UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 29, 2002
Commission File No. 0-17038
Concord Camera Corp.
(Exact name of registrant as specified in its charter)
New Jersey 13-3152196
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) identification no.)
4000 Hollywood Boulevard, Presidential Circle - 6th Floor, North Tower,
Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 331-4200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the Common Stock (based upon the high and low
trading prices) held by non-affiliates of the Company on August 30, 2002, was
approximately $96,196,371.
As of August 30, 2002, there were 27,825,499 shares of the Company's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
See Exhibit Index -- Page 53
PART I
Unless the context indicates otherwise, when used in this report, "we," "us,"
"our," "Concord" and the "Company" refer to Concord Camera Corp. and its
subsidiaries. Beginning in Fiscal 1999, the Company changed its fiscal year to
end on the Saturday closest to June 30. Fiscal 2002 refers to the Fiscal Year
ended June 29, 2002, Fiscal 2001 refers to the Fiscal Year ended June 30, 2001,
Fiscal 2000 refers to the Fiscal Year ended July 1, 2000, and Fiscal 1999 refers
to the Fiscal Year ended July 3, 1999. Prior to 1999, the Company's fiscal year
was the twelve-month period ended June 30. References to "fiscal year"
incorporate this usage.
All information in this report gives effect to a two-for-one stock split
effective on April 14, 2000 to shareholders of record on March 27, 2000.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report and the documents that are incorporated by reference into this
report contain "forward-looking statements" within the meaning of the safe
harbor provisions of The Private Securities Litigation Reform Act of 1995. Some
of the forward-looking statements can be identified by the use of
forward-looking words such as "believes," "expects," "may," "will," "should,"
"seeks," "intends," "plans," "estimates," or "anticipates" or the negative of
those words or other comparable terminology. Forward-looking statements concern
expectations, beliefs, projections, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that are not
historical facts. They instead represent only our present belief regarding
future events, many of which, by their nature, are inherently uncertain and
involve risks and uncertainties. A number of important factors could cause
actual results to differ, perhaps materially, from the anticipated results
indicated in the forward-looking statements. For a discussion of some of the
factors that could cause actual results to differ, please see the discussion
under "Risk Factors" contained in this report. Any forward-looking statements
contained in this report, or in the documents incorporated by reference into
this report, represent our estimates only as of the date of this report, or as
of such earlier dates as are indicated, and should not be relied upon as
representing our estimates as of any subsequent date. While we may elect to
update forward-looking statements at some point in the future, we specifically
disclaim any obligation to do so, even if our estimates change.
Item 1. The Business.
Photography Market Overview
There are four main categories of cameras within the amateur photography market:
o Digital cameras -- A digital camera uses an electronic sensor (versus
silver halide film) to electronically capture an image, which is then stored
in a memory device. Digital cameras allow for instantaneous viewing, and
images can easily be downloaded to a computer for viewing, manipulation,
reproduction and storage. According to IDC(1), approximately 18 million
consumer digital cameras(2) were shipped worldwide in 2001 (a 180% increase
in the number of units shipped as compared to 1999) generating shipment
values of approximately $8 billion(3).
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(1) IDC (a division of IDG) is a leading provider of industry analysis and
market data.
-2-
o Single use cameras -- Single use cameras are sold preloaded with film and
battery and are designed to be used only once. After use, the consumer
returns the entire camera to the photo processor. The processor then
extracts the film and either disposes of the camera carcass or returns it
for recycling. According to the Photo Marketing Association ("PMA"), on a
unit basis, single use cameras account for approximately 87% of all
non-digital cameras sold worldwide, but we estimate this segment accounts
for less than 30% of amateur non-digital camera industry revenues.
o 35mm and APS cameras -- This category includes essentially all other
(non-single use) cameras that use silver halide film. Film formats include
both 35mm and Advanced Photo System ("APS") (24mm). On a unit basis, 35mm
and APS cameras account for about 11% of all non-digital cameras sold
worldwide and about 57% of worldwide amateur non-digital camera industry
revenues, according to the PMA.
o Instant cameras -- Instant cameras provide the advantage of instant
photographs, but the cost per print is substantially higher than 35mm and
APS cameras. There is also a difference in the quality of prints produced by
instant cameras. On a unit basis, instant cameras account for about 1.5% of
all non-digital cameras sold worldwide and about 2% of worldwide amateur
non-digital camera industry revenues, according to the PMA.
Market Trends
We expect to capitalize on a number of trends within the image capture industry,
including the following:
o Growth of Digital Photography. Digital photography is one of the fastest
growing areas of the photography market. According to IDC, worldwide
consumer digital camera shipments grew at an average rate of approximately
65% per year from 1999 through 2001, and are projected to grow at an average
rate of approximately 17% per year over the next three years with shipments
expected to reach 40.7 million units in 2006. Despite their relatively
recent acceptance in the consumer market, digital camera sales have already
surpassed sales of instant cameras, single lens reflex cameras ("SLRs") and
traditional(4) 35mm and APS cameras. We believe we are well positioned to
address this market, with a design team focused on the development of
digital image capture devices and significant clean room facilities
dedicated to the manufacture and assembly of digital cameras. See
"Manufacturing Facilities" below.
o New Digital Image Capture Devices. In a clear departure from silver halide
photography, digital imaging enables images to be displayed and used in ways
that were previously impossible. Device manufacturers have begun to
incorporate image capture devices into cellular phones, personal digital
assistants, laptop computers and security monitoring devices.
--------------
(2) "Consumer digital cameras" are cameras capturing images in digital format
only, and priced from $49 to $1,500.
(3) According to IDC's initially advertised prices for end-users.
(4) "Traditional" cameras do not include single use or digital cameras.
-3-
o Growth of Single Use Cameras. Single use cameras are inexpensive, easy to
use and deliver high quality photographs. From 1999 through 2001, the number
of single use cameras sold worldwide grew at a compound annual rate of 15%,
according to the PMA, and is forecasted to grow at an average annual rate of
8% through 2005.
Our Company
We design, develop, manufacture and sell on a worldwide basis high quality,
popularly priced, easy-to-use image capture products. Our products include
digital image capture devices, 35mm and APS traditional and single use cameras,
and instant cameras. We believe we are the fourth largest manufacturer of single
use cameras in the world (behind Eastman Kodak Company ("Kodak"), Fuji Photo
Film Co. Ltd. ("Fuji") and Konica Corporation). By investing significant funds
in our design, development, engineering and manufacturing capabilities, we have
positioned ourselves to capitalize on the industry trend to outsource the
design, development and manufacture of all types of image capture devices. As a
consequence, we now develop new products, including digital image capture
devices and innovative electronic, optical and mechanical devices, both for our
own account and in conjunction with our Original Equipment Manufacturer ("OEM")
customers and some of our key retail customers. We serve as a contract
manufacturer of developed and co-developed products for our OEM customers, and
we also sell our own branded and private label versions of many of those
products incorporating certain of the co-developed technology to our retail
customers.
We manufacture products in the People's Republic of China ("PRC"). Our
manufacturing facility, together with several employee dormitories we lease,
comprise in excess of 600,000 square feet. We have operated in the PRC since
1984. Our manufacturing capabilities and facilities in the PRC are key
components of our low cost of production. Our Hong Kong management team, many of
whom live in the PRC, oversees our manufacturing activities. Our products are
conceptualized, designed, developed and engineered principally in design centers
in Hong Kong, the PRC and the United States.
We have evolved from a manufacturer and distributor of cameras to a contract
manufacturer of high quality image capture products with strong retail
distribution. At the same time we have developed and manufacture a full line of
lower priced digital cameras. Average revenue per unit from our digital products
is significantly higher than from our traditional and single use camera
products. In Fiscal 2002, we completed new digital camera development projects
that resulted in the recent introduction to the marketplace of a number of new
products as well as providing a platform for the future development of other
digital products. Our design team is currently engaged in the development of
additional new digital products. See "Products" below. The experience gained
from these development projects should enable us to compete effectively for
supply contracts with companies desiring to offer low cost digital camera
solutions to their customers.
-4-
Our Growth Strategy
We intend to enhance our position as a leader in contract manufacturing while
continuing to expand our retail sales and distribution ("RSD") business. Our
growth strategy includes the following key elements:
o Continue to expand our RSD business. We continue to globally expand our RSD
business by increasing the number of customers, product listings, retail
segments and sales volumes through the continued introduction of new products,
some of which are the result of our development and/or co-development projects
with our OEM customers. Our retail customers include, but are not limited to,
Argos, Boots, CVS, Eckerd, Rite Aid, Target, Walgreens and Wal-Mart. We
continue to invest in our internal sales and marketing capabilities to expand
our retail business.
In August 2002, we entered into two trademark licensing agreements with the
entity that purchased the assets of Polaroid Corporation ("Polaroid") in an
asset purchase transaction approved by the U.S. Bankruptcy Court supervising the
Polaroid reorganization. These licenses enable us to market our single use
(subject to the Japan restriction under the Fuji license)and traditional
film-based cameras (but not instant or digital cameras) worldwide to retailers
under the Polaroid brand name. See "Licensing Activities" below.
o Obtain additional business from our OEM customers. Over the years we have
captured OEM business from several of the world's leading companies including
Kodak, Hewlett-Packard Company ("Hewlett-Packard"), Nokia Mobile Phones Ltd.
("Nokia") and Polaroid. We continue to invest in product development and low
cost manufacturing to increase business from our existing OEM customers.
o Develop new OEM relationships. We intend to leverage our existing
relationships and our strong capabilities in engineering, design and
manufacturing to establish new OEM relationships. We intend to attract new OEM
customers by exploiting our expertise in designing and low cost manufacturing of
digital and film-based image capture devices for leading companies.
o Differentiate ourselves from other contract manufacturers. We will continue to
differentiate ourselves from our competitors by providing OEM customers with the
dedicated design and development expertise at our facilities in Hollywood,
Florida, Hong Kong and the PRC, as well as our advanced, high quality, low cost
manufacturing capabilities.
o Pursue strategic relationships and acquisitions. When appropriate, we intend
to seek strategic relationships with leading companies in our industry, as well
as acquisitions that will help us further expand our customer base, product mix,
and distribution channels thereby enhancing our OEM and retail competitive
position. We recently engaged an investment bank to help us attempt to identify
suitable acquisition targets.
-5-
Products
We design, develop, manufacture and sell image capture products. Our products
include digital image capture devices, 35mm and APS traditional and single use
cameras, and instant cameras. We often serve as a contract manufacturer of
developed and co-developed products for our customers. We also sell to our
retail customers our own branded and private label versions of many of those
products incorporating certain of the developed and co-developed technology.
We manufacture digital image capture devices, 35mm and APS traditional and
single use cameras, and instant cameras. Our Company manufactures and assembles
products in the PRC both as a contract manufacturer on an OEM basis and for
direct sale under our trademarks and brand names, and under private label brand
names. New products are, and we expect they will continue to be, designed and
developed both independently and on a co-development basis with existing and
potential OEM customers.
We offer a wide variety of CMOS(5) and CCD-imager(6) based digital cameras,
ranging from those with VGA(7) resolution up to and including those with
multi-megapixel resolution. Over the next several years, digital cameras are
expected to represent a material portion of our sales as well as an increasing
portion of worldwide camera sales. During Fiscal 2002, we completed the design
and development of distinct new digital still camera platforms and currently
have additional product platforms in the early stages of development. From these
first platforms we have built, and recently began selling, certain new distinct
camera models. These platforms are designed for configuration flexibility so
that features, styles, and user interfaces can be customized quickly, allowing
for the creation of numerous models and appearances using a common base to
accommodate different user and customer preferences.
We also offer a complete line of single use cameras using platforms that enable
us to change the optics, flash, encasements, finishes and packaging to
accommodate different user and customer preferences. Our 35mm camera products
range from entry-level to higher-end, fully featured zoom models and include
models used by certain RSD customers to support special promotion and loyalty
programs they offer to their customers.
Concord's expenditures for product design and development increased from $4.9
million in Fiscal 2000 to more than $7.6 million in Fiscal 2002. For additional
information regarding amounts we spent on product development activities, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below. We anticipate product development costs will increase
slightly in Fiscal 2003.
OEM Sales
We have developed products and long-term relationships with some of the world's
largest and most successful film, camera, global communication and technology
companies. Sales to OEM customers are handled by our in-house sales and
marketing personnel.
----------------
(5) "CMOS" is the acronym for complementary metal-oxide semiconductor.
(6) "CCD" is the acronym for charge-coupled device.
(7) "VGA" is the acronym for video graphics array.
-6-
In Fiscal 2002, no single OEM customer's purchases represented more than 10% of
our total net sales. OEM customers accounted for approximately $33.6 million, or
26.0%, of our total net sales in Fiscal 2002.
During Fiscal 2002, our OEM customers included Agfa-Gevaert AG ("Agfa")(8),
Ferrania S.p.A. and Ferrania USA, Inc. (formerly part of Imation, Inc.)
("Ferrania")(9), Hewlett-Packard, Kodak, Nokia and Polaroid. For more
information about certain of these existing and former OEM customers, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below.
Future OEM Relationships
We believe we are positioned to become one of the beneficiaries of an
outsourcing trend in the traditional, single use and digital image capture
device markets, including wireless transmission and Internet connectivity. By
investing significant funds in development, design, engineering and
manufacturing capabilities, we have become a high quality, low cost contract
manufacturer. In addition, OEM customers are increasingly searching for
development and co-development partners that can provide them with value added
assistance in the design, development and testing of innovative technologies.
Our ability to serve not only as a reliable, quality contract manufacturer but
also as a valuable strategic partner positions us for continued growth in our
OEM business.
We are in discussions and/or negotiations with existing and potential OEM
customers for the development, design and production of a number of new
products. Our product development capabilities enable us to offer proprietary
assistance in the development of products for OEM customers. We target potential
OEM customers with: (a) an established brand name; (b) existing channels of
distribution; (c) multiple product outsourcing potential (traditional, single
use and digital cameras); and (d) products complementary to our manufacturing
and value-added skills.
Retail Sales
We make direct sales to retailers on a worldwide basis through offices and/or
representatives in the United States, Latin America and Canada ("Concord
Americas"), offices in the United Kingdom, France and Germany ("Concord
Europe"), and offices in Hong Kong ("Concord Asia"). Concord Asia is also
involved in OEM sales, as well as sales to and sales support for large retail
customers in the Americas, Europe and Asia. We market our products to retailers
on a private label basis and/or under the following brand names:
---------------
(8) Although our contract with Agfa expired in January 2002, we continued to
manufacture certain products for Agfa during the remainder of Fiscal 2002.
(9) Although our contract with Ferrania expired in June 2001, we continued to
manufacture certain products for Ferrania during Fiscal 2002.
-7-
o Argus(R) o Goldline(R)
o Apex(R) o Keystone(R)
o Concord(R) o Le Clic(R)
o Concord Eye Q(R) o Polaroid(R)
o Fun Shooter(R)
In August 2002, we entered into two trademark licensing agreements with the
entity that purchased the assets of Polaroid in an asset purchase transaction
approved by the U.S. Bankruptcy Court supervising the Polaroid reorganization.
These licenses enable us to market our single use (subject to the Japan
restriction under the Fuji license) and traditional film-based cameras (but not
instant or digital cameras) worldwide to retailers under the Polaroid brand
name. See "Licensing Activities" below.
Our worldwide retail customers include, but are not limited to, the following
large discount, drug and retail chains: Argos, Boots, CVS, Eckerd, Rite
Aid, Target, Walgreens and Wal-Mart.
We also sell our products to other consumer product companies who use our
products as premiums in connection with their product sales.
We have in-house sales and marketing personnel who make a majority of our direct
sales to OEM and retail customers. To assist our in-house RSD sales staff, we
also have approximately nine non-affiliated sales agents who serve specific
geographic areas. Sales agents generally receive commissions ranging from 1.0%
to 3.0% of net sales to retail customers, depending on the type of customer, and
may act as selling agents for products of other manufacturers.
Our direct sales to retailers represented approximately $95.7 million, or 74.0%
of total net sales in Fiscal 2002, and approximately $83.3 million or 46.3% of
total net sales in Fiscal 2001. This increase was fueled by the introduction of
new products and marketing programs. In Fiscal 2002, we had two retail customers
each of whose purchases represented in excess of 10% of our total net sales: (i)
Walgreens (19.6% of total net sales); and (ii) Wal-Mart (18.6% of total net
sales).
Competition
The image capture industry is highly competitive. As a manufacturer and
distributor of high quality, popularly priced image capture devices, we
encounter substantial competition from a number of firms, many of which have
longer operating histories, more established markets and more extensive
facilities than we have. Many of our competitors have greater resources than we
have or may reasonably be expected to have in the foreseeable future. Our
competitive position is dependent upon our ability to continue to manufacture in
the PRC.
Licensing Activities
In August 2002, we entered into two license agreements with the entity that
purchased the assets of Polaroid on July 31, 2002 in an asset purchase
transaction approved by the U.S. Bankruptcy Court supervising the Polaroid
reorganization. These licenses provide us with the exclusive (with the exception
of products already released by Polaroid into the distribution chain), worldwide
use of the Polaroid brand trademark in connection with the manufacture,
distribution, promotion and sale of 35mm and APS single use cameras, 35mm and
APS manual and motorized cameras, including zoom cameras, and certain related
accessories. The licenses do not include instant or digital cameras. Each
license includes an initial term of three and a half years and may be renewed at
our option for an additional three-year period.
-8-
We are one of a limited number of companies licensed by Fuji to manufacture and
remanufacture single use cameras. Single use cameras accounted for approximately
$90.5 million, or 70% of our Fiscal 2002 net sales. We have a worldwide
(excluding Japan until January 1, 2005) non-exclusive license to use Fuji's
portfolio of patents and patent applications related to single use cameras. The
license extends until the later of February 26, 2021 or the expiration of the
last of the licensed Fuji patents to expire. In June 1999, the International
Trade Commission ("ITC") banned the unlicensed importation into the United
States of new and reloaded single use cameras due to the infringement of such
imports on existing patents held by Fuji. The Court of Appeals for the Federal
Circuit (the "Federal Circuit") recently upheld the ban on new single use
cameras and reversed the ITC's ban on reloaded single use cameras which were
originally sold in the United States by Fuji or its licensees and reloaded in a
prescribed manner. The Federal Circuit's decision opens the United States market
to competition from non-Fuji licensees for single use cameras originally sold in
the United States by Fuji or its licensees and reloaded (either in the United
States or abroad) in the prescribed manner. The Federal Circuit's decision could
have a material adverse impact on our revenues and earnings.
Manufacturing
We conduct all of our manufacturing in the PRC. Our vertically integrated
manufacturing facilities include, but are not limited to, plastic injection
molding of lenses and other parts, stamping and machining of metal parts,
manufacturing of printed circuit boards ("PCBs"), assembly of PCBs using surface
mount technology machinery and manual insertion, application specific integrated
circuit bonding, quality control, quality assurance, painting and final assembly
and testing.
Manufacturing Facilities. We began constructing our current manufacturing
facilities in the PRC in Fiscal 1996. We expanded them in Fiscal 1999 by
increasing our manufacturing and related dormitory facilities to over 600,000
square feet. See "Properties" below.
In February 2000 we opened a new production facility dedicated to digital image
capture devices. Two-thirds of this new facility is comprised of class 10,000
clean rooms where the ambient air particle count is controlled and special gowns
are worn by all personnel to maintain a high level of cleanliness. This
facility, located on the site of our PRC manufacturing operations, has a fully
trained and dedicated on-site staff including operators, engineers (mechanical,
electrical and optical) and production managers and supervisors.
Our PRC manufacturing facilities received the Social Accountability 8000
("SA8000") certification in November 2001. The SA8000 is an international
standard designed to ensure safe working conditions, fair management practices
and the protection of workers' rights. Our PRC manufacturing facilities have
also been ISO9002 accredited by the China Quality Certification Center for
Import & Export since Fiscal 1997.
-9-
Our Hong Kong office has been ISO9001 accredited by Det Norske Veritas since
early 2001. The ISO9001 standard encompasses design, development, purchasing and
order fulfillment functions.
Equipment and Raw Materials. We own the tools and equipment necessary to
manufacture many of the components used in our products. Numerous manufacturers
and suppliers located in the Far East and other parts of the world supply us
with various components and raw materials that we do not manufacture. Raw
materials and components that we purchase include film, batteries, glass lenses,
plastic resins, metal, packaging, electronic components, sensors, digital signal
processors, memory and displays.
Component procurement for digital cameras is more complex than for traditional
and single use cameras. Availability, delays in procuring, and price
fluctuations of the components for digital cameras, which may be outside our
control, could adversely impact our business, results of operations and
financial condition.
PRC Operations. Our operations and profitability are substantially dependent
upon our manufacturing and assembly activities. Our current processing agreement
with the PRC entities expires in October 2006. We intend to continue to expand
our operations in the PRC, but there can be no assurance we will be able to do
so.
We recently established and registered a wholly foreign owned enterprise
("WFOE"), named Concord Camera (Shenzhen) Company Limited ("Concord Shenzhen"),
pursuant to the law of the PRC concerning enterprises with sole foreign
investment. The business license of Concord Shenzhen, which is a wholly-owned
subsidiary of Concord Camera HK Limited ("Concord HK"), permits it to
manufacture and sell a variety of cameras and camera components and will permit
it to make sales both in the PRC and internationally of the products it
manufactures. We expect that Concord Shenzhen will begin operations in the PRC
during Fiscal 2003.
Trademarks and Patents
We own trademarks which include, but are not limited to, the CONCORD(R),
KEYSTONE(R), CONCORD EYE Q(R), FUN SHOOTER(R), LE CLIC(R), GOLDLINE(R) and
APEX(R) names for cameras sold in the United States and numerous foreign
countries and the ARGUS(R) name in numerous foreign countries. We license the
trademark POLAROID(R) for exclusive use worldwide in connection with the
manufacture, distribution, promotion and sale of single use and traditional
film-based cameras (excluding instant and digital cameras). We own numerous
patents, certain of which are used in our current products. We have applied for,
and will continue to apply for, in the United States and foreign countries,
patents to protect the inventions and technology developed by or for the
Company. We do not believe our competitiveness and market share are dependent on
the ultimate disposition of our patent applications.
-10-
Restructuring
Beginning in the fourth quarter of Fiscal 2001, we announced and began
implementing a restructuring and cost containment initiative in an effort to
enhance operating efficiencies and reduce costs through workforce reductions,
facility consolidations and other cost-saving measures. As part of this
initiative, which we completed in the fourth quarter of Fiscal 2002, we reduced
our manufacturing workforce in the PRC from approximately 6,000 to approximately
4,000, and eliminated approximately 70 employees outside the PRC.
Employees
As of August 1, 2002, we had 207 employees, approximately 62% of whom were
located in Hong Kong and the PRC. None of our employees are represented by
collective bargaining agreements.
Pursuant to our agreements with governmental agencies in the PRC, those
governmental agencies provide us with approximately 4,000 workers at our
facilities in the PRC. We believe our ongoing relationship with these workers is
good.
Financial Information about Geographic Areas
For financial information about geographic areas, see Note 22 to the
Consolidated Financial Statements.
Item 2. Properties.
In Hollywood, Florida, we lease our principal office space, which consists of
approximately 15,000 square feet. We also lease a domestic warehouse in Fort
Lauderdale, Florida, which consists of approximately 13,700 square feet, about
825 square feet of which is office space. These leases expire on September 30,
2010 and January 31, 2009, respectively.
In Hong Kong, we lease a total of approximately 32,915 square feet of business
and warehouse space comprised of one floor under a lease expiring in 2047 and
four floors under a lease expiring in July 2004(10). In the United Kingdom, we
own an 11,000 square foot building on a one-half acre parcel. We also lease
warehouse and/or office space in France, Canada and Germany in connection with
the activities of our subsidiaries in these jurisdictions.
In the PRC, we own a manufacturing facility in the Longgang District of
Shenzhen, and we lease several employee dormitories and a cafeteria. Pursuant to
land use agreements entered into with certain PRC governmental agencies, we
obtained the title and rights to use approximately eight acres of land for
factory buildings, dormitories and related ancillary buildings. Under the land
use agreement, we have the right to use the land through the year 2038. At the
end of the term, a PRC governmental agency will own the facilities and we will
have the right to lease the land and improvements thereon at then prevailing
lease terms.
--------------
(10) We have the option to extend the term of this lease to July 31, 2006.
-11-
Item 3. Legal Proceedings.
In July 2002, an amended class action complaint was filed against the Company
and certain of its officers in the United States District Court for the Southern
District of Florida by individuals purporting to be shareholders of the Company.
