FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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 29, 2003
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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
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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
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(Address of principal executive offices) (Zip Code)
(954) 331-4200
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(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 - 27,940,759 shares as of May 1, 2003
Index
Concord Camera Corp. and Subsidiaries
Part I. Financial Information Page No.
--------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of
March 29, 2003 and June 29, 2002................................... 3
Condensed consolidated statements of operations for the
quarter and nine months ended March 29, 2003
and March 30, 2002................................................... 4
Condensed consolidated statements of cash flows for the nine
months ended March 29, 2003 and March 30, 2002....................... 5
Notes to condensed consolidated financial statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 20
Item 4. Controls and Procedures.................................................... 20
Part II. Other Information
Item 1. Legal Proceedings.......................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders........................ 22
Item 6. Exhibits and Reports on Form 8-K........................................... 22
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
Concord Camera Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
March 29, June 29,
2003 2002
--------- ---------
Assets (Unaudited)
------
Current Assets:
Cash and cash equivalents $ 33,816 $ 103,868
Short-term investments 49,906 --
Accounts receivable, net 19,352 22,984
Inventories 34,355 22,485
Prepaid expenses and other current assets 3,948 4,194
--------- ---------
Total current assets 141,377 153,531
Property, plant and equipment, net 20,779 20,985
Goodwill, net 3,721 3,721
Other assets 25,313 19,839
--------- ---------
Total assets $ 191,190 $ 198,076
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 15,398 $ 12,502
Accrued expenses 8,885 12,013
Other current liabilities 1,664 634
--------- ---------
Total current liabilities 25,947 25,149
Senior notes -- 14,934
Other long-term liabilities 10,679 8,837
--------- ---------
Total liabilities 36,626 48,920
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; 29,458 and 29,029 shares issued
as of March 29, 2003 and June 29, 2002, respectively 141,092 140,547
Paid-in capital 4,507 4,412
Deferred stock-based compensation (232) (332)
Notes receivable arising from common stock purchase agreements -- (1)
Retained earnings 13,400 8,667
Accumulated other comprehensive loss (66) --
--------- ---------
158,701 153,293
Less: treasury stock, at cost, 1,543 shares (4,137) (4,137)
--------- ---------
Total stockholders' equity 154,564 149,156
--------- ---------
Total liabilities and stockholders' equity $ 191,190 $ 198,076
========= =========
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 29, March 30, March 29, March 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 36,246 $ 26,422 $ 128,268 $ 98,574
Cost of products sold 27,854 24,615 102,686 83,696
--------- --------- --------- ---------
Gross profit 8,392 1,807 25,582 14,878
Selling expenses 1,886 1,432 5,896 4,586
General and
administrative expenses 5,367 4,071 14,914 16,252
(Recovery) of operating
expenses, net -- (1,150) -- (1,150)
Variable stock-based
compensation expenses -- 1,169 -- 2,825
Interest expense 206 570 1,030 1,864
Other (income), net (464) (320) (1,429) (2,682)
--------- --------- --------- ---------
Income (loss) before
income taxes 1,397 (3,965) 5,171 (6,817)
Provision (benefit) for
income taxes 140 (617) 438 (646)
--------- --------- --------- ---------
Net income (loss) $ 1,257 $ (3,348) $ 4,733 $ (6,171)
========= ========= ========= =========
Basic earnings (loss)
per common share $ 0.05 $ (0.12) $ 0.17 $ (0.23)
========= ========= ========= =========
Diluted earnings (loss)
per common share $ 0.04 $ (0.12) $ 0.16 $ (0.23)
========= ========= ========= =========
Weighted average
common shares
outstanding - basic 27,915 27,442 27,858 27,425
Dilutive effect of
common stock options 1,627 -- 1,561 --
--------- --------- --------- ---------
Weighted average
common shares
outstanding - diluted 29,542 27,442 29,419 27,425
========= ========= ========= =========
See accompanying notes.
4
Concord Camera Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
For the nine months ended
-------------------------
March 29, March 30,
2003 2002
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 4,733 $ (6,171)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 4,636 4,626
Write-off of deferred finance costs 303 --
Non cash compensation expense -- 2,873
Reversal of net accrued product costs (2,234) --
Provision for inventory -- 1,011
Provision for doubtful accounts -- 2,283
Changes in operating assets and liabilities:
Accounts receivable 3,632 4,432
Inventories (11,870) 5,897
Prepaid expenses and other current assets 1,246 (546)
Other assets (5,077) (3,170)
Accounts payable 2,896 (8,309)
Accrued expenses (893) (3,770)
Other current liabilities 30 (171)
Other liabilities 842 1,786
--------- ---------
Net cash (used in) provided by operating activities (1,756) 771
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (3,899) (1,427)
Purchases of available-for-sale investments (50,008) --
Proceeds from maturities of held-to-maturity investments -- 49,869
--------- ---------
Net cash (used in) provided by investing activities (53,907) 48,442
--------- ---------
Cash flows from financing activities:
Principal repayment of senior notes (14,934) --
Net principal repayments under capital lease obligations -- (504)
Net proceeds from issuance of common stock 545 351
--------- ---------
Net cash used in financing activities (14,389) (153)
--------- ---------
Net (decrease) increase in cash and cash equivalents (70,052) 49,060
Cash and cash equivalents at beginning of period 103,868 57,475
--------- ---------
Cash and cash equivalents at end of period $ 33,816 $ 106,535
========= =========
See accompanying notes
5
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
March 29, 2003
(Unaudited)
Note 1 - Basis of Presentation:
-------------------------------
General
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 three-month period ended March 29, 2003 ("Third Quarter Fiscal
2003") are not necessarily indicative of the results that may be expected for
the fiscal year ending June 28, 2003 ("Fiscal 2003"). The balance sheet at June
29, 2002 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. and subsidiaries (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 29, 2002
("Fiscal 2002").
