Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 2004
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 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 Blvd., 6th Floor, North Tower, Hollywood, Florida 33021
----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(954) 331-4200
--------------
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, no par value - 28,924,637 shares as of April 30, 2004
Index
Concord Camera Corp. and Subsidiaries
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Condensed consolidated balance sheets as of March 27, 2004 (Unaudited) and June 28, 2003.......................3
Condensed consolidated statements of operations (Unaudited) for the quarter and nine months ended
March 27, 2004 and March 29, 2003..............................................................................4
Condensed consolidated statements of cash flows (Unaudited)
for the nine months ended March 27, 2004 and March 29, 2003....................................................5
Notes to condensed consolidated financial statements...........................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................................................26
Item 4. Controls and Procedures.............................................................................................26
Part II. Other Information
Item 1. Legal Proceedings...................................................................................................27
Item 4. Submission of Matters to a Vote of Security Holders.................................................................27
Item 6. Exhibits and Reports on Form 8-K....................................................................................27
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
Concord Camera Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
March 27, June 28,
2004 2003
----------- ----------
Assets (Unaudited)
Current Assets:
Cash and cash equivalents $ 62,290 $ 38,221
Short-term investments - 50,035
Accounts receivable, net 21,138 32,494
Inventories 43,776 32,317
Prepaid expenses and other current assets 6,659 5,122
--------- ---------
Total current assets 133,863 158,189
Property, plant and equipment, net 20,089 21,328
Goodwill, net 3,721 3,721
Other assets, net 18,557 22,576
--------- ---------
Total assets $ 176,230 $ 205,814
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 12,634 $ 22,105
Accrued expenses 12,991 13,023
Other current liabilities 2,110 1,984
--------- ---------
Total current liabilities 27,735 37,112
Other long-term liabilities 11,495 11,874
--------- ---------
Total liabilities 39,230 48,986
Commitments and contingencies
Stockholders' equity:
Blank check preferred stock, no par value,
1,000 shares authorized, none issued - -
Common stock, no par value, 100,000 shares
authorized; 30,410 and 29,464 shares issued
as of March 27, 2004 and June 28, 2003, respectively 142,824 141,109
Paid-in capital 4,911 5,407
Deferred stock-based compensation (63) (190)
Deferred share arrangement 413 -
Retained (deficit) earnings (6,052) 15,070
Accumulated other comprehensive loss - (431)
--------- ---------
142,033 160,965
Less: treasury stock, at cost, 1,599 and 1,543 shares as
of March 27, 2004 and June 28, 2003, respectively (4,620) (4,137)
Less: common stock held in trust, 331 shares as
of March 27, 2004 (413) -
--------- ---------
Total stockholders' equity 137,000 156,828
--------- ---------
Total liabilities and stockholders' equity $ 176,230 $ 205,814
========= =========
See accompanying notes.
3
Concord Camera Corp. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
For the quarter ended For the nine months ended
------------------------------ ----------------------------------
March 27, March 29, March 27, March 29,
2004 2003 2004 2003
--------- --------- --------- ---------
Net sales $ 28,280 $ 36,246 $ 150,744 $ 128,268
Cost of products sold 33,952 27,854 139,214 102,686
--------- --------- --------- ---------
Gross (deficit) profit (5,672) 8,392 11,530 25,582
Selling expenses 3,234 1,886 9,322 5,896
General and administrative
expenses 7,211 5,367 18,737 14,914
Variable stock-based
compensation income (3,700) - (601) -
Interest expense 124 206 494 1,030
Other income,
net (688) (464) (539) (1,429)
--------- --------- --------- ---------
(Loss) income before (11,853) 1,397 (15,883) 5,171
income taxes
Provision for
income taxes 5,743 140 5,239 438
--------- --------- --------- ---------
Net (loss) income $ (17,596) $ 1,257 $ (21,122) $ 4,733
========= ========= ========= =========
Basic (loss) income per
common share $ (0.61) $ 0.05 $ (0.74) $ 0.17
========= ========= ========= =========
Diluted (loss) income per
common share $ (0.61) $ 0.04 $ (0.74) $ 0.16
========= ========= ========= =========
Weighted average
common shares
outstanding - basic 28,774 27,915 28,642 27,858
Dilutive effect of common
stock options - 1,627 - 1,561
--------- --------- --------- ---------
Weighted average
common shares
outstanding - diluted 28,774 29,542 28,642 29,419
========= ========= ========= =========
See accompanying notes.
4
Concord Camera Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
For the nine months ended
----------------------------
March 27, March 29,
2004 2003
--------- ---------
Cash flows from operating activities:
Net (loss) income $ (21,122) $ 4,733
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Increase in deferred tax valuation allowance 7,153 -
Depreciation and amortization 5,218 4,636
Write-off of deferred finance costs - 303
Loss related to available-for-sale investments 916 -
Variable stock-based compensation income (601) -
Reversal of net accrued product costs - (2,234)
Changes in operating assets and liabilities:
Accounts receivable 11,356 3,632
Inventories (11,459) (11,870)
Prepaid expenses and other current assets (1,537) 1,246
Other assets (3,038) (5,077)
Accounts payable (9,471) 2,896
Accrued expenses (33) (893)
Other current liabilities 126 30
Other liabilities (378) 842
--------- ---------
Net cash used in operating activities (22,870) (1,756)
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (3,842) (3,899)
Proceeds from sales of available-for-sale investments 50,429 -
Purchases of available-for-sale investments (880) (50,008)
--------- ---------
Net cash provided by (used in) investing activities 45,707 (53,907)
--------- ---------
Cash flows from financing activities:
Principal repayment of senior notes - (14,934)
Net proceeds from issuance of common stock 1,232 545
--------- ---------
Net cash provided by (used in) financing activities 1,232 (14,389)
--------- ---------
Net increase (decrease) in cash and cash equivalents 24,069 (70,052)
Cash and cash equivalents at beginning of period 38,221 103,868
--------- ---------
Cash and cash equivalents at end of period $ 62,290 $ 33,816
========= =========
See accompanying notes.
5
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 27, 2004
(Unaudited)
Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the quarter ended March 27, 2004 ("Third Quarter Fiscal 2004") and
the nine months ended March 27, 2004 ("Fiscal 2004 YTD") are not necessarily
indicative of the results that may be expected for the fiscal year ending July
3, 2004 ("Fiscal 2004"). For comparative purposes, the following prior periods
have been defined as follows: quarter ended March 29, 2003 ("Third Quarter
Fiscal 2003") and nine months ended March 29, 2003 ("Fiscal 2003 YTD"). The
balance sheet at June 28, 2003 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. Concord Camera Corp., a New Jersey
corporation, and its consolidated subsidiaries (collectively referred to as the
"Company") manage their business on the basis of one reportable segment. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 28, 2003 ("Fiscal 2003").
Note 2 - Summary of Significant Accounting Policies:
Principles of Consolidation
The accompanying condensed 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 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.
Revenue Recognition
Revenues are recognized when title and risk of loss are transferred to the
customer, which is generally when the product is shipped. Revenues are recorded
net of anticipated returns which the Company estimates based on historical rates
of return, adjusted for current events as appropriate, in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 48, Revenue Recognition
When Right of Return Exists. Revenues are also recorded net of certain
allowances provided to customers, including those related to advertising,
discounts, and other promotions, in accordance with Emerging Issues Task Force
("EITF") Issue No. 01-09, Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products).
During the Third Quarter Fiscal 2004, the Company changed its estimate of
anticipated returns for previously recorded sales which had an impact of
reducing "Net sales" in the accompanying Condensed Consolidated Statement of
Operations by $0.7 million and increasing net loss by $(0.2) million, or $(0.01)
per share.
6
Foreign Currency Transactions
The Company operates on a worldwide basis and its results may be adversely or
positively affected by fluctuations of various foreign currencies against the
U.S. Dollar, specifically, the Canadian Dollar, European Euro, British Pound
Sterling, People's Republic of China Renminbi, Hong Kong Dollar and Japanese
Yen. Although the U.S. Dollar is the functional currency for each of the
Company's subsidiaries, certain net sales to customers and purchases of certain
components and services are transacted in local currency, 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 condensed
consolidated statements of operations. Foreign currency gains of $0.6 million
and $0.3 million were included in "Other income, net" for the Third Quarter
Fiscal 2004 and the Third Quarter Fiscal 2003, respectively. Foreign currency
gains of $0.6 million and $0.7 million were included in "Other income, net" for
Fiscal 2004 YTD and Fiscal 2003 YTD, respectively.
Hedging Activities
As of March 27, 2004, the Company was not engaged in any hedging activities and
there were no forward exchange contracts outstanding.
Investments
As of March 27, 2004, the Company did not have any investments classified as
"Short-term investments" in the accompanying condensed consolidated balance
sheet. As of June 28, 2003, the Company's "Short-term investments" as classified
in the accompanying condensed consolidated balance sheet consisted of fixed
income funds that invest in debt securities and are considered
available-for-sale securities. Available-for-sale securities are carried at fair
value, with the unrealized gains and losses, net of tax, reported as a component
of accumulated other comprehensive loss reported in the stockholders' equity
section in the accompanying condensed consolidated balance sheet as of June 28,
2003, unless the loss is other than temporary, and then it is recorded as an
expense. Realized gains and losses, interest and dividends are classified as
investment income in "Other income, net" in the accompanying condensed
consolidated statements of operations. The Company sold the remaining balance of
the short-term investments on December 30, 2003 at a loss of $0.9 million.
Therefore, during the quarter ended December 27, 2003 ("Second Quarter Fiscal
2004"), the Company recorded a $0.9 million loss as a result of the sale of its
short-term investments. The loss on the short-term investments is included in
"Other income, net" in the accompanying condensed consolidated statements of
operations. Dividend income of $0 million and $0.2 million related to the
short-term investments was included in "Other income, net" for the Third Quarter
Fiscal 2004 and the Third Quarter Fiscal 2003, respectively. Dividend income of
$0.9 million and $0.2 million related to the short-term investments was included
in "Other income, net" for Fiscal 2004 YTD and Fiscal 2003 YTD, respectively.
See "Comprehensive Income" below for further discussion of unrealized losses
related to available-for-sale securities. Investments held in deferred
compensation rabbi trusts directed by participants are classified as trading and
changes in the fair value of such investments are recorded in earnings.
Stock-Based Compensation
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, ("SFAS
No. 123") as amended by SFAS No. 148, Accounting for Stock-Based Compensation
and Disclosure, ("SFAS No. 148") the Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, ("APB
No. 25") intrinsic value method and related interpretations in accounting for
its employee stock-based transactions and has complied with the disclosure
requirements of SFAS No. 148. Under APB No. 25, compensation expense is
calculated at the time of option grant, based upon the difference between the
exercise price of the option and the fair market value of the Company's no par
value common stock ("Common Stock"). Compensation expense is recognized over the
option's vesting period. No compensation expense for stock options is recognized
for stock option awards granted at or above fair market value.
7
In fiscal 2002, the Company consummated an exchange offer for certain
outstanding stock options and, as a result, is required to apply variable
stock-based compensation accounting for the new options issued in the exchange
until they are exercised, cancelled or expired. During the Third Quarter Fiscal
2004, the Company recorded $3.7 million of variable stock-based compensation
income in the condensed consolidated statements of operations. During Fiscal
2004 YTD, the Company recorded $0.6 million of variable stock-based compensation
income. For the Third Quarter Fiscal 2003 and Fiscal 2003 YTD, the Company did
not record any variable stock-based compensation expense in the condensed
consolidated statements of operations because the Common Stock price on March
29, 2003 was below the new repriced stock options' exercise price of $5.97.
Because the determination of variable stock-based compensation expense or income
associated with the repriced stock options is dependent upon the market price of
the Common Stock at the end of the applicable reporting period, it is not
possible to determine its future impact, either favorable or unfavorable, on the
Company's consolidated financial statements for prospective reporting periods.
The Company considers all of its variable stock-based compensation expense or
income as a component of general and administrative expenses.
For purposes of pro forma disclosures under SFAS No. 123, as amended by SFAS No.
148, the estimated fair value of the equity awards is amortized to expense over
the options' vesting period. The following table illustrates the effect on net
(loss) income and (loss) income per share if the fair value based method had
been applied to all outstanding and unvested awards in each period (in
thousands, except per share amounts):
For the quarter ended For the nine months ended
------------------------------------- ---------------------------------------
March 27, March 29, March 27, March 29,
2004 2003 2004 2003
-------------- ---------------- ---------------- ----------------
Net (loss) income, as reported $ (17,596) $ 1,257 $ (21,122) $ 4,733
Add: variable stock-based compensation
income, net of related tax effects,
included in the determination of net
(loss) income as reported (3,700) - (601) -
Deduct: total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects (309) (586) (1,096) (1,360)
---------------- ---------------- ---------------- ----------------
Pro forma net (loss) income $ (21,605) $ 671 $ (22,819) $ 3,373
================ ================ ================ ================
(Loss) income per common share:
Basic - as reported $ (0.61) $ 0.05 $ (0.74) $ 0.17
================ ================ ================ ================
Basic - pro forma $ (0.75) $ 0.02 $ (0.80) $ 0.12
================ ================ ================ ================
Diluted - as reported $ (0.61) $ 0.04 $ (0.74) $ 0.16
================ ================ ================ ================
Diluted - pro forma $ (0.75) $ 0.02 $ (0.80) $ 0.12
================ ================ ================ ================
Income Taxes
As of March 27, 2004, management evaluated the Company's deferred tax assets. 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 initiatives
and strategies for U.S. federal and state and Hong Kong tax purposes. The
Company recorded income tax expense of $5.7 million and $5.2 million for the
quarter and nine months ended March 27, 2004, respectively compared to $0.1
million and $0.4 million for the quarter and nine months ended March 29, 2003,
respectively. The increase in income tax expense in both the quarter and nine
months ended March 27, 2004 is primarily due to an adjustment to record a
deferred tax asset valuation allowance of $7.2 million. This adjustment
reflected a change in circumstances which resulted in a judgment that, based on
the provisions in SFAS 109 that restrict the Company's ability to consider
forecasts of future income on tax planning strategies and the effects of the
current results and business environment, amounts of deferred tax assets
relating to the United States, Europe and Hong Kong, may not be realized. The
change in circumstances arises from an assessment of current economic climate,
particularly the continuance of competitive pricing pressures in the industry,
that have provided negative evidence about the Company's ability to realize
certain deferred tax assets. The Company will reverse its valuation allowance
into income when and to the extent sufficient positive evidence arises to
support the realization of the related deferred tax assets.
8
The Company estimates its interim effective tax rate before consideration of a
valuation allowance based upon its projected consolidated annual effective
income tax rate. This rate is largely a function of the amounts of pre-tax
income or loss attributed to both domestic and foreign operations, the
application of their respective statutory tax rates and the anticipated
utilization of available net operating loss carryforwards to reduce taxable
income. A significant portion of the Company's pre-tax loss was generated in
Hong Kong, where the statutory tax rate is 8.75%.
Comprehensive Income
Comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive
Income, ("SFAS No. 130") includes net (loss) income adjusted for certain
revenues, expenses, gains and losses that are excluded from net (loss) income
under accounting principles generally accepted in the U.S. Unrealized gains and
losses related to the Company's available-for-sale investments are included as a
component of "Accumulated other comprehensive loss" reported in the accompanying
condensed consolidated balance sheet as of June 28, 2003. Such gains and losses
are excluded from net income (loss). During the Second Quarter Fiscal 2004, the
Company recorded a realized loss of $0.9 million related to its
available-for-sale securities by reclassifying to expense an unrealized loss of
$0.9 million previously classified within "Accumulated other comprehensive loss"
in the accompanying condensed consolidated balance sheet. See "Investments"
above for a further discussion of available-for-sale securities.
(Loss) Income Per Share
Basic and diluted income (loss) per share are calculated in accordance with SFAS
No. 128, Earnings per Share, ("SFAS No. 128"). All applicable income (loss) per
share amounts have been presented in conformity with SFAS No. 128 requirements.
During the Third Quarter Fiscal 2004 and Fiscal 2004 YTD, the Company issued
53,499 and 946,178 shares of Common Stock, respectively, upon the exercise of
stock options. In Fiscal 2004 YTD, the delivery of 331,011 of the shares issued
under the Company's Deferred Delivery Plan was deferred but the weighted average
effect of those shares was included in the denominator of both basic and diluted
loss per share calculations for the Third Quarter Fiscal 2004 and Fiscal 2004
YTD. See Note 7 - Deferred Share Arrangement. In the Third Quarter Fiscal 2004
and Fiscal 2004 YTD, potentially dilutive securities were comprised of options
to purchase 1,288,612 and 1,773,395 shares of Common Stock, respectively, that
were not included in the calculation of diluted loss per share because their
impact was antidilutive.
Reclassifications
Certain amounts in the prior year have been reclassified to conform to the
current year presentation.
Note 3 - Recently Issued Accounting Pronouncements:
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, ("SFAS No. 150"). The statement established standards
for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). The statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company does not have any financial instruments falling within the
scope of this statement, therefore, no additional disclosures are required and
the adoption of SFAS No. 150 did not have a material impact on the Company's
consolidated financial statements.
9
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities as revised in December 2003, ("FASB Interpretation
No. 46-Revised"). FASB Interpretation No. 46-Revised requires consolidation of a
variable interest entity if a company's variable interest absorbs a majority of
the entity's expected losses or receives a majority of the entity's expected
residual returns, or both. The Company does not have any significant interest in
any variable interest entities, therefore, the adoption of FASB Interpretation
No. 46-Revised did not have a material impact on the Company's consolidated
financial statements.
In January 2003, the Emerging Issues Task Force ("EITF") of the FASB issued EITF
No. 00-21 "Accounting for Revenue Arrangements with Multiple Deliverables"
("EITF 00-21"). EITF 00-21 establishes the criteria for recognizing revenue in
arrangements where multiple deliverables exist in one agreement. EITF 00-21
requires each deliverable in an arrangement with multiple deliverables have a
determinable fair value to the customer on a standalone basis to allow revenue
recognition prior to the delivery of all deliverables relating to the
arrangement. EITF 00-21 also provides guidance on allocating the total
arrangement revenue to the individual deliverables. The adoption of EITF 00-21
did not have a material impact on the Company's consolidated financial
statements.
Note 4 - Inventories:
Inventories consist of the following:
(in thousands)
March 27, June 28,
2004 2003
--------------------- ---------------------
Raw materials, components, and work-in-
process $19,405 $19,345
Finished goods 24,371 12,972
--------------------- ---------------------
Total inventories $43,776 $32,317
===================== =====================
Inventories, consisting of raw materials, work-in-process and finished goods,
are stated at the lower of cost or market value and are determined on a
first-in, first-out basis. Inventories include materials, labor, and
manufacturing overhead costs. The Company establishes inventory provisions for
excess, obsolete or slow-moving inventory based on changes in customer demand,
technological developments or other market and economic factors.
During the Third Quarter Fiscal 2004, the Company recorded an inventory related
pre-tax charge of $6.8 million primarily attributable to recent price declines
in the digital camera market, increased competitive pricing pressures and excess
customer inventory levels which have negatively impacted the value of its
digital camera and component inventory. The Company reduced the carrying value
of certain digital camera and component inventory below their cost basis to
their estimated net realizable value at March 27, 2004. The inventory related
pre-tax charge of $2.6 million recorded in the Second Quarter Fiscal 2004 was
primarily attributable to lowering the carrying value of finished goods related
to a certain 3.0 megapixel charged-couple device ("CCD") digital camera and
certain components and raw materials related to the production of this and
certain other digital cameras below their cost basis to their estimated net
realizable value. For the Third Quarter Fiscal 2004, the inventory related
pre-tax charge had the effect of decreasing inventory by $6.8 million and
increasing cost of products sold by $6.8 million. For Fiscal 2004 YTD, the
inventory related pre-tax charges had the effect of decreasing inventory by $9.4
million and increasing cost of products sold by $9.4 million.
During the quarter ended September 27, 2003 ("First Quarter Fiscal 2004"), the
Company changed its method of applying manufacturing labor and overhead costs to
inventory. Previously, the Company used the ratio of labor and overhead costs
compared to material costs incurred during a twelve-month period to estimate
labor and overhead costs to be applied to material costs in inventory at the end
of the period. Under the new method, manufacturing labor and overhead costs are
applied to inventory using a standard cost approach to estimate the costs
incurred during the procurement and production processes.
10
The new standard cost approach was made possible by the Company's efforts to
update its information systems and capture additional information related to its
standard costs of manufacturing. Management believes the new method of applying
manufacturing labor and overhead costs to inventories improves the matching of
costs incurred to manufacture the product with their flow through the production
process. Under APB Opinion No. 20, Accounting Changes, this accounting change is
considered to be a change in accounting estimate inseparable from a change in
accounting method. If the Company had not changed its method of applying
manufacturing labor and overhead costs to inventory during the First Quarter
Fiscal 2004: (i) cost of products sold and net loss in the Third Quarter Fiscal
2004 would have been $1.0 million and $0.9 million lower ($0.03 per diluted
common share), respectively; and (ii) cost of products sold and net loss in
Fiscal 2004 YTD would have been $3.3 million and $2.9 million lower ($0.10 per
diluted common share), respectively.
Note 5 - Property, Plant and Equipment, Net
Property, plant and equipment, net are carried at cost less accumulated
depreciation and amortization. Depreciation is computed by use of the
straight-line method over the estimated useful lives of the respective assets.
Small tools and accessories used in production in the Peoples' Republic of China
("PRC") are charged to operations when purchased. Leasehold costs and
improvements are amortized on a straight-line basis over the term of their lease
or their estimated useful lives, whichever is shorter.
During the Second Quarter Fiscal 2004, the Company reduced the carrying value
and the remaining useful lives of certain molds and tooling used in the
production of certain digital cameras since the Company believes these products
have a shortened product life due to market conditions and these specific molds
and tooling do not have alternative production uses. In the Third Quarter Fiscal
2004, the reduction in the Second Quarter Fiscal 2004 of the remaining useful
lives of the molds and tooling had the effect of decreasing property, plant and
equipment, net by $0.4 million and increasing depreciation expense, which is
included in the cost of products sold by $0.4 million. See Note 4 - Inventories.
Note 6 - Senior Notes:
On August 15, 2002, the Company repurchased its $15 million, 11% Senior Notes.
The Company paid slightly below par to repurchase and cancel the Senior Notes.
At the time of repurchase, the Company incurred $0.3 million of expenses
associated with the write-off of deferred finance costs related to the Senior
Notes, which was included in interest expense in the accompanying condensed
consolidated statement of operations for Fiscal 2003 YTD.
Note 7 - Deferred Share Arrangement:
Pursuant to the Company's Deferred Delivery Plan and an election previously made
thereunder, on July 14, 2003, the Company's Chairman, Chief Executive Officer
and President ("Chairman") tendered 55,989 fully paid and owned shares of Common
Stock to the Company in payment of the exercise price (the "Payment Shares") of
his option to purchase 387,000 shares of Common Stock ("Delivery Plan
Transaction"). With the approval of the Compensation Committee of the Company's
Board of Directors, the Deferred Delivery Plan allows certain executive officers
to elect to defer the gains on certain stock option exercises by deferring
delivery of the "profit" shares to be received upon exercise. Upon the Delivery
Plan Transaction, the 55,989 Payment Shares were classified as "Treasury stock"
and recorded at a cost of $482,625. In exchange, 387,000 new shares of Common
Stock were issued by the Company and classified as "Common stock" at a cost of
$482,625 of which 55,989 shares were issued to the Chairman and 331,011 shares,
the delivery of which was deferred by the Chairman, were issued to a rabbi
trust. The 331,011 shares held in this rabbi trust have been recorded at a cost
of $412,825 and are classified as "Common stock held in trust." The
corresponding liability to the Chairman has been recorded at $412,825 and is
classified as "Deferred share arrangement" in the stockholders' equity section
of the accompanying condensed consolidated balance sheet.
11
Note 8 - Commitments and Contingencies:
Deferred Long-Term Compensation
On August 6, 2003, certain executive officers were awarded $1.9 million in the
aggregate of contingent deferred compensation, which is not yet earned or
vested, under the Company's Amended and Restated 2002 Long-Term Cash Incentive
Plan (the "LTCIP") with respect to the Fiscal 2002-2003 performance period (the
"Deferred LTCIP Awards"). The Deferred LTCIP Awards vest, so long as the
executive continues to be employed by the Company, in three equal annual
installments on August 6, 2004, 2005 and 2006, or immediately upon: (i) a change
of control of the Company or (ii) the executive's death or disability. The
Deferred LTCIP Award granted to the Chairman has substantially the same terms
and conditions as the other Deferred LTCIP Awards. However, in addition to the
events that will accelerate the vesting of the other Deferred LTCIP Awards, it
provides for immediate vesting in the event of termination without cause, a
constructive termination of employment without cause, or the non-renewal of his
employment contract. The supplemental executive retirement plan and agreement
("SERP") adopted by the Company for the benefit of the Chairman ("the Chairman
SERP") and the SERPs of other executives to whom Deferred LTCIP Awards were
granted were amended to include appropriate terms to govern the Deferred LTCIP
Awards and the Company contributed the foregoing amounts to trusts established
for the purpose of holding funds to satisfy the Company's obligations under the
Deferred LTCIP Awards. The Company expenses the Deferred LTCIP Awards over the
vesting period and the related liability as of March 27, 2004 is classified
under "Other long-term liabilities" in the accompanying condensed consolidated
balance sheet.
License and Royalty Agreements
On August 21, 2002, the Company entered into two Polaroid licensing agreements
that provide for the exclusive (with the exception of products already released
by Polaroid into the distribution chain), worldwide use by the Company of the
Polaroid brand trademark in connection with the manufacture, distribution,
promotion and sale of single use cameras and traditional film based cameras,
including zoom cameras, and certain related accessories. The licenses do not
include instant or digital cameras. Each license includes an initial term of
three and a half years and may be renewed under the same economic terms at the
Company's option, for an additional three-year period. Each license agreement
provides for the payment by the Company of $3.0 million of minimum royalties, or
$6.0 million in total, which will be fully credited against percentage
royalties. The Company has recorded these agreements as royalty assets which are
amortized based upon percentages applied to single use and traditional film
based camera sales. Through August 2003, the Company had paid a total of $5.0
million, which represents $2.5 million for each license agreement, as partial
payment of the minimum royalties. The Company has recorded the remaining $1.0
million future minimum royalty payments as a current liability that is payable
in August 2004.
Intellectual Property Claims
From time to time, the Company receives patent infringement claims which it
analyzes and, if appropriate, may either take action to avoid infringement,
settle the claim or negotiate a license. In addition to the patent infringement
suit discussed in Note 9, the Company has received notifications from two other
entities, one of which is a significant customer of the Company, alleging that
certain of the Company's digital products infringe upon those entities'
respective patents. The Company is analyzing the validity of the claims and is
engaged in discussions with these parties to resolve their claims. The
resolution of the claims may involve licensing and payments by the Company, the
terms or amounts of which cannot be determined or reasonably estimated at this
time. With respect to these two claims, the Company has asserted claims for
indemnity against several third parties.
Indemnification
Pursuant to an indemnification agreement with certain third parties, the Company
had been reimbursing such parties for legal costs incurred by them in connection
with the securities class action suit against the Company. Pursuant to a court
order dated March 16, 2004, the claims against these certain third parties in
connection with the securities class action suit have been dismissed and
accordingly, no further legal costs are anticipated to be incurred by them in
connection with the securities class action suit. Previously, there was no
maximum limit with respect to the amount related to this indemnification. As of
March 27, 2004, there were no amounts accrued relating to such indemnification.
See Note 9 - Litigation and Settlements below.
12
Note 9 - Litigation and Settlements:
In July 2002, a class action complaint was filed against the Company and certain
of its officers in the United States District Court for the Southern District of
Florida by individuals purporting to be shareholders of the Company. The Company
filed a motion to dismiss the lawsuit on August 30, 2002, and in December 2002,
the complaint was dismissed by the Court. In January 2003, an amended class
action complaint (the "Amended Complaint") was filed adding certain of the
Company's current and former directors as defendants. The lead plaintiffs in the
Amended Complaint seek to act as representatives of a class consisting of all
persons who purchased the Company's Common Stock (i) issued pursuant to the
Company's September 26, 2000 secondary offering (the "Secondary Offering") or
(ii) during the period from September 26, 2000 through June 22, 2001, inclusive
(the "Class Period"). The Amended 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 the
Registration Statement and Prospectus issued in connection with the Secondary
Offering, in periodic reports it filed with the Securities and Exchange
Commission ("SEC") and in press releases it made to the public regarding its
operations and financial results. The allegations are centered around claims
that 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 failures
artificially inflated the price of the Common Stock. The Amended Complaint seeks
unspecified damages, interest, attorneys' fees, costs of suit and unspecified
other and further relief from the Court. The Company intends to vigorously
defend the lawsuit and filed a motion to dismiss the Amended Complaint on April
18, 2003. Oral argument on the Company's motion to dismiss was heard by the
Court on October 2, 2003 and no decision has been rendered by the Court to date.
Co-defendants, Raymond James & Associates, Inc. and Robinson-Humphrey Company
LLC, filed a motion to dismiss the claims against them and, on March 16, 2004,
the Court issued an order granting their motion to dismiss. The lawsuit is in
the earliest stage and discovery has not yet commenced. Although the Company
believes this lawsuit is without merit, its outcome cannot be predicted, and if
adversely determined, the ultimate liability of the Company, which could be
material, cannot be ascertained. On September 17, 2002, the Company was advised
by the staff of the SEC that it is conducting an informal inquiry related to the
matters asserted in the class action complaint. On October 15, 2002, the staff
of Nasdaq requested certain information and materials related to the matters
asserted in the class action complaint and as to matters related to the
previously reported embezzlement of Company funds by a former employee,
uncovered in April 2002. The Company has not received any further communication
from the SEC with respect to the informal inquiry or from Nasdaq with respect to
their request since the Company last responded in February 2003.
In April 2004, a patent infringement complaint was filed against 28 defendants,
including the Company, in the United States District Court for the Eastern
District of Texas. The complaint asserts that certain defendants have conducted
activities which infringe U.S. Patent No. 4,698,672, entitled Coding System for
Reducing Redundancy. The complaint seeks unspecified damages, interest,
attorneys' fees, costs of suit and unspecified other and further relief from the
court. With respect to this suit, the Company has asserted claims for indemnity
against several third parties. The lawsuit is in the earliest stage and
discovery has not yet commenced. Although the Company believes this lawsuit is
without merit, its outcome cannot be predicted, and if adversely determined, the
ultimate liability of the Company, which could be material, cannot be
ascertained.
The Company is involved from time to time in routine other 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 the Company's financial
position or results of operations.
Note 10 - Related Party Transactions:
From May 1, 2002 through June 15, 2003, William J. Lloyd, who was a member of
the Company's Board of Directors during that time, provided consulting services
to the Company on an as needed basis in exchange for a $5,000 per month retainer
and reimbursement of all reasonable business expenses. The Company accepted Mr.
Lloyd's resignation from the Board of Directors, effective July 31, 2003, and
the consulting relationship was terminated effective June 15, 2003. In
connection with Mr. Lloyd's resignation, the Board approved an extension of the
expiration dates of certain options held by Mr. Lloyd, and the continued vesting
through January 2005 of 12,000 shares subject to one of his options. The
modification of the options' terms resulted in a non-recurring charge of
$105,000 to compensation expense recorded in the First Quarter Fiscal 2004. In
accordance with FASB Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation, an interpretation of APB Opinion No. 25, the
modification of the options' terms did not affect any other options granted
under the relevant stock option plan and did not result in the application of
variable accounting to these options.
13
Note 11 - Subsequent Event:
On May 10, 2004, Concord Camera GmbH ("Concord GmbH"), a wholly-owned subsidiary
of Concord Camera Corp., acquired in an all cash transaction 100% of the
outstanding stock of Jenimage Europe GmbH ("Jenimage") from 4MBO International
Electronic AG ("4MBO"). 4MBO, a consumer electronics distributor, filed for
insolvency protection on February 27, 2004 in Germany. Jenimage, based in Jena,
Germany, is a distributor of JENOPTIK branded photographic and imaging products
including digital cameras, Advance Photo System (APS) and 35mm cameras,
binoculars and accessories. The total purchase price was $13.4 million. In
connection with the acquisition, Concord has entered into a twenty year,
worldwide trademark license agreement with Jenoptik AG (the "license agreement")
for the exclusive use of the JENOPTIK brand name and trademark on consumer
imaging products including, but not limited to, digital, single use and
traditional cameras, and other imaging products and related accessories. The
acquisition cost of the license was $1.8 million. The license agreement provides
for a royalty of 0.5% of net sales of consumer imaging products bearing the
JENOPTIK brand name for the first ten years of the license agreement and a
royalty fee of 0.6% for the remaining ten years of the license agreement. There
are no minimum guaranteed royalty payments. As of March 31, 2004, Jenimage had
net assets of approximately $18.0 million.
Item 2. 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 year ended June 28, 2003 ("Fiscal 2003") consolidated financial
statements, and the related notes thereto, of Concord Camera Corp. and
subsidiaries (collectively referred to as "Concord," the "Company," "we," "us,"
or "our"). 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 our operations, markets, products, prices and other factors discussed
elsewhere in this report and other reports filed by us 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
our behalf.
Overview
This overview should be read in conjunction with the overview in Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for Fiscal 2003.
The loss in our Third Quarter Fiscal 2004 was higher than expected due to the
following factors:
1. Lower than anticipated sales;
2. Digital camera and component inventory charges, low production
volumes, and manufacturing inefficiencies;
3. Higher selling, general and administrative costs; and
4. Increased deferred tax valuation allowance.
1. Lower Than Anticipated Sales
Historically, the third quarter is the seasonally lowest sales quarter of our
fiscal year. However, our Third Quarter Fiscal 2004 resulted in significantly
lower sales and a higher loss than anticipated. Sales of single use and
traditional camera products were lower than expected because several of our
large customers exited the holiday season with high inventories resulting in
lower sales than anticipated. We expect sales of single use and traditional
camera products to increase in the fourth quarter of our fiscal year as
inventories at our large customers decline and the summer picture-taking season
begins. In addition, our fourth quarter is historically a higher sales quarter
within the fiscal year for us and our retail customers.
14
During our Third Quarter Fiscal 2004, the digital camera market in the United
States and Europe faced stiff competition due to high inventories at our retail
customers, competitors and other manufacturers. High inventories led to fierce
price competition in the digital camera category. While digital camera sales
increased over last year's third quarter due to a 23% increase in average
selling price, unit volume and average selling prices were below expectation
because of competitive pricing and weak sell through with several retail
customers. We reduced the selling prices in the digital camera category to meet
stiff competition. Excess inventory with several retail customers also led to
significant increases in our sales provisions for digital camera returns and
allowances. With several new digital camera products being introduced in the
fourth quarter of this fiscal year and the first two quarters of fiscal 2005, we
anticipate increased digital camera sales, both in unit volume and average
selling price as compared to fiscal 2004.
2. Digital Inventory Charges, Low Production Volumes, and
Manufacturing Inefficiencies
Significant price declines in digital cameras led to a $6.8 million inventory
charge to lower the carrying values of certain digital camera component and
finished goods inventory below their cost basis to their estimated net
realizable values. Lower than expected sales and, therefore, lower production
volume in our manufacturing facilities created significant under absorption of
manufacturing labor and overhead costs. In addition, we experienced some
manufacturing inefficiencies in the production of digital cameras. These items
led to significantly lower gross profits in both dollars and as a percentage of
sales. We expect our fourth quarter sales volume to increase manufacturing
efficiencies and reduce under absorption. However, in future quarters, sales of
digital cameras with the herein referenced lower carrying values will result in
lower gross profit as a percentage of net sales as there will be approximately
no margin on the sales of these products.
3. Higher Selling, General and Administrative Costs
These costs have also increased as we have invested in our future growth through
the addition of personnel. We have incurred higher selling costs resulting
primarily from the cost of additional sales and marketing personnel. General and
administrative costs have increased due to the acquisition and implementation of
an Enterprise Resource Planning ("ERP") system, and significant costs incurred
associated with implementing measures necessary to comply with the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") and related regulations.
4. Increased Deferred Tax Valuation Allowance
We increased our deferred tax valuation allowance by $7.2 million. This increase
had the impact of increasing our provision for income taxes in our third quarter
of this fiscal year. We determined that we may not be able to realize certain
deferred tax assets in Hong Kong, Europe and the U.S.
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 Condensed Consolidated Financial Statements and Notes thereto. 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 the
more significant estimates and assumptions used in the preparation of our
Condensed Consolidated Financial Statements and Notes thereto:
15
Provision for Doubtful Accounts
The provision for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts owed to us could be adversely affected.
Inventories
Inventories, consisting of raw materials, work-in-process and finished goods,
are stated at the lower of cost or market value and are determined on a
first-in, first-out basis. Inventories include materials, labor, and
manufacturing overhead costs. We establish inventory provisions for excess,
obsolete or slow-moving inventory based on changes in customer demand,
technological developments or other market and economic factors, including
product price declines in cameras, in particular digital cameras, increased
competitive pricing pressure and excess customer inventory levels.
Inventory purchases and commitments are based upon future demand forecasts. If
there is a sudden and significant decrease in demand for our products, or there
is a higher rate of inventory obsolescence because of rapidly changing
technology and customer requirements, we may be required to reduce the carrying
value of our inventory resulting from lower of cost or market adjustments which
could result in our gross profit being adversely affected. The obsolescence risk
is more significant for digital camera products due to their shorter life
cycles.
During the Third Quarter Fiscal 2004, the Company recorded an inventory related
pre-tax charge of $6.8 million primarily attributable to recent price declines
in the digital camera market, increased competitive pricing pressures and excess
customer inventory levels which have negatively impacted the value of our
digital camera and component inventory. The Company lowered the carrying value
of certain digital camera and component inventory below their cost basis to
their estimated net realizable value at March 27, 2004. An inventory related
pre-tax charge recorded in the Second Quarter Fiscal 2004 of $2.6 million was
primarily attributable to lowering the carrying amount of finished goods related
to a certain 3.0 megapixel charged-couple device ("CCD") digital camera and
certain components and raw materials related to the production of this and
certain other digital cameras below their cost basis to their estimated net
realizable value. For Third Quarter Fiscal 2004, the inventory related pre-tax
charge had the effect of decreasing inventory by $6.8 million and increasing
cost of products sold by $6.8 million. For Fiscal 2004 YTD, the inventory
related pre-tax charges had the effect of decreasing inventory by $9.4 million
and increasing cost of products sold by $9.4 million.
During the quarter ended September 27, 2003 ("First Quarter Fiscal 2004"), we
changed our method of applying manufacturing labor and overhead costs to
inventory. Previously, we used the ratio of labor and overhead costs compared to
material costs incurred during a twelve-month period to estimate labor and
overhead costs to be applied to material costs in inventory at the end of the
period. Under the new method, manufacturing labor and overhead costs are applied
to inventory using a standard cost approach to estimate the costs incurred
during the procurement and production processes.
The new standard cost approach was made possible by our efforts to update our
information systems and capture additional information related to our standard
costs of manufacturing. Management believes the new method of applying
manufacturing labor and overhead costs to inventories improves the matching of
costs incurred to manufacture the products with their flow through the
production process. Under APB Opinion No. 20, Accounting Changes, this
accounting change is considered a change in accounting estimate inseparable from
a change in accounting method. If the Company had not changed its method of
applying manufacturing labor and overhead costs to inventory during the First
Quarter Fiscal 2004 then: (i) cost of products sold and net loss in the Third
Quarter Fiscal 2004 would have been $1.0 million and $0.9 million lower ($0.03
per share), respectively; and (ii) cost of products sold and net loss in Fiscal
2004 YTD would have been $3.3 million and $2.9 million lower ($0.10 per share),
respectively. See Note 4 - Inventories in the Notes to Condensed Consolidated
Financial Statements.
Income 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 the feasibility of tax planning initiatives and strategies. Should we
determine that it is more likely than not that we will realize certain of our
deferred tax assets in the future, an adjustment would be required to reduce the
existing valuation allowance and increase income. On the contrary, if we
determine that we would not be able to realize our recorded deferred tax asset,
an adjustment to increase our valuation allowance would be charged to the
results of operations in the period such conclusion was made. Such charge could
have an adverse effect on our provision for income taxes included in our results
of operations.
16
Our estimation of annual pre-tax income or loss for each taxing jurisdiction is
a significant factor in determining our anticipated annual effective income tax
rate. If the actual pre-tax income or loss for any taxing jurisdiction differs
materially from our estimate, then this difference could materially affect our
anticipated annual effective income tax rate.
During the Third Quarter Fiscal 2004, we determined a portion of our deferred
tax asset may not be fully realizable. Accordingly, we recorded an increase of
$7.2 million to the existing deferred tax asset valuation allowance. As of March
27, 2004, the Company had deferred tax assets of $1.9 million that was net of a
deferred tax asset valuation allowance of $7.2 million included in "Other
assets, net" on the Company's condensed consolidated balance sheet.
Revenue Recognition
Revenues are recognized when title and risk of loss are transferred to the
customer, which is generally when the product is shipped. Revenues are recorded
net of anticipated returns which the Company estimates based on historical rates
of return, adjusted for current events as appropriate, in accordance with
Statement of Financial Accounting Standard No. 48, Revenue Recognition When
Right of Return Exists. Revenues are also recorded net of certain allowances
provided to customers, including those related to advertising, discounts, and
other promotions, in accordance with Emerging Issues Task Force ("EITF") Issue
No. 01-09, Consideration Given by a Vendor to a Customer (Including a Reseller
of the Vendor's Products).
During the Third Quarter Fiscal 2004, the Company changed its estimate of
anticipated returns for previously recorded sales which had an impact of
reducing net sales by $0.7 million and increasing the net loss by $(0.2)
million, or $(0.01) per share. If actual returns are higher than estimated, our
net sales could be adversely affected.
Long-lived and Other Assets
We test for recoverability of long-lived assets whenever certain events or
changes in circumstances as described under the guidance of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," indicate that
their carrying amount may not be recoverable. Assets we review for possible
impairment include patents, licensing and royalty agreements and certain
property, plant and equipment. We will record an impairment loss when
indications of impairment are present and where undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amounts.
During the Second Quarter Fiscal 2004, we reduced the carrying value and the
remaining useful lives of certain molds and tooling used in the production of
certain digital cameras since management believes these products have a
shortened product life due to market conditions and these specific molds and
tooling do not have alternative production uses. The reduction of the remaining
useful lives of the molds and tooling had the effect of decreasing property,
plant and equipment, net by $0.5 million, and increasing depreciation expense by
$0.5 million, which is included in the cost of products sold. Further, in the
Third Quarter Fiscal 2004, this reduction had the effect of decreasing property,
plant and equipment, net by $0.4 million, and increasing depreciation expense,
which is included in cost of products sold, by $0.4 million.
We amortize royalty related assets based upon percentages applied to single use
and traditional film based camera sales. These percentages of sales are derived
from management's estimate of future sales volumes. Because judgment is required
to estimate future sales volumes, the estimates are not necessarily indicative
of the sales volumes that will be realized in the future. Accordingly, if actual
sales volumes differ materially from our estimates, then this difference could
materially affect the percentage used to amortize these assets.
17
Goodwill
Effective July 1, 2001, the Company adopted the provisions of SFAS No. 142
"Goodwill and Other Intangible Assets", which eliminates the amortization of
goodwill and indefinite-lived intangible assets, and conducts an annual review
of these assets for impairment. Identifiable intangible assets with determinable
useful lives will continue to be amortized over their useful lives. In
accordance with SFAS No. 142, the Company ceased amortization of its goodwill
balances. The Company currently does not have any other indefinite-lived
intangible assets. In accordance with SFAS No. 142, the Company performed an
impairment test of its existing goodwill on the first business day of its fiscal
fourth quarter and it was management's assessment that goodwill impairment had
not occurred.
Accounting for Litigation and Settlements
We are involved in various legal proceedings. Due to their nature, such legal
proceedings involve inherent uncertainties including, but not limited to, court
rulings, negotiations between affected parties and the possibility of
governmental intervention. Management assesses the probability of loss for such
contingencies and accrues a liability and/or discloses the relevant
circumstances, as appropriate. Management believes that any liability of ours
that may arise as a result of currently pending legal proceedings will not have
a material adverse effect on our financial condition taken as a whole.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 3 -
Recently Issued Accounting Pronouncements in the Notes to Condensed Consolidated
Financial Statements.
18
Results of Operations
Quarter Ended March 27, 2004 Compared to the Quarter Ended March 29, 2003
Net Sales
Net sales for the Third Quarter Fiscal 2004 were $28.3 million, a decrease of
$8.0 million, or 22.0 %, as compared to net sales for the quarter ended March
29, 2003 ("Third Quarter Fiscal 2003"). The decrease in sales was in large part
due to fewer single use and traditional cameras sold in both our retail sales
and distribution ("RSD") and design and manufacturing services ("DMS")
businesses, primarily due to lower than expected demand from several large
customers some of which exited the holiday season with high inventories.
Although our average selling prices for digital cameras increased by 23% over
last year's third quarter, unit volume and average selling prices were below
expectation due to competitive pricing and weak sell through with several retail
customers. Price declines in the digital camera category due to competition and
excess inventory with several retail customers led to significant increases in
our provision for digital camera returns and allowances, all contributing to
lower net sales, gross profits and margins.
RSD sales were $19.3 million for the Third Quarter Fiscal 2004, a decrease of
$4.6 million, or 19.1%, as compared to the Third Quarter Fiscal 2003, and
accounted for 68.2% of total net sales. The decrease in RSD net sales was mostly
due to lower than expected sales of single use and traditional cameras to
existing customers. DMS net sales were $9.0 million for the Third Quarter Fiscal
2004, a decrease of $3.3 million, or 27.3%, as compared to the same period last
year, and accounted for 31.8% of total net sales. The decline in DMS net sales
was primarily attributable to a decrease in sales of single use cameras to a
certain customer, which was offset, to some extent, by single use and digital
camera sales to other customers.
RSD net sales of our operations in the United States, Latin America and Canada
for the Third Quarter Fiscal 2004 were $13.2 million, a decrease of $3.2
million, or 19.6%, as compared to the same quarter last year. The decrease in
RSD net sales was due to fewer sales of single use and traditional cameras to
existing customers.
RSD net sales of our operations in the United Kingdom, Germany and France for
the Third Quarter Fiscal 2004 were $5.6 million, a decrease of $1.6 million, or
22.7%, as compared to the Third Quarter Fiscal 2003. This decrease was primarily
attributable to lower digital products sales to existing customers.
Net sales of our operations in the People's Republic of China ("PRC") and Hong
Kong for the Third Quarter Fiscal 2004 were $9.5 million, a decrease of $3.1
million, or 24.4%, as compared to the Third Quarter Fiscal 2003. The decrease
was attributable primarily to decreased single use camera sale volume related to
a certain DMS customer.
Gross (Deficit) Profit
Gross (deficit) for the Third Quarter Fiscal 2004 was $(5.7) million, or (20.1)%
of net sales, versus gross profit of $8.4 million, or 23.2% of net sales in the
same quarter last year. During the Third Quarter of Fiscal 2004, gross profit
was negatively effected by $6.8 million pre-tax charge to cost of products sold
relating to an inventory reduction to lower the carrying value of certain
digital camera and component inventory below their cost basis to their estimated
net realizable value as a result of competitive pricing pressure and excess
customer inventory levels. For the Third Quarter Fiscal 2004, the inventory
related pre-tax charge had the effect of decreasing inventory by $6.8 million
and increasing cost of products sold by $6.8 million, or $0.24 per diluted
common share. Higher manufacturing costs mainly resulting from significant under
absorption of labor and overhead due to lower production volumes and production
inefficiencies contributed to the decrease in gross profit. To a lesser extent,
lower gross profit percentages related to certain DMS and branch product sales
contributed to the gross profit decrease. In the Third Quarter Fiscal 2004, the
reduction that took place in the Second Quarter Fiscal 2004 of the remaining
useful lives of the molds and tooling had the effect of increasing depreciation
expense, which is included in cost of products sold, by $0.4 million. If the
Company had not changed its method of applying manufacturing labor and overhead
costs to inventory during the First Quarter Fiscal 2004, then cost of products
sold and net loss in the Third Quarter Fiscal 2004 would have been $1.0 million
and $0.9 million lower ($0.03 per share), respectively. During the Third Quarter
Fiscal 2003, gross profit was positively impacted by a favorable resolution of a
previously disclosed disputed claim with a DMS customer. Over the course of a
thirty month DMS supply agreement which expired in January 2002, the Company
recorded certain accrued assets and liabilities related to product costs. The
favorable resolution resulted in a reduction of cost of products sold of $2.2
million. We continue to invest in new product engineering, design, and
development, primarily focusing on digital technologies and products. Product
engineering, design and development costs for the Third Quarter Fiscal 2004 and
the Third Quarter Fiscal 2003, in dollars and as a percentage of net sales, were
$2.4 million (8.6%) and $2.2 million (6.0%), respectively. For further
discussion, see the discussion under the caption "Inventories" in the Critical
Accounting Policies section above.
19
Operating Expenses
Selling expenses for the Third Quarter Fiscal 2004 were $3.2 million, or 11.4%
of net sales. This compared to $1.9 million, or 5.2% of net sales, for the Third
Quarter Fiscal 2003. The increase was primarily due to the cost of additional
sales and marketing personnel, tradeshows and higher freight costs. Consistent
with our strategic plan to grow sales, we have increased our sales and marketing
personnel worldwide to position us for future growth.
General and administrative ("G&A") expenses for the Third Quarter Fiscal 2004
were $7.2 million, or 25.5% of net sales. This compared to $5.4 million, or
14.8% of net sales, for the Third Quarter Fiscal 2003. The increase in G&A
expense was primarily due to increases in professional fees associated with
installing an ERP system, costs associated with implementing measures necessary
to comply with Sarbanes-Oxley, and increases in salaried personnel expenses
including severance, partially offset by lower legal costs.
Variable stock-based compensation income for the Third Quarter Fiscal 2004 was
$3.7 million because the common stock price was lower than at the beginning of
the fiscal period. The Company recorded no expense in the same quarter last year
because the Common Stock price on March 29, 2003, (the last day of Third Quarter
Fiscal 2003) was below the repriced options' exercise price of $5.97. See Note 2
- - Summary of Significant Accounting Policies in the Notes to Condensed
Consolidated Financial Statements.
Interest Expense
Interest expense for the Third Quarter Fiscal 2004 was $0.1 million compared to
$0.2 million in the Third Quarter Fiscal 2003.
Other Income, Net
Other income, net was $0.7 million and $0.5 million for the Third Quarter Fiscal
2004 and the Third Quarter Fiscal 2003, respectively. The increase of $0.2
million was primarily due to foreign currency gains. See Note 2 - Summary of
Significant Accounting Policies in the Notes to Condensed Consolidated Financial
Statements.
Income Taxes
During the Third Quarter of Fiscal 2004, we determined that a portion of our
deferred tax asset may not be fully realizable and accordingly we increased our
deferred tax asset valuation allowance by $7.2 million, that included $1.4
million to offset the income tax benefit relating to our operating loss recorded
during the quarter. This compared to a provision of $0.1 million for the Third
Quarter Fiscal 2003. We estimate our interim effective income tax rate based
upon the projected consolidated annual effective income tax rate. In general,
our annual effective income tax rate is largely a function of the amounts of
pre-tax income or loss attributed to both domestic and foreign operations, the
application of their respective statutory tax rates, and the utilization of
available net operating loss carryforwards to reduce taxable income. See Note
2- Summary of Significant Accounting Policies in the Notes to Condensed
Consolidated Financial Statements.
Net (Loss) Income
As a result of the matters described above, we incurred a net loss of $(17.6)
million, or $(0.61) per diluted common share, for the Third Quarter Fiscal 2004
as compared to net income of $1.3 million, or $0.04 per diluted common share,
for the Third Quarter Fiscal 2003.
20
Results of Operations
Nine Months Ended March 27, 2004 Compared to the Nine Months Ended March 29,
2003
Net Sales
Net sales for the nine months ended March 27, 2004 ("Fiscal 2004 YTD") were
$150.7 million, an increase of $22.5 million, or 17.5%, as compared to net sales
for the nine months ended March 29, 2003 ("Fiscal 2003 YTD"). The increase in
sales was in large part due to new single use and traditional cameras sold in
both our RSD and DMS businesses. RSD sales were $117.0 million for Fiscal 2004
YTD, an increase of $19.0 million, or 19.4%, as compared to Fiscal 2003 YTD, and
accounted for 77.6% of total net sales. The growth in RSD net sales was mostly
due to sales of Polaroid branded single use and traditional cameras, new
customers and organic growth from existing customers due to sell through and new
product introductions. DMS net sales were $33.7 million in Fiscal 2004 YTD, an
increase of $3.5 million, or 11.7%, as compared to the same period last year,
and accounted for 22.4% of total net sales. The increase in DMS net sales was
primarily attributable to sales of single use cameras to a certain customer,
partially offset by lower sales to existing customers.
RSD net sales of our operations in the United States, Latin America and Canada,
for Fiscal 2004 YTD, were $82.4 million, an increase of $14.2 million, or 21.0%,
as compared to the same period last year. The increase in RSD net sales was due
to sales of Polaroid branded and other single use and traditional cameras to new
and existing customers resulting in increased market penetration, new digital
camera product sales and organic growth from existing customers due to sell
through and new product introductions.
RSD net sales of our operations in the United Kingdom, Germany and France for
Fiscal 2004 YTD were $32.2 million, an increase of $4.3 million, or 15.5%, as
compared to Fiscal 2003 YTD. This increase was primarily attributable to
offering new digital products to new and existing customers.
Net sales of our operations in the PRC and Hong Kong for Fiscal 2004 YTD were
$36.1 million, an increase of $3.9 million, or 12.1%, as compared to Fiscal 2003
YTD. The increase was attributable primarily to growth in our DMS business.
Gross Profit
Gross profit for Fiscal 2004 YTD was $11.5 million, or 7.6% of net sales, versus
$25.6 million, or 19.9% of net sales, in Fiscal 2003 YTD. During Fiscal 2004
YTD, gross profit was negatively affected by the $9.9 million pre-tax charges to
cost of products sold which resulted from an inventory related pre-tax charge of
$9.4 million to lower the carrying value of certain digital camera and component
inventories below their cost basis to their estimated net realizable value
resulting from the negative impact of a decline in the digital camera market,
competitive pricing pressure, and excess customer inventory levels and increased
depreciation expense of $0.5 million related to the reduction of the remaining
useful lives of molds and tooling related to certain digital cameras. For Fiscal
2004 YTD, the inventory related pre-tax charges had the effect of decreasing
inventory by $9.4 million and increasing cost of products sold by $9.4 million,
or $0.33 per diluted common share. In addition, higher manufacturing costs
mainly resulting from production inefficiencies related to the production of
digital camera products contributed to the decrease in gross profit, in dollars
and as a percentage of sales. If the Company had not changed its method of
applying manufacturing labor and overhead costs to inventory during the First
Quarter Fiscal 2004, then cost of products sold and net loss in Fiscal 2004 YTD
would have been $3.3 million and $2.9 million lower ($0.10 per share),
respectively. The comparable prior year period included a $2.2 million benefit
of the favorable resolution of a previously disclosed disputed claim with a DMS
customer in the third quarter partially offset by $0.8 million of additional air
freight costs due to the West Coast dock worker labor dispute. Product
engineering, design and development costs for Fiscal 2004 YTD and Fiscal 2003
YTD, in dollars and as a percentage of net sales, were $7.6 million (5.0 %) and
$6.1 million (5.0%), respectively. For further discussion, see the discussion
under the caption "Inventories" in the Critical Accounting Policies section
above.
Operating Expenses
Selling expenses for Fiscal 2004 YTD were $9.3 million, or 6.2% of net sales.
This compared to $5.9 million, or 4.6% of net sales for Fiscal 2003 YTD. The
increase was primarily due to the cost of additional sales and marketing
personnel, royalties related to the Polaroid brand licenses, tradeshows, and
higher variable costs including freight and handling, all of which are
attributable to our sales growth.
21
G&A expenses for Fiscal 2004 YTD were $18.7 million, or 12.4% of net sales. This
compared to $14.9 million, or 11.6% of net sales, for Fiscal 2003 YTD. The
increase in G&A expenses was primarily due to increases in personnel,
professional fees associated with installing an ERP system, costs associated
with implementing measures necessary to comply with Sarbanes-Oxley, and
additional costs associated with our growth. During Fiscal 2003 YTD, G&A
expenses included a $0.5 million recovery from Polaroid Corporation resulting in
a reduction of expenses.
Variable stock-based compensation income for Fiscal 2004 YTD was $0.6 million
because the Common Stock price on March 27, 2004 (the last day of the fiscal
period) was lower than the Common Stock prices at the beginning of the fiscal
period. No variable stock-based compensation income or expense was recorded in
the same period last year. See Note 2 - Summary of Significant Accounting
Policies in the Notes to Condensed Consolidated Financial Statements.
Interest Expense
Interest expense for Fiscal 2004 YTD was $0.5 million, compared to $1.0 million
in the same period last year. The decrease of $0.5 million was attributable to
the reduction in interest expense related to the repurchase of Senior Notes in
August 2002 and the non-recurring write-off of deferred finance costs of $0.3
million recorded in Fiscal 2003 YTD. See Note 6 - Senior Notes in the Notes to
Condensed Consolidated Financial Statements.
Other Income, Net
Other income, net was $0.5 million and $1.4 million for Fiscal 2004 YTD and
Fiscal 2003 YTD, respectively. The decrease of $0.9 million related primarily to
the loss of $0.9 million recorded in the Second Quarter Fiscal 2004 as a result
of the sale of short-term investments. Over the holding period of the short-term
investments, we realized a net positive return of $0.6 million after giving
effect to the dividend income received which more than offset the loss. See Note
2 - Summary of Significant Accounting Policies in the Notes to Condensed
Consolidated Financial Statements.
Income Taxes
During the Third Quarter of Fiscal 2004, we determined that a portion of our
deferred tax asset may not be fully realizable and accordingly we increased our
deferred tax asset valuation allowance by $7.2 million, which included $2.0
million to offset the benefit relating to losses generated during the first
three quarters of Fiscal 2004. This compared to a provision of $0.4 million for
the first three quarters of Fiscal 2003. We estimate our interim effective
income tax rate based upon the projected consolidated annual effective income
tax rate. Prior to the recognition of any valuation allowances, our annual
effective income tax rate is largely a function of the amounts of pre-tax income
or loss attributed to both domestic and foreign operations, the application of
their respective statutory tax rates, and the utilization of available net
operating loss carry-forwards to reduce taxable income. See Note 2- Summary of
Significant Accounting Policies in the Notes to Condensed Consolidated Financial
Statements.
Net (Loss) Income
As a result of the matters described above, we incurred a net loss of $(21.1)
million, or $(0.74) per share, for Fiscal 2004 YTD as compared to net income of
$4.7 million, or $0.16 per diluted share, for Fiscal 2003 YTD.
Liquidity and Capital Resources
We are not aware of factors that are reasonably likely to adversely affect
liquidity trends, other than those factors summarized under the caption "Risk
Factors" in our Annual Report on Form 10-K for Fiscal 2003. 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 March 27, 2004. In the ordinary course of business, we enter into operating
lease commitments, purchase commitments and other contractual obligations. These
transactions are recognized in our financial statements in accordance with
accounting principles generally accepted in the United States, and are more
fully discussed below.
22
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. We have from time to time held, and
will continue to hold, discussions and negotiations with lending institutions
about borrowing funds to finance our growth opportunities.
Working Capital - At March 27, 2004, we had working capital of $106.1 million
compared to $121.1 million at June 28, 2003, a decrease of $15.0 million. The
decrease in working capital was primarily attributable to the decrease in cash
and short-term investments partially offset by an increase in inventory.
Cash Used in Operations - Cash used in operations during Fiscal 2004 YTD was
$22.9 million, which compared unfavorably to cash used in operations of $1.8
million for the comparable period during Fiscal 2003. The significant cash used
in operating activities for Fiscal 2004 YTD was primarily attributable to a loss
this year versus a profit last year, an increase in inventories, and a decrease
in accounts payable, partially offset by a decrease in accounts receivable.
Cash Provided by (Used in) Investing Activities - Purchases of property, plant
and equipment for Fiscal 2004 YTD and Fiscal 2003 YTD were both $3.9 million. In
Fiscal 2003 YTD, we purchased certain short-term investments and in Fiscal 2004
YTD we sold those investments.
Cash Provided by (Used in) Financing Activities - Cash provided by financing
activities for Fiscal 2004 YTD was $1.2 million attributable entirely to
proceeds received from the exercise of stock options. Cash used in financing
activities for Fiscal 2003 YTD was $14.4 million, which was primarily
attributable to the repurchase of Senior Notes partially offset by proceeds from
the exercise of stock options and warrants.
Operating Leases- We enter into operating leases in the ordinary course of
business (e.g., warehouse facilities, office space and equipment) where the
economic profile is favorable. The effects of outstanding leases are not
material to us in terms of either annual cash flow or total future minimum
payments.
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. Such commitments are not at prices in excess of
current market and typically do not exceed one year.
Other Contractual Obligations -We do not have any material financial guarantees
or other contractual commitments that are reasonably likely to have an adverse
affect on liquidity. See Hong Kong Financing Facilities below for additional
information about our financial guarantees. See also Note 8 - Commitments and
Contingencies in the Notes to Condensed Consolidated Financial Statements.
Hong Kong Credit Facilities - Our Hong Kong subsidiary has an aggregate of
approximately $26.0 million in borrowing capacity under various financing and
revolving credit facilities. 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. During the Second Quarter Fiscal 2004, our
Hong Kong subsidiary increased its overall borrowing capacity by $2.5 million.
The revolving credit facilities are comprised of an Import Facility, a Packing
Credit and Export Facility and a Foreign Exchange Facility (collectively, the
"Hong Kong Credit Facilities"). The ability to draw each of the credit
facilities is subject to certain financial ratios and covenants. The Hong Kong
Credit Facilities bear interest at variable rates. At March 27, 2004, there was
$26.0 million available under the Hong Kong Credit Facilities and there were no
amounts outstanding under them.
United Kingdom Credit Facility - In November 1999, our United Kingdom subsidiary
obtained a United Kingdom credit facility (the "UK Facility") that was secured
by substantially all of our United Kingdom subsidiary's assets. The UK Facility
bore interest at 1.5% above the UK prime lending rate and was principally
utilized for working capital needs and allowed borrowings of up to approximately
$1.2 million. The facility expired in August 2003.
23
Senior Notes - See Note 6 - Senior Notes in the Notes to Condensed Consolidated
Financial Statements.
License Agreements - See Note 8 - Commitments and Contingencies in the Notes to
Condensed Consolidated Financial Statements.
Intellectual Property Claims - See Note 8 - Commitments and Contingencies and
Note 9 - Litigation and Settlements in the Notes to Condensed Consolidated
Financial Statements.
Significant Customers
Sales to our three largest customers comprised a significant portion of our
total net sales for the Third Quarter Fiscal 2004 and Fiscal 2004 YTD. The loss
of any one of these customers or significantly reduced sales to any one of these
customers could have a material adverse impact on results of operations. For
further information, see our Annual Report on Form 10-K for Fiscal 2003.
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 might have an interest in making an investment in or acquiring us,
(iii) potential joint venture partners looking toward formation of strategic
alliances that would broaden our product base or enable us to enter new lines of
business and (iv) potential new and existing DMS customers where the design,
development and production of new products, including certain new technologies,
would enable us to expand our existing business, and enter new markets. However,
there can be no assurance that any definitive agreement will be reached
regarding any of the foregoing, nor does management believe that such agreements
are necessary for the successful implementation of our strategic plans. In May
of 2004, the Company purchased 100% of the outstanding stock of Jenimage Europe
GmbH in an all cash transaction. See Note 11 - Subsequent Event in the Notes to
Condensed Consolidated Financial Statements.
Forward-Looking Statements
The statements contained in this report that are not historical facts are
"forward-looking statements" (as such term is defined in the Private Securities
Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as: "estimates," "projects," "anticipates,"
"expects," "intends," "believes," "plans," or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in such forward-looking statements as a result of certain
factors. For a discussion of some of the factors that could cause actual results
to differ, see the discussion under "Risk Factors" contained in our most recent
Annual Report filed with the SEC on Form 10-K for Fiscal 2003 and subsequently
filed reports. We wish to caution the reader that these forward-looking
statements, such as statements regarding the development of our business, our
anticipated revenues or capital expenditures, projected profits or losses and
other statements contained in this report regarding matters that are not
historical facts, are only estimates or predictions. No assurance can be given
that future results will be achieved. Actual events or results may differ
materially as a result of risks facing us or actual results differing from the
assumptions underlying such statements. In particular, anticipated revenues
could be adversely affected by production difficulties or economic conditions
negatively affecting the market for our products. Obtaining the results expected
from the introduction of our new products will require timely completion of
development, successful ramp-up of full-scale production on a timely basis and
customer and consumer acceptance of those products. In addition, our DMS
agreements require an ability to meet high quality and performance standards, to
24
successfully implement production at greatly increased volumes and to sustain
production at greatly increased volumes, as to all of which there can be no
assurance. There also can be no assurance that products under development will
be successfully developed or that once developed such products will be
commercially successful. Any forward-looking statements contained in this report
represent our estimates only as of the date of this report, or as of such
earlier dates as are indicated herein, 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.
25
Item 3. 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 exposure to
changes in interest rates and foreign currency exchange rates through our
regular operating and financing activities.
At March 27, 2004, our exposure to changes in interest rates was minimal, since
we had no long-term or short-term debt outstanding. Since we have no debt
outstanding, we do not deem interest rate risk to be significant or material to
our financial position or results of operations. We do not presently use
derivative instruments to adjust our interest rate risk profile. We do not
utilize financial instruments for trading or speculative purposes, nor do we
utilize leveraged financial instruments.
Although the U.S. Dollar is the functional currency for each of our
subsidiaries, certain net sales to customers and purchases of certain components
and services are transacted in local currency, thereby creating an exposure to
fluctuations in foreign currency exchange rates. The impact of foreign exchange
transactions is reflected in our statements of operations. As of March 27, 2004,
we were not engaged in any hedging activities and we had no forward exchange
contracts outstanding. We continue to analyze the benefits and costs associated
with hedging against foreign currency fluctuations.
Item 4. CONTROLS AND PROCEDURES
CEO and CFO Certifications. The certifications of the CEO and the CFO required
by Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended
(the "Certifications") are filed as exhibits to this report. This section of the
report contains the information concerning the evaluation of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) ("Disclosure Controls") and changes to internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
("Internal Controls") referred to in the Certifications and this information
should be read in conjunction with the Certifications for a more complete
understanding of the topics presented.
Limitations on the Effectiveness of Controls. Our management, including the
principal executive officer and principal financial officer, does not expect
that our Disclosure Controls or Internal Controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of the limitations in any and all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. Further,
the design of any control system is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Because of these inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Evaluation of Disclosure Controls. Based on our management's evaluation (with
the participation of our principal executive officer and principal financial
officer), as of the end of the period covered by this report, our principal
executive officer and principal financial officer have concluded that as of the
end of the period covered by this report, our Disclosure Controls were designed
to provide reasonable assurance of achieving their objectives and, at the
"reasonable assurance" level, were effective to ensure that information required
to be disclosed by us in reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
Changes in Internal Controls. There was no change in our Internal Controls
during the Third Quarter Fiscal 2004 that has materially affected, or is
reasonably likely to materially affect, our Internal Controls.
26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9 - Litigation and Settlements in the Notes to Condensed Consolidated
Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on January 22, 2004. The
following is a summary of the matters voted on at that meeting.
The shareholders elected each of the Company's nominees to the Board of
Directors. The persons elected to the Board of Directors, and the number of
votes cast for and withheld for each nominee for director, were as follows:
Director For Withheld
-------- ----------- -----------------
Ira B. Lampert 19,380,456 6,044,275
Ronald S. Cooper 24,280,481 1,144,250
Morris H. Gindi 24,580,614 844,117
J. David Hakman 24,581,602 843,129
William J. O'Neill, Jr. 24,578,397 846,334
The shareholders ratified the appointment of Ernst & Young LLP as the Company's
independent auditors for Fiscal 2004 by the following vote: 24,773,697 votes
"For"; 493,640 votes "Against"; and 157,394 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. Description Method of Filing
- --- ----------- ----------------
3.1 Certificate of Incorporation, as amended through May 9, Incorporated by reference to the Company's annual
2000 report on Form 10-K for the year ended July 1,
2000.
3.2 Restated By-Laws, as amended through January 21, 2004 Incorporated by reference to the Company's
quarterly report on Form 10-Q for the quarter
ended December 27, 2003.
10.1 Amendment No. 3, dated as of August 6, 2003, to Filed herewith.
Amended and Restated Supplemental Executive
Retirement Plan and Agreement dated as of April 19,
2000, between Ira B. Lampert and the Company
10.2 Form of Amendment No. 3, dated as of August 6, Filed herewith.
2003, to the Supplemental Executive Retirement Plan
and Agreement between the Company and each of Brian
King, Keith Lampert and Urs Stampfli
27
10.3 Amendment No. 1, dated as of August 6, 2003, to Filed herewith.
Supplemental Executive Retirement Plan and
Agreement dated as of July 22, 2002, between
Richard Finkbeiner and the Company
10.4 Amendment No. 1, dated as of March 2, 2004, to Filed herewith.
Terms of Employment effective as of November 11,
2002, between Keith Lampert and the Company
31.1 Certification of Chief Executive Officer pursuant Filed herewith.
to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer pursuant Filed herewith.
to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer pursuant Filed herewith.
to 18 U.S.C.ss.1350
32.2 Certification of Chief Financial Officer pursuant Filed herewith.
to 18 U.S.C.ss.1350
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the quarter ended March 27, 2004.
However, on February 5, 2004, we reported under Item 12 of Form 8-K information
regarding a press release announcing our financial results for the quarter and
six months ended December 27, 2003, and furnished a copy of the press release as
an exhibit to the foregoing report.
S I G N A T U R E
Pursuant to the requirements 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.
-------------------------------------------
(Registrant)
DATE: May 17, 2004 By: /s/ Richard M. Finkbeiner
--------------------------------
(Signature)
Richard M. Finkbeiner
Senior Vice President and Chief Financial Officer
DULY AUTHORIZED AND PRINCIPAL FINANCIAL OFFICER