The lead plaintiffs in the amended complaint seek to act as representatives of a
class consisting of all persons who purchased the Company's Common Stock during
the period from May 1, 2000 through June 22, 2001, inclusive (the "Class
Period"). The complaint asserts, among other things, that the Company made
untrue statements of material fact and omitted to state material facts necessary
to make statements made not misleading in periodic reports it filed with the
Securities and Exchange Commission and in press releases it made to the public
regarding its operations and financial results. The allegations are centered
around claims that at the outset the Company failed to disclose that the
transaction with then customer, KB Gear Interactive, Inc. ("KB Gear"), was a
highly risky transaction, claims that throughout the Class Period the Company
failed to disclose that a large portion of its accounts receivable was
represented by a delinquent and uncollectible balance due from then customer, KB
Gear, and claims that such failure artificially inflated the price of the Common
Stock. The complaint seeks unspecified damages, interest, attorneys' fees, costs
of suit and unspecified other and further relief from the court. The Company
intends vigorously to defend the lawsuit. The lawsuit is in the earliest stage
and discovery has not yet commenced. The Company filed a motion to dismiss on
August 30, 2002. Although the Company believes this lawsuit is without merit,
its outcome cannot be predicted, and if adversely determined, the ultimate
liability of the Company, which could be material, cannot be ascertained.
On September 17, 2002, the Company was advised by the staff of the Securities
and Exchange Commission that it is conducting an informal inquiry related to the
matters described above.
In April 2002, a patent infringement complaint was filed by the Massachusetts
Institute of Technology and Electronics for Imaging, Inc. against 214
defendants, including the Company, in the United States District Court for the
Eastern District of Texas. The complaint asserts that the defendants have
offered for sale and sold products that infringe United States Patent No.
4,500,919, entitled Color Reproduction System, which patent expired on May 4,
2002. The complaint seeks unspecified damages, interest, attorneys' fees, costs
of suit and unspecified other and further relief from the court. Although the
Company believes this lawsuit is without merit, its outcome cannot be predicted,
and if adversely determined, the ultimate liability of the Company, which could
be material, cannot be ascertained.
The Company is involved from time to time in routine legal matters incidental to
its business. In the opinion of our management, the resolution of such matters
will not have a material adverse effect on its financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-12-
PART II
Item 5. Market for Company's Common Equity and Related Shareholder Matters.
Our Common Stock has been quoted on the Nasdaq National Market under the symbol
"LENS" since July 12, 1988. The following table shows, for each quarter in
Fiscal 2001 and Fiscal 2002, the high and low sales prices per share of our
Common Stock as reported by the Nasdaq National Market. All share prices set
forth below have been adjusted to reflect the two-for-one split of our Common
Stock effected on April 14, 2000.
Quarter Ended High Low
June 29, 2002............................... $ 9.15 $ 4.95
March 30, 2002.............................. $ 9.39 $ 6.00
December 29, 2001........................... $ 7.79 $ 3.80
September 29, 2001.......................... $ 6.23 $ 3.80
June 30, 2001............................... $10.07 $ 4.75
March 31, 2001.............................. $20.00 $ 6.38
December 30, 2000........................... $34.50 $13.75
September 30, 2000.......................... $27.88 $18.69
The closing price of our Common Stock on the Nasdaq National Market on August
30, 2002 was $4.70 per share. As of August 30, 2002, there were approximately
1,038 shareholders of record of our Common Stock.
The Company has never paid cash dividends and does not presently intend to pay
cash dividends.
-13-
Item 6. Selected Financial Data.
Fiscal Year Ended
-----------------
June 29, June 30, July 1, July 3, June 30,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands except per share data)
STATEMENT OF
OPERATIONS DATA:
Net sales(a) $129,317 $180,061 $167,720 $115,386 $98,617
Cost of product sold 110,345 152,598 126,148 86,664 74,771
-------- -------- -------- -------- -------
Gross profit(a) 18,972 27,463 41,572 28,722 23,846
Operating expenses(a) 26,161 45,056 25,607 20,567 17,846
-------- -------- -------- -------- -------
Operating (loss) income (7,189) (17,593) 15,965 8,161 6,000
Other (income), net (538) (4,892) (883) (441) (517)
-------- -------- -------- -------- -------
(Loss) income before taxes (6,651) (12,701) 16,848 8,602 6,517
(Benefit) provision for taxes (1,403) (931) (2,751) 893 504
-------- -------- -------- -------- -------
Net (loss) income $ (5,248) $(11,770) $ 19,599 $ 7,709 $ 6,013
======== ======== ======== ======== =======
Basic (loss) earnings per share(b) $ (0.19) $ (0.45) $ 0.89 $ 0.35 $ 0.27
======== ======== ======== ======== =======
Diluted (loss) earnings per share(b) $ (0.19) $ (0.45) $ 0.81 $ 0.33 $ 0.26
======== ======== ======== ======== =======
BALANCE SHEET DATA:
Working capital $128,383 $131,003 $ 52,600 $ 37,447 $20,813
======== ======== ======== ======== =======
Total assets $198,076 $213,666 $134,003 $ 96,647 $72,082
======== ======== ======== ======== =======
Total debt $ 14,934(c) $ 15,416 $ 19,555 $ 29,735 $15,599
======== ======== ======== ======== =======
Total stockholders' equity $149,156 $154,337 $ 66,290 $ 42,696 $36,105
======== ======== ======== ======== =======
(a) All amounts have been presented in accordance with the Emerging Issue Task
Force No. 00-25, Vendor Income Statement Characterization of Consideration
from a Vendor to a Retailer, which requires the reclassification of certain
variable selling expenses from being reported as an operating expense to a
reduction of net sales. For further discussion, see Note 1 to the
Consolidated Financial Statements.
(b) Per share data for all periods presented has been restated to reflect a
two-for-one stock split in Fiscal 2000. For further discussion, see Note 11
to the Consolidated Financial Statements.
(c) This debt was retired in August 2002. For further discussion, see Notes 9
and 24 to the Consolidated Financial Statements.
-14-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis should be read in conjunction with the
Fiscal 2002 consolidated financial statements and the related notes thereto.
Except for historical information contained herein, the matters discussed below
are forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such statements involve
risks and uncertainties, including but not limited to economic, governmental,
political, competitive and technological factors affecting Concord's operations,
markets, products, prices and other factors discussed elsewhere in this report
and the documents filed with the Securities and Exchange Commission ("SEC").
These factors may cause results to differ materially from the statements made in
this report or otherwise made by or on behalf of Concord.
OVERVIEW
We design, develop, manufacture and sell on a worldwide basis high quality,
popularly priced, easy-to-use image capture products. Our products include
digital image capture devices, 35 mm and APS traditional and single use cameras
and instant cameras. We manufacture and assemble our products in the People's
Republic of China ("PRC") for sales to retailers under our brand names, on a
premium and private label basis, and to Original Equipment Manufacturers
("OEM").
Over the last several years, we have evolved from a manufacturer and distributor
of cameras to a contract manufacturer of high quality image capture products
with strong retail distribution. We have improved the quality and capacity of
our manufacturing operations to a world class standard and have acquired
additional core technology, design and engineering expertise which has, in turn,
enabled us to improve product performance and picture quality and to respond
quickly to customer requirements.
We recently established and registered a wholly foreign owned enterprise
("WFOE"), named Concord Camera (Shenzhen) Company Limited ("Concord Shenzhen"),
pursuant to the law of the PRC concerning enterprises with sole foreign
investment. The business license of Concord Shenzhen, which is a wholly-owned
subsidiary of Concord HK, permits it to manufacture and sell a variety of
cameras and camera components and will permit it to make sales both in the PRC
and internationally of the products it manufactures. We expect that Concord
Shenzhen will begin operations in the PRC during Fiscal 2003.
We sell directly to our retail sales and distribution ("RSD") customers on a
worldwide basis through offices and/or representatives in the United States,
Latin America and Canada ("Concord Americas"), offices in the United Kingdom,
France and Germany ("Concord Europe"), and offices in Hong Kong ("Concord
Asia"). Concord Asia is involved in all OEM sales as well as free on board
("FOB") Hong Kong sales to large retail customers in the Americas, Asia, and
Europe. These divisions market our products under the brand names Concord(R),
Polaroid(R), Concord EyeQ(R), Keystone(R), Le Clic(R), Argus(R), Apex(R),
Goldline(R) and Fun Shooter(R).
-15-
As a contract manufacturer, we have also developed products with some of the
world's largest and most successful film, camera, global communication and
technology companies. Our relationships with our OEM customers are handled by
our in-house sales and marketing personnel. In Fiscal 2002, no single OEM
customer's purchases represented more than 10% of our net total sales.
As a result of our strategy over the last several years, our sales mix has
become more diversified. Sales to our RSD customers accounted for approximately
74.0% of total net sales for Fiscal 2002 compared to approximately 32.3% of
total net sales during Fiscal 2000 and sales to our OEM customers represented
26.0% of total net sales in Fiscal 2002 compared to 67.7% of total net sales in
Fiscal 2000. The evolution of our OEM and branded products into digital and
other image capture devices has diversified our product base. In Fiscal 2002,
our second year of selling digital image capture devices, such products
accounted for approximately 10.7% of our total net sales. Net sales of single
use cameras accounted for approximately 70.0% of total net sales in Fiscal 2002,
compared to approximately 48.2% in Fiscal 2000. Although single use camera sales
represented a substantial portion of our total net sales in Fiscal 2002, in the
future we anticipate this percentage to decrease as sales of digital image
capture devices increase.
In accordance with Emerging Issues Task Force ("EITF") Issue No. 00-25, Vendor
Income Statement Characterization of Consideration from a Vendor to a Retailer,
which addresses the operating statement classification of consideration between
a vendor and a retailer, we have reclassified certain variable selling expenses
including advertising allowances and other discounts and allowances from being
reported as a selling expense to a reduction of net sales. As a result of
adopting EITF 00-25 in the second quarter of Fiscal 2002 and reclassifying
certain variable selling expenses for all amounts presented, we are reporting
lower net sales, lower gross margins and lower selling expenses for all Fiscal
Years discussed. Approximately $2,561,000, $3,352,000, and $5,439,000 of
variable selling expenses, consisting principally of advertising and promotional
allowances, were reclassified as a reduction of net sales, resulting in a
corresponding reduction of gross profit and selling expenses, with no effect on
net income, for Fiscal 2002, Fiscal 2001, and Fiscal 2000, respectively.
For Fiscal 2002, our RSD and OEM net sales were approximately $95,685,000 and
$33,632,000, respectively. For Fiscal 2002, our RSD net sales include FOB Hong
Kong sales of Concord Asia to its customers in the Americas of approximately
$32,622,000 and to its customers in Europe of approximately $13,812,000.
To the extent possible, we will attempt to continue obtaining additional
business from our current customers, and to establish new OEM and RSD
relationships by positioning ourselves as an innovative designer, developer,
manufacturer, and marketer of high quality, popularly priced image capture
products.
-16-
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the Consolidated Financial Statements and accompanying notes. Our application of
accounting policies affects these estimates and assumptions. Actual results
could differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies affect our more significant
estimates and assumptions used in the preparation of our Consolidated Financial
Statements and accompanying notes:
Provision for Doubtful Accounts
The provision for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts owed to us could be adversely affected.
Inventory
Inventory purchases and commitments are based upon future demand forecasts. If
there is a sudden and significant decrease in demand for our products, or there
is a higher rate of inventory obsolescence because of rapidly changing
technology and customer requirements, we may be required to increase our
inventory allowances resulting from lower of cost or market value adjustments
and our gross profit could be adversely affected.
Deferred Taxes
The deferred tax valuation allowance is based on our assessment of the
realizability of our deferred tax assets on an ongoing basis and may be adjusted
from time to time as necessary. In determining the valuation allowance, we have
considered future taxable income and the feasibility of tax planning
initiatives. Should we determine that it is more likely than not that we will
realize certain of our deferred tax assets in the future, an adjustment would be
required to reduce the existing valuation allowance and increase income. On the
contrary, if we determine that we would not be able to realize our recorded
deferred tax asset, an adjustment to increase the valuation allowance would be
charged to the results of operations in the period such conclusion was made.
Such charge could have an adverse effect on our provision for income taxes
included in our results of operations.
Sales Returns
A provision for sales returns is established based on historical trends in
product returns. If future returns are higher than we predicted based on the
historical data, our net sales could be adversely affected.
-17-
Variable Stock-Based Compensation Accounting for Repriced Stock Options
As a result of an exchange offer for outstanding stock option grants that was
consummated in the Fall of 2001, we are now required to apply variable
stock-based compensation accounting for these grants until the options are
exercised, cancelled or expired. For Fiscal 2002, we did not record any variable
stock-based compensation expense in the consolidated statement of operations
because our closing Common Stock price on June 29, 2002 was below the new
repriced stock options' exercise price of $5.97. Because the determination of
variable stock-based compensation expense associated with the repriced stock
options is significantly dependent upon our closing stock price at the end of
each prospective reporting period, it is not possible to determine its future
impact, either favorable or unfavorable, on our consolidated financial
statements.
RESULTS OF OPERATIONS
Fiscal 2002 Compared to Fiscal 2001
Net Sales
Net sales for Fiscal 2002 were approximately $129,317,000, a decrease of
approximately $50,744,000, or 28.2%, as compared to net sales for Fiscal 2001.
The decrease in net sales resulted principally from decreases in sales to OEM
customers partially offset by an increase in sales to new and existing RSD
customers. On a comparative basis, in Fiscal 2002 the decrease in OEM sales was
attributed to the lack of sales of a certain digital product to a former
customer, significantly lower sales of instant cameras, and decreases in sales
of both digital and film based products. The increase in RSD net sales was
primarily due to increases in sales to leading retailers in the Americas. For
Fiscal 2002, RSD customer net sales were approximately $95,685,000, an increase
of approximately $12,388,000, or 14.9%, as compared to Fiscal 2001. For Fiscal
2002, OEM net sales were approximately $33,632,000, a decrease of approximately
$63,132,000, or 65.2% as compared to Fiscal 2001.
Net sales of Concord Asia for Fiscal 2002, excluding FOB Hong Kong net sales to
its customers in the Americas and Europe of approximately $46,434,000, were
approximately $34,356,000, a decrease of approximately $62,550,000, or 64.5%, as
compared to Fiscal 2001. The decrease was due to lower OEM net sales.
Net sales of Concord Americas for Fiscal 2002, including FOB Hong Kong net sales
to customers in the Americas, were approximately $68,704,000, an increase of
approximately $11,864,000, or 20.9% as compared to Fiscal 2001. The increase was
primarily due to the success of certain new marketing programs, increased
penetration with existing customers, and the positive sell through of certain
new products.
Net sales of Concord Europe for Fiscal 2002, including FOB Hong Kong net sales
to customers in Europe, were approximately $26,257,000, a decrease of
approximately $58,000, or 0.2% as compared to Fiscal 2001.
-18-
Gross Profit
Gross profit for Fiscal 2002 was approximately $18,972,000, a decrease of
approximately $8,491,000, or 30.9% as compared to Fiscal 2001. Gross profit,
expressed as a percentage of net sales, decreased to 14.7% for Fiscal 2002 as
compared to 15.3% for Fiscal 2001. The decrease in gross profit as a percentage
of net sales was attributable to: (i) significantly lower net sales, (ii) a
digital inventory provision of approximately $2,250,000, (iii) competitive price
pressures and unfavorable absorption of manufacturing overhead and labor
utilization, (iv) a provision of approximately $1,011,000 related to specific
product inventory for Polaroid Corporation ("Polaroid") which filed for
bankruptcy in October 2001 and (v) higher product development costs. Included in
gross profit for Fiscal 2001 was approximately $4,714,000 of inventory
provisions and approximately $500,000 associated with a restructuring and cost
containment program ("Restructuring Initiative") that was initiated in June
2001. Product development costs and percentages of net sales for Fiscal 2002 and
2001 were approximately $7,604,000 (5.9%) and $6,413,000 (3.6%), respectively.
We first began selling digital products in Fiscal 2001. Our product mix, which
historically consisted entirely of traditional and single use cameras, is
anticipated to continue changing with the introduction of more digital products
in the future. Digital products, as compared to traditional and single use
cameras, sell at significantly higher unit prices but generate lower gross
margins as a percentage of net sales. However, digital products generate greater
gross profit dollars per unit than traditional and single use cameras.
Consequently, as digital products increase as a percentage of our sales mix, we
expect to experience a lower overall gross profit margin percentage and higher
revenue and gross profit dollars per unit sold.
In addition, as we manufacture more digital products, we increase the risk of
gross profit fluctuations due to digital component availability and increased
costs. Since component availability can fluctuate and is subject to possible
procurement delays and other constraints, it could possibly limit net profit
growth and might have a negative impact on net sales and gross margins. Digital
camera products are also subject to rapid technological changes, price erosion
and obsolescence to a greater extent than traditional camera products. Because
of rapid technological changes, some of our digital camera products became
obsolete and consequently we recorded a significant inventory provision related
to digital inventory during Fiscal 2002.
Operating Expenses
Operating expenses, consisting of selling, general and administrative, recovery
of operating expenses, net, terminated acquisition costs and interest expenses,
decreased by approximately $16,373,000, or 36.3%, to $28,683,000 for Fiscal 2002
from approximately $45,056,000 for Fiscal 2001. Operating expenses, as a
percentage of net sales, decreased to 22.2% in Fiscal 2002 from 25.0% in Fiscal
2001. Included in general and administrative expenses for Fiscal 2002 were
certain amounts aggregating $3,033,000 comprised of (i) a provision related to
an accounts receivable of $1,611,000 associated with Polaroid's bankruptcy
filing; (ii) a net provision related to an accounts receivable of $672,000
associated with Kmart Corporation's bankruptcy filing in January 2002; (iii) a
charitable contribution that the Company made for victims of the September 11,
2001 terrorist attack in the amount of $1,063,000; and (iv) a reversal in June
2002 of an accrual associated with the Restructuring Initiative of approximately
$313,000 which resulted in a reduction of general and administrative expenses
("Restructuring Reversal"). The Restructuring Initiative was completed in June
2002. In Fiscal 2001, general and administrative expenses included an
approximate $15,800,000 provision ("OEM Provision") for doubtful accounts for an
accounts receivable associated with a former OEM customer. Also, as a result of
the Restructuring Initiative, general and administrative expenses included
approximately $900,000 ("Restructuring Charge") of the approximate $1,400,000
restructuring charge that the Company recorded in its fourth quarter of Fiscal
2001. Also, operating expenses for Fiscal 2001 included expenses of
approximately $800,000 incurred in connection with a proposed acquisition that
was not consummated.
-19-
Selling expenses decreased by approximately $1,805,000, or 22.2%, to
approximately $6,343,000 for Fiscal 2002 from approximately $8,149,000 for
Fiscal 2001. The decrease was primarily due to a significant decline in net
sales resulting in lower freight and certain other variable selling expenses, as
well as a decrease in salaries, travel and entertainment and tradeshow expenses.
Selling expenses, as a percentage of net sales, increased to 4.9% for Fiscal
2002 from 4.5% for Fiscal 2001.
General and administrative expenses decreased by approximately $12,348,000, or
37.1%, to approximately $20,967,000 for Fiscal 2002 from approximately
$33,315,000 for Fiscal 2001. As a percentage of net sales, general and
administrative expenses decreased to 16.2% for Fiscal 2002 from 18.5% for Fiscal
2001.
In April 2002, we uncovered a fraudulent scheme including check forgery by a
former employee, which resulted in the embezzlement of approximately $1,250,000
over an eighteen-month period ending in April 2002, the preponderance of which
occurred in Fiscal 2002. To date, our ongoing investigation confirms that the
former employee acted alone and the misappropriated funds have been identified.
We expect to recover the full amount of the embezzlement from a combination of
insurance proceeds and assets secured and to be recovered from the individual.
Accordingly, the recovery of approximately $1,250,000, net of an approximate
$95,000 cash recovery resulting in a net receivable of $1,155,000, has been
recorded as an accrued receivable and is included in prepaid and other current
assets in the accompanying consolidated balance sheet as of June 29, 2002. In
addition, we have recorded under the caption recovery of operating expenses, net
in the accompanying consolidated statement of operations for Fiscal 2002,
approximately $1,150,000 related to the recovery, which is net of approximately
$100,000 of expenses related to the investigation and recovery efforts. The
entire amount of the recovery was recorded in the third quarter of Fiscal 2002
due to the fact that it is impractical to determine the impact on Fiscal 2002
quarterly periods. The embezzled amounts related to the prior fiscal year were
not significant.
Terminated acquisition costs of approximately $800,000 in Fiscal 2001 related to
a proposed acquisition that was not consummated. Negotiations regarding this
acquisition were terminated in September 2000.
-20-
Interest expense decreased by approximately $270,000, or 9.7%, to approximately
$2,522,000 for Fiscal 2002 from approximately $2,793,000 for Fiscal 2001. The
lower interest expense in Fiscal 2002 was attributable to the decreased use of
short-term borrowings and the repayment of certain capital leases.
Other (Income), Net
Other (income), net was approximately $3,060,000 and $4,892,000 for Fiscal 2002
and Fiscal 2001, respectively. Other (income), net primarily includes investment
income, foreign exchange gains and losses, directors' fees, and certain public
relations costs. The decrease in Fiscal 2002 was primarily attributable to lower
investment income offset by approximately $1,178,000 of income from an
arbitration award.
Income Taxes
Since July 1998, the annual tax rate of Concord Camera HK Limited ("Concord HK")
has been 8.0%. As a company engaged in processing activities in the PRC, we
currently do not pay taxes or import/export duties in the PRC, but there can be
no assurance that we will not be required to pay such taxes or duties in the
future. Hong Kong is taxed separately from the PRC.
As a company engaged in processing activities in the PRC, we have never paid any
income or turnover tax to the PRC on account of those activities in the PRC.
Existing PRC statutes can be construed as providing for a minimum of 10% to 15%
income tax and a 3% turnover tax on our processing activities; however, the PRC
has never attempted to enforce those statutes. We have been advised that the
PRC's State Tax Bureau is reviewing the applicability of those statutes to
processing activities of the type engaged in by us, but it has not yet announced
any final decisions as to the taxability of those activities. After consultation
with our tax advisors, we do not believe that any tax exposure we may have on
account of our processing operations in the PRC will be material to our
financial statements.
We do not provide for U.S. federal income taxes on undistributed earnings of our
foreign subsidiaries because we intend to permanently reinvest such earnings.
Undistributed earnings of our foreign subsidiaries approximated $41,761,000 as
of June 29, 2002. It is not practicable to estimate the amount of tax that might
be payable on the eventual remittance of such earnings. Upon eventual
remittance, no withholding taxes will be payable. For U.S. federal tax purposes,
as of June 29, 2002, we have net operating loss carryforwards of approximately
$12,630,000, of which approximately $4,257,000 was attributable to deductions
associated with stock option exercises, that expire as follows: $854,000 in
2008, $2,716,000 in 2009, $4,094,000 in 2010, $390,000 in 2014, and the balance
thereafter. For U.S. state tax purposes, we have net operating losses of
approximately $1,705,000 that begin to expire in 2021. Additionally, we have
approximately $19,562,000 of which $16,525,000 relates to Hong Kong, of net
operating loss carryforwards related to our foreign operations which have no
expiration dates.
As of June 29, 2002, and June 30, 2001, we evaluated our deferred tax assets. As
part of assessing the realizability of our deferred tax assets, we evaluated
whether it is more likely than not that some portion, or all of our deferred tax
assets, will be realized. The realization of our deferred tax assets relates
directly to our tax planning strategies and our ability to generate taxable
income for U.S. federal and state and Hong Kong tax purposes. As of June 29,
2002 and June 30, 2001 based on all the available evidence, we determined that
it is more likely than not that our domestic and Hong Kong net deferred tax
assets will be fully realized. Consequently, we did not adjust the valuation
allowance. We also evaluated our European net deferred tax assets and determined
that $1,154,000 and $2,181,000 were to be recorded as a valuation allowance as
of June 29, 2002 and June 30, 2001, respectively. For Fiscal 2002, Fiscal 2001
and Fiscal 2000, our effective tax rates were (21.1%), (7.3%), and (16.3%),
respectively. Our future effective tax rate will depend upon the mix between
foreign and domestic taxable income and losses, and the statutory rates of the
related tax jurisdictions.
-21-
Net Loss
As a result of the matters described above, we reported a net loss of
approximately $5,248,000, or $0.19 per share, for Fiscal 2002 as compared to a
net loss of approximately $11,770,000, or $0.45 per share, for Fiscal 2001.
Fiscal 2001 Compared to Fiscal 2000
Net Sales
Net sales for Fiscal 2001 were approximately $180,061,000, an increase of
approximately $12,341,000, or 7.4%, as compared to net sales for Fiscal 2000.