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. Each of the Company's foreign subsidiaries purchases the majority of its
finished goods inventories in U.S. Dollars and the majority of the Company's net
sales are in U.S. Dollars. Accordingly, the U.S. Dollar is the functional
currency. Certain net sales to customers and purchases of certain components and
services are transacted in local currency, including Japanese Yen, thereby
creating an exposure to fluctuations in foreign currency exchange rates. The
remeasurement 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.
Hedging Activities
As of March 29, 2003, the Company was not engaged in any hedging activities and
there were no forward exchange contracts outstanding.
Short-term Investments
At March 29, 2003, the Company's "Short-term investments", as classified in the
accompanying condensed consolidated balance sheets, consisted of fixed income
funds that invest in debt securities and are considered available-for-sale
securities. Investments in marketable securities not classified as
held-to-maturity or trading are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a component of other comprehensive
income (loss). Realized gains and losses, interest and dividends are included in
investment income (loss) which is included in "Other (income), net" in the
accompanying condensed consolidated statements of operations. As of March 29,
2003, the gross cost, unrealized holding loss, and fair value of the investments
were $50.0 million, $0.1 million, and $49.9 million, respectively. Dividend
income of $0.2 million was included in "Other (income), net" for the quarter and
nine months ended March 29, 2003.
6
Comprehensive Income (Loss)
Comprehensive income (loss) which is included as a component of accumulated
other comprehensive income (loss) reported in the accompanying condensed
consolidated balance sheets, consists of unrealized gains and losses on
marketable securities, which are classified as available-for-sale investments.
Such gains and losses are excluded from net income (loss). As of March 29, 2003,
amounts classified as "Accumulated other comprehensive loss" in the accompanying
condensed consolidated balance sheets consisted solely of gross unrealized
losses on available-for-sale securities of $102,000, less taxes of $36,000, for
a net loss of $66,000. See Note 1 - Short-term Investments.
Income Taxes
The Company estimates its effective tax rate base upon the projected
consolidated annual effective income tax rate. This rate is largely a function
of the amounts of income and 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 used to
reduce taxable income. During the quarter and nine months ended March 29, 2003,
a significant portion of the Company's income has been generated in Hong Kong,
where the statutory tax rate is 8%.
Historically, the Company has recorded a full valuation allowance on deferred
tax assets related to net operating loss carryforwards in certain European
jurisdictions. This valuation allowance was based upon management's assessment
as to their realizability. Based upon these European operations' ability to
generate taxable income during Fiscal 2003, management anticipates utilizing a
portion of these net operating loss carryforwards. As these European operations
generate taxable income, the Company effectively reduces a portion of the
valuation allowance based upon management's assessment of the ultimate
realizability of the deferred tax assets.
Reclassifications
Certain amounts in the prior year have been reclassified to conform to the
current year presentation. See Note 2 - Recently Issued Accounting
Pronouncements, below.
Note 2 - Recently Issued Accounting Pronouncements:
---------------------------------------------------
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities." FASB
Interpretation No. 46 requires consolidation of a variable interest entity if a
company's variable interest absorbs a majority of the entity's losses or
receives a majority of the entity's expected residual returns, or both. Because
the Company does not have any variable interest entities, no additional
disclosures are required and FASB Interpretation No. 46 will not have a material
impact on the Company's condensed consolidated financial statements.
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure" which amends SFAS No. 123, "Accounting for Stock-Based
Compensation" to provide for alternative methods of transition for an entity
that changes to the fair value method of accounting for employee stock-based
compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS
No. 123 to require expanded disclosure including significant interim period
disclosures of the effects of an entity's accounting policy with respect to
stock-based employee compensation. SFAS No. 148 which became effective in the
Third Quarter Fiscal 2003 is not expected to have a material impact on its
consolidated financial statements, as the Company has not adopted the fair value
method for employee stock-based compensation. See Note 6 - Stock Option Plans.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" which requires guarantors to make significant new
disclosures and requires certain guarantees to be recorded at fair value. FASB
Interpretation No. 45 disclosure requirements are effective for periods ending
after December 15, 2002 and for guarantees issued or modified after December 31,
2002. Because the Company has no material guarantees, no additional disclosures
are required and FASB Interpretation No. 45 is not expected to have a material
impact on the Company's consolidated financial statements.
7
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction.
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" and other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. Per SFAS No.145, a gain or loss from the
extinguishment of debt should not be classified as extraordinary if it does not
meet the criteria for classification as an extraordinary item under APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 145 is effective for financial
statements issued after May 15, 2002. Accordingly, the Company has recorded a
loss of $0.3 million associated with the write-off of deferred finance costs on
the repurchase of its Senior Notes under the caption "Interest expense" in the
accompanying condensed consolidated statement of operations for the nine months
ended March 29, 2003. See Note 4 - Senior Notes.
Note 3 - Inventories:
---------------------
Inventories consist of the following:
(amounts in thousands)
March 29, June 29,
2003 2002
------- -------
Raw materials, components, and work-in-
process $17,265 $16,197
Finished goods 17,090 6,288
------- -------
Total inventories $34,355 $22,485
======= =======
Note 4 - 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 statements of operations for the nine months ended March 29, 2003.
Note 5 - Exchange Offer:
------------------------
On August 28, 2001, the Company initiated an offer to exchange outstanding stock
options with an exercise price of more than $7.00 per share for new options to
purchase 75% of the shares subject to the outstanding options at an exercise
price of $5.97 per share (the closing price of the Common Stock as reported on
the Nasdaq National Market on the date the Board of Directors approved the
exchange offer.) The exchange offer expired on October 16, 2001. Options to
purchase 1,375,876 shares of Common Stock were tendered in the exchange offer
and accepted by the Company for cancellation and new options to purchase
1,031,908 shares of no par value common stock ("Common Stock") were issued in
exchange therefor. As a result of the exchange offer, the Company is required to
apply variable accounting to these stock options until they are exercised,
cancelled or expired. For the third quarter and nine months ended March 29,
2003, the Company did not record any variable stock-based compensation expense
in the accompanying condensed consolidated statements of operations because the
Company's ending Common Stock price on March 29, 2003 was below the exercise
price of the repriced stock options. For the quarter and nine months ended March
30, 2002, the Company incurred $1.2 million and $2.8 million, respectively, of
variable stock-based compensation expense.
8
Note 6 - Stock Option Plans:
----------------------------
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
income (loss) and earning (loss) 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 29, March 30, March 29, March 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss), as reported $ 1,257 $ (3,348) $ 4,733 $ (6,171)
Add: variable stock-based compensation expenses, net of
related tax effects, included in the determination
of net income (loss) as reported -- 987 -- 2,557
Deduct: total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects (586) (462) (1,360) (2,694)
--------- --------- --------- ---------
Pro forma net income (loss) $ 671 $ (2,823) $ 3,373 $ (6,308)
========= ========= ========= =========
Earnings (loss) per share:
Basic - as reported $ 0.05 $ (0.12) $ 0.17 $ (0.23)
--------- --------- --------- ---------
Basic - pro forma $ 0.02 $ (0.10) $ 0.12 $ (0.23)
--------- --------- --------- ---------
Diluted - as reported $ 0.04 $ (0.12) $ 0.16 $ (0.23)
--------- --------- --------- ---------
Diluted - pro forma $ 0.02 $ (0.10) $ 0.11 $ (0.23)
========= ========= ========= =========
Note 7 - Other Items:
---------------------
During the fourth quarter of Fiscal 2001, the Company announced a restructuring
and cost containment initiative ("Restructuring Initiative"), which consisted of
facilities consolidation, the closure of the Company's single use camera short
run labeling facility in the United States, and the termination of approximately
71 employees primarily employed in manufacturing, engineering, sales and
marketing and administration functions. The Restructuring Initiative was fully
implemented by the end of Fiscal 2002. During the quarter and nine months ended
March 30, 2002, the Company implemented elements of its Restructuring Initiative
and incurred approximately $0.2 million and $0.8 million, respectively, in
payments related to personnel redundancy costs and facilities consolidation.
During the third quarter of Fiscal 2003, the Company favorably resolved a
disputed claim with a design and manufacturing services ("DMS") customer. Over
the course of a 30 month DMS supply agreement, which expired in January 2002,
the Company recorded certain accrued assets and liabilities. The favorable
resolution resulted in a reversal of these accrued assets and liabilities with a
corresponding reduction of cost of products sold of $2.2 million recorded in the
accompanying condensed consolidated statements of operations for the quarter and
nine months ended March 29, 2003.
During the third quarter of Fiscal 2002, the Company recognized a provision for
inventory of approximately $2.3 million principally related to the
rationalization of sub-one megapixel digital inventory comprised of components
and finished goods. The Company recorded the provision for inventory in cost of
products sold in the accompanying condensed consolidated statements of
operations for the quarter and nine months ended March 30, 2002.
9
During the first quarter of Fiscal 2002, the Company recognized a provision
related to accounts receivable of $1.6 million, and a provision related to
inventory of $1.8 million. Both of these provisions related to Polaroid
Corporation ("Polaroid"), which filed for protection under Chapter 11 of the
U.S. Bankruptcy Code on October 12, 2001, and were included in general and
administrative expenses and cost of products sold, respectively, in the
accompanying condensed consolidated statements of operations for the nine months
ended March 30, 2002. As a result of inventory sales to Polaroid, in the third
quarter of Fiscal 2002, the Company recorded approximately $0.8 million of
income by reducing part of the $1.8 million provision. In the first quarter of
Fiscal 2003, in settlement of Concord's outstanding claims related to the
Polaroid bankruptcy, we recorded as a reduction of general and administrative
expenses a $0.5 million payment.
During the second quarter of Fiscal 2002, the Company recorded a $1.0 million
accounts receivable provision related to Kmart Corporation which filed for
protection under Chapter 11 of the U.S. Bankruptcy Code on January 22, 2002. In
the third quarter of Fiscal 2002, the Company recorded a recovery of
approximately $0.3 million associated with the sale to a third party of the
Kmart accounts receivable. The initial provision for doubtful accounts recorded
in the second quarter of Fiscal 2002 and subsequent recovery in the third
quarter of Fiscal 2002 were included in general and administrative expenses in
the accompanying statements of operations.
Note 8 - (Recovery) of Operating Expenses, Net:
-----------------------------------------------
In April 2002, the Company uncovered a fraudulent scheme including check forgery
by a former employee, which resulted in the embezzlement of approximately $1.3
million over an eighteen-month period ending in April 2002, the preponderance of
which occurred in Fiscal 2002. The Company's investigation confirmed that the
former employee acted alone and the misappropriated funds have been identified.
The Company expects to recover the full amount of the embezzlement from a
combination of insurance proceeds and assets secured and to be recovered from
the individual. Accordingly, the Company has recorded accrued receivables, net
of cash recoveries, of approximately $1.0 million and $1.2 million in prepaid
and other current assets in the accompanying condensed consolidated balance
sheets as of March 29, 2003 and June 29, 2002, respectively. In addition, the
Company recorded under the caption "(Recovery) of operating expenses, net" in
the accompanying condensed consolidated statement of operations for Fiscal 2002,
approximately $1.2 million related to the recovery, which is net of
approximately $0.1 million of expenses related to the investigation and recovery
efforts. The entire amount of the recovery was recorded in the third quarter of
Fiscal 2002 due to the fact that it was impractical to determine the impact on
Fiscal 2002 quarterly periods. The embezzled amounts relating to the prior
fiscal year were not significant.
Note 9 - Litigation:
--------------------
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. The complaint was
dismissed by the Court in December 2002 in response to the motion to dismiss
filed by the Company. In January 2003, an amended class action 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 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. 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
Securities and Exchange Commission that it is conducting an informal inquiry
related to the matters described above. On October 15, 2002, the staff of Nasdaq
requested certain information and materials related to the matters described
above and as to matters related to the previously reported embezzlement of
Company funds by a former employee, uncovered in April 2002.
10
In April 2002, a patent infringement complaint was filed by the Massachusetts
Institute of Technology and Electronics for Imaging, Inc. against 214
defendants, including the Company, in the United States District Court for the
Eastern District of Texas. The complaint asserts that the defendants have
offered for sale and sold products that infringe United States Patent No.
4,500,919, entitled Color Reproduction System, which patent expired on May 4,
2002. The complaint seeks unspecified damages, interest, attorneys' fees, costs
of suit and unspecified other and further relief from the court. Although the
Company believes this lawsuit is without merit, its outcome cannot be predicted,
and if adversely determined, the ultimate liability of the Company, which could
be material, cannot be ascertained.
In December 2002, a patent infringement complaint was filed by Alfred B. Levine
against the Company in the United States District Court for the District of
Maryland. The complaint asserts that the Company has manufactured, marketed and
sold products that infringe United States Patent No. 4,588,282, entitled
Multiplexed Photocopier System With Portable Scanner, and United States Patent
No. 4,751,583, entitled Off Line Photocopying System Using Portable Electronic
Camera, Visual Previewing and Image Processing. The complaint seeks unspecified
damages, attorneys' fees, costs of suit and unspecified other and further relief
from the court. Although the Company believes this lawsuit is without merit, its
outcome cannot be predicted, and if adversely determined, the ultimate liability
of the Company, which could be material, cannot be ascertained.
The Company is involved from time to time in routine legal matters incidental to
its business. In the opinion of our management, the resolution of such matters
will not have a material adverse effect on its financial position or results of
operations.
Note 10 - Commitments and Contingencies:
----------------------------------------
On August 26, 2002, the Company announced it entered into two trademark
licensing agreements with the entity that purchased the assets of Polaroid in an
asset purchase transaction approved by the U.S. Bankruptcy Court supervising the
Polaroid reorganization. The two license agreements provide for the exclusive,
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 includes provisions for the payment of
$3.0 million of minimum royalties, or $6.0 million in total, which will be fully
credited against percentage royalties. In August 2002, the Company paid a total
of $4.0 million, which represented $2.0 million for each license agreement, as
partial payment of the minimum royalties. Additionally, the Company recorded the
remaining $2.0 million minimum royalty liability as a non-cash transaction.
In May 2003, the Company received notification from a third party alleging that
certain of the Company's digital products, as well as those of other companies,
infringe upon their patents. The letter requests the Company to engage in
discussions regarding the alleged infringement and a licensing arrangement.
Discussions have not yet commenced and consequently it is premature to ascertain
the legitimacy or materiality of the alleged infringement.
11
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 29, 2002 ("Fiscal 2002") consolidated financial
statements, and the related notes thereto, of Concord Camera Corp. and
subsidiaries ("Concord" or the "Company"). Except for historical information
contained herein, the matters discussed below are forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements involve risks and uncertainties, including
but not limited to economic, governmental, political, competitive and
technological factors affecting Concord's operations, markets, products, prices
and other factors discussed elsewhere in this report and other reports filed by
the Company with the Securities and Exchange Commission ("SEC"). These factors
may cause results to differ materially from the statements made in this report
or otherwise made by or on behalf of Concord.
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 accompanying notes. Our
application of accounting policies affects these estimates and assumptions.
Actual results could differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect our
more significant estimates and assumptions used in the preparation of our
condensed consolidated financial statements and accompanying notes:
Provision for Doubtful Accounts
The provision for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts owed to us could be adversely affected.
Inventory
Inventory purchases and commitments are based upon future demand forecasts. If
there is a sudden and significant decrease in demand for our products, or there
is a higher rate of inventory obsolescence because of rapidly changing
technology and customer requirements, we may be required to increase our
inventory provisions. This would result in lower of cost or market inventory
valuation adjustments and our gross profit could be adversely affected.
Deferred Taxes
The deferred tax valuation allowance is based on our assessment of the
realizability of our deferred tax assets on an ongoing basis and may be adjusted
from time to time as necessary. In determining the valuation allowance, we have
considered future taxable income and the feasibility of tax planning
initiatives. Should we determine that it is more likely than not that we will
realize certain of our deferred tax assets in the future, an adjustment would be
required to reduce the existing valuation allowance and increase income. On the
contrary, if we determine that we would not be able to realize our recorded
deferred tax asset, an adjustment to increase the valuation allowance would be
charged to the results of operations in the period such conclusion was made.
Such charge could have an adverse effect on our provision for income taxes
included in our results of operations.
Sales Returns
A provision for sales returns is established based on historical product returns
data and trends. If future returns are higher than we estimated, our net sales
and gross profits could be adversely affected.
12
Variable Stock-Based Compensation Accounting for Repriced Stock Options
As a result of an exchange offer that was consummated in October 2001, we are
now required to apply variable stock-based compensation accounting for these new
options issued in the exchange until they are exercised, cancelled or expired.
Because the determination of variable stock-based compensation expense
associated with these stock options is significantly dependent upon our closing
stock price at the end of each prospective reporting period, it is not possible
to determine its future impact, either favorable or unfavorable, on our
consolidated financial statements. See Note 5 - Exchange Offer in the
accompanying Notes to Condensed Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
-----------------------------------------
For a discussion of recently issued accounting pronouncements, see Note 2 -
Recently Issued Accounting Pronouncements in the accompanying Notes to Condensed
Consolidated Financial Statements.
Risk of Severe Acute Respiratory Syndrome (SARS)
------------------------------------------------
Since the Company has significant operations in Hong Kong and China, we have
taken several preventive measures to help ensure the safety of our employees
from contracting or spreading SARS. At this time, we are not aware of any
employee having SARS. We believe we have taken all reasonably prudent actions to
protect our employees and our Company, but there can be no assurance our
business will not be materially adversely affected if the SARS outbreak becomes
more widespread.
Results of Operations
---------------------
Quarter Ended March 29, 2003 Compared to the Quarter Ended March 30, 2002
-------------------------------------------------------------------------
Net Sales
----------
Net sales for the third quarter of Fiscal 2003 were $36.2 million, an increase
of $9.8 million, or 37.2%, as compared to net sales for the third quarter of
Fiscal 2002. Our net sales for the third quarter set a Company record by
exceeding net sales in any prior third quarter, which is historically the
Company's weakest quarter. The increase in sales was in large part due to new
single use and traditional cameras sold in both our retail sales and
distribution ("RSD") and design and manufacturing services ("DMS") businesses.
Additionally, our net sales of digital cameras for the third quarter of Fiscal
2003 were $6.3 million compared to $3.6 million for the same period last year,
an increase of $2.7 million or 75.5%. RSD sales were $23.1 million for the third
quarter this year, an increase of $5.4 million, or 30.8%, as compared to the
third quarter last year, and accounted for 63.9% of total net sales. The growth
in RSD net sales was mostly due to new digital product sales, 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 $13.1 million in our third quarter of Fiscal 2003, an increase of
$4.4 million, or 50.2%, as compared to the same period last year, and accounted
for 36.1% of total net sales. The increase in DMS net sales was primarily due to
a new single use camera being manufactured for Eastman Kodak Company ("Kodak")
under a new supply agreement entered into in September 2002.
Net sales of the Company's operations in the People's Republic of China (the
"PRC") and Hong Kong (collectively, "Asia") for the third quarter of Fiscal
2003, were $12.6 million, an increase of $3.8 million, or 43.9%, as compared to
the third quarter of Fiscal 2002. The increase was attributed entirely to our
DMS business.
RSD net sales of the Company's operations in the United States, Latin America
and Canada (the "Americas"), for the third quarter of Fiscal 2003, were $16.4
million, an increase of $3.7 million, or 28.8%, as compared to the same quarter
last year. The increase in RSD net sales was due to new digital product sales
and sales of Polaroid branded single use and traditional cameras to new and
existing customers as a result of increased market penetration, and organic
growth from existing customers due to sell through and new product
introductions.
13
RSD net sales of the Company's operations in the United Kingdom, Germany and
France ("Europe") for this year's fiscal third quarter were $7.2 million, an
increase of $2.3 million, or 47.1%, as compared to the third quarter of Fiscal
2002. This increase was primarily attributable to offering new digital products
to new and existing customers.
Gross Profit
------------
Gross profit for the third quarter of Fiscal 2003 was $8.4 million, or 23.2% of
net sales, versus $1.8 million, or 6.8% of net sales in the same quarter last
year. During the third quarter of 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 to cost of products sold of $2.2 million, or 6.2% of net sales. In
last year's fiscal third quarter, we incurred a net inventory provision of $1.5
million, or 5.7% of net sales. Gross profit, in both dollars and as a percentage
of net sales, improved over last year's fiscal third quarter due to
significantly higher sales and efficiency gains in our manufacturing processes
at our vertically integrated world class manufacturing facility located in the
PRC. 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 of Fiscal 2003 and Fiscal
2002, in dollars and as a percentage of net sales, were $2.2 million (6.0%) and
$1.8 million (6.8%), respectively.
Operating Expenses
------------------
Selling expenses for the third quarter of Fiscal 2003 were $1.9 million, or 5.2%
of net sales. This compares to $1.4 million, or 5.4% of net sales for the third
quarter last year. The increase in absolute dollars was primarily due to
additional sales and marketing personnel, higher variable costs including
freight and handling costs, and royalties related to the Polaroid licenses, all
of which are attributable to the Company's sales growth.
General and administrative ("G&A") expenses for the third quarter of Fiscal 2003
were $5.4 million, or 14.8% of net sales. This compared to $4.1 million, or
15.4% of net sales, for the third quarter last year. The increase in G&A
expenses was primarily due to additional staffing, non-reimbursed legal expenses
associated with defending the Company's class action litigation, certain
intellectual property related legal costs, insurance costs and some increased
costs associated with the Company's growth. Last year's G&A expenses included
$0.3 million relating to a bad debt recovery for Kmart Corporation.
There was no recovery of operating expenses, net in the Fiscal 2003 third
quarter as compared to last year which included $(1.2) million. See Note 8 -
(Recovery) of Operating Expenses, Net in the accompanying Notes to Condensed
Consolidated Financial Statements.
There were no variable stock-based compensation expenses in the Fiscal 2003
third quarter as compared to the same quarter last year which included $1.2
million. See Note 5 - Exchange Offer in the accompanying Notes to Condensed
Consolidated Financial Statements.
Interest expense for the third quarter of Fiscal 2003 was $0.2 million compared
to $0.6 million in the same quarter last year. The decrease of $0.4 million was
attributable to the repurchase of the Senior Notes in August 2002 and the
related reduction of interest expense.
Other (Income), Net
-------------------
Other (income), net was $(0.5) million and $(0.3) million for the third quarter
of Fiscal 2003 and Fiscal 2002, respectively. The increase of $0.2 million
related primarily to foreign exchange gains.
Income Taxes
------------
The Company's provision for income taxes was $0.1 million for the third quarter
of Fiscal 2003 compared to a benefit of $0.6 million for the third quarter of
Fiscal 2002. The Company estimates its effective income tax rate based upon the
projected consolidated annual effective income tax rate. In general, the
Company's annual effective income tax rate is largely a function of the amounts
of income and 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 1-
Basis of Presentation in the accompanying Notes to Condensed Consolidated
Financial Statements.
14
Net Income (Loss)
-----------------
As a result of the matters described above, the Company had net income of $1.3
million, or $0.04 per diluted share, for the third quarter of Fiscal 2003 as
compared to a net loss of $(3.3) million, or $(0.12) per share, for the third
quarter of Fiscal 2002.
Nine Months Ended March 29, 2003 Compared to the Nine Months
Ended March 30, 2002
-------------------------------------------------------------
Net Sales
----------
Net sales for the nine months ended March 29, 2003 ("Fiscal 2003 YTD") were
$128.3 million, an increase of $29.7 million, or 30.1%, as compared to net sales
for the nine months ended March 30, 2002 ("Fiscal 2002 YTD"). RSD sales for
Fiscal 2003 YTD were $97.8 million, an increase of $28.7 million, or 41.7%, as
compared to Fiscal 2002 YTD, and accounted for 76.3% of total net sales. This
growth was in large part due to new digital product sales, sales of Polaroid
branded single use and traditional cameras, new accounts and organic growth from
existing accounts due to sell through and new product introductions. During the
first three quarters of Fiscal 2003, we offered for sale thirteen Concord
branded digital product models ranging from simple VGA to four megapixel
products. Accordingly, our sales of digital products for the first three
quarters of Fiscal 2003 have increased $40.1 million over the same period in
Fiscal 2002, from $8.5 million to $48.6 million in Fiscal 2003. Digital product
sales represented the primary contributing factor to our 30% net sales increase
over the same period in Fiscal 2002. DMS sales were $30.5 million, an increase
of $1.0 million, or 3.1%, as compared to Fiscal 2002 YTD, and accounted for
23.7% of total sales. The increase was due in part to digital product sales to a
Fuji Photo Film Co., Ltd. subsidiary, Legend Group Limited in the PRC, and
Visioneer, Inc.; sales of a new single use camera being manufactured for Kodak
under a new supply agreement entered into September 2002; and other sales to
existing customers, partially offset by the previously disclosed expiration of
certain DMS contracts.
Net sales of the Company's operations in Asia for Fiscal 2003 YTD were $32.4
million, an increase of $2.2 million, or 7.4%, as compared to Fiscal 2002 YTD.
DMS sales comprised $30.5 million of the $32.4 million sales in Asia. The
remaining $1.9 million were comprised of RSD sales that were primarily
attributable to digital product sales to new customers.
RSD net sales of the Company's operations in the Americas for Fiscal 2003 YTD
were $68.2 million, an increase of $18.6 million, or 37.5%, as compared to the
same period last year. The increase in RSD net sales was due in large part to
new digital product sales, sales of Polaroid branded single use and traditional
cameras, new accounts and organic growth from existing accounts due to sell
through and new product introductions.
RSD net sales of the Company's operations in Europe for Fiscal 2003 YTD were
$27.7 million, an increase of $8.9 million, or 47.0% as compared to Fiscal 2002
YTD. This increase was primarily attributable to the introduction of new digital
products to new and existing RSD customers.
Gross Profit
------------
Gross profit for Fiscal 2003 YTD was $25.6 million, or 19.9% of net sales,
versus $14.9 million, or 15.1% of net sales in Fiscal 2002 YTD. This year
included the $2.2 million, or 1.7% of net sales, benefit of the favorable
dispute resolution in the third quarter partially offset by $0.8 million, or
0.6% of net sales, of additional air-freight costs in the second quarter due to
the West Coast dock workers' labor dispute, while last year included $3.3
million, or 3.3% of net sales, of net inventory provisions. Fiscal 2003 YTD
gross profit, both in absolute dollars and as a percentage of net sales improved
over last year due to significantly higher sales and efficiency gains in
manufacturing. Product engineering, design and development costs for Fiscal 2003
YTD and Fiscal 2002 YTD, in dollars and as a percentage of net sales, were $6.1
million (4.8%) and $5.8 million (5.9%), respectively.
15
Our product mix, which historically consisted almost entirely of traditional and
single use cameras, has changed significantly during the first nine months of
Fiscal 2003 wherein digital products contributed almost 40% of total net sales.
Digital products, as compared to traditional and single use cameras, sell at
significantly higher unit prices but typically generate lower gross profit
margins. However, digital products generate greater gross profit dollars per
unit than traditional and single use cameras. Consequently, as digital products
increase as a percentage of our sales mix, we expect to experience a lower
overall gross profit margin percentage and higher revenue and gross profit
dollars per unit sold.
In addition, as we manufacture more digital products, we increase the risk of
gross profit fluctuations due to digital component availability and increased
costs. Since component availability can fluctuate and is subject to possible
procurement delays and other constraints, it could negatively impact net
profits, net sales and gross margins. Digital camera products are also subject
to relatively more rapid technological changes, price erosion and obsolescence
than traditional camera products. Because of highly competitive markets and
rapid technological changes, the market prices of some of our digital camera
products may decline relatively rapidly and some of our digital products may
become obsolete. We record inventory provisions which value our inventories at
the lower of cost or market value based on prevailing market prices.
Operating Expenses
------------------
Selling expenses for Fiscal 2003 YTD were $5.9 million, or 4.6% of net sales.
For the same period last year, selling expenses were $4.6 million, or 4.7% of
net sales. The increase was primarily due to additional sales and marketing
personnel, higher freight and handling costs, and royalties related to the
Polaroid brand licenses, all of which are attributable to the Company's year
over year sales growth.
General and administrative expenses for Fiscal 2003 YTD were $14.9 million, or
11.6% of net sales. This compared to $16.3 million, or 16.5% of net sales last
year. Fiscal 2002 YTD G&A expenses included a $1.6 million accounts receivable
provision due to the Polaroid bankruptcy, a $1.1 million charitable contribution
for victims of the September 11, 2001 terrorist attack, and a net $0.7 million
provision due to the Kmart bankruptcy. Fiscal 2003 YTD G&A expenses included a
$0.5 million reduction in expense due to a payment from Polaroid in settlement
of Concord's outstanding Polaroid claims related to the Polaroid bankruptcy
filing. The remaining elements of G&A expenses increased year over year by
approximately $2.5 million primarily due to additional staffing, professional
and insurance costs, and other costs associated with the Company's growth.
There was no recovery of operating expenses, net in Fiscal 2003 YTD as compared
to last year which included $(1.2) million. See Note 8 - (Recovery) of Operating
Expenses, Net in the accompanying Notes to Condensed Consolidated Financial
Statements.
There were no variable stock-based compensation expenses in Fiscal 2003 YTD as
compared to last year which included $2.8 million. See Note 5 - Exchange Offer
in the accompanying Notes to Condensed Consolidated Financial Statements.
Interest expense for Fiscal 2003 YTD was $1.0 million, versus $1.9 million last
year, a decrease of $0.9 million. The decrease in interest expense was due to
the Senior Notes repurchase described herein.
Other (Income), Net
--------------------
Other (income), net was $(1.4) million and $(2.7) million for Fiscal 2003 YTD
and Fiscal 2002 YTD, respectively, resulting in a decrease of $1.3 million. Last
year included a $1.2 million arbitration award and also included higher
investment income. This was partially offset by higher foreign currency gains
this year.
Income Taxes
------------
The Company's provision for income taxes was $0.4 million for Fiscal 2003 YTD
compared to a benefit of $0.6 million for Fiscal 2002 YTD. The Company estimates
its effective income tax rate based upon the projected consolidated annual
effective income tax rate. In general, the Company's effective income tax rate
is largely a function of the amounts of income and 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 1 - Basis of Presentation in the accompanying
Notes to Condensed Consolidated Financial Statements.
16
Net Income (Loss)
-----------------
As a result of the matters described above, the Company had net income of $4.7
million, or $0.16 per diluted share, for Fiscal 2003 YTD as compared to a net
loss of $(6.2) million, or $(0.23) per share, for Fiscal 2002 YTD.
Liquidity and Capital Resources
-------------------------------
On January 22, 2002, the SEC issued an interpretive release on disclosures
related to liquidity and capital resources. This release requires us to disclose
factors that are likely to affect our liquidity trends. We are not aware of
factors that are reasonably likely to adversely affect liquidity trends, other
than those factors summarized under the caption "Risk Factors" in the Company's
Annual Report on Form 10-K for Fiscal 2002. We do not have, nor do we engage in,
transactions with any special purpose entities or variable interest entities. We
are not engaged in hedging activities and had no forward exchange contracts
outstanding at March 29, 2003. In the ordinary course of business, we enter into
operating lease commitments, purchase commitments and other contractual
obligations. These transactions are recognized in our financial statements in
accordance with generally accepted accounting principles in the United States,
and are more fully discussed below.
We believe that our cash and cash equivalents, anticipated cash flow from
operations, and amounts available under our credit facilities provide sufficient
liquidity and capital resources for our anticipated short-term working capital
and capital expenditure requirements as well as our anticipated long-term
working capital and capital expenditure requirements for the foreseeable future.
Working Capital - At March 29, 2003, we had working capital of $115.4 million
compared to $128.4 million at June 29, 2002, a decrease of $13.0 million. The
decrease was primarily attributed to the change in cash and cash equivalents and
short-term investments, which together, decreased by $20.2 million from $103.9
million at June 29, 2002 to $83.7 million at March 29, 2003, partially offset by
favorable changes to certain other working capital accounts. The decrease of
$20.2 million was primarily attributable to (i) the August 2002 repurchase of
our $15.0 million Senior Notes at slightly below par, without penalty, (ii)
pre-paying $4.0 million in conjunction with the Polaroid license agreements, and
(iii) purchases of property, plant and equipment of $3.9 million. Accounts
receivable, net decreased by $10.0 million during the third quarter and
decreased $3.6 million during Fiscal 2003 YTD. Working capital was impacted by
inventory increasing $11.9 million from $22.5 million at June 29, 2002 to $34.4
million at March 29, 2003.
Cash Used in Operations - Cash used in operations during Fiscal 2003 YTD was
$1.8 million, which compared unfavorably to cash provided by operations of $0.8
million for the comparable period during Fiscal 2002 YTD. The change in cash
used in operating activities for Fiscal 2003 YTD was primarily attributable to
an increase in inventories in anticipation of sales in the fourth quarter of
Fiscal 2003.
Cash Used in Investing Activities - Purchases of property, plant and equipment
for Fiscal 2003 YTD and Fiscal 2002 YTD were $3.9 million and $1.4 million,
respectively. The increase was primarily a result of higher expenditures on
plant and equipment purchases for our manufacturing facility in the PRC. We
anticipate capital expenditures will increase substantially over Fiscal 2002 due
to increased investments in plant and equipment at our manufacturing facility in
the PRC in anticipation of increased net sales in Fiscal 2003. The decrease in
cash provided from investing activities during Fiscal 2003 YTD resulted from the
Company purchasing short-term investments during that period, whereas in Fiscal
2002, the Company received cash proceeds when certain short-term investments
made in Fiscal 2001 matured in Fiscal 2002 YTD.
Cash Used in Financing Activities - Cash used in financing activities for Fiscal
2003 YTD was $14.4 million. This resulted from the repurchase of the Senior
Notes partially offset by proceeds received from the exercise of stock options
and warrants. Cash used by financing activities for Fiscal 2002 YTD was $0.2
million, which was primarily attributable to the repayment of certain capital
leases partially offset by proceeds from the exercise of stock options.
17
Operating Leases - We entered into operating leases in the ordinary course of
business (e.g., warehouse facilities, office space and equipment) where the
economic profile was favorable. The effects of outstanding leases are not
material to us in terms of either annual cash flow or total future minimum
payments.
Purchase Commitments - As part of the ordinary course of our business, we enter
into and have purchase commitments for materials, supplies, services, and
property, plant and equipment. In the aggregate, such commitments are not at
prices in excess of current market and typically do not exceed one year.
Other Contractual Obligations - We do not have any material financial guarantees
or other contractual commitments that are reasonably likely to adversely affect
liquidity. See Hong Kong Financing Facilities for information about our
financial guarantees.
Hong Kong Financing Facilities - Our Hong Kong subsidiary, Concord Camera HK
Limited, ("Concord HK"), has various financing and revolving credit facilities
in place providing an aggregate of $23.5 million in borrowing capacity. Certain
of the revolving credit facilities are denominated in Hong Kong Dollars. Since
1983 the Hong Kong Dollar has been pegged to the United States Dollar. The
revolving credit facilities are comprised of 1) an approximate $11.0 million
Import Facility, 2) an approximate $2.6 million Packing Credit and Export
Facility, 3) an approximate $1.9 million Foreign Exchange Facility and 4) an
$8.0 million Accounts Receivable Financing Facility (collectively the "Hong Kong
Financing Facilities"). The $8.0 million Accounts Receivable Financing Facility
is secured by certain accounts receivable of Concord HK. Concord Camera Corp.
guarantees the Hong Kong Financing Facilities. Availability under the Accounts
Receivable Financing Facility is subject to advance formulas based on Eligible
Accounts Receivable and all the credit facilities are subject to certain
financial ratios and covenants. The revolving credit facilities bear interest at
variable rates. At March 29, 2003, there were no amounts outstanding under the
Hong Kong Financing Facilities.
United Kingdom Credit Facility - In November 1999, our United Kingdom ("UK")
subsidiary obtained a credit facility from a UK financial institution (the "UK
Facility") that is secured by substantially all of our UK subsidiary's assets.
The UK Facility bears interest at 1.5% above the UK prime lending rate and
allows borrowings of up to approximately $1.1 million. At March 29, 2003, there
were no amounts outstanding under the UK Facility.
Senior Notes - See Note 4 - Senior Notes, in the accompanying Notes to Condensed
Consolidated Financial Statements.
License Agreement - See Note 10 - Commitments and Contingencies, in the
accompanying Notes to Condensed Consolidated Financial Statements.
Alleged Patent Infringement - See Note 10 - Commitments and Contingencies, in
the accompanying Notes to Condensed Consolidated Financial Statements.
Outlook
-------
For the fourth quarter of Fiscal 2003, we anticipate net sales in the
approximate range of $50 to $55 million and net income in the approximate range
of $0.9 to $1.8 million, or $0.03 to $0.06 per share, before non-cash variable
stock option expense.
Growth Opportunities
--------------------
We are evaluating various growth opportunities that could require significant
funding commitments. We have from time to time held, and will continue to hold,
discussions and negotiations with (i) companies that represent potential
acquisition or investment opportunities, (ii) potential strategic and financial
investors who have expressed an interest in making an investment in or acquiring
us, (iii) potential joint venture partners looking toward formation of strategic
alliances that would broaden our product base or enable us to enter new lines of
business and (iv) potential new and existing DMS customers where the design,
development and production of new products, including certain new technologies,
would enable us to expand our existing business, and enter new markets including
new ventures focusing on new technologies. However, there can be no assurance
that any definitive agreement will be reached regarding any of the foregoing,
nor does management believe that such agreements are necessary for the
successful implementation of our strategic plans.
18
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. The Company's 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
the Company's most recent Annual Report filed with the SEC on Form 10-K for
Fiscal 2002 and subsequently filed reports. Management wishes to caution the
reader that these forward-looking statements, such as statements regarding the
development of the Company's business, the Company's anticipated revenues or
capital expenditures, