fiscal 2002 quarterly periods.
NOTE 22 - OTHER INCOME, NET:
(in thousands)
Included in the accompanying consolidated statements of operations under the
caption, "other income, net" is the following:
Fiscal Year
-----------------------------------------
2004 2003 2002
----------- ------------- -----------
Investment income $ (1,282) $ (1,527) $ (2,351)
Loss on sale of securities 916 -- --
Foreign currency gain, net (691) (1,406) (193)
Other expenses, net 557 561 662
Arbitration award --- --- (1,178)
---------- ---------- ----------
Other income, net $ (500) $ (2,372) $ (3,060)
========== ========== ==========
NOTE 23 - GEOGRAPHIC AREA INFORMATION:
(tables in thousands)
Pursuant to SFAS No. 131, Disclosure About Segments of a Business Enterprise and
Related Information, the Company is required to report segment information. The
Company operates in only one business segment, imaging equipment, and sells only
one type of product, image capture devices. Accordingly, the Company's reported
consolidated annual net sales reflects the revenue from the sale of such image
capture devices from external customers and no additional segment reporting is
required. SFAS No. 131 also requires certain revenue disclosures of geographic
information based on the Company's determination as to which regions such
revenues were attributed. Accordingly, for purposes of this disclosure, the
Company attributed RSD sales to the region where the customer's home office was
located and all DMS sales were attributed to Asia. A summary of selected
financial information regarding the Company's geographic operations (the
Americas consist of the United States, Canada, and Latin America; Europe
consists of the United Kingdom and the other countries in the European Union;
Asia consists of Hong Kong and the PRC) is set forth below:
F-35
Fiscal Year
----------------------------------------
Sales made to unaffiliated customers: 2004 2003 2002
---------- ---------- -----------
Americas $ 106,025 $ 101,866 $ 68,703
Asia 49,723 46,240 34,357
Europe 47,384 41,677 26,257
---------- ---------- ----------
Total $ 203,132 $ 189,783 $ 129,317
========== ========== ==========
July 3, June 28,
Identifiable assets: 2004 2003
---------- ----------
Americas $ 96,396 $ 126,622
Asia 58,738 61,355
Europe 34,383 17,837
---------- ----------
Total $ 189,517 $ 205,814
========== ==========
In Fiscal 2004, each of the following customers accounted for at least 10% of
net sales: Eastman Kodak Company ("Kodak"), Wal-Mart Stores, Inc. ("Wal-Mart")
and Walgreen Co. ("Walgreens"). These companies represented the Company's three
largest customers generating net sales in Fiscal 2004 of approximately $39.7
million (19.5% of total net sales), $39.1 million (19.1% of total net sales) and
$23.1 million (11.3% of total net sales), respectively. The loss of any one of
these customers or significantly reduced sales to these customers could have a
material adverse impact on results of operations. 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.
In Fiscal 2003, each of the following customers accounted for at least 10% of
net sales: Walgreen Co. ("Walgreens"), Wal-Mart Stores, Inc. ("Wal-Mart") and
Eastman Kodak Company ("Kodak"). These companies represented the Company's three
largest customers generating net sales in Fiscal 2003 of approximately $36.3
million (19.1% of total net sales), $32.7 million (17.2% of total net sales) and
$29.7 million (15.6% of total net sales), respectively. The loss of any one of
these customers or significantly reduced sales to these customers could have a
material adverse impact on results of operations.
In Fiscal 2002, each of the following customers accounted for at least 10% of
consolidated net sales: Walgreens and Wal-Mart. These companies represented the
Company's largest customers generating net sales in Fiscal 2002 of approximately
$25.4 million (19.6% of total net sales) and $24.0 million (18.6% of total net
sales), respectively. The loss of any one of these customers or significantly
reduced sales to these customers could have a material adverse impact on future
results of operations.
No other customer accounted for 10% or more of consolidated net sales during
Fiscal 2004, Fiscal 2003 or Fiscal 2002.
F-36
NOTE 24 - QUARTERLY RESULTS (UNAUDITED:
(in thousands, except per share data)
Quarter Ended
--------------------------------------------------------------------
Sept. 27, Dec. 27, Mar. 27, July 3,
2003 2003 2004 2004
------------- ------------- -------------- -------------
Net sales $ 57,401 $ 65,063 $ 28,280 $ 52,388
Gross profit (deficit) 10,740 6,461 (5,672) 2,649
Loss before income taxes (702) (3,327) (11,853) (13,581)
Net loss (614) (2,911) (17,596) (10,101)
Basic loss per share $ (0.02) $ (0.10) $ (0.61) $ (0.36)
Diluted loss per share $ (0.02) $ (0.10) $ (0.61) $ (0.36)
Quarter Ended
--------------------------------------------------------------------
Sept. 28, Dec. 28, Mar. 29, June 28,
2002 2002 2003 2003
------------- ------------- -------------- -------------
Net sales $ 30,182 $ 61,840 $ 36,246 $ 61,515
Gross profit 7,722 9,468 8,392 10,669
Income before income taxes 1,230 2,545 1,397 1,800
Net income 1,391 2,085 1,257 1,670
Basic income per share $ 0.05 $ 0.07 $ 0.05 $ 0.06
Diluted income per share $ 0.05 $ 0.07 $ 0.04 $ 0.06
During Fourth Quarter Fiscal 2004, the Company determined that net sales for the
Third Quarter Fiscal 2004 had been overstated by $4.0 million due to certain
errors including the timing of recognizing revenue from certain customers and
the estimation of sales returns and allowances. After taking into consideration
the corresponding overstatement of cost of products sold, these errors had the
impact of overstating gross profit and understating net loss in the third
quarter by $140 thousand. In accordance with APB Opinion No. 28, Interim
Financial Reporting, these items have been corrected in the Company's fourth
quarter and there is no impact to the consolidated net sales, gross profit or
net loss for Fiscal 2004.
See Note 20, "Other Items," for a description of items that had a significant
effect on certain quarters.
F-37
SCHEDULE II
CONCORD CAMERA CORP.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Column A Column B Column C Column D Column E
Additions
-----------------------------------
Balance at Charged to Charged to Balance at
beginning of costs and other end
Description period expenses accounts Deductions of period
------------------ --------------- --------------- ---------------- --------------- ----------------
1. Allowances for sales returns and allowances, discounts, and doubtful accounts
FISCAL YEAR:
2002 $ 703 1,889 -- -- $ 2,592
2003 $ 2,592 519 -- -- $ 3,111
2004 $ 3,111 6,444 176 -- $ 9,731
2. Deferred income tax valuation allowance
FISCAL YEAR:
2002 $ 2,181 -- -- 1,027 $ 1,154
2003 $ 1,154 -- 162 790 $ 526
2004 $ 526 11,616 -- -- $ 12,142
F-38