The increase in net sales resulted principally from increases in sales to new
and existing RSD customers partially offset by a decrease in sales to OEM
customers. RSD net sales increased primarily due to increased sales to new and
existing RSD customers of digital and single use camera products partially
offset by a decrease in sales of other camera products. In Fiscal 2001, RSD net
sales were approximately $83,297,000, an increase of approximately $29,047,000,
or 53.5% as compared to Fiscal 2000. In Fiscal 2001, OEM net sales were
approximately $96,764,000, a decrease of approximately $16,706,000, or 14.7% as
compared to Fiscal 2000.
Net sales of Concord Asia for Fiscal 2001, excluding FOB Hong Kong net sales to
its customers in the Americas and Europe of approximately $47,008,000, were
approximately $96,906,000, a decrease of approximately $16,580,000, or 14.6% as
compared to Fiscal 2000. The decrease resulted from lower sales to existing OEM
customers partially offset by an increase in sales to new OEM customers.
Net sales of Concord Americas for Fiscal 2001, including FOB Hong Kong net sales
to customers in the Americas were approximately $56,840,000, an increase of
approximately $27,892,000, or 96.4% as compared to Fiscal 2000. The increase was
primarily due to the success of certain programs with new and existing
customers, increased penetration with existing customers and the positive sell
through of certain new products.
Net sales of Concord Europe for Fiscal 2001, including FOB Hong Kong net sales
to customers in Europe, were approximately $26,315,000, an increase of
approximately $1,029,000, or 4.1% as compared to Fiscal 2000. This increase
resulted primarily from the successful implementation of new programs with both
existing and new customers.
-22-
Gross Profit
Gross profit for Fiscal 2001 was approximately $27,463,000, a decrease of
approximately $14,108,000, or 33.9% as compared to Fiscal 2000. Gross profit, as
a percentage of net sales, decreased to 15.3% for Fiscal 2001 as compared to
24.8% for Fiscal 2000. The decrease in gross profit as a percentage of net sales
in Fiscal 2001 compared to Fiscal 2000 was attributable to (i) competitive price
pressures and unfavorable absorption of manufacturing overhead and labor
utilization, (ii) nonrecurring charges of approximately $4,714,000 recorded in
the fourth quarter of Fiscal 2001 related to inventory provisions and
approximately $500,000 recorded in the fourth quarter of Fiscal 2001 related to
the Restructuring Initiative, (iii) higher product development costs and (iv)
revenues from the sale of digital products. Of the $4,714,000 inventory
provision, approximately $2,714,000 related to certain specific product
inventory that was intended for a former OEM customer and approximately
$2,000,000 resulted from inventory being written down to lower of cost or market
value. Product development costs and percentages of net sales for Fiscal 2001
and Fiscal 2000 were approximately $6,413,000 (3.6%) and $4,921,000 (2.9%),
respectively.
Operating Expenses
Operating expenses, consisting of selling, general and administrative,
terminated acquisition costs and interest expenses, increased by approximately
$19,450,000, or 76.0%, to $45,056,000 for Fiscal 2001 from approximately
$25,606,000 for Fiscal 2000. Also, for Fiscal 2001, operating expenses included
approximately $800,000 incurred in connection with a proposed acquisition that
was not consummated. Operating expenses, as a percentage of net sales, increased
to 25.0% for Fiscal 2001 from 15.3% for Fiscal 2000.
Selling expenses increased by approximately $2,444,000, or 42.8%, to
approximately $8,149,000 for Fiscal 2001 from approximately $5,705,000 for
Fiscal 2000. The increase was primarily due to higher freight and certain
variable selling expenses, resulting from an increase in net sales, as well as
higher salaries. Selling expenses as a percentage of net sales, increased to
4.5% for Fiscal 2001 from 3.4% for Fiscal 2000.
General and administrative expenses increased by approximately $16,682,000, or
100.3%, to approximately $33,315,000 for Fiscal 2001 from approximately
$16,633,000 for Fiscal 2000. General and administrative expenses as a percentage
of net sales, increased to 18.5% for Fiscal 2001 from 9.9% for Fiscal 2000.
Interest expense decreased by approximately $476,000, or 14.6%, to approximately
$2,793,000 for Fiscal 2001 from approximately $3,269,000 for Fiscal 2000. The
lower interest expense in Fiscal 2001 was attributable to a reduction in
short-term borrowings and the repayment of certain capital leases.
-23-
Other (Income), Net
Other (income), net was approximately $4,892,000 and $882,000 for Fiscal 2001
and Fiscal 2000, respectively. Other (income), net primarily includes investment
income, foreign exchange gains and losses, directors' fees, and certain public
relations costs. The increase in Fiscal 2001 was primarily attributable to
higher investment income resulting from the invested proceeds from our public
equity offering consummated in the Fall of 2000.
Income Taxes
As of July 1, 2000, after assessing the realizability of the domestic net
deferred tax asset, we reversed the existing valuation allowance for the
domestic net deferred tax asset. Accordingly, the valuation allowance was
reversed in full and approximately $4,518,000 was recognized as a deferred tax
asset at July 1, 2000 and a corresponding deferred tax benefit was also
recognized. We recognized a net tax benefit of $2,751,000 for Fiscal 2000, of
which approximately $1,100,000 related to current tax expense for foreign
operations.
Net (Loss) Income
As a result of the matters described above, we reported a net loss of
approximately $11,770,000, or $0.45 per share, for Fiscal 2001 as compared to
net income of approximately $19,599,000, or $0.81 per diluted share, for Fiscal
2000, which included the net deferred tax benefit of approximately $2,751,000,
or $0.11 per diluted share, related to the tax benefit.
Foreign Currency Transactions
We operate on a worldwide basis and our results may be adversely or positively
affected by fluctuations of various foreign currencies against the U.S. Dollar,
specifically, the Canadian Dollar, the European Euro, British Pound Sterling,
PRC Renminbi, Hong Kong Dollar and the Japanese Yen. Our foreign subsidiaries
purchase their inventories in U.S. Dollars and the majority of their sales are
in U.S. Dollars. Accordingly, the U.S. Dollar is the functional currency.
Certain net sales to our customers and purchases of certain components and
services are transacted in local currency including Japanese Yen, thereby
creating an exposure to fluctuations in foreign currency exchange rates. The
translation from the applicable currencies to U.S. Dollars is performed for
balance sheet accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using a weighted average
exchange rate during the period. Gains or losses resulting from foreign currency
transactions and remeasurement are included in "Other (income), net" in the
accompanying consolidated statements of operations.
-24-
LIQUIDITY AND CAPITAL RESOURCES
On January 22, 2002, the Securities and Exchange Commission issued an
interpretive release on disclosures related to liquidity and capital resources.
This release requires us to disclose factors that are likely to affect our
liquidity trends. We are not aware of factors that are reasonably likely to
adversely affect liquidity trends, other than those factors summarized under the
caption "Risk Factors" in this report. We do not have, nor do we engage in,
transactions with any special purpose entities. We are not engaged in hedging
activities and had no forward exchange contracts outstanding at June 29, 2002.
In the ordinary course of business, we enter into operating lease commitments,
purchase commitments and other contractual obligations. These transactions are
recognized in the our financial statements in accordance with generally accepted
accounting principles in the United States, and are more fully discussed below.
We believe that our cash and cash equivalents, short-term investments,
anticipated cash flow from operations, and amounts available under our credit
facilities provide sufficient liquidity and capital resources for our
anticipated short-term working capital and capital expenditure requirements as
well as our anticipated long-term working capital and capital expenditure
requirements for the foreseeable future.
Working Capital - At June 29, 2002, we had working capital of approximately
$128,383,000 compared to approximately $131,003,000 at June 30, 2001. Total cash
and cash equivalents and short-term investment amounts included in working
capital at June 29, 2002 and June 30, 2001 were approximately $103,868,000 and
$107,344,000, respectively. In August 2002, we repurchased our $15,000,000
Senior Notes at slightly below par, without penalty, and retired all of our
outstanding long-term debt. This transaction reduced our cash and cash
equivalents, working capital, and long-term debt amounts as well as our future
cash interest costs.
Cash Provided by Operations - Cash used in operations in Fiscal 2002 was
approximately $1,134,000, which compared favorably to cash used in operations of
approximately $3,441,000 for Fiscal 2001 and unfavorably to cash provided by
operations of approximately $9,661,000 for Fiscal 2000. The changes in cash
provided by operating activities for the respective Fiscal Years were primarily
attributable to changes in accounts receivable, inventories and accounts
payable.
Cash Used in Investing Activities - Capital expenditures for Fiscal 2002, Fiscal
2001 and Fiscal 2000 were approximately $2,141,000, $7,488,000, and $7,792,000,
respectively, and related primarily to expenditures on plant and equipment
purchased for our manufacturing facility in the PRC. The decrease in Fiscal 2002
was primarily the result of significantly lower expenditures on plant and
equipment purchases for our manufacturing facility in the PRC due to the decline
in sales. We anticipate capital expenditures will increase substantially over
those in Fiscal 2002 due to increased investments in plant and equipment at our
manufacturing facility in the PRC in anticipation for increased revenue,
primarily from OEM sales. For Fiscal 2002, the increase in cash from investing
activities related to the maturity of certain short-term investments made in
Fiscal 2001.
-25-
Cash Used in Financing Activities - Cash used in financing activities in Fiscal
2002 was approximately $202,000. This resulted from repayments of capital lease
obligations partially offset by proceeds received from the exercise of stock
options. Cash provided by financing activities in Fiscal 2001 was approximately
$93,883,000, which was primarily attributable to our public equity offering
(described more fully below) in the Fall of 2000. This compared to Cash used in
financing activities in Fiscal 2000 of approximately $8,185,000. In Fiscal 2000,
we refinanced certain short-term debt borrowed under our Hong Kong Financing and
United Kingdom Credit Facilities (each facility is described more fully below)
and paid off certain other high interest cost obligations including certain
leases.
Operating Leases- We entered into operating leases in the ordinary course of
business (e.g., warehouse facilities, office space and equipment) where the
economic profile was favorable. The effects of outstanding leases are not
material to us in terms of either annual cash flow or total future minimum
payments. See Note 15, Commitments and Contingencies, to the consolidated
financial statements.
Purchase Commitments - As part of the ordinary course of our business, we enter
into and have purchase commitments for materials, supplies, services, and
property, plant and equipment. In the aggregate, such commitments are not at
prices in excess of current market and typically do not exceed one year.
Related Party Transactions- We entered into related party transactions as
discussed in Note 17, Related Party Transactions, to the consolidated financial
statements. These transactions do not materially affect our results of
operations, cash flows or financial condition.
Other Contractual Obligations - We do not have any material financial guarantees
or other contractual commitments that are reasonably likely to adversely affect
liquidity. See Hong Kong Financing Facilities for information about our
financial guarantees.
Hong Kong Financing Facilities - Concord HK has various financing and revolving
credit facilities in place providing an aggregate of approximately $23,500,000
in borrowing capacity. Certain of the revolving credit facilities are
denominated in Hong Kong dollars. Since 1983 the Hong Kong dollar has been
pegged to the United States dollar. The revolving credit facilities are
comprised of 1) an approximately $11,000,000 Import Facility, 2) an
approximately $2,600,000 Packing Credit and Export Facility, 3) an approximately
$1,900,000 Foreign Exchange Facility and 4) an $8,000,000 Accounts Receivable
Financing Facility (collectively the "Hong Kong Financing Facilities"). The
$8,000,000 Accounts Receivable Financing Facility is secured by certain accounts
receivable of Concord HK and guaranteed by us. We also guarantee the remaining
amount of approximately $15,500,000 under the Hong Kong Financing Facilities.
Availability under the Accounts Receivable Financing Facility is subject to
advance formulas based on Eligible Accounts Receivable and all the credit
facilities are subject to certain financial ratios and covenants. The revolving
credit facilities bear interest at variable rates. At June 29, 2002, there were
no amounts outstanding under the Hong Kong Financing Facilities.
-26-
United Kingdom Credit Facility - In November 1999, our United Kingdom subsidiary
obtained a United Kingdom credit facility (the "UK Facility") that is secured by
substantially all of our United Kingdom subsidiary's assets. The UK Facility
bears interest at 1.5% above the UK prime lending rate and was principally
utilized for working capital needs and allows borrowings of up to approximately
$1,100,000. At June 29, 2002, there were no amounts outstanding under the UK
Facility.
United States Credit Facility - In June 2000, one of the Company's subsidiaries
entered into a credit facility (the "US Facility") with a lender to provide up
to $5,000,000 of unsecured working capital. The US Facility bore interest at
1.75% above the London Interbank Offer Rate and expired in June 2002. No amounts
were outstanding under the US Facility at June 29, 2002.
Exchange Offer - On August 28, 2001, we launched an offer to exchange
outstanding stock options that had an exercise price of more than $7.00 per
share for new options to purchase 75% of the shares subject to the outstanding
options at an exercise price of $5.97 per share (the closing price of the Common
Stock reported on the Nasdaq National Market on the date the Board of Directors
approved the exchange offer.) The exchange offer expired on October 16, 2001.
Options to purchase 1,375,876 shares of Common Stock were tendered in the
exchange offer and accepted by us and cancelled and new options to purchase
1,031,908 shares of Common Stock were issued in exchange for the cancelled
options. As a result of the exchange offer, we are now required to apply
variable accounting to these stock option grants until the options are
exercised, cancelled or expire. For Fiscal 2002, we did not record any variable
stock-based compensation expense in the consolidated statement of operations
because our closing Common Stock price on June 29, 2002 was below the exercise
price of $5.97. Because the determination of variable accounting expense
associated with the repriced stock options is dependent, in part, on our closing
stock price at the end of each prospective reporting period, it is not possible
to determine its future impact, either favorable or unfavorable, on our
financial statements.
Common Stock Buy-Back Programs - In Fiscal 2000, we purchased 190,888 shares of
our Common Stock on the open market for approximately $759,000 as part of a
Board of Directors approved Common Stock buy-back program. In February 2001, we
adopted an additional share repurchase program pursuant to which the Board of
Directors allocated up to $10,000,000 for the repurchase of shares of our Common
Stock. We have not repurchased any shares pending completion of a review of our
other capital investment opportunities but continue to believe that our Common
Stock is significantly undervalued at current prices.
Public Equity Offering - On September 26, 2000, pursuant to an underwritten
public offering, we sold 3,900,000 shares of our Common Stock at $23.00 per
share. On October 2, 2000, pursuant to an over-allotment option granted to the
underwriters, we sold an additional 585,000 shares of our Common Stock at a
price of $23.00 per share. We received net proceeds of approximately $96,881,000
from the offering, after deducting offering costs and underwriting fees of
approximately $6,274,000 from the gross proceeds of $103,155,000. The use of the
offering proceeds was intended for the repayment of outstanding indebtedness
including capital leases, for capital expenditures and for general corporate and
strategic purposes, including working capital and investments in new
technologies, product lines and complementary businesses.
-27-
Stock Split - On April 14, 2000, we effected a two-for-one stock split of our
Common Stock through a stock dividend to shareholders of record on March 27,
2000. Accordingly, share and per-share data for all periods presented in this
report have been restated to reflect the stock split.
Senior Notes - On July 30, 1998, we consummated a private placement of
$15,000,000 of unsecured senior notes that bore interest at 11%. In August 2002,
we repurchased all of these senior notes at slightly below par.
License Agreement - On August 26, 2002, our Company announced it entered into
two trademark licensing agreements, with the entity that purchased the assets of
Polaroid in an asset purchase transaction approved by the U.S. Bankruptcy Court
supervising the Polaroid reorganization. The two license agreements provide the
Company with the exclusive, worldwide use of the Polaroid brand trademark in
connection with the manufacture, distribution, promotion and sale of single-use
cameras and traditional film based cameras, including zoom cameras, and certain
related accessories. The licenses do not include instant or digital cameras.
Each license includes an initial term of three and a half years and may be
renewed, at our option, for an additional three-year period. Each license
agreement includes provisions for the payment of $3,000,000 of minimum
royalties, which will be fully credited against percentage royalties. In August
2002, we paid a total of $4,000,000, which represented $2,000,000 for each
license agreement, as partial payment of the minimum royalties.
Growth Opportunities - We are evaluating various growth opportunities that could
require significant funding commitments. We have from time to time held, and
will continue to hold, discussions and negotiations with (i) companies that
represent potential acquisition or investment opportunities, (ii) potential
strategic and financial investors who have expressed an interest in making an
investment in or acquiring us, (iii) potential joint venture partners looking
toward formation of strategic alliances that would broaden our product base or
enable us to enter new lines of business and (iv) potential new and existing OEM
customers where the design, development and production of new products,
including certain new technologies, would enable us to expand our existing
business, and enter new markets including new ventures focusing on wireless
connectivity and other new communication technologies. We recently engaged an
investment bank to help us attempt to identify suitable acquisition targets.
However, there can be no assurance that any definitive agreement will be reached
regarding any of the foregoing, nor does management believe that such agreements
are necessary for the successful implementation of our strategic plans.
-28-
RISK FACTORS
You should carefully consider the following risks regarding our Company. These
and other risks could materially and adversely affect our business, operating
results or financial condition. You should also refer to the other information
contained or incorporated by reference in this report.
Most of our operations are subject to control by the People's Republic of China
(PRC) and several of its local governmental agencies.
The continuing viability of our PRC agreements is crucial to our business
operations in the PRC. We manufacture a majority of the components used in our
cameras and assemble all of our manufactured finished products in the PRC. Our
agreements with various PRC government or quasi-government agencies currently
provide us with approximately 4,000 workers. We are responsible for their wages,
food and housing and must comply with a variety of local labor and employee
benefit laws covering these workers. While we believe we are in substantial
compliance with applicable laws as currently enforced, these laws are subject to
modification and interpretation by the applicable governmental authorities. We
cannot predict the impact of any future modifications to or strict enforcement
of the existing laws. In addition, the termination or material modification of
any of our agreements with the PRC government and quasi-government agencies
could have a material adverse impact on our revenues and earnings.
Political and economic uncertainties in the PRC could affect our business.
Our business could be adversely affected by the imposition in the PRC of
austerity measures intended to reduce inflation, which could result in the
inadequate development or maintenance of infrastructure, the unavailability of
adequate power and water supplies, transportation, raw material and parts, or a
deterioration of the general political, economic or social environment in the
PRC.
Relocation time and expenses could result in substantial losses.
If we determine it is necessary to relocate our manufacturing facilities from
the PRC, due to confiscation, expropriation, nationalization, embargoes, or
other governmental restrictions, we would incur substantial operating and
capital losses including losses resulting from business interruption and delays
in production. In addition, as a result of a relocation of our manufacturing
equipment and other assets, we would likely incur relatively higher
manufacturing costs, which could reduce sales and decrease the current margin on
the products we previously manufactured in the PRC. Relocation of our
manufacturing operations would also result in disruption in the delivery of our
products, which could, in turn, reduce demand for our products in the future.
There is also a risk of business interruption as a result of political events,
the costs of which may exceed our insurance coverage.
The PRC has experienced political disruptions in the past. We maintain political
risk insurance up to $15 million on equipment and business interruption
insurance up to $15 million, but it is possible that political events may cause
an interruption of our manufacturing operations, the cost of which might exceed
our insurance coverage.
-29-
We are dependent on certain large customers.
In Fiscal 2002, we had two customers (Walgreens and Wal-Mart) each of whose
purchases represented in excess of 10% of our total net sales and whose
purchases in the aggregate represented over 38% of our total net sales.
The loss of any of our large customers could have a material adverse impact on
our revenues and profits.
We are exposed to credit risk associated with sales to our customers.
In Fiscal 2002, two of our customers, Polaroid and Kmart, filed for protection
from their creditors under Chapter 11 of the U.S. Bankruptcy Code. As a result,
during Fiscal 2002 we recognized provisions related to Polaroid accounts
receivable and inventory and Kmart accounts receivable. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" above.
Polaroid's purchases represented approximately 3.6% and Kmart's purchases
represented less than 1%, respectively, of our total Fiscal 2002 net sales.
The reversal of the International Trade Commission ban on importation of
re-loaded single use cameras could adversely affect our business.
In June 1999, the International Trade Commission ("ITC") banned the unlicensed
importation into the United States of new and reloaded single use cameras due to
the infringement of such imports on existing patents held by Fuji. The Court of
Appeals for the Federal Circuit (the "Federal Circuit") recently upheld the ban
on new single use cameras and reversed the ITC's ban on reloaded single use
cameras which were originally sold in the United States by Fuji or its licensees
and reloaded in a prescribed manner. The Federal Circuit's decision opens the
United States market to competition from non-Fuji licensees for single use
cameras originally sold in the United States by Fuji or its licensees and
reloaded (either in the United States or abroad) in the prescribed manner. The
Federal Circuit's decision could have a material adverse impact on our revenues
and earnings.
-30-
We are dependent on a small group of key personnel.
Our business is managed by a small number of key management and operating
personnel. In particular, we rely on the continued services of Ira B. Lampert,
our Chairman, Chief Executive Officer and President. The loss of this or any
other key employee could have a material adverse impact on our business. We
believe our future success will depend in large part on our continued ability to
attract highly skilled and qualified personnel. Competition for such personnel
is intense. We may not be able to hire the necessary personnel to implement our
business strategy, or we may need to pay higher compensation for employees than
currently budgeted. Our inability to attract and retain such personnel could
limit our growth and affect our profits.
Our digital camera products involve a more complex development process, which we
may not be able to successfully integrate into our operations.
Digital cameras involve a more complex development process and component
procurement process than our traditional and single use cameras. Manufacturing
delays, including component procurement delays or shortages and the timely
introduction and delivery of new components, which may be outside our control,
could adversely impact our business, results of operations and financial
condition.
Digital camera products are subject to rapid technological changes, price
erosion and obsolescence.
Digital camera products are subject to rapid technological changes, price
erosion and obsolescence to a greater extent than traditional camera products.
Because of rapid technological changes, some of our digital camera products
became obsolete and, consequently, we recorded significant inventory provisions
related to digital inventory during Fiscal 2002. To be successful in the
development, manufacture and sale of digital camera products, we have to react
quickly to technological advances and manage our inventory effectively to
accommodate price competition and the short life span of such products.
To achieve our operating and financial objectives, we must manage our
anticipated growth effectively.
We anticipate that our business will grow. Our future success depends in large
part on our ability to manage our anticipated growth. To manage this growth, we
will need to hire additional experienced, skilled personnel and to train, manage
and retain key employees. These activities may strain our management resources.
If we were unable to manage growth effectively, our profits would be adversely
affected.
-31-
The camera and photographic products industry is highly competitive.
As a manufacturer and distributor of low cost, popularly priced image capture
products, we encounter substantial competition from a number of firms, many of
which have longer operating histories, more established markets, more extensive
facilities and, in some cases, greater resources.
We are exposed to risks associated with intellectual property used in image
capture devices.
Image capture devices use technology which may be protected by unknown United
States or foreign patents. The right to use such intellectual property is
subject to the availability of suitable license conditions from the patent
holders which could have a material adverse effect on our business and financial
condition. A claim of infringement by such a patent holder could be
time-consuming and costly to defend. A lawsuit alleging patent infringement was
filed by the Massachusetts Institute of Technology and Electronics for Imaging,
Inc. in April 2002 against 214 defendants, including the Company. See "Legal
Proceedings" above.
We face certain foreign currency risks as a result of conducting a substantial
portion of our business activities in Hong Kong.
Since 1983 the Hong Kong Dollar has been pegged to the United States Dollar, but
the exchange rate of the Hong Kong Dollar may fluctuate in the future. Although
our OEM and major retail business is conducted in U.S. Dollars, certain of our
obligations under agreements in the PRC and with our Hong Kong suppliers are
paid in Hong Kong Dollars. We are also exposed to currency risks in Japan and
other countries where we purchase materials for our products or sell those
products. We generally do not engage in currency hedging activities.
We also face political risks as a result of conducting administrative, sales,
engineering and design activities in Hong Kong and the PRC.
In July 1997, the exercise of sovereignty over Hong Kong was transferred from
the United Kingdom to the PRC and Hong Kong became a Special Administrative
Region of the PRC. We cannot predict how the PRC will interpret and implement
the basic law that provides, in part, for the capitalist system and way of life
to remain unchanged for 50 years. We also cannot predict the effect of any such
action on our business activities in Hong Kong or our operations or financial
condition in general. Any significant changes affecting our operations or
financial condition in the PRC or Hong Kong could have a material adverse effect
on our business and financial condition.
The importation of products into the United States and other countries in which
our products are sold is subject to various other risks.
The United States, the PRC, Hong Kong, the European Union or other countries may
impose trade restrictions that could adversely affect our operations. In
addition, the United States is currently monitoring various PRC practices,
including trade, investment and government procurement, as well as the PRC's
compliance with various multilateral and bilateral agreements. We cannot predict
whether the United States will take future trade actions against the PRC that
may result in increased tariffs against PRC products, including products
imported by us.
-32-
The market price of our Common Stock may fluctuate.
The stock markets, and in particular the Nasdaq National Market, have
experienced extreme price and volume fluctuations that have affected the market
prices of equity securities of many companies and that often have been unrelated
or disproportionate to the operating performance of such companies. These broad
market factors may adversely affect the market price of our Common Stock. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
that company. Such a lawsuit was recently instituted against us and could result
in substantial costs and a diversion of management's attention and resources,
which could harm our business. See "Legal Proceedings."
We may not be able to identify and integrate future acquisitions.
We intend to pursue strategic acquisitions that we consider reasonable in light
of the revenues and profits we believe we will be able to generate from these
acquisitions. The cost of acquisitions within the industry has generally
increased over time. Additionally, we compete for acquisitions with certain
other industry competitors, some of which have greater financial and other
resources than we do. Increased demand for acquisitions may result in fewer
acquisition opportunities for us as well as higher acquisition prices. Although
we believe opportunities may exist for us to grow through acquisitions, we may
not be able to identify and consummate acquisitions on acceptable terms. If we
do acquire other companies, we may not be able to profitably manage and
successfully integrate them with our operations and sales and marketing efforts
without substantial costs or delays. Acquisitions involve a number of potential
risks, including the potential loss of customers, increased leverage and debt
service requirements, combining disparate company cultures and facilities and
operating in geographically diverse markets. One or more of our future
acquisitions may have a material adverse effect on our financial condition and
results of operations.
We are unable to predict the effect of terrorist acts on commerce.
Terrorist attacks in New York and Washington, D.C. in September of 2001 have
disrupted commerce throughout the United States and other parts of the world.
The continued threat of terrorism within the United States and abroad and the
potential for military action and heightened security measures in response to
such threat may cause significant disruption to commerce throughout the world.
To the extent that such disruptions result in delays or cancellations of
customer orders, a general decrease in consumer spending, or our inability to
effectively market and sell our products, our business and results of operations
could be materially and adversely affected. We are unable to predict whether the
threat of terrorism or the responses thereto will result in any long-term
commercial disruptions or if such activities or responses will have a long-term
material adverse effect on our business, results of operations or financial
condition.
-33-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a result of our global operating and financial activities, we are exposed to
changes in interest rates and foreign currency exchange rates that may adversely
affect our results of operations and financial position. In seeking to minimize
the risks and/or costs associated with such activities, we manage exposures to
changes in interest rates and foreign currency exchange rates through our
regular operating and financing activities.
At June 29, 2002, our exposure to changes in interest rates was minimal, since
our long-term debt of $15,000,000 had a fixed interest rate. In August 2002, we
retired all of our long-term debt. We had no short-term borrowings outstanding
as of June 29, 2002 but we do borrow from time to time under our credit
facilities. These borrowings are of a short-term nature typically subject to
variable interest rates based on a prime rate or LIBOR plus or minus a margin.
Since we have no debt outstanding, we do not deem interest rate risk to be
significant or material to our financial position or results of operations. We
do not presently use derivative instruments to adjust our interest rate risk
profile. We do not utilize financial instruments for trading or speculative
purposes, nor do we utilize leveraged financial instruments.
Each of the our foreign subsidiaries purchases their inventories in U.S. Dollars
and certain of their sales are in foreign currency, thereby creating an exposure
to fluctuations in foreign currency exchange rates. We purchase certain
components, raw materials and services needed to manufacture our products in
foreign currencies including Japanese Yen. The impact of foreign exchange
transactions is reflected in our statements of operations. As of June 29, 2002,
we were not engaged in any hedging activities and we had no forward exchange
contracts outstanding. We continue to analyze the benefits and costs associated
with hedging against foreign currency fluctuations.
Item 8. Financial Statements and Supplementary Data.
The financial statements listed in Item 15(a) (1) and (2) are included in this
report beginning on page F-2.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
-34-
PART III
Item 10. Directors and Executive Officers of the Company.
Executive Officers and Directors
Our executive officers and directors, and their respective ages as of August 15,
2002, are as follows:
Name Age Position
Ira B. Lampert(3)(4) 57 Chairman, Chief Executive Officer and President
Brian F. King 49 Senior Executive Vice President, Chief Operating
Officer and Secretary
Richard M. Finkbeiner 55 Senior Vice President and Chief Financial Officer
Keith L. Lampert 32 Executive Vice President and Director of Worldwide
Operations of the Company;
Managing Director of Concord HK
Gerald J. Angeli 49 Vice President of Worldwide Engineering and Technology
Harlan I. Press 38 Vice President, Treasurer and Assistant Secretary
Urs W. Stampfli 51 Senior Vice President and Director of Global Sales and
Marketing
Ronald S. Cooper(1)(2) 64 Director
Morris H. Gindi(1)(5) 57 Director
J. David Hakman(3)(4) 60 Director
William J. Lloyd(5) 63 Director
William J. O'Neill, Jr.(1)(2) 60 Director
-----------------
(1) Member of Audit Committee.
(2) Member of Compensation and Stock Option Committee.
(3) Member of Executive Committee.
(4) Member of Director Affairs Committee.
(5) Member of Marketing and Product Development Committee.
Ira B. Lampert has been the Chairman and Chief Executive Officer of the Company
since July 13, 1994. For the calendar year 1995 and again from July 31, 1998
through the present, Mr. Lampert also served as President of the Company. Mr.
Lampert is a member of the Board of the Queens College Foundation of the City
University of New York and is the Treasurer of the Boys & Girls Republic, a
nonprofit organization for underprivileged children.
Brian F. King has been Senior Executive Vice President and Chief Operating
Officer of the Company since February 2002, having served as Senior Vice
President of the Company from August 1998 to February 2002. In addition, Mr.
King has served as Secretary of the Company since August 1996 and served as
Managing Director of Concord HK from August 1996 through April 2000. Mr. King
served as the Company's Vice President of Corporate and Strategic Development
from June 1996 to August 1998.
-35-
Richard M. Finkbeiner joined the Company in July 2002 as Senior Vice President
and Chief Financial Officer. Prior to joining the Company, Mr. Finkbeiner was
Corporate Vice President and Chief Financial Officer of Menasha Corporation, a
$1 billion privately owned manufacturing and services company. He was Executive
Vice President and Chief Financial Officer of Creative Computers, Inc., a
publicly-traded reseller of computer equipment, from 1996 until he joined
Menasha in 1998. Mr. Finkbeiner has been Chief Financial Officer for several
other companies and spent 12 years with Hallmark Cards. He has an M.S. degree in
Applied Math, an M.B.A., and a C.P.A. certificate.
Keith L. Lampert, who is a son of Ira B. Lampert, has been Executive Vice
President and Director of Worldwide Operations of the Company since February
2002 and Managing Director of Concord HK since April 2000. From March 2001 to
February 2002, Mr. Lampert also served as the Company's Vice President of
Worldwide Operations. He became a Vice President of the Company in August 1998,
having joined the Company in 1993. Among other things, Mr. Lampert is
responsible for the Company's operations in Hong Kong and the People's Republic
of China.
Gerald J. Angeli joined the Company in April 2000 as Vice President, OEM Product
Supply. Since March 2001, he has served as the Company's Vice President of
Worldwide Engineering and Technology. From July 1997 to April 2000, Mr. Angeli
was Vice President, Global Manufacturing and Products Supply for NCR
Corporation's Systemedia Group, where he was responsible for manufacturing,
customer service, distribution and logistics. Before that, Mr. Angeli was
employed by Kodak for 20 years in various capacities, most recently as Manager
of Worldwide Manufacturing and Supply Chain and Vice President, Consumer
Imaging.
Harlan I. Press has been Vice President and Treasurer since April 2000, Chief
Accounting Officer since November 1994, and Assistant Secretary of the Company
since October 1996. Mr. Press served as the Corporate Controller of the Company
from October 1996 through April 2000. Mr. Press is a member of the American
Institute of Certified Public Accountants, the New York State Society of
Certified Public Accountants and the Financial Executives Institute.
Urs W. Stampfli has been Senior Vice President since February 2002 and Director
of Global Sales and Marketing for the Company since April 2000. Mr. Stampfli
joined the Company in May 1998, as Director of Global Sales and Marketing, and
became a Vice President of the Company in April 2000. From 1990 to April 1998,
Mr. Stampfli was Vice President, Marketing, Photo Imaging Systems of Agfa
Division, Bayer Corporation.
Ronald S. Cooper has been a director of the Company since January 2000. Mr.
Cooper is a co-founder and principal of LARC Strategic Concepts, LLC, a
consulting firm focusing on emerging growth companies. Mr. Cooper retired from
Ernst & Young LLP in September 1998, having joined the firm in 1962. He became a
partner in 1973 and was Managing Partner of the firm's Long Island office from
1985 until he retired. He is also a director of Frontline Capital Group, a
publicly traded e-commerce company.
-36-
Morris H. Gindi has been a director of the Company since 1988. Mr. Gindi has
served as the Chief Executive Officer of Notra Trading Inc., an import agent in
the home textiles industry, since 1983 and as Chief Executive Officer of Morgan
Home Fashions, a manufacturer and distributor of home textiles, since 1995.
J. David Hakman has been a director of the Company since 1993. Mr. Hakman owns
Hakman Capital Corporation, an investment and merchant banking concern, a
subsidiary of which is a member of the National Association of Securities
Dealers, Inc. In addition, Mr. Hakman is a director of Hanover Direct, Inc., a
direct marketing business.
William J. Lloyd has been a director of the Company since May 2000. Mr. Lloyd is
founder and President of Inwit, Inc., a technology consulting firm. He has been
working with a law firm and other clients in the San Diego, California area,
primarily with respect to patents and other technical matters, since March 2002.
From November 2000 to February 2002, he was Executive Vice President and Chief
Technology Officer of Gemplus International, a leading smart card solutions
provider for telecommunications, financial services and e-business security.
Prior to joining Gemplus, Mr. Lloyd was Co-Chief Executive Officer of Phogenix
Imaging, LLC, a Hewlett-Packard/Kodak joint venture. From 1969 to 2000, Mr.
Lloyd held various management positions at Hewlett-Packard, most recently as
Vice President, Chief Technology Officer for its Digital Media Solutions and
Personal Appliances and Services.
William J. O'Neill, Jr. has been a director of the Company since August 2001.
Mr. O'Neill is a founder and principal of O'Neill Group, Inc., a consulting firm
focused on developing business strategies, operational execution, financial
evaluations and fundraising activities. From 1969 to 1999, Mr. O'Neill held
various management positions at Polaroid, most recently as Executive Vice
President and President, Corporate Business Development. In July 2001, he was
appointed as Dean of the Frank Sawyer School of Management at Suffolk University
in Boston, Massachusetts.
Audit Committee Financial Expertise
Two members of the Audit Committee of our Board of Directors, namely Ronald S.
Cooper and William J. O'Neill, Jr., have significant financial expertise. Ronald
S. Cooper has over 35 years of experience in the field of public accounting,
retiring in 1998 from Ernst & Young LLP. During that time, Mr. Cooper was
involved in the audits of numerous public companies and gained broad experience
with SEC filings. William J. O'Neill, Jr. was Chief Financial Officer (and
Executive Vice President) of Polaroid from 1990 to 1998, having held various
other positions with Polaroid including that of Corporate Controller for four
years. As a result of the foregoing, both of these members of the Audit
Committee have: (i) an understanding of generally accepted accounting principles
and financial statements; (ii) experience in the preparation or auditing of
financial statements of generally comparable issuers and the application of such
principles in connection with the accounting for estimates, accruals and
reserves; (iii) experience with internal accounting controls; and (iv) an
understanding of audit committee functions.
-37-
Section 16 Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires our directors, executive officers and ten percent (10%)
shareholders ("Reporting Persons") to file initial reports of ownership and
reports of changes in ownership of the Common Stock and any other equity
securities with the SEC. Reporting Persons are required to furnish us with
copies of all Section 16(a) reports they file. Based on a review of the copies
of the reports furnished to us and written representations from our directors
and executive officers that no other reports were required, we believe that the
Reporting Persons complied with all Section 16(a) filing requirements applicable
to them with respect to Fiscal 2002.
-38-
Item 11. Executive Compensation.
SUMMARY COMPENSATION TABLE
The following table contains certain information regarding aggregate
compensation paid or accrued by the Company during Fiscal 2002 to the Chief
Executive Officer and to each of the other four highest paid executive officers.
Long-Term
Annual Compensation
Compensation Awards
------------------------------------------- ------------
Shares
Other Annual Underlying All Other
Name and Fiscal Salary Bonus** Compensation Options Compensation
Principal Position Year ($) ($) ($) (#) ($)
------------------ ------------ ----------------------------------------------------------------------------
Ira B. Lampert 2002 $920,833* -- $681,110(1) 263,004(6) $960,447(8)
Chairman, Chief 2001 969,444 860,686 686,555(1) -- 961,524(8)
Executive Officer 2000 704,167 400,000 596,586(1) 350,672(7) 487,267(9)
and President
Brian F. King 2002 400,000* -- 7,177(2) 127,260(6) 375,372(10)
Senior Executive Vice 2001 425,000 444,809 132,970(2) -- 385,807(10)
President and Chief 2000 327,147 175,000 95,249(2) 169,680(7) 123,148(11)
Operating Officer
Keith L. Lampert 2002 225,000* -- 228,968(3) 76,356(6) 170,973(12)
Executive Vice President 2001 240,000 281,639 214,908(3) -- 229,868(12)
and Director of Worldwide 2000 204,601 100,000 144,174(3) 101,808(7) 83,520(11)
Operations;
Managing Director
of Concord HK
Urs W. Stampfli 2002 210,500* -- 12,000(4) 18,665(6) 44,276(13)
Senior Vice President and 2001 223,650 155,282 12,000(4) -- 44,647(13)
Director of Global 2000 192,500 45,000 12,000(4) 24,886(7) 7,245(14)
Sales and Marketing
Gerald J. Angeli 2002 190,000 -- 37,000(5) 67,500(6) 22,051(15)
Vice President of 2001 190,000 20,000 12,000(4) -- 10,000(16)
Worldwide Engineering and 2000 47,500 -- 3,000(4) 90,000(7) --
Technology
-----------------
(*) In light of the cost-cutting measures recently undertaken by the
Company, these executive officers all voluntarily agreed, on a verbal
basis, to a decrease in their base salaries of approximately 11%
effective as of July 1, 2001 (the beginning of Fiscal 2002). Keith
Lampert and Urs Stampfli subsequently received salary increases
effective as of their promotions on February 25, 2002. See "Executive
Employment Contracts, Termination of Employment and Change in Control
Arrangements" below.
-39-
(**) Represents bonuses determined and paid by the Company in the fiscal
year, based on the Company's and the executive's performance in the
previous fiscal year. No bonuses were awarded with respect to Fiscal
2002 or Fiscal 2001.
(1) Includes: (a) auto allowances and costs, partial housing costs and
reimbursement of taxes, respectively, of $30,714, $48,000 and $93,789
in Fiscal 2002, $30,808, $47,797 and $99,325 in Fiscal 2001, and
$35,911, $48,000 and $99,430 for Fiscal 2000; and (b) the yearly credit
under the Lampert SERP (described below under "Executive Employment
Contracts, Termination of Employment and Change in Control
Arrangements") of $500,000 in Fiscal 2002 and 2001, and $400,000 in
Fiscal 2000.
(2) For Fiscal 2002, this represents $18,000 in auto allowance paid, less
Hong Kong tax reimbursements of $25,177 repaid by Mr. King to the
Company. For Fiscal 2001, this represents $108,142 paid by the Company
pursuant to the Company's Executive Management Tax Equalization Policy
for executives stationed overseas, $18,000 in auto allowance, and
$6,828 in overseas housing costs. For Fiscal 2000, this includes
$71,367 in overseas housing costs and $18,000 in auto allowance paid by
the Company.
(3) Includes: (a) amounts paid pursuant to the Company's Executive
Management Tax Equalization Policy of $89,519 in Fiscal 2002, $102,518
in Fiscal 2001, and $34,213 in Fiscal 2000; (b) an overseas allowance
of $25,000 per annum; and (c) overseas housing costs of $111,826 in
Fiscal 2002, $82,969 in Fiscal 2001 and $82,052 in Fiscal 2000.
(4) Represents auto allowances paid.
(5) Represents a $25,000 overseas allowance and $12,000 in auto allowance
paid.
(6) This stock option was granted on October 17, 2001 in connection with
the Company's exchange offer (described under "Executive Compensation -
Stock Options" below), in exchange for the stock option granted in
Fiscal 2000 which has been cancelled.
(7) As indicated in footnote 6, this stock option has been cancelled.
(8) Represents: (a) $516,666 of the April 19, 2000 grant of deferred
compensation that vested in each of these fiscal years, as described
under "Executive Employment Contracts, Termination of Employment and
Change in Control Arrangements" below; (b) payments by the Company for
insurance premiums of $27,838 in Fiscal 2002 and $39,975 in Fiscal
2001; (c) in Fiscal 2002, payments by the Company for companion travel;
and (d) $404,883 repaid to Ira B. Lampert in Fiscal 2002 and Fiscal
2001 as deferred compensation pursuant to the conditional release
program (described under "Certain Relationships and Related
Transactions" below) because he prepaid the total amount of the
indebtedness before it was scheduled to be forgiven by the Company.
(9) Includes: (a) $452,371 of indebtedness forgiven (including principal
and interest) by the Company as part of the conditional release program
described under "Certain Relationships and Related Transactions" below;
and (b) payments by the Company for insurance premiums.
(10) Represents: (a) 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; (b) payments by the Company for
insurance premiums; and (c) $122,714 and $133,419 repaid to Brian F.
King in Fiscal 2002 and Fiscal 2001, respectively, as deferred
compensation pursuant to the conditional release program (described
under "Certain Relationships and Related Transactions" below) because
he prepaid the total amount of the indebtedness before it was scheduled
to be forgiven by the Company.
(11) Represents: (a) indebtedness forgiven (including principal and
interest) by the Company in Fiscal 2000, in the amount of $120,632 for
Brian King and $82,935 for Keith L. Lampert, respectively, as part of
the conditional release program described under "Certain Relationships
and Related Transactions" below; and (b) payments by the Company for
insurance premiums.
-40-
(12) Represents: (a) 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; (b) payments by the Company for
insurance premiums; and (c) $83,321 and $78,858 repaid to Keith L. Lampert
in Fiscal 2002 and Fiscal 2001, respectively, as deferred compensation
pursuant to the conditional release program (described under "Certain
Relationships and Related Transactions" below) because he prepaid the
total amount of the indebtedness before it was scheduled to be forgiven
by the Company.
(13) Represents 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, and insurance premiums paid by the
Company.
(14) Represents insurance premiums paid by the Company.
(15) Represents: (a) the amount of deferred compensation that vested in
Fiscal 2002, as described under "Executive Employment Contracts,
Termination of Employment and Change in Control Arrangements" below;
(b) $10,000 in debt forgiven pursuant to Mr. Angeli's Terms of
Employment; and (c) payments by the Company for insurance premiums.
(16) Represents $10,000 in debt forgiven pursuant to Mr. Angeli's Terms
of Employment.
Stock Options
The following table sets forth information concerning stock option grants made
during Fiscal 2002 to the executive officers named in the "Summary Compensation
Table." All of these grants were made in connection with the Company's exchange
offer (described under "Executive Compensation - Stock Options" below), in
exchange for stock options that had been granted in Fiscal 2000. The options
received in Fiscal 2000 were surrendered and cancelled in exchange for the
options granted in Fiscal 2002.
Stock Option Grants in Fiscal 2002
Value at Potential Realizable
Grant Value at Assumed
% of Total Date Annual Rates of Stock
Number of Options Exercise Market Price Appreciation
Shares Granted to Price Price for Option Term
Underlying Employees Per ----- -----------------
Options in Share Expiration 0% 5% 10%
Name Granted Fiscal 2002 ($) Date ($) ($) ($)
------------------- ------- ----------- --- ---- --- --- ---
Ira B. Lampert 263,004(1) 17.8 $5.97 04/23/10 -- $987,449 $2,502,389
Brian F. King 127,260(1) 8.6 5.97 04/23/10 -- 477,798 1,210,833
Keith L. Lampert 76,356(1) 5.2 5.97 04/23/10 -- 286,679 726,500
Urs W. Stampfli 18,665(1) 1.3 5.97 04/23/10 -- 70,078 177,591
Gerald J. Angeli 67,500(2) 4.6 5.97 04/16/10 -- 253,429 642,238
----------------
(1) The stock option vested immediately as to 146,113 shares under Ira B.
Lampert's option, 70,700 shares under Brian King's option, 42,420 shares
under Keith Lampert's option, and 10,369 shares under Urs Stampfli's option,
with the balance vesting in two equal annual installments on January 1, 2002
and January 1, 2003.
(2) This option vested immediately as to 22,500 shares and as to 22,500 shares
on April 17, 2002, with the balance to vest on April 17, 2003.
-41-
The following table sets forth information concerning stock option exercises
during Fiscal 2002 by each of the executive officers named in the "Summary
Compensation Table" and the fiscal year-end value of unexercised options held by
such officers, based on the closing price of $5.101 for the Common Stock on June
28, 2002.
Aggregated Stock Option Exercises in Fiscal 2002
and Fiscal Year-End Option Values
Shares
Acquired Number of Shares Value of Unexercised
on Value Underlying Unexercised In-the-Money Options
Exercise Realized Options at FY End (#) at FY End ($)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Ira B. Lampert 25,000* $172,344* 1,466,558 58,446 $5,052,181 --
Brian F. King -- -- 485,646 28,280 1,526,342 --
Keith L. Lampert 5,000* 24,269* 344,388 16,968 1,139,354 --
Urs W. Stampfli -- -- 74,517 4,148 141,060 --
Gerald J. Angeli -- -- 45,000 22,500 -- --
-----------------
* None of the shares acquired upon these exercises have been sold; the
executives exercised these options and held the shares so acquired.
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 on the date the Board approved the exchange offer).
The exchange offer expired on October 16, 2001. The Company accepted for
exchange and cancelled 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.
Executive Employment Contracts, Termination of Employment
and Change in Control Arrangements
Pursuant to the employment agreement between the Company and Ira B. Lampert
dated as of May 1, 1997, as amended (the "Lampert Agreement"), Mr. Lampert
serves in the capacities of Chairman, Chief Executive Officer and President of
the Company. The Lampert Agreement provides for an annual salary of $900,000
(voluntarily reduced effective as of July 1, 2001 to $800,000 per annum), has a
term of four years and provides for the term of employment to be automatically
extended for one additional day for each day of the term of employment during
which neither party notifies the other that the term should not be extended. The
Lampert Agreement prohibits Mr. Lampert from competing with the Company for a
one-year period following the termination of his employment with the Company.
-42-
Pursuant to the Lampert Agreement, the Company adopted a supplemental executive
retirement plan which was later amended and restated as of April 19, 2000 (the
"Lampert SERP") for the benefit of Mr. Lampert. A specified amount, currently
$500,000, is credited to the Lampert SERP account each year (the "Yearly
Credit"). The Yearly Credits are 100% vested and not subject to forfeiture. Each
time the Company credits a Yearly Credit to the Lampert SERP account, the
Company simultaneously contributes an amount equal to such credit to a trust
established for the purpose of accumulating funds to satisfy the obligations
incurred by the Company pursuant to the Lampert SERP.
The Terms of Employment between the Company and Brian F. King, dated as of
January 1, 2000, provided for an annual salary of $400,000, which increased to
$450,000 effective January 1, 2001 (voluntarily reduced effective as of July 1,
2001 to $400,000 per annum). The agreement expires on January 2, 2003, unless
renewed by mutual agreement of the parties, and may be terminated by the Company
on thirty days' notice. Under this agreement, if the Company terminates Mr.
King's employment at any time without cause or if Mr. King terminates his
employment after January 1, 2003, he is entitled to severance payments equal to
one year's base salary plus his automobile allowance, and the deferred
compensation described below. The agreement also prohibits Mr. King from
competing with the Company for one year following the termination of his
employment with the Company.
The Terms of Employment between the Company and Keith L. Lampert, dated as of
January 1, 2000, provided for an annual salary of $255,000 effective as of
January 1, 2001 (voluntarily reduced effective as of July 1, 2001 to $225,000
per annum), which increased to $260,000 effective as of his promotion on
February 25, 2002. Pursuant to the agreement, Mr. Lampert also receives an
overseas allowance of $25,000 per year. The agreement further provides that Mr.
Lampert will be provided with housing at the Company's expense, and tax
equalization in accordance with the Company's Executive Management Tax
Equalization Policy, for so long as Mr. Lampert is on overseas assignment. The
agreement expires on January 2, 2003, unless renewed by mutual agreement of the
parties, and may be terminated by the Company on thirty days' notice. Under this
agreement, if the Company terminates Mr. Lampert's employment at any time
without cause or if Mr. Lampert terminates his employment after January 1, 2003,
he is entitled to severance payments equal to one year's base salary plus his
overseas allowance, automobile allowance and the deferred compensation described
below. The agreement also prohibits Mr. Lampert from competing with the Company
for one year following the termination of his employment with the Company.
-43-
The Terms of Employment between the Company and Urs W. Stampfli, dated as of
January 1, 2000, provided for an annual salary of $236,800 effective as of
January 1, 2001 (voluntarily reduced effective as of July 1, 2001 to $210,000
per annum), which increased to $235,000 effective as of his promotion on
February 25, 2002. The agreement expires on January 2, 2003, unless renewed by
mutual agreement of the parties, and may be terminated by the Company on thirty
days' notice. Under this agreement, if the Company terminates Mr. Stampfli's
employment at any time without cause or if Mr. Stampfli terminates his
employment after January 1, 2003, he is entitled to severance payments equal to
one year's base salary plus his automobile allowance and the deferred
compensation described below. The agreement also prohibits Mr. Stampfli from
competing with the Company for one year following the termination of his
employment with the Company.
The Terms of Employment between the Company and Gerald J. Angeli, dated as of
April 17 2000, as amended (the "Angeli Agreement"), provide for an annual salary
of $190,000. The agreement also provides for an overseas allowance of $25,000
per year if Mr. Angeli spends at least six months in Hong Kong and the PRC, to
be prorated for periods of less than six months overseas. It expires on April
17, 2003, unless renewed by mutual agreement of the parties, and may be
terminated by either party on thirty days' notice. Under this agreement, if the
Company terminates Mr. Angeli's employment without cause, he is entitled to
severance payments equal to one month's base salary for each three months of his
employment with the Company, up to a maximum of twelve months' base salary. The
agreement also prohibits Mr. Angeli from competing with the Company for one year
following the termination of his employment with the Company.
In connection with a one-time grant of deferred compensation to the following
executive officers, effective as of April 19, 2000, the Company adopted a
Supplemental Executive Retirement Plan and Agreement for the benefit of each of
Brian F. King, Keith L. Lampert, Urs W. Stampfli and Harlan I. Press (the
"Executive SERPs"). The Company simultaneously contributed the following amounts
to trusts established for the purpose of holding funds to satisfy the Company's
obligations under each of the Executive SERPs: (i) under the plan for Brian F.
King, $750,000; (ii) under the plan for Keith L. Lampert, $450,000, (iii) under
the plan for Harlan I. Press, $165,000, and (iv) under the plan for Urs W.
Stampfli, $110,000. The amounts in the Executive SERP accounts vest, so long as
the executive continues to be employed by the Company, in three equal annual
installments beginning January 1, 2001 or immediately upon: (i) a change of
control of the Company; or (ii) a termination of the executive's employment by
the Company without cause. The Company simultaneously approved a one-time grant
of deferred compensation to Ira B. Lampert in the amount of $1,549,999 with the
same vesting schedule as under the Executive SERPs. The Lampert SERP includes
appropriate terms to govern the one-time grant of deferred compensation to Mr.
Lampert.
In connection with a one-time grant of deferred compensation to Gerald J. Angeli
as of July 31, 2001, the Company adopted a Supplemental Executive Retirement
Plan and Agreement (the "Angeli SERP") for the benefit of Mr. Angeli and
contributed $115,000 to a trust established for the purpose of holding funds to
satisfy its obligations under the Angeli SERP. The amounts in the Angeli SERP
account vest, so long as Mr. Angeli continues to be employed by the Company, in
five annual installments increasing from $11,500 on June 11, 2002 and 2003, to
$23,000 on June 11, 2004 and $34,500 on June 11, 2005 and 2006.
Directors Compensation
During Fiscal 2002, each non-employee member of the Board of Directors was paid
the following: (i) an annual fee of $12,000 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. The annual fee payable to each non-employee Board member for serving
on the Board was reduced from $15,000 to $12,000 effective as of the beginning
of Fiscal 2002.
-44-
In addition, pursuant to the Company's 1993 Incentive Plan, each non-employee
director automatically receives the following options to purchase shares of the
Common Stock. Upon appointment to the Board, each non-employee director
receives: (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
receives 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.
The Company's directors participated in the exchange offer described above under
the caption "Stock Options" and exchanged their outstanding options having an
exercise price of more than $7.00 per share for new options to purchase 75% of
the shares subject to the old options, at an exercise price at $5.97 per share.
Effective July 19, 2001, the Company amended the outstanding, fully vested
options held by three former directors to permit such options to be exercised
until their stated expiration date, in light of the valuable years of advice and
service that had been provided during the eight-to-ten years of their tenure as
members of the Board of Directors. These former directors also participated in
the exchange offer described above under the caption "Stock Options."
-45-
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth certain information as of July 31, 2002 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 executive officer named in the "Summary Compensation Table"; and (iv)
all directors and executive officers as a group:
Name of Beneficial Owner Amount and Nature of Percent
------------------------ Beneficial Ownership(1) of Class(1)
----------------------- -----------
(i) Beneficial Owners of More than 5% of the Common Stock
"MEP Group" of Company Officers or
Employees as described in (2) below 3,103,718(2) 10.4%
Awad Asset Management, Inc. 3,519,001 12.7%
250 Park Avenue
New York, New York 10177
Royce & Associates, Inc. 1,902,100 6.9%
1414 Avenue of the Americas
New York, New York 10019
Prudential Financial, Inc. 1,606,100(3) 5.8%
751 Broad Street
Newark, New Jersey 07102
(ii) Directors
Ira B. Lampert 2,007,258(2)(4) 6.9%
Ronald S. Cooper 57,500(5) *
Morris H. Gindi 69,500(6) *
J. David Hakman 409,000(7) 1.5%
William J. Lloyd 47,750(8) *
William J. O'Neill, Jr. 21,000(9) *
(iii) Named Executive Officers
Brian F. King............................................. 485,646(2)(10) 1.7%
Keith L. Lampert.......................................... 409,388(2)(11) 1.5%
Gerald J. Angeli.......................................... 46,200(12) *
Urs W. Stampfli........................................... 84,517(13) *
(iv) All executive officers and directors as a group (12 persons) 3,839,185 12.7%
--------------------
* Indicates less than one percent (1%).
-46-
(1) For purposes of this table, beneficial ownership was determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") based upon information furnished by the
persons listed or contained in filings made by them with the Securities and
Exchange Commission; 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 July 31, 2002, the
Company had 27,680,499 shares of Common Stock issued and outstanding. All
shares were owned directly with sole voting and investment power unless
otherwise indicated.
(2) As of July 31, 2002, a group comprised of five officers or employees of the
Company (Messrs. Ira B. Lampert, Brian F. King, Keith L. Lampert, Harlan I.
Press and Arthur Zawodny) (collectively, the "MEP Group") beneficially
owned, in the aggregate, 883,766 shares and options to purchase 2,219,952
shares of Common Stock, or 10.4% of 29,900,451 (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 July 31, 2002 were exercised). Of that total,
493,066 shares and options to purchase 604,000 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 390,700 shares and options to purchase 1,615,952
shares of Common Stock were purchased or held outside the MEP. See "Certain
Relationships and Related Transactions" below. The MEP Group's address is
c/o Concord Camera Corp., 4000 Hollywood Boulevard, Presidential Circle -
6th Floor, North Tower, Hollywood, Florida 33021.
(3) Based on information contained in a Schedule 13G dated February 13, 2002,
filed by Prudential Financial, Inc.
(4) Represents 1,466,558 shares that may be acquired pursuant to stock options
exercisable within 60 days of July 31, 2002, 515,700 shares owned, as to
all of which Mr. Lampert has sole dispositive power, and 25,000 shares held
by a ss.501(c)(3) charitable trust of which Mr. Lampert is a trustee with
voting and dispositive power. Since Mr. Lampert is part of the MEP Group,
the shares beneficially owned by him are included in footnote (2) above;
the MEP Group is deemed to have acquired the shares beneficially owned by
any member of the MEP Group described in footnote (2) above.
(5) Includes 44,500 shares that may be acquired pursuant to stock options
exercisable within 60 days of July 31, 2002.
(6) Includes 54,500 shares that may be acquired pursuant to stock options
exercisable within 60 days of July 31, 2002, 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) 54,500 shares that may be acquired pursuant to stock
options, and 77,000 shares that may be acquired pursuant to a warrant, both
of which are exercisable within 60 days of July 31, 2002; and (ii) 84,500
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 163,000 shares held by a corporation
controlled by Mr. Hakman.
(8) Represents 47,750 shares that may be acquired pursuant to stock options
exercisable within 60 days of July 31, 2002.
(9) Represents 21,000 shares that may be acquired pursuant to stock options
exercisable within 60 days of July 31, 2002.
(10) Represents 293,980 shares that may be acquired pursuant to stock options
exercisable within 60 days of July 31, 2002 and 191,666 shares owned, as to
all of which Mr. King has sole dispositive power. Since Mr. King is part of
the MEP Group, the shares beneficially owned by him are included in
footnote (2) above; the MEP Group is deemed to have acquired the shares
beneficially owned by any member of the MEP Group described in footnote (2)
above.
-47-
(11) Represents 344,388 shares that may be acquired pursuant to stock options
exercisable within 60 days of July 31, 2002 and 65,000 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 (2) above; the MEP Group is deemed to have acquired the shares
beneficially owned by any member of the MEP Group described in footnote (2)
above.
(12) Includes 45,000 shares that may be acquired pursuant to stock options
exercisable within 60 days of July 31, 2002.
(13) Includes 74,517 shares that may be acquired pursuant to stock options
exercisable within 60 days of July 31, 2002.
Fiscal Year-End Equity Compensation Plan Information
The following table sets forth aggregated information concerning our equity
compensation plans outstanding at June 29, 2002.
No. of Securities
Remaining Available
No. of Securities to be Weighted-Average for Future Issuance
Issued upon Exercise of Exercise Price of under Equity Compensation
Options, Warrants and Options, Warrants and Plans (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
3,211,342 $3.18 404,970
Equity Compensation Plans
Not Approved by
Shareholders 1,156,166 $3.45 494,000
--------- ---------
Total 4,367,508 $3.25 898,907
========= =========
At June 29, 2002, we had a total of forty (40) 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 "2002 Incentive Plan"); (ii) thirty-seven (37) individual
stock option plans that were issued to employees (four of whom are executive
officers) as an inducement to their employment with the Company and one that was
issued to a consultant as a retention inducement; and (iii) a warrant that was
issued in 1997 as compensation for certain consulting services. None of the
options issued under any of these plans qualifies as an incentive stock option
for federal tax purposes.
At June 29, 2002, 500,000 shares of Common Stock were reserved for issuance
pursuant to outstanding options granted under and options available for grant
under the 2002 Incentive Plan. New recruits (including officers), non-officer
employees and consultants in our service are eligible to participate in the 2002
Incentive Plan. This plan generally provides 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 this plan which expire or otherwise terminate prior to exercise will be
available for subsequent issuance under the 2002 Incentive Plan. Except as
otherwise required by law or the 2002 Incentive 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.
-48-
At June 29, 2002, 1,003,166 shares of Common Stock in the aggregate were
reserved for issuance under individual stock option plans that were issued to
employees (four 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 retention of new employees and
consultants and have substantially the same terms and conditions as options
issued under the 2002 Incentive Plan. 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
individual stock option plan issued to our Chairman, Chief Executive Officer and
President, Ira B. Lampert, has substantially the same terms and conditions as
the other individual plans, however, it provides that the option will remain
exercisable until its stated expiration date in the event of Mr. Lampert's
termination without cause, the non-renewal of his employment contract, his death
or disability, or a change of control.
The consultant's stock option began vesting on the date of grant, continues
vesting in annual installments and will become vested in full on April 24, 2004,
provided he continues to make his services available to the Company. The
consultant is required to pay liquidated damages to the Company if the stock
option stops vesting because he stopped making his services available to the
Company (other than by reason of his death or disability). In the event of the
death or disability of the consultant, or a change of control, while the
consultant is still making his services available to the Company, the option
will become exercisable in full and remain exercisable until the stated
expiration date.
The warrant that was issued on September 25, 1997 to a corporation controlled by
David Hakman was adopted without shareholder approval. The warrant is described
below under "Certain Relationships and Related Transactions - Consulting
Arrangements with Directors." Since this plan was not registered, shares issued
pursuant to the warrant are subject to restrictions on their transferability.
-49-
Item 13. Certain Relationships and Related Transactions.
Consulting Arrangements with Directors
A corporation controlled by J. David Hakman has provided consulting services to
us since 1997 pursuant to an engagement agreement entered into on September 25,
1997, as later amended and supplemented (the "Hakman Agreement"). Pursuant to
the Hakman Agreement, the Company granted a warrant to purchase up to 260,000
shares of Common Stock at an exercise price of $2.25 per share to the
corporation controlled by Mr. Hakman. In October 2000, the corporation exercised
the warrant as to all 113,000 shares that had vested up until that time. As of
July 31, 2002, 147,000 shares remained subject to the warrant and 77,000 of
those shares were vested and exercisable. The Hakman Agreement expired on August
31, 2002 and the warrant will expire, to the extent not theretofore exercised,
on September 25, 2002. Since the Hakman Agreement has expired, none of the
remaining 70,000 shares subject to the warrant will vest before the warrant
expires.
Since May 1, 2002, William J. Lloyd has been providing us with consulting
services related to the technological aspects of the design, development and
manufacture of cameras and other products. As compensation for these consulting
services, the Company pays him a retainer of $5,000 per month.
Transactions under the Management Equity Provisions of the 1993 Incentive Plan
On August 23, 1995, the Compensation Committee of the Board approved stock
purchase awards under the Management Equity Provisions 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, as 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 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 Incentive Plan. If issued, such
contingent restricted shares were to vest over a three-year period and were
subject to forfeiture prior to vesting under certain conditions.
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 bear interest at an annual rate of 6%. Concurrently with the
execution of their respective Purchase Agreements and Notes, 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.
-50-
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 the Company's
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 covered thereby 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
$5.00 (pre-split adjustment) 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 will continue
on January 1 each year through January 1, 2003. The total principal sum subject
to forgiveness under the Release Program is $2,386,500, together with interest
owed under the Notes. The debt forgiveness is conditioned upon the person's
continued employment with the Company. If a person ceases to be an employee or
consultant of the Company prior to full forgiveness of the debt, the principal
balance of the Note will immediately become due and payable, including any
amounts scheduled to be forgiven at a future date.
As contemplated by the Management Equity Provisions, 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 current members. The
Purchased Shares and options awarded pursuant to the Management Equity
Provisions are presently held by Ira B. Lampert, Brian F. King, Keith L.
Lampert, Harlan I. Press and Arthur Zawodny.
In January 2000, the Board further provided that a participant in the Management
Equity Provisions would have the right to prepay all or any portion of the
indebtedness represented by a Note issued in connection with the purchase of
shares, 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 following are the scheduled release dates, and the total amounts that are
(or were, as the case may be) to be forgiven* on such dates, under the Release
Program.
-51-
Total Principal
Indebtedness Total Purchased
Forgiven or Shares Released or
Releasee Release Dates to be Forgiven to be 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 King, Keith Lampert and Arthur Zawodny
have each prepaid in full the balance of the debts represented by their Notes
and, assuming their continued employment with the Company, will be entitled to
receive deferred compensation in lieu of the amounts scheduled to be forgiven
under the Release Program.
Employment of Christopher Lampert
Another son of Ira B. Lampert, Christopher Lampert, works for the Company in
Hong Kong as a project analyst. In Fiscal 2002, we paid a total of $64,428 for
his salary and his housing in Hong Kong. Housing is customarily provided to our
employees stationed by the Company in Hong Kong on foreign assignment.
PART IV
Item 14. Controls and Procedures.
There were no significant changes to our internal controls, or in other factors
that could significantly affect these controls, since the date of evaluation in
connection with our most recent annual audit.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(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 certified public accountants and
financial statement schedule are filed under Item 8 of this report:
(a)(1) Financial Statements Page
Report of Independent Certified Public Accountants...................................... F-1
Consolidated Balance Sheets at June 29, 2002 and June 30, 2001.......................... F-2
Consolidated Statements of Operations for the years ended
June 29, 2002, June 30, 2001 and July 1, 2000....................................... F-3
Consolidated Statements of Stockholders' Equity for the years
ended June 29, 2002, June 30, 2001 and July 1, 2000................................. F-4
Consolidated Statements of Cash Flows for the years
ended June 29, 2002, June 30, 2001 and July 1, 2000................................. F-5
Notes to Consolidated Financial Statements.............................................. F-6
(a)(2) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts and Reserves............................. F-36
-52-
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.
(a)(3) Exhibits
No. Description Method of Filing
---- ------------- ----------------
3.1 Certificate of Incorporation, as amended Incorporated by reference to the Company's
through May 9, 2000 annual report on Form 10-K for the year ended
July 1, 2000.
3.2 Restated By-Laws, as amended through Incorporated by reference to the Company's
December 21, 2000 quarterly report on Form 10-Q for the quarter
ended December 30, 2000.
4.1 Form of Common Stock Certificate Incorporated by reference to the Company's
registration statement on Form 8-A filed
September 20, 2000.
4.2 Purchase Agreement, dated July 30, 1998, Incorporated by reference to the Company's
between Dreyfus High Yield Strategies Fund annual report on Form 10-K for the year ended
and the Company June 30, 1998.
4.3 Indenture, dated July 30, 1998, between Incorporated by reference to the Company's
Bankers Trust Company and the Company annual report on Form 10-K for the year ended
June 30, 1998.
4.4 Registration Rights Agreement, dated July 3, Incorporated by reference to the Company's
1998, between Dreyfus High Yield Strategies annual report on Form 10-K for the year ended
Fund and the Company June 30, 1998.
-53-
9.1 Amended and Restated Voting Agreement, dated Incorporated by reference to the Company's
February 28, 1997, among the parties annual report on Form 10-K for the year ended
signatory thereto, including among others, July 1, 2000.
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 to add
certain shares owned by Harlan Press
10.1 Settlement Agreement between the Company and Incorporated by reference to the Company's
the Commission effective September 1, 1994 annual report on Form 10-K for the year ended
June 30, 1994.
10.2 Second renewal agreement of Master Incorporated by reference to the Company's
Processing Contract No. (86)507, dated March quarterly report on Form 10-Q for the quarter
15, 1996, and approval notice issued by the ended September 30, 2000.
Longgang Economic Development Bureau
(English translations)
10.3 Contract for Grant of State-Owned Land Use Incorporated by reference to the Company's
Right, dated November 8, 1994, with the quarterly report on Form 10-Q for the quarter
Shenzhen Land Bureau (English translation) ended September 30, 2000.
10.4 Supplemental Agreement to the Contract for Incorporated by reference to the Company's
the Utilization of Land in Factory annual report on Form 10-K for the year ended
Construction between Concord HK and Henggang June 30, 1994.
Investment Holdings Limited dated June 20,
1994 and translation
10.5 Hong Kong Credit Facility and Factoring Incorporated by reference to the Company's
Agreement, dated September 8, 1999, between quarterly report on Form 10-Q for the
The Hongkong and Shanghai Banking quarter ended January 1, 2000.
Corporation Limited ("HSBC") and Concord HK
10.6 Letter agreement between HSBC and Concord HK Incorporated by reference to the Company's
dated June 4, 2001, relating to and amending annual report on Form 10-K for the year
the Hong Kong Credit Facility ended June 30, 2001.
-54-
10.7 Letter agreement between HSBC and Concord HK Incorporated by reference to the Company's
dated November 8, 2001, relating to and quarterly report on Form 10-Q for the
amending the Hong Kong Credit Facility and quarter ended March 30, 2002.
Factoring Agreement
10.8 Letter agreements between HSBC and Concord Filed herewith.
HK dated June 1, 2002 and June 4, 2002,
relating to and amending the Hong Kong
Credit Facility and Factoring Agreement
10.9 Business License of Concord Camera Filed herewith.
(Shenzhen) Company Limited, issued by the
Shenzhen Administration of Industry and
Commerce on April 25, 2002 (English
translation)
10.10 Incentive Plan (1993), as amended through Incorporated by reference to the Company's
April 24, 2000 annual report on Form 10-K for the year ended
July 1, 2000.
10.11 Amendments to the Incentive Plan (1993) Incorporated by reference to the
dated as of April 19, 2001 and August 2, Company's Schedule TO/A-1 filed August 28, 2001
2001
10.12 2002 Incentive Plan for Non-Officer Filed herewith.
Employees, New Recruits and Consultants, and
Amendment No. 1 to same dated September 4,
2002
10.13 Stock Option (Plan and) Agreement, dated as Filed herewith.
of October 17, 2001, between Gerald J.
Angeli and the Company
10.14 Stock Option (Plan and) Agreement, dated as Filed herewith.
of May 15, 1998, between Urs W. Stampfli and
the Company
10.15 Stock Option (Plan and) Agreement, dated as Filed herewith.
of December 22, 1996, between Brian F. King
and the Company
10.16 Stock Option (Plan and) Agreement, dated as Filed herewith.
of December 22, 1996, between Ira B. Lampert
and the Company
-55-
10.17 Amended and Restated 1995 Annual Incentive Filed herewith.
Compensation Plan, restated to January 17,
2002
10.18 2002 Long Term Cash Incentive Plan, and Filed herewith.
2002-2003 Performance Criteria
10.19 Amended and Restated Employment Agreement, Incorporated by reference to the Company's
dated as of May 1, 1997, between the Company annual report on Form 10-K for the year ended
and Ira B. Lampert June 30, 1997.
10.20 Amendment No. 1 dated as of August 25, 1998, Incorporated by reference to the Company's
Amendment No. 3 dated as of April 19, 2000, annual report on Form 10-K for the year ended
and Amendment No. 4 dated as of January 1, June 30, 2001.
2001, to Amended and Restated Employment
Agreement dated as of May 1, 1997, between
Ira B. Lampert and the Company
10.21 Amendment No. 2, dated as of January 1, Incorporated by reference to the Company's
1999, to Amended and Restated Employment quarterly report on Form 10-Q for the quarter
Agreement dated as of May 1, 1997, between ended January 2, 1999.
Ira B. Lampert and the Company
10.22 Amended and Restated Deferral Agreement, Filed herewith.
dated as of January 1, 2002, between Concord
Camera Corp. and Ira B. Lampert
10.23 Deferral Agreement, dated as of June 2, Filed herewith.
2000, between Concord Camera Corp. and Keith
L. Lampert, and amendment to same dated as
of June 1, 2002
10.24 Amended and Restated Supplemental Executive Incorporated by reference to the Company's
Retirement Plan and Agreement dated as of annual report on Form 10-K for the year ended
April 19, 2000, between Ira B. Lampert and June 30, 2001.
the Company, and Amendment No. 1 to same
dated as of January 1, 2001
-56-
10.25 Amendment No. 2, dated as of January 1, Filed herewith.
2002, to Amended and Restated Supplemental
Executive Retirement Plan and Agreement
dated as of April 19, 2000, between Ira B.
Lampert and the Company
10.26 Terms of Employment between Brian F. King Incorporated by reference to the Company's
and the Company, effective as of January 1, annual report on Form 10-K for the year ended
2000 June 30, 2001.
10.27 Terms of Employment between Harlan I. Press Incorporated by reference to the Company's
and the Company, effective as of January 1, annual report on Form 10-K for the year ended
2000 June 30, 2001.
10.28 Terms of Employment between Urs W. Stampfli Incorporated by reference to the Company's
and the Company, effective as of January 1, annual report on Form 10-K for the year ended
2000 June 30, 2001.
10.29 Terms of Employment between Keith L. Lampert Incorporated by reference to the Company's
and the Company, effective as of January 1, annual report on Form 10-K for the year ended
2000 June 30, 2001.
10.30 Terms of Employment between Gerald J. Angeli Filed herewith.
and the Company, effective as of April 17,
2000, with amendments dated as of June 11,
2001 and August 12, 2002, respectively
10.31 Form of Supplemental Executive Retirement Incorporated by reference to the Company's
Plan and Agreement, dated as of April 19, annual report on Form 10-K for the year
2000, between the Company and each of ended July 1, 2000.
certain executive officers
10.32 Form of Amendment to the Supplemental Incorporated by reference to the Company's
Executive Retirement Plan and Agreement, annual report on Form 10-K for the year ended
dated as of April 19, 2000, between the June 30, 2001.
Company and each of certain executive
officers
-57-
10.33 Form of Amendment No. 2, dated as of June 1, Filed herewith.
2002, to the Supplemental Executive
Retirement Plan and Agreement between the
Company and each of Brian King, Keith
Lampert, Urs Stampfli and Harlan Press
10.34 Supplemental Executive Retirement Plan and Filed herewith.
Agreement, dated as of July 31, 2001,
between the Company and Gerald J. Angeli
10.35 Concord Camera Corp. Executive Management Filed herewith.
Tax Equalization Policy
10.36 Lease Agreement, undated between Prologis Incorporated by reference to the Company's
Trust, a Maryland real estate investment quarterly report on Form 10-Q for the
trust, and the Company quarter ended January 2, 1999.
10.37 Lease Agreement, dated as of August 12, Incorporated by reference to the Company's
1998, between CarrAmerica Realty Corp. and quarterly report on Form 10-Q for the quarter
the Company ended January 2, 1999.
10.38 First Amendment, dated October 12, 1999, to Incorporated by reference to the Company's
Lease dated as of August 12, 1998, between quarterly report on Form 10-Q for the
CarrAmerica Realty Corp. and the Company quarter ended October 2, 1999.
10.39 Second Amendment, dated January 3, 2000, to Incorporated by reference to the Company's
Lease dated as of August 12, 1998, between annual report on Form 10-K for the year
CarrAmerica Realty Corp. and the Company ended July 1, 2000.
21 Subsidiaries of the Company Filed herewith.
23 Consent of Independent Certified Public Filed herewith.
Accountants
99.1 Certification of Chief Executive Officer Filed herewith.
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Filed herewith.
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
The Financial Statement Schedules required to be filed pursuant to this Item
15(d) are listed above.
-58-
(b) Reports on Form 8-K.
On May 24, 2002, the Company filed a report under Item 5 - Other Events on Form
8-K reporting that it had obtained certain Polaroid trademark licenses, subject
to approval by the bankruptcy court supervising the Polaroid reorganization
proceedings. The bankruptcy court's approval was subsequently issued and, in
August 2002, the foregoing trademark licenses were executed and delivered to the
Company. For more details, see "The Business - Licensing Activities."
-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: September 26, 2002 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 and on the dates indicated.
Name Capacity Date
---- -------- ----
/s/ Ira B. Lampert Chairman of the Board, Chief Executive September 26, 2002
------------------------------ Officer and President
Ira B. Lampert (Principal Executive Officer)
/s/ Richard M. Finkbeiner Senior Vice President and September 26, 2002
-------------------------- Chief Financial Officer
Richard M. Finkbeiner (Principal Financial Officer)
/s/ Harlan I. Press Vice President and Treasurer September 26, 2002
------------------------------ (Principal Accounting Officer)
Harlan I. Press
/s/ Ronald S. Cooper Director September 26, 2002
------------------------------
Ronald S. Cooper
/s/ Morris H. Gindi Director September 26, 2002
------------------------------
Morris H. Gindi
/s/ J. David Hakman Director September 26, 2002
------------------------------
J. David Hakman
/s/ William J. Lloyd Director September 26, 2002
------------------------------
William J. Lloyd
/s/ William J. O'Neill, Jr. Director September 26, 2002
----------------------------
William J. O'Neill, Jr.
-60-
CERTIFICATION
-------------
I, Ira B. Lampert, certify that:
1. I have reviewed this annual report on Form 10-K of Concord
Camera Corp. (the "Company");
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this annual report.
Dated: September 26, 2002 /s/ Ira B. Lampert
----------------------------------------------
Ira B. Lampert, Chief Executive Officer
CERTIFICATION
-------------
I, Richard M. Finkbeiner, certify that:
1. I have reviewed this annual report on Form 10-K of Concord
Camera Corp. (the "Company");
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this annual report.
Dated: September 26, 2002 /s/ Richard M. Finkbeiner
----------------------------------------------
Richard M. Finkbeiner, Chief Financial Officer
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Concord Camera Corp.
We have audited the accompanying consolidated balance sheets of Concord Camera
Corp. and subsidiaries as of June 29, 2002 and June 30, 2001, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 29, 2002. 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 generally accepted
in the 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 June 29, 2002 and June 30, 2001, and the
consolidated results of operations and cash flows for each of the three years in
the period ended June 29, 2002, in conformity with accounting principles
generally accepted in the United States. 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 6 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142 in 2002.
Ernst & Young LLP
Atlanta, Georgia
July 31, 2002, except for Note 24 as to
which the date is August 31, 2002
F-1
Concord Camera Corp. and Subsidiaries
Consolidated Balance Sheets
June 29, 2002 June 30, 2001
------------- -------------
Assets
Current Assets:
Cash and cash equivalents $ 103,867,598 $ 57,474,828
Short-term investments -- 49,869,567
Accounts receivable, net 22,984,322 25,253,614
Inventories 22,484,721 30,766,198
Prepaid expenses and other current assets 4,194,654 4,128,858
------------- ------------
Total current assets 153,531,295 167,493,065
Property, plant and equipment, net 20,985,446 24,396,407
Goodwill, net 3,720,528 3,720,528
Other assets 19,839,191 18,055,713
------------- -------------
Total assets $ 198,076,460 $ 213,665,713
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 12,502,087 $ 17,991,337
Accrued expenses 12,013,093 15,447,170
Current portion of obligations under capital leases -- 503,547
Other current liabilities 633,600 2,547,719
------------- -------------
Total current liabilities 25,148,780 36,489,773
Senior notes 14,933,931 14,912,501
Other liabilities 8,837,501 7,926,290
-------------- -------------
Total liabilities 48,920,212 59,328,564
Commitments and contingencies
Stockholders' Equity:
Blank check preferred stock, no par value,
1,000,000 shares authorized, none issued -- --
Common stock, no par value, 100,000,000 shares
authorized; 29,029,359 and 28,911,734 shares issued
as of June 29, 2002 and June 30, 2001, respectively 140,547,679 140,255,065
Paid-in capital 4,412,410 4,321,856
Deferred stock based compensation
(332,445) --
Retained earnings 8,667,119 13,914,908
Notes receivable arising from common
stock purchase agreements (1,377) (17,542)
-------------- -------------
153,293,386 158,474,287
Less: treasury stock, at cost, 1,542,526 shares (4,137,138) (4,137,138)
-------------- -------------
Total stockholders' equity 149,156,248 154,337,149
-------------- -------------
Total liabilities and stockholders' equity $ 198,076,460 $ 213,665,713
============== =============
See accompanying notes.
F-2
Concord Camera Corp. and Subsidiaries
Consolidated Statements of Operations
Year Ended
----------
June 29, 2002 June 30, 2001 July 1, 2000
------------- ------------- ------------
Net sales $ 129,316,594 $ 180,061,056 $ 167,719,526
Cost of products sold 110,344,520 152,597,558 126,147,774
------------- ------------- ------------
Gross profit 18,972,074 27,463,498 41,571,752
Selling expenses 6,343,302 8,148,517 5,704,566
General and administrative expenses 20,967,240 33,314,782 16,633,210
(Recovery) of operating expenses, net (1,150,000) -- --
Terminated acquisition costs -- 800,207 --
Interest expense 2,522,314 2,792,616 3,268,560
Other (income), net (3,060,163) (4,891,425) (881,762)
------------- ------------- ------------
(Loss) income before income taxes (6,650,619) (12,701,199) 16,847,178
Benefit for income taxes (1,402,830) (930,849) (2,751,389)
------------- ------------- ------------
Net (loss) income $ (5,247,789) $ (11,770,350) $ 19,598,567
============= ============= ============
Basic (loss) earnings per common share $(0.19) $(0.45) $0.89
============= ============= ============
Diluted (loss) earnings per common share $(0.19) $(0.45) $0.81
============= ============= ============
Weighted average
common shares outstanding-basic 27,437,618 25,991,868 21,989,381
Dilutive effect of common stock options -- -- 2,324,087
------------- ------------- ------------
Weighted average
common shares outstanding-diluted 27,437,618 25,991,868 24,313,468
============= ============= ============
See accompanying notes.
F-3
Concord Camera Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Notes
receivable
arising from
Deferred common stock
Common Stock Paid-in Stock Based Retained purchase Treasury Stock
Issued Shares Stated Value Capital Compensation Earnings agreements Shares Cost Total
--------------------------- --------- ------------ -------- ------------- -------- ------ --------
Balance as of
July 3, 1999 23,259,184 $41,117,335 $1,033,553 $ -- $6,086,691 $(2,163,542) 1,351,726 $(3,378,512) $42,695,525
Exercise of
stock options
and warrants 566,550 1,027,921 -- -- -- -- -- -- 1,027,921
Interest on
notes receivable
arising from
common stock
purchase
agreements -- -- -- -- -- (85,190) -- -- (85,190)
Officers' notes
forgiven
on stock
purchases -- -- -- -- -- 452,965 -- -- 452,965
Officers' notes
paid on
stock purchases -- -- -- -- -- 1,766,530 -- -- 1,766,530
Purchase of
treasury stock,
at cost -- -- -- -- -- -- 190,800 (758,626) (758,626)
Stock option
issuance
related
to non-employees -- -- 1,592,275 -- -- -- -- -- 1,592,275
Net income -- -- -- -- 19,598,567 -- -- -- 19,598,567
------------------------------------------------------------------------------------------------------------------------
Balance as
of July
1, 2000 23,825,734 42,145,256 2,625,828 -- 25,685,258 (29,237) 1,542,526 (4,137,138) 66,289,967
Issuance
of common
stock, net 4,485,000 96,881,243 -- -- -- -- -- -- 96,881,243
Exercise of
stock options
and warrants 601,000 1,228,566 -- -- -- -- -- -- 1,228,566
Income tax
benefit from
stock options
exercised -- -- 1,696,028 -- -- -- -- -- 1,696,028
Interest on
notes receivable
arising from
common stock
purchase
agreements -- -- -- -- -- (1,754) -- -- (1,754)
Officers' notes
forgiven
on stock
purchases -- -- -- -- -- 13,449 -- -- 13,449
Net loss -- -- -- -- (11,770,350) -- -- -- (11,770,350)
------------------------------------------------------------------------------------------------------------------------
Balance as of
June 30,
2001 28,911,734 140,255,065 4,321,856 -- 13,914,908 (17,542) 1,542,526 (4,137,138) 154,337,149
Exercise
of stock
options 117,625 292,614 -- -- -- -- -- -- 292,614
Deferred
stock based
compensation -- -- -- (332,445) -- -- -- -- (332,445)
Interest on
notes
receivable
arising
from common
stock
purchase
agreements -- -- -- -- -- (780) -- -- (780)
Officers'
notes
forgiven
on stock
purchases -- -- -- -- -- 7,849 -- -- 7,849
Officers'
notes paid
on stock
purchases -- -- -- -- -- 9,096 -- -- 9,096
Stock based
compensation -- -- 90,554 -- -- -- -- -- 90,554
Net loss -- -- -- -- (5,247,789) -- -- -- (5,247,789)
------------------------------------------------------------------------------------------------------------------------
Balance as
of June 29,
2002 29,029,359 $140,547,679 $4,412,410 $(332,445) $8,667,119 $ (1,377) 1,542,526 $(4,137,138) $149,156,248
=========================================================================================================================
See accompanying notes.
F-4
Concord Camera Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended
----------
June 29, June 30, July 1, July 1,
2002 2001 2000
-------- ------- -------
Cash flows from operating activities:
Net (loss) income $ (5,247,789) $ (11,770,350) $ 19,598,567
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating activities:
Depreciation and amortization 6,259,809 5,737,190 4,639,724
Officers' notes forgiven on stock purchases 7,849 13,449 452,965
Interest income on notes receivable arising from
common stock agreements (780) (1,754) (85,190)
Deferred income taxes and stock option exercise tax benefit (1,402,830) 173,949 (4,232,389)
Non-cash compensation expense -- 401,363 220,193
Provision for doubtful accounts 2,282,871 15,800,000 --
Provision for inventory 3,261,274 4,714,000 --
Restructuring (reversal) reserve (448,000) 1,400,000 --
Changes in operating assets and liabilities:
Accounts receivable (13,579) (7,483,565) (15,297,718)
Inventories 5,020,203 (3,877,052) (10,982,591)
Prepaid expenses and other current assets 163,041 3,245,861 (3,222,708)
Other assets (1,651,408) (2,554,839) (3,216,104)
Accounts payable (5,489,250) (7,519,288) 9,286,087
Accrued expenses (2,872,250) (765,641) 8,930,879
Other current liabilities (1,914,119) (360,915) 383,649
Other liabilities 911,211 (593,106) 3,185,488
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,133,747) (3,440,698) 9,660,852
Cash flows from investing activities:
Purchases of property, plant and equipment (2,141,213) (7,488,077) (7,792,029)
Purchases of held-to-maturity investments -- (49,869,567)
Proceeds from maturities of held-to-maturity investments 49,869,567 -- --
----------- ----------- -----------
Net cash provided by (used in) investing activities 47,728,354 (57,357,644) (7,792,029)
Cash flows from financing activities:
Net repayments under short-term debt agreements -- (2,190,264) (5,898,638)
Repayments under long-term debt agreements -- -- (2,100,000)
Net principal repayments under capital lease obligations (503,547) (2,036,669) (2,222,477)
Purchases of treasury stock -- -- (758,626)
Proceeds from notes receivable arising from
common stock purchase agreements 9,096 -- 1,766,530
Net proceeds from issuance of common stock 292,614 98,109,809 1,027,921
------- ---------- ------------
Net cash (used in) provided by financing activities (201,837) 93,882,876 (8,185,290)
Net increase (decrease) in cash and cash equivalents 46,392,770 33,084,534 (6,316,467)
Cash and cash equivalents at beginning of the year 57,474,828 24,390,294 30,706,761
------------ ----------- ------------
Cash and cash equivalents at end of the year $103,867,598 $57,474,828 $ 24,390,294
============ =========== ============
See Note 2, " Supplemental Cash Flow Information" and accompanying notes.
F-5
CONCORD CAMERA CORP. & 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 high quality, popularly priced, easy-to-use image capture
products on a worldwide basis. Substantially all of the Company's manufacturing
and assembly processes occur in the People's Republic of China ("PRC"). The
Company's products include digital image capture devices, 35mm and APS
traditional and single use cameras, and instant cameras. The Company also serves
as a contract manufacturer of developed and co-developed products for its
original equipment manufacturer ("OEM") customers, and also sells its own
branded and private label versions of many of those products, incorporating
certain of the co-developed technology, to its retail sales and distribution
("RSD") customers.
During the fiscal years ended June 29, 2002 ("Fiscal 2002"), June 30, 2001
("Fiscal 2001"), and July 1, 2000 ("Fiscal 2000"), net sales and percentages of
total net sales to the Company's three largest customers amounted to
approximately $61,939,000 (47.9%), $74,684,000 (41.5%), and $97,856,000 (58.3%),
respectively. See Note 22, "Geographic Area Information" for further information
about significant customers.
Beginning in Fiscal 1999, the Company changed its fiscal year end to end on the
Saturday closest to June 30. Prior to Fiscal 1999, the Company's fiscal year was
the twelve-month period ending June 30. Accordingly, for Fiscal 2002, Fiscal
2001 and Fiscal 2000, the fiscal year-ends were on June 29, 2002, June 30, 2001,
and July 1, 2000, respectively.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and include the accounts of the Company and its consolidated subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted 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.
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, the European Euro, British Pound
Sterling, People's Republic of China Renminbi, Hong Kong Dollar and the Japanese
Yen. Each of the Company's foreign subsidiaries purchases its inventories in
U.S. Dollars and has the majority of its sales in U.S. Dollars. Accordingly, the
U.S. Dollar is the functional currency. Certain net sales to customers and
purchases of certain components and services are transacted in local currency
including Japanese Yen, thereby creating an exposure to fluctuations in foreign
currency exchange rates. The translation from the applicable currencies to U.S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the period. Gains or losses resulting from
foreign currency transactions and remeasurement are included in "Other (income),
net" in the accompanying consolidated statements of operations. For Fiscal 2002,
Fiscal 2001, and Fiscal 2000 included in other (income), net in the accompanying
consolidated statements of operations are approximately $(194,000), $(348,000),
and $143,000, respectively, of net foreign currency (gains) losses.
F-6
Hedging Activities
During Fiscal 2002, Fiscal 2001 and Fiscal 2000 the Company had no forward
exchange contracts outstanding and did not participate in any other type of
hedging activities.
Concentration of Credit Risk
The Company sells a significant number 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 and Hong Kong.
Receivables arising from these sales are generally not collateralized. The
Company monitors the credit worthiness of its customers and reviews outstanding
receivable balances for collectibility on a regular basis and records provisions
for doubtful accounts as necessary. Customers that individually account for
greater than 10% of the Company's total net sales create a concentration of
credit risk. During Fiscal 2002, there were two such customers. See Note 22,
"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 short duration to maturity. The fair value 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. The carrying amounts of the Company's
Senior Notes approximate fair value at June 29, 2002 and at June 30, 2001. See
Note 9, "Senior Notes" and Note 24, "Subsequent Events" relating to the
Company's subsequent retirement of its long-term debt.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
Short-Term Investments
The Company accounts for marketable securities in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, which requires that all
applicable investments be classified as trading securities, available-for-sale
securities or held-to-maturities securities. The Company did not have any
investments classified as trading securities or available-for-sale securities.
The Company's investments in debt securities, all of which mature in six months
or less, are held to maturity and valued at amortized cost, which approximates
fair market value. The Company had no short-term investments at June 29, 2002.
The aggregate fair market value at June 30, 2001 approximates the carrying value
due to the short maturity, and was approximately $49,870,000 and consisted
entirely of U.S. government agency backed securities. Since the aggregate fair
market value approximated the carrying value, there are no gross holding gains
or losses. The average yield of these securities at June 30, 2001 was 3.83%.
F-7
Inventories
Inventories, the majority of which are raw materials, components and
work-in-progress, are stated at the lower of cost or market value and are
determined on a first-in, first-out basis. Work-in-progress and component
inventory costs include materials, labor, and manufacturing overhead. The
Company provides inventory reserves for excess, obsolete or slow-moving
inventory based on changes in customer demand, technological developments or
other economic factors.
Property, Plant and Equipment, Net
Property, plant and equipment 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 2002, Fiscal 2001, and Fiscal 2000 was
approximately $5,429,000, $4,561,000, and $3,643,000, respectively. Amortization
of assets recorded under capital leases is included in depreciation and
amortization expense.
Useful Lives
Asset Class (in years)
----------- --------
Buildings, including buildings under capital lease 30-50
Equipment, including equipment under capital lease 3-10
Office furniture and equipment 3-7
Automobiles 6-7
Leasehold improvements 3-11
Intangible Assets, Net
Goodwill represents the excess of purchase price over the fair value of net
assets acquired and, for the two-year period ended June 30, 2001, goodwill was
amortized on a straight-line basis over periods ranging from fifteen to twenty
years. Effective July 1, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" and ceased amortizing its remaining net goodwill
balances. Under SFAS No. 142, the Company's goodwill is subject to an impairment
test, at least annually. 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 6, "Goodwill, Net" and Note 7 "Other Assets" for a
discussion of the effect of adopting SFAS No. 142.
Impairment of Long-Lived Assets
In accordance with the Financial Accounting Standards Board ("FASB"), SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, 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. No
impairment indicators were identified for Fiscal 2002, Fiscal 2001 or Fiscal
2000. See "Recently Issued Accounting Standards" below for a discussion of the
effect of adopting SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
Revenue Recognition
Revenues are recognized when title and risk of loss are transferred to
customers, which is generally when the product is shipped. Net sales also
include a provision for returns based on historical trends in product returns.
If future returns are higher than estimated based on historical data, net sales
could be adversely affected.
F-8
Shipping and Handling Costs
Amounts charged to customers and costs incurred by the Company related to
shipping and handling are included in net sales and selling expenses,
respectively. The Company incurred shipping and handling costs of approximately
$1,294,000, $1,778,000 and $1,730,000 during Fiscal 2002, Fiscal 2001 and Fiscal
2000, respectively.
Product Development Costs
Product 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 expensed
in the period in which they are incurred. The Company's products are developed,
designed and engineered principally by its own engineers in the Company's three
product development and design centers located in the U.S., Hong Kong and the
PRC. The Company expended approximately $7,604,000, $6,413,000, and $4,921,000
during Fiscal 2002, Fiscal 2001, and Fiscal 2000, 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 costs, which include advertising allowances and other discounts,
have been expensed as incurred and have historically been included in selling
expenses. However, in accordance with EITF Issue No. 00-25, Vendor Income
Statement Characterization of Consideration from a Vendor to a Retailer, which
addresses the operating statement classification of consideration between a
vendor and a retailer, the Company has reclassified certain variable selling
expenses including advertising allowances, other discounts, and other allowances
from being reported as an operating expense to a reduction of net sales. As a
result of the Company adopting EITF 00-25 in its second quarter of Fiscal 2002,
lower sales, lower gross margins, and lower selling expenses are reported.
Approximately $2,561,000, $3,352,000, and $5,439,000 of variable selling
expenses, consisting principally of advertising and promotional allowances, were
reclassified as a reduction of net sales, resulting in a corresponding reduction
of gross profit and selling expenses, with no effect on net income, for Fiscal
2002, Fiscal 2001, and Fiscal 2000, respectively.
Stock-Based Compensation
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for its employee stock-based transactions and has complied with
the disclosure requirement of SFAS 123. See Note 11, "Stockholders' Equity" and
Note 12, "Stock Option Plans". Under APB 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 Common Stock.
Compensation expense is recognized over the option's vesting period. In the Fall
of 2001, 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 repriced options until they are exercised, cancelled or
expired. For Fiscal 2002, the Company did not record any variable stock-based
compensation expense in the consolidated statement of operations because its
closing Common Stock price on June 29, 2002 was below the new repriced stock
options' exercise price of $5.97. Because the determination of variable
stock-based compensation expense associated with the repriced stock options is
significantly dependent upon the Company's closing Common Stock price at the end
of each prospective reporting period, it is not possible to determine its future
impact, either favorable or unfavorable, on our consolidated financial
statements.
F-9
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 basis 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.
(Loss) Earnings Per Share
Basic and diluted (loss) earnings per share are calculated in accordance with
SFAS No. 128, Earnings per Share. All applicable (loss) earnings per share
amounts have been presented to conform to SFAS No. 128 requirements. In Fiscal
2002 and Fiscal 2001, potentially dilutive securities, comprised of options to
purchase 1,705,270 and 2,439,448 shares of Common Stock, respectively, were not
included in the calculation of diluted loss per share because their impact was
antidilutive. On April 14, 2000, the Company effected a two-for-one stock split
of its 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 the
accompanying consolidated financial statements have been restated to reflect the
stock split.
Recently Issued Accounting Standards
On June 29, 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 applies to all
business combinations with a closing date after June 30, 2001, and eliminates
the pooling-of-interests method of accounting and further clarifies the criteria
for recognition of intangible assets separately from goodwill. SFAS No. 142
eliminates the amortization of goodwill and indefinite-lived intangible assets
and initiates an annual review for impairment. Identifiable intangible assets
with determinable useful lives will continue to be amortized. See Note 6,
"Goodwill, Net" and Note 7, "Other Assets" in the accompanying consolidated
financial statements for a discussion of the effect of adopting SFAS No. 142.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No.144"). SFAS No. 144 superseded SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. There is no anticipated material
financial statement impact to the Company upon its adoption of SFAS No. 144 at
June 30, 2002.
Reclassifications
Certain amounts in prior years have been reclassified to conform to the current
year presentation.
Other Comprehensive Income
The Company has no other comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income".
F-10
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION:
Fiscal Year
-----------
2002 2001 2000
--------- ------- --------
Cash paid for interest $1,841,000 $2,217,000 $2,768,000
Cash paid for income taxes $ 494,000 $1,523,000 $ 819,000
=========== ========== ==========
NOTE 3 - ACCOUNTS RECEIVABLE, NET:
Accounts receivable consist of the following:
June 29, June 30,
2002 2001
-------- --------
Trade accounts receivable $25,576,005 $25,956,441
Less: provisions for doubtful accounts,
discounts, and allowances (2,591,683) (702,827)
---------- -----------
Total accounts receivable, net $22,984,322 $25,253,614
=========== ===========
NOTE 4 - INVENTORIES:
Inventories consist of the following:
June 29, June 30,
2002 2001
-------- --------
Raw material, components and work-in-progress $ 16,196,725 $23,987,935
Finished goods 6,287,996 6,778,263
------------ -----------
Total inventories $ 22,484,721 $30,766,198
============ ===========
F-11
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET:
Property, plant and equipment consist of the following:
June 29, June 30,
2002 2001
-------- --------
Buildings, including buildings under capital lease $ 7,384,730 $ 7,318,539
Equipment, including equipment under capital lease 30,498,805 27,685,170
Office furniture and equipment 9,975,487 10,326,834
Automobiles 477,806 458,370
Leasehold improvements 4,836,646 4,864,431
----------- -----------
53,173,474 50,653,344
Less: accumulated depreciation and amortization (32,188,028) (26,256,937)
----------- ----------
Total property, plant and equipment, net $20,985,446 $24,396,407
=========== ===========
NOTE 6 - GOODWILL, NET
Effective July 1, 2001, the Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 eliminates the amortization
of goodwill and indefinite-lived intangible assets, and initiates an annual
review of these assets for impairment. Identifiable intangible assets with
determinable useful lives will continue to be amortized. 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 is required to
perform an impairment test of its existing goodwill within the first six months
following adoption of SFAS No. 142. The Company completed step one of the
impairment test under SFAS No. 142, and it is management's assessment that
goodwill impairment does not exist. The accounting standard requires the
presentation of a reconciliation of previously reported net income and earnings
per share to the amounts adjusted for the exclusion of the goodwill amortization
net of related tax effect.
June 29, June 30,
2002 2001
-------- --------
Goodwill $ 6,401,264 $ 6,401,264
Less: accumulated amortization (2,680,736) (2,680,736)
----------- -----------
Goodwill, net $ 3,720,528 $ 3,720,528
=========== ===========
Net (loss) income and (loss) income per share for Fiscal 2001 and Fiscal 2000,
as adjusted for the exclusion of amortization expense, were as follows:
F-12
Fiscal 2001 Impact of
----------------------------------- Exclusion of
As As Goodwill
Reported Adjusted Amort. Expense
---------------- ----------------- -----------------
Loss before income
taxes (as originally reported) $ (12,701,199) $ (12,701,199) $ --
Adjustment for the exclusion
of goodwill amortization -- 291,031 291,031
------------- ---------------- ---------------
(Loss) income before income taxes (12,701,199) (12,410,168) 291,031
(Benefit) provision for income taxes (930,849) (843,540) 87,309
------------- ---------------- ---------------
Net (loss) income $ (11,770,350) $ (11,566,628) $ 203,722
============= ================ ===============
$ (0.45) $ (0.45) $ --
Basic and diluted loss per share ============= ================ ===============
Impact of
Fiscal 2000 Exclusion of
-----------------------------------
As As Goodwill
Reported Adjusted Amort. Expense
---------------- ----------------- ------------------
Income before income
taxes (as originally reported) $ 16,847,178 $ 16,847,178 $ --
Adjustment for the exclusion
of goodwill amortization -- 127,705 127,705
--------------- ---------------- -----------------
Income before income taxes 16,847,178 16,974,883 127,705
(Benefit) provision for income taxes (2,751,389) (2,713,078) 38,311
---------------- ---------------- -----------------
Net income $ 19,598,567 $ 19,687,961 $ 89,394
=============== ================ =================
Basic earnings per share $ 0.89 $ 0 .90 $ 0.01
=============== ================ =================
Diluted earnings per share $ 0.81 $ 0.81 $ -
=============== ================ =================
F-13
NOTE 7 - OTHER ASSETS:
Other assets consist of:
Useful Lives June 29, June 30,
(in Years) 2002 2001
------------ -------- --------
Patents, trademarks and licenses, net 5-20 $ 5,241,872 $ 5,565,623
Deferred finance costs, net 7 411,366 589,597
Deferred compensation 6,970,413 5,944,929
Deferred tax asset, net 6,893,362 5,719,369
Other 322,178 236,195
------------ ------------
Total other assets $ 19,839,191 $ 18,055,713
============ ============
As described in Note 6, "Goodwill, Net", the Company adopted SFAS No. 142. With
the adoption of SFAS No.142, the company must additionally disclose the
following for other intangible assets: the gross carrying amounts, accumulated
amortization, weighted average amortization period, and total amortization
expense for each period for which a statement of financial position is
presented. In addition, the Company must disclose the estimated aggregate
amortization expense for each of the five succeeding fiscal years. As of June
29, 2002, the aggregate weighted average amortization period for patents,
trademarks, and licenses was approximately eighteen years. For Fiscal 2002 and
Fiscal 2001, intangible asset amortization expense was $708,075 and $556,512,
respectively. See Note 10 "Other Liabilities" for a description of deferred
compensation.
June 29, June 30,
2002 2001
-------- --------
Patents, trademarks and licenses $ 8,931,396 $ 8,547,072
Less: accumulated amortization (3,689,524) (2,981,449)
----------- ------------
Patents, trademarks and licenses, net $ 5,241,872 $ 5,565,623
=========== ============
Patents, trademarks, and licenses:
---------------------------------
Estimated Aggregate
Fiscal Year Amortization Expense
----------- --------------------
2003 $599,000
2004 $341,000
2005 $327,000
2006 $324,000
2007 $291,000
NOTE 8 - SHORT-TERM DEBT AND FINANCING FACILITIES:
The Company had no short-term debt outstanding as of June 29, 2002 or June 30,
2001.
Hong Kong Financing Facilities
A Hong Kong subsidiary of the Company has various revolving credit facilities in
place providing an aggregate of approximately $23,500,000 in borrowing capacity.
Certain of the revolving credit facilities are denominated in Hong Kong dollars.
Since 1983 the Hong Kong dollar has been pegged to the United States dollar. The
revolving credit facilities are comprised of 1) an approximate $11,000,000
Import Facility, 2) an approximate $2,600,000 Packing Credit and Export
Facility, 3) an approximate $1,900,000 Foreign Exchange Facility and 4) an
$8,000,000 Accounts Receivable Factoring Facility (collectively, the "Hong Kong
Financing Facilities"). The $8,000,000 Accounts Receivable Factoring Facility is
secured by certain accounts receivables of the Hong Kong subsidiary and
guaranteed by the Company. The Company also guarantees the remaining amount of
approximately $15,500,000 under the Hong Kong Financing Facilities. Availability
under the Accounts Receivable Factoring Facility is subject to advance formulas
based on Eligible Accounts Receivable and all the credit facilities are subject
to certain financial ratios and covenants. The revolving credit facilities bear
interest at variable rates and expire in May 2003. At June 29, 2002 and June 30,
2001, there were no amounts outstanding under the Hong Kong Financing
Facilities.
F-14
United Kingdom Credit Facility
A United Kingdom (UK) subsidiary of the Company had a revolving credit facility
in place that provided approximately $1,100,000 of borrowing capacity. The
facility was secured by substantially all of the assets of the subsidiary, and
was principally utilized for working capital needs and bore interest at 1.5%
above the UK prime lending rate. At June 29, 2002 and June 30, 2001, no amounts
were outstanding under this facility. The United Kingdom Credit Facility expires
in August 2003.
United States Credit Facility
In June 2000, one of the Company's subsidiaries entered into a credit facility
(the "US Facility") with a lender to provide up to $5,000,000 of unsecured
working capital. The US Facility bore interest at 1.75% above the London
Interbank Offer Rate and expired in June 2002. No amounts were outstanding under
the US Facility at June 29, 2002 and June 30, 2001.
NOTE 9 - SENIOR NOTES:
On July 30, 1998, the Company consummated a private placement of $15,000,000 of
unsecured senior notes ("Senior Notes"). The notes bore interest at 11%, and the
maturity date was July 15, 2005. Interest payments were due quarterly. The
amortization of the deferred costs associated with the Senior Notes was included
in interest expense in the accompanying consolidated statements of operations.
As of June 29, 2002 and June 30, 2001, the outstanding balances of the Senior
Notes were $14,933,931 and $14,912,501, respectively.
On August 15, 2002, the Company repurchased and cancelled the Senior Notes. See
Note 24, "Subsequent Events".
NOTE 10- OTHER LIABILITIES:
Other liabilities consist of the following:
June 29, June 30,
2002 2001
---- ----
Deferred compensation $5,960,641 $4,736,740
Licensing related obligations 2,659,604 2,899,032
Other 217,256 290,518
---------- ----------
Total other liabilities $8,837,501 $7,926,290
========== ==========
F-15
Deferred compensation represents 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
agreements. An asset associated with such deferred compensation arrangements was
also recorded in other assets in the accompanying balance sheets as of June 29,
2002 and June 30, 2001, respectively. Licensing related obligations represent
the total amount equal to the present value of future payments related to
various licensing agreements. See Note 15, "Commitments and Contingencies."
NOTE 11 - STOCKHOLDERS' EQUITY:
On September 26, 2000, the Company sold, pursuant to an underwritten public
offering, 3,900,000 shares of its no par value common stock ("Common Stock") at
a price of $23.00 per share. Pursuant to an over-allotment option granted to the
underwriters, the Company sold an additional 585,000 shares of Common Stock on
October 3, 2000 at a price of $23.00 per share. The net proceeds of the offering
to the Company were approximately $96,881,000, after deducting offering costs
and underwriting fees of approximately $6,274,000 from gross proceeds of
$103,155,000. The use of the offering proceeds was intended to repay 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.
In the fourth quarter of Fiscal 2000, the Board of Directors of the Company
("Board") authorized the Company to issue up to 1,000,000 shares of blank check
preferred stock, with such rights and preferences as may be determined by the
Board from time to time. None of this preferred stock has been issued to date.
On April 14, 2000, the Company effected a two-for-one stock split of its 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 the
accompanying consolidated financial statements have been restated to reflect the
stock split.
The Company has not declared or paid any cash dividends for any of the fiscal
years presented in the accompanying consolidated financial statements.
On August 23, 1995, the Compensation Committee of the Board approved stock
purchase awards under the Management Equity Provisions of the Company's 1993
Incentive Plan ("Incentive Plan" or "1993 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, as 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 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 Incentive
Plan. If issued, such contingent restricted shares were to vest over a
three-year period and were subject to forfeiture prior to vesting under certain
conditions.
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 bear interest at an annual rate of 6%. Concurrently with the
execution of their respective Purchase Agreements and Notes, 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.
F-16
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 the Company's
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 covered thereby 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
$5.00 (pre-split adjustment) 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 will continue
on January 1 each year through January 1, 2003. The total principal sum subject
to forgiveness under the Release Program is $2,386,500, together with interest
owed under the Notes. The debt forgiveness is conditioned upon the person's
continued employment with the Company. If a person ceases to be an employee or
consultant of the Company prior to full forgiveness of the debt, the principal
balance of the Note will immediately become due and payable, including any
amounts scheduled to be forgiven at a future date.
As contemplated by the Management Equity Provisions, 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 current members. The
Purchased Shares and options awarded pursuant to the Management Equity
Provisions are presently held by Ira B. Lampert, Brian F. King, Keith L.
Lampert, Harlan I. Press and Arthur Zawodny.
In January 2000, the Board further provided that a participant in the Management
Equity Provisions would have the right to prepay all or any portion of the
indebtedness represented by a Note issued in connection with the purchase of
shares, 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 following are the scheduled release dates, and the total amounts that are
(or were, as the case may be) to be forgiven* on such dates, under the Release
Program.
Total Principal Total Purchased
Indebtedness Forgiven Shares Released
Releasee Release Dates or to be Forgiven or to be 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
F-17
-----------
* After the January 1, 2000 release date, the balance of these amounts were
repaid in full. Ira B. Lampert, Brian King, Keith Lampert and Arthur Zawodny
have each prepaid in full the balance of the debts represented by their Notes
and, assuming their continued employment with the Company, will be entitled to
receive deferred compensation in lieu of the amounts scheduled to be forgiven
under the Release Program.
NOTE 12 - STOCK OPTION PLANS:
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 ("2002 Plan").
The 2002 Plan permits the Company's Compensation Committee or Board to grant, in
their discretion, a variety of Common Stock awards on a stand-alone,
combination, or tandem basis. The 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 on the date the Board of Directors approved the
exchange offer.) The exchange offer expired on October 16, 2001. Options to
purchase 1,375,876 shares of Common Stock were tendered in the exchange offer
and accepted by the Company for cancellation and new options to purchase
1,031,908 shares of Common Stock were issued in exchange therefor. As a result
of the exchange offer, the Company is required to apply variable accounting for
these stock option grants until the options are exercised, cancelled or expired.
For Fiscal 2002, the Company did not record any variable stock-based
compensation expense in the accompanying consolidated statements of operations
because the Company's ending Common Stock price on June 29, 2002 was below the
exercise price of $5.97.
The Company's Incentive Plan permits the Compensation Committee of the Company's
Board to grant a variety of Common Stock awards and provides for a formula plan
for annual grants to non-employee directors. As amended, the Incentive Plan
provides for a maximum number of 3,616,249 shares of Common Stock available for
awards. The Incentive Plan expires in December 2003.
The Company, from time to time, will grant stock options to certain individuals
as part of an `individual employee stock option plan' as an inducement to
employment. These grants are not part of the Incentive Plan.
F-18
Stock option activity is as follows:
1993 Plan 2002 Plan Individual Plans
------------------------------- ------------------------------- ----------------- -----------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------- ----------------- -------------- ---------------- ----------------- -----------------
Outstanding at July 3, 1999 2,528,296 $1.24 1,266,332 $1.72
-- --
Canceled (29,326) $2.86 -- -- (64,000) $6.45
Granted 1,306,874 $19.73 -- -- 287,500 $9.48
Exercised (306,796) $1.52 -- -- (217,400) $2.10
------------- ----------------- -------------- ---------------- ----------------- ------------
Outstanding at July 1, 2000 3,499,048 $8.31 1,272,432 $3.17
-- --
Canceled (200,000) $22.19 -- -- (60,834) $14.06
Granted 269,500 $8.63 -- -- 317,500 $17.90
Exercised (325,000) $1.56 -- -- (267,600) $2.65
------------- ----------------- -------------- ---------------- ----------------- ------------
Outstanding at June 30, 2001 3,243,548 $7.55 1,261,498 $7.07
-- --
Canceled (1,090,965) $20.82 -- -- (403,832) $17.13
Granted 1,101,884 $6.06 6,000 $5.35 367,000 $6.11
Exercised (43,125) $1.66 -- -- (74,500) $2.97
------------- ----------------- -------------- ---------------- ----------------- ------------
Outstanding at June 29, 2002 3,211,342 $3.18 6,000 $5.35 1,150,166 $3.44
============= ================= ============== ================ ================= ============
Exercisable at June 29, 2002 2,707,810 $2.72 -- -- 733,698 $2.55
============= ================= ============== ================ ================= ============
Exercisable at June 30, 2001 2,602,041 $6.37 -- -- 705,664 $4.17
============= ================= ============== ================ ================= ============
Exercisable at July 1, 2000 2,575,294 $4.75 -- -- 676,398 $1.65
============= ================== ============= ================ ================ =============
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 June 29, 2002 Life Exercise Price June 29, 2002 Exercise Price
----------- ------------ ---------------- ------------- --------------- --------------- --------------
$.50 $1 818,666 4.5 $0.91 818,666 $0.91
$ 1 $2 951,500 3.1 $1.30 941,500 $1.29
$ 2 $4 145,000 5.0 $2.50 123,000 $2.45
$ 4 $6 991,009 6.7 $5.81 653,982 $5.96
$ 6 $8 260,167 7.2 $6.67 131,662 $6.66
$ 8 $9 45,000 5.5 $8.23 39,000 $8.22
------------ ------------- -------------- ------------- ------------
$.50 $9 3,211,342 5.0 $3.18 2,707,810 $2.72
============ ============= ============== ============== ============
F-19
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 June 29, 2002 Life Exercise Price June 29, 2002 Exercise Price
----------- ------------ ---------------- ------------- --------------- --------------- --------------
$4 $6 6,000 10.0 $5.35 -- --
--------------- --------------- ------------- ------------- ---------------
$4 $6 6,000 10.0 $5.35 -- --
=============== ================ ============= ============= ===============
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 June 29, 2002 Life Exercise Price June 29, 2002 Exercise Price
-------- --------- ----------------------------------------------- ---------------------------------
$.50 $1 -- -- -- -- --
$1 $2 442,000 1.5 $1.27 442,000 $1.27
$2 $4 257,666 2.7 $2.40 130,666 $2.55
$4 $6 296,500 8.1 $5.70 137,700 $5.91
$6 $8 140,000 8.8 $6.93 23,332 $6.86
$8 $9 14,000 9.8 $8.31 -- --
-------------- ------------- ----------- -------------- ------------
$.50 $9 1,150,166 4.5 $3.44 733,698 $2.55
============== ============= =========== ============== ============
1993 2002 Individual
At June 29, 2002: Plan Plan Plans Total
----------------- ------------------ -------------- -------------- --------------
Shares of common stock available for future grants 404,907 494,000 -- 898,907
Shares of common stock reserved for future issuances 3,211,342 6,000 1,150,166 4,367,508
The Company accounts for its stock option plans using the intrinsic value method
prescribed by APB No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations, under which no compensation cost for stock options is
recognized for stock option awards granted at or above fair market value.
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.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, "Accounting for Stock Issued to Employees" ("SFAS No. 123"), and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The effects of applying
SFAS No. 123 for either recognizing compensation expense or providing pro forma
disclosures are not likely to be representative of the effects on reported net
income 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 June 29, 2002:
F-20
Fiscal 2002 Fiscal 2001 Fiscal 2000
--------------- ---------------- ---------------
Risk- Free Interest Rate 3.3% 3.5% 4.6%
Expected Option Lives 3-5 years 3-4 years 3-4 years
Expected Volatilities 0.883 0.871 0.749
Expected Dividend Yields 0% 0% 0%
Weighted Average Fair Value
of Options Granted $1.85 $6.51 $7.67
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 the purposes of pro forma disclosures, the estimated fair value of the
equity awards is amortized to expense over the options vesting period. The
Company's pro forma information is as follows:
Fiscal Year
-----------
2002 2001 2000
---- ---- -----
Net (loss) income $ (5,247,789) $ (11,770,350) $19,598,567
Pro forma stock option expense (3,711,672) (5,034,461) (1,220,369)
------------ ------------- ----------
Pro forma net (loss) income $ (8,959,461) $ (16,804,811) $18,378,198
============ ============== ============
Pro forma basic net (loss) income per share $ (0.33) $(0.65) $ 0.84
======= ======= ======
Pro forma diluted net (loss) income per share $ (0.33) $(0.65) $ 0.76
======= ======= ======
F-21
NOTE 13 - DEFINED CONTRIBUTION PLAN:
The Company maintains a defined contribution plan ("401(k)") that covers
substantially all employees meeting certain service requirements. The Company,
in 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 2002, Fiscal 2001, and Fiscal 2000, the Company's expenses related
to the 401(k) were $235,000, $224,000, and $168,000, respectively.
NOTE 14- INCOME TAXES:
(Loss) income before income taxes in the accompanying consolidated statements of
operations consists of the following:
Year Ended
----------
June 29, June 30, July 1,
2002 2001 2000
------------ ------------- ------------
United States $(3,104,734) $ (126,216) $27,000
Foreign (3,545,885) (12,574,983) 16,820,178
----------- ------------ -----------
$(6,650,619) $(12,701,199) $16,847,178
=========== ============ ===========
The benefit for income taxes is comprised of the following:
Year Ended
----------
June 29, June 30, July 1,
2002 2001 2000
---- ---- ----
Current:
United States $ -- $591,230 $298,000
Foreign -- -- --
1,183,000
Deferred:
United States (1,120,509) (525,265) (4,522,579)
Foreign (282,321) (996,814) 290,190
------------ ---------- ------------
$ (1,402,830) $ (930,849) $ (2,751,389)
============ ========== ============
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 carryforwards. The tax effects of significant items
comprising the Company's deferred tax assets and liabilities as of June 29, 2002
are as follows:
F-22
United States Foreign
------------- -------
Federal State Hong Kong Europe Total
------- ----- --------- ------ -----
Deferred Tax Liabilities:
-------------------------
Difference between book and tax
basis of property $ -- $ -- $(866,609) $ -- $(866,609)
Other deferred liabilities (115,876) -- (15,250) (131,126)
---------- ----------- ------------ ----------- ---------
Total deferred liabilities $ (115,876) $ -- $ (881,859) $ -- $ (997,735)
========== =========== ============ =========== ==========
Deferred Tax Assets:
Operating loss carryforwards 2,707,568 168,681 1,322,026 1,087,409 5,285,684
Reserves not currently deductible 256,789 12,032 -- -- 268,821
Depreciation 157,483 9,836 -- -- 167,319
Compensation accruals 2,562,229 172,131 -- -- 2,734,360
Difference between book and tax
basis of property 128,840 7,879 -- -- 136,719
Tax credits 128,799 -- -- -- 128,799
Amortization 604,333 19,462 -- -- 623,795
Contributions carryover 307,543 25,973 -- -- 333,516
Other deferred tax assets 2,359 3,718 -- 66,120 72,197
---------- ----------- ------------ ----------- ----------
Total deferred tax assets $6,855,943 $ 419,712 $ 1,322,026 $ 1,153,529 $9,751,210
========== =========== ============ =========== ==========
Less: valuation allowance -- -- -- (1,153,529) (1,153,529)
---------- ----------- ------------ ----------- ----------
Net deferred tax asset $6,740,067 $ 419,712 $ 440,167 $ -- $7,599,946
========== =========== ============ =========== ==========
The net deferred tax assets included in "Prepaid expenses and other current
assets" in the accompanying consolidated balance sheet at June 29, 2002 was
$706,584 and the net deferred tax assets included in "Other assets" in the
accompanying consolidated balance sheet at June 29, 2002 was $6,893,362.
The tax effects of significant items comprising the Company's deferred tax
assets and liabilities as of June 30, 2001 are as follows:
United States Foreign
------------- -------
Federal State Hong Kong Europe Total
------- ----- --------- ------ -----
Deferred Tax Liabilities:
-------------------------
Difference between book and tax
basis of property $ -- $ -- $(1,202,322) $ -- $(1,202,322)
---------- ----------- ----------- ----------- -----------
Other deferred liabilities -- -- $ (4,754) (6,670) (11,424)
---------- ----------- ----------- ----------- -----------
Total deferred liabilities $ -- $ -- $(1,207,076) $ (6,670) $(1,213,746)
========== =========== =========== =========== ===========
F-23
Deferred Tax Assets:
Operating loss carryforwards 3,354,524 314,781 1,065,000 2,158,984 6,893,289
Reserves not currently deductible 356,592 22,879 -- 14,054 393,525
Depreciation 122,728 10,348 -- 14.787 147,863
Compensation accruals 1,062,677 85,146 -- -- 1,147,823
Difference between book and tax
basis of property 266,090 26,056 -- -- 292,146
Tax credits 128,799 -- -- -- 128,799
Amortization 428,533 8,954 -- -- 437,487
Contributions carryover 882 4,196 -- -- 5,078
Other deferred tax assets 123,329 22,678 -- -- 146,007
---------- ----------- ----------- ----------- -----------
Total deferred tax assets $5,844,154 $ 495,038 $ 1,065,000 $ 2,187,825 $ 9,592,017
========== =========== =========== =========== ===========
Less: valuation allowance -- -- -- (2,181,155) (2,181,155)
---------- ----------- ----------- ----------- -----------
Net deferred tax asset $5,844,154 $ 495,038 $ (142,076) $ -- $ 6,197,116
========== =========== =========== =========== ===========
The net deferred tax assets included in "Prepaid expenses and other current
assets" in the accompanying consolidated balance sheet at June 30, 2001 was
$477,747 and the net deferred tax assets included in "Other assets" in the
accompanying consolidated balance sheet at June 30, 2001 was $5,719,369.
Since July 1998, the Company's Hong Kong subsidiary's annual tax rate has been
8.0%. The Company currently does not pay taxes or import/export duties in the
PRC on its processing activities, but there can be no assurance that the Company
will not be required to pay such taxes or duties in the future. Income derived
from Hong Kong business activities is taxed separately from the PRC.
The Company has never paid any income or turnover tax to the PRC on account of
its processing 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 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 its financial
statements.
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
$41,761,000 as of June 29, 2002. It is not practicable to estimate the amount of
tax that might be payable on the eventual remittance of such earnings. Upon
eventual remittance, no withholding taxes will be payable under current law. As
of June 29, 2002, Concord had net operating loss carryforwards for U.S. tax
purposes of approximately $12,630,000, of which approximately $4,257,000 and
$3,982,000 as of June 29, 2002 and June 30, 2001, respectively, were
attributable to deductions associated with stock option exercises. The net
operating loss carryforwards expire as follows: $854,000 in 2008, $2,716,000 in
2009, $4,094,000 in 2010, $390,000 in 2014 and the balance thereafter. Net
operating losses of approximately $1,705,000 for state tax purposes begin
expiring in 2021. Additionally, the Company has approximately $19,562,000, of
which $16,525,000 relates to Hong Kong, of operating loss carryforwards related
to its foreign operations which have no expiration dates.
F-24
As of June 29, 2002, management evaluated the Company's deferred tax asset. As
part of assessing the realizability of its deferred tax assets, management
evaluated whether it is more likely than not that some portion, or all of its
deferred tax assets, will be realized. The realization of its U.S. and Hong Kong
deferred tax assets relates directly to the Company's tax planning strategies
and the ability to generate taxable income for U.S. federal and state tax
purposes and Hong Kong purposes. As of June 29, 2002, based on all the available
evidence, management determined that it is more likely than not that its U.S.
and Hong Kong deferred tax assets will be fully realized. Accordingly, there was
no valuation allowance recorded against its U.S. deferred tax asset at June 29,
2002. The Company's management also evaluated its European deferred tax assets
and determined that a full valuation allowance of $1,153,529 and $2,181,155 at
June 29, 2002 and June 30, 2001, respectively, was appropriate. For Fiscal 2002,
Fiscal 2001, and Fiscal 2000, the Company's effective tax rate was (21.1%),
(7.3%), and (16.3%), respectively. The Company's future effective tax rate will
depend on the mix between foreign and domestic taxable income and losses, and
the statutory rates of the related tax jurisdictions.
Historically, the Company had maintained full valuation allowances against its
deferred tax assets. As of July 1, 2000, based on all the available evidence,
management determined that it is more likely than not that its U.S. deferred tax
assets will be fully realized. Accordingly, the valuation allowance was reversed
in full and $4,517,580 was recognized as a deferred tax asset at July 1, 2000.
A reconciliation of income tax expense computed at the statutory U.S. federal
rate to the actual benefit for income taxes is as follows:
Year Ended
----------
June 29, June 30, July 1,
2002 2001 2000
-------- -------- -------
Computed tax (benefit) at statutory U.S. federal tax rates $ (2,327,717) $ (4,445,419) $ 5,728,040
Earnings of foreign subsidiaries subject to a different tax rate 2,056,778 3,461,949 (2,994,480)
Reversal of valuation allowance -- -- (6,024,148)
U.S. permanent differences 44,461 -- --
U.S. federal minimum tax -- -- 95,000
Utilization of European valuation allowance (1,123,495) -- --
State income tax, net of federal benefit (78,314) 75,762 203,000
Other 25,457 (23,141) 241,199
----------- ---------- ------------
Benefit for income taxes $(1,402,830) $ (930,849) $ (2,751,389)
=========== ========== ============
F-25
NOTE 15- COMMITMENTS AND CONTINGENCIES:
Offices and Warehouses
United States
The Company's principal offices, including the U.S. design center, are
approximately 15,000 square feet at 4000 Hollywood Blvd., Hollywood, Florida.
The Company's domestic warehouse is approximately 13,700 square feet, about 825
square feet of which is office space, in Fort Lauderdale, Florida. The Company's
leases for these facilities provide for rent of approximately $23,000 and $7,500
per month, respectively, with annual increases of 4% and 3%, respectively, and
expire on September 30, 2010, and January 31, 2009, respectively.
Hong Kong
The Company leases a total of approximately 32,915 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 2004, 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 the Company-owned manufacturing
facilities located in the Longgang District of Shenzhen, PRC (the "Company
Facility"). The Company leases employee dormitories and canteens (the
"Dormitories") at a cost of approximately $44,000 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
$4,000,000. 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 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 will have the right 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 the
UK that is used in connection with its operations in the UK. 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.
Leases
The Company also leased various fixed assets that have been 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 paid off the remaining balance of its capital lease obligations.
The following is a summary of assets under capitalized leases:
June 29, June 30,
2002 2001
-------- --------
Assets under capitalized leases $ -- $3,555,457
Less: accumulated amortization -- (1,578,641)
-------------- ----------
$ -- $1,976,816
============== ==========
F-26
Future minimum rental payments are as follows:
Fiscal Year Operating leases
----------- ----------------
2003 $1,493,727
2004 $1,043,627
2005 $ 717,540
2006 $ 654,608
2007 $ 488,028
Thereafter $2,066,478
---------
Total minimum payments $ 6,464,008
===========
Rental expense for operating leases of approximately $1,628,000, $1,943,000, and
$1,204,000 was incurred for Fiscal 2002, Fiscal 2001 and Fiscal 2000,
respectively.
Executive SERPS and Employment Agreements
Pursuant to the employment agreement between the Company and Ira B. Lampert
dated as of May 1, 1997, as amended (the "Lampert Agreement"), Mr. Lampert
serves in the capacities of Chairman, Chief Executive Officer and President of
the Company. The Lampert Agreement provides for an annual salary of $900,000
(voluntarily reduced effective as of July 1, 2001 to $800,000 per annum), has a
term of four years and provides for the term of employment to be automatically
extended for one additional day for each day of the term of employment during
which neither party notifies the other that the term should not be extended. The
Lampert Agreement prohibits Mr. Lampert from competing with the Company for a
one-year period following the termination of his employment with the Company.
Pursuant to the Lampert Agreement, the Company adopted a supplemental executive
retirement plan which was later amended and restated as of April 19, 2000 (the
"Lampert SERP") for the benefit of Mr. Lampert. A specified amount, currently
$500,000, is credited to the Lampert SERP account each year (the "Yearly
Credit"). The Yearly Credits are 100% vested and not subject to forfeiture. Each
time the Company credits a Yearly Credit to the Lampert SERP account, the
Company simultaneously contributes an amount equal to such credit to a trust
established for the purpose of accumulating funds to satisfy the obligations
incurred by the Company pursuant to the Lampert SERP.
The Company also has employment agreements with its other executive officers
that provide for annual salaries ranging from approximately $180,000 to
$450,000, 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. Each agreement contains, 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.
In connection with a one-time grant of deferred compensation to the following
executive officers, effective as of April 19, 2000, the Company adopted a
Supplemental Executive Retirement Plan and Agreement for the benefit of each of
Brian F. King, Keith L. Lampert, Urs W. Stampfli and Harlan I. Press (the
"Executive SERPs"). The Company simultaneously contributed the following amounts
to trusts established for the purpose of holding funds to satisfy the Company's
obligations under each of the Executive SERPs: (i) under the plan for Brian F.
King, $750,000; (ii) under the plan for Keith L. Lampert, $450,000, (iii) under
the plan for Harlan I. Press, $165,000, and (iv) under the plan for Urs W.
Stampfli, $110,000. The amounts in the Executive SERP accounts vest, so long as
the executive continues to be employed by the Company, in three equal annual
installments beginning January 1, 2001 or immediately upon: (i) a change of
control of the Company; or (ii) a termination of the executive's employment by
the Company without cause. The Company simultaneously approved a one-time grant
of deferred compensation to Ira B. Lampert in the amount of $1,549,999 with the
same vesting schedule as under the Executive SERPs. The Lampert SERP includes
appropriate terms to govern the one-time grant of deferred compensation to Mr.
Lampert.
F-27
In connection with a one-time grant of deferred compensation to Gerald J. Angeli
as of July 31, 2001, the Company adopted a Supplemental Executive Retirement
Plan and Agreement (the "Angeli SERP") for the benefit of Mr. Angeli and
contributed $115,000 to a trust established for the purpose of holding funds to
satisfy its obligations under the Angeli SERP. The amounts in the Angeli SERP
account vest, so long as Mr. Angeli continues to be employed by the Company, in
five annual installments increasing from $11,500 on June 11, 2002 and 2003, to
$23,000 on June 11, 2004 and $34,500 on June 11, 2005 and 2006.
The Lampert SERP and the Executive SERPs 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 7, "Other
Assets", and Note 10, "Other Liabilities", of the accompanying notes to the
consolidated financial statements.
Customer Supply Agreement
Under a July 1999 OEM supply agreement which expired in January 2002, an OEM
customer submitted a claim which has been disputed by the Company. The Company
is currently in discussions with the customer. The Company believes it has
adequately provided for the claim and that amounts accrued as of June 29, 2002
are sufficient.
License and Royalty Agreements
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 Concord a worldwide (excluding Japan until January 1, 2005)
non-exclusive license to use Fuji's portfolio of patents and patent applications
related to single use cameras. In consideration of the license, Concord has
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 June 29, 2002
and June 30, 2001 was an asset associated with the Fuji license. Concord 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 June 29, 2002, and June 30, 2001 which was equal
to the present value of future license fee payments. Because these recorded
amounts were the result of a non-cash transaction, they are not reflected in the
changes in other assets and other liabilities in the accompanying consolidated
statement of cash flow for Fiscal 2001. 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.
In August 2002, the Company entered into two trademark licensing agreements with
the entity that purchased the assets of Polaroid in an asset purchase
transaction approved by the U.S. Bankruptcy Court supervising the Polaroid
reorganization. See Note 24, "Subsequent Events" of the accompanying notes to
the consolidated financial statements.
F-28
NOTE 16-- LITIGATION AND SETTLEMENTS:
In July 2002, an amended class action complaint was filed against the Company
and certain of its officers in the United States District Court for the Southern
District of Florida by individuals purporting to be shareholders of the Company.
The lead plaintiffs in the amended complaint seek to act as representatives of a
class consisting of all persons who purchased the Company's Common Stock during
the period from May 1, 2000 through June 22, 2001, inclusive (the "Class
Period"). The complaint asserts, among other things, that the Company made
untrue statements of material fact and omitted to state material facts necessary
to make statements made not misleading in periodic reports it filed with the
Securities and Exchange Commission and in press releases it made to the public
regarding its operations and financial results. The allegations are centered
around claims that at the outset the Company failed to disclose that the
transaction with then customer, KB Gear Interactive, Inc. ("KB Gear"), was a
highly risky transaction, claims that throughout the Class Period the Company
failed to disclose that a large portion of its accounts receivable was
represented by a delinquent and uncollectible balance due from then customer, KB
Gear, and claims that such failure artificially inflated the price of the Common
Stock. The complaint seeks unspecified damages, interest, attorneys' fees, costs
of suit and unspecified other and further relief from the court. The Company
intends vigorously to defend the lawsuit. The lawsuit is in the earliest stage
and discovery has not yet commenced. The Company filed a motion to dismiss the
lawsuit on August 30, 2002. Although the Company believes this lawsuit is
without merit, its outcome cannot be predicted, and if adversely determined, the
ultimate liability of the Company, which could be material, cannot be
ascertained. On September 17, 2002, the Company was advised by the staff of the
Securities and Exchange Commission that it is conducting an informal inquiry
related to the matters described above.
In April 2002, a patent infringement complaint was filed by the Massachusetts
Institute of Technology and Electronics for Imaging, Inc. against 214
defendants, including the Company, in the United States District Court for the
Eastern District of Texas. The complaint asserts that the defendants have
offered for sale and sold products that infringe United States Patent No.
4,500,919, entitled Color Reproduction System, which patent expired on May 4,
2002. The complaint seeks unspecified damages, interest, attorneys' fees, costs
of suit and unspecified other and further relief from the court. Although the
Company believes this lawsuit is without merit, its outcome cannot be predicted,
and if adversely determined, the ultimate liability of the Company, which could
be material, cannot be ascertained.
All of the Company's litigation and arbitration proceedings with its former
chief executive officer, Jack C. Benun ("Benun"), have been concluded. In early
October 2001, the Company realized the award of $1,133,246 plus $45,175 of post
award interest for a total of $1,178,421 and a total of $202,740 was remitted to
Benun in payment of a loan previously made by Benun to the Company. The award
was recorded as other income and included under the caption "Other (income),
net" in the accompanying condensed consolidated statement of operations for
Fiscal 2002. As a result of the foregoing, the New Jersey action instituted by
Benun was dismissed with prejudice.
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 17 - RELATED PARTY TRANSACTIONS:
On May 1, 2002, the Company entered into a consulting agreement with William J.
Lloyd, a member of the Board of Directors. Pursuant to the agreement, Mr. Lloyd
is to provide consulting services to the Company on an as needed basis in
exchange for a $5,000 per month retainer payable at the end of each calendar
month and reimbursement of all reasonable business expenses. The term of the
agreement continues from May 1, 2002 until terminated by either party and may be
terminated by either party upon providing thirty days notice.
A corporation controlled by J. David Hakman has provided consulting services to
the Company since 1997 pursuant to an engagement agreement entered into on
September 25, 1997, as later amended and supplemented (the "Hakman Agreement").
Pursuant to the Hakman Agreement, the Company granted a warrant with a five-year
term expiring September 25, 2002 to purchase up to 260,000 shares of Common
Stock at an exercise price of $2.25 per share to the corporation controlled by
Mr. Hakman. In October 2000, the corporation exercised the warrant as to all
113,000 shares that had vested up until that time. As of June 29, 2002 147,000
shares remained subject to the warrant and 20,000 of those shares were vested
and exercisable. See Note 24, "Subsequent Events".
F-29
NOTE 18 - RESTRUCTURING INITIATIVES AND OTHER CHARGES:
During the fourth quarter of the Fiscal 2001, the Company announced a
restructuring and cost containment initiative ("Restructuring Initiative") to
improve its competitiveness and operating efficiency and to reduce its cost
structure. The Restructuring Initiative was fully implemented by the end of
Fiscal 2002 and consisted of facilities consolidation, the closure of the
Company's single use camera short run labeling facility in the United States,
and the termination of approximately 71 employees primarily employed in
manufacturing, engineering, sales and marketing and administration functions.
The Company has also reduced its manufacturing workforce in the PRC by
approximately 2,000 workers. Costs accrued for the Restructuring Initiative were
approximately $1,400,000, which were comprised of approximately $400,000 related
to the closure of facilities and approximately $1,000,000 related to personnel
redundancy costs. During Fiscal 2002, the Company incurred approximately
$952,000 in payments related to personnel redundancy costs and facilities
consolidation. During the fourth quarter, the Company reversed the remaining
accrual balance of $448,000 by recording a corresponding reduction in cost of
products sold and general and administrative expenses in the amounts of $135,000
and $313,000, respectively. The table below summarizes the balance of the
accrued Restructuring Initiative liability and the utilization of that accrual
during Fiscal 2002:
Accrued Accrued
Balance Balance
June 30, 2001 Payments Reversals June 29, 2002
------------- ----------- ------------ -------------
Personnel redundancy $ 1,000,000 $ (762,000) $ (238,000) $ --
Facilities consolidation 400,000 (190,000) (210,000) --
----------- ---------- ---------- ---------
$ 1,400,000 $ (952,000) $ (448,000) $ --
=========== ========== ========== =========
In the accompanying consolidated balance sheet at June 30, 2001, the Company
recorded approximately $1,400,000 in accrued expenses related to the
Restructuring Initiative. In the accompanying consolidated statement of
operations for Fiscal 2001, the Company recorded approximately $500,000 and
$900,000 related to the Restructuring Initiative under costs of products sold
and general and administrative expenses, respectively.
During the third quarter of Fiscal 2002, the Company recognized a provision for
inventory of approximately $2,250,000 principally related to the rationalization
of sub-one megapixel digital inventory comprised of components and finished
goods. The Company recorded the provision for inventory in costs of products
sold in the accompanying statements of operations.
During the second quarter of Fiscal 2002, the Company recognized a provision
related to accounts receivable of $960,000 ("Kmart Provision") associated with
Kmart Corporation ("Kmart"), 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 $288,000 associated with the
sale to a third party of the Kmart account 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 consolidated statements of
operations.
F-30
During the first quarter of Fiscal 2002, the Company recognized a provision for
doubtful accounts of approximately $1,611,000, and a provision for inventory of
approximately $1,761,000. 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. In the third
quarter of Fiscal 2002, the Company recorded approximately $750,000 of income by
relieving part of the $1,761,000 provision related to the Polaroid inventory as
a result of sales to Polaroid of Polaroid inventory.
During the fourth quarter of Fiscal 2001, the Company recognized a provision for
doubtful accounts of approximately $15,800,000, and a provision for inventory of
approximately $2,714,000. These provisions related to a former OEM customer and
were included in general and administrative expense and cost of products sold,
respectively, in the accompanying consolidated statements of operations for
Fiscal 2001. Additionally, in the fourth quarter of Fiscal 2001, the Company
recorded a $2,000,000 provision resulting from inventory written down to the
lower of cost or market value. These costs were included in the cost of products
sold in the accompanying consolidated statement of operations for Fiscal 2001.
NOTE 19- 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
$1,250,000 over an eighteen-month period ending in April 2002, the preponderance
of which occurred in Fiscal 2002. To date, the Company's ongoing investigation
confirms that the former employee acted alone and the misappropriated funds have
been identified. The Company expects to recover the full amount of the
embezzlement from a combination of insurance proceeds and assets secured and to
be recovered from the individual. Accordingly, the recovery of approximately
$1,250,000, net of an approximate $95,000 cash recovery resulting in a net
receivable of $1,155,000, has been recorded as an accrued receivable and is
included in prepaid and other current assets in the accompanying consolidated
balance sheet as of June 29, 2002. In addition, the Company has recorded under
the caption recovery of operating expenses, net in the accompanying consolidated
statement of operations for Fiscal 2002, approximately $1,150,000 related to the
recovery, which is net of approximately $100,000 of expenses related to the
investigation and recovery efforts. The entire amount of the recovery was
recorded in the third quarter of Fiscal 2002 due to the fact that it is
impractical to determine the impact on Fiscal 2002 quarterly periods. The
embezzled amounts related to the prior fiscal year were not significant.
NOTE 20- TERMINATED ACQUISITION COSTS:
Terminated acquisition costs of approximately $800,000 for Fiscal 2001 were
related to a proposed acquisition that was not consummated. Negotiations
regarding this acquisition were terminated in September 2000.
NOTE 21 - OTHER (INCOME), NET:
Included in the accompanying consolidated statements of operations under the
caption, other (income), net is the following:
June 29, June 30, July 1,
2002 2001 2000
-------- -------- -------
Investment income $(2,350,588) $(5,123,000) $(1,359,231)
Arbitration Award (1,178,421) -- --
Foreign currency (gain) loss, net (193,543) (348,283) 143,427
Other expense, net 662,389 579,858 334,042
----------- ----------- -----------
Other (income), net $(3,060,163) $(4,891,425) $ (881,762)
=========== =========== ===========
F-31
NOTE 22 - GEOGRAPHIC AREA INFORMATION:
Pursuant to SFAS No. 131, Disclosure About Segments of a Business Enterprise and
Related Information, the Company is required to report segment information.
Since the Company operates in only one business segment, imaging equipment, and
sells only one type of product, image capture devices, 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 the disclosure, the
Company attributed RSD sales to the region where the customer's home office was
located and all OEM 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:
Year Ended
----------
June 29, June 30, July 1,
Sales made to unaffiliated customers: 2002 2001 2000
-------- -------- -------
Americas $ 68,703,000 $ 56,840,000 $ 28,948,000
Europe 26,257,000 26,315,000 25,285,000
Asia 34,357,000 96,906,000 113,487,000
-------------- ------------- ------------
Total $ 129,317,000 $ 180,061,000 $167,720,000
============= ============= ============
F-32
June 29, June 30,
Identifiable assets: 2002 2001
------------ --------
Americas $ 139,722,000 $ 120,449,000
Europe 9,284,000 11,262,000
Asia 49,070,000 81,955,000
------------- -------------
Total $ 198,076,000 $ 213,666,000
============= =============
In Fiscal 2002, each of the following customers accounted for at least 10% of
consolidated net sales: Walgreen Co. ("Walgreens") and Wal-Mart Stores, Inc.
These companies represented the Company's two largest customers generating net
sales of approximately $25,395,000 (19.6% of total net sales) and $24,048,000
(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 to the financial statements.
In Fiscal 2001, each of the following customers accounted for at least 10% of
consolidated net sales: KB Gear, (former customer), Walgreens, and Eastman Kodak
Company ("Kodak"). Net sales to these companies were approximately $26,216,000
(14.6% of total net sales), $25,854,000 (14.4% of total net sales) and
$22,614,000 (12.6% of total net sales), respectively. In Fiscal 2000, each of
the following customers accounted for at least 10% of consolidated net sales:
Polaroid and Kodak. Net sales to these companies were approximately $43,463,000
(25.9% of total net sales) and $38,787,000 (23.1% of total net sales),
respectively.
No other customer accounted for 10% or more of consolidated net sales during
Fiscal 2002, Fiscal 2001 or Fiscal 2000.
F-33
NOTE 23 - QUARTERLY RESULTS (UNAUDITED):
(Dollars in thousands except per share data)
Quarter Ended
-------------
Sept 29, Dec 29, Mar 30, June 29,
2001 2001 2002 2002
-------- ------- ------- --------
Net sales $32,887 $39,266 $26,422 $30,742
Gross profit 5,744 7,328 1,807 4,094
(Loss) income before income taxes (1,438) (1,414) (3,965) 166
Net (loss) income (1,269) (1,555) (3,348) 924
Basic (loss) earnings per share $(0.04) $(0.06) $(0.12) $0.03
Diluted (loss) earnings per share $(0.04) $(0.06) $(0.12) $0.03
Quarter Ended
-------------
Sept 30, Dec 30, Mar 31, June 30,
2000 2000 2001 2001
-------- ------- ------- --------
Net sales $61,280 $58,126 $23,798 $36,857
Gross profit 14,287 12,613 416 147
Income (loss) before income taxes 6,764 7,275 (3,535) (23,205)
Net income (loss) 6,206 6,787 (3,737) (21,026)
Basic earnings (loss) per share $0.28 $0.25 $(0.14) $(0.77)
Diluted earnings (loss) per share $0.25 $0.23 $(0.14) $(0.77)
In connection with the adoption of EITF 00-25 in the second quarter of Fiscal
2002, the Company reclassified approximately $702,000 and $1,444,000, for the
first quarter of Fiscal 2002 and Fiscal 2001, respectively, of variable selling
expenses, consisting primarily of advertising and promotional allowances, as a
reduction of net sales resulting in a corresponding reduction of gross profit
and selling expenses with no effect on net income.
NOTE 24 - SUBSEQUENT EVENTS
On August 15, 2002, the Company repurchased their outstanding $15,000,000 11%
Senior Notes due 2005. The Company paid slightly below par to repurchase and
cancel the Senior Notes, and incurred at the time of repurchase approximately
$300,000 of expense associated with capitalized note and credit costs related to
the repurchase.
F-34
On August 26, 2002, the Company announced it entered into two trademark
licensing agreements with the entity that purchased the assets of Polaroid in an
asset purchase transaction approved by the U.S. Bankruptcy Court supervising the
Polaroid reorganization. The two license agreements provide the Company with the
exclusive, worldwide use of the Polaroid brand trademark in connection with the
manufacture, distribution, promotion and sale of single use cameras and
traditional film based cameras, including zoom cameras, and certain related
accessories. The licenses do not include instant or digital cameras. Each
license includes an initial term of three and a half years and may be renewed,
at Concord's option, for an additional three-year period. Each license agreement
includes provisions for the payment of $3,000,000 of minimum royalties, which
will be fully credited against percentage royalties. In August 2002, the Company
paid a total of $4,000,000, which represented $2,000,000 for each license
agreement, as partial payment of the minimum royalties.
The Hakman Agreement expired on August 31, 2002 and the corporation controlled
by Mr. Hakman holds the right to exercise 77,000 vested shares of Common Stock
subject to the warrant including 57,000 shares which vested on July 31, 2002.
See Note 17, "Related Party Transaction". Since the Hakman agreement expired on
August 31, 2002, the remaining 70,000 unvested shares subject to the warrant
will remain unexercisable until the warrant expires. The warrant will expire, to
the extent not theretofore exercised, on September 25, 2002.
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Schedule II
CONCORD CAMERA CORP.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Charged to
beginning of costs and other Balance at end
Description period expenses accounts Deductions of period
----------- ------------ ---------- ---------- ---------- --------------
1. Provision for doubtful accounts, discounts and allowances
Fiscal Year:
2000 $ 399,705 $ 25,179 -- -- $ 424,884
2001 $ 424,884 $ 277,944 -- -- $ 702,828
2002 $ 702,827 $1,888,856 -- -- $2,591,683
Note: This schedule does not include approximately $15,800,000 related to a
provision recorded for doubtful accounts in Fiscal 2001.
2. Deferred tax valuation allowance
Fiscal Year:
2000 $6,024,148 -- -- $6,024,148 $ --
2001 -- $2,181,155 -- -- $2,181,155
2002 $2,181,155 -- -- $1,027,626 $1,153,529
F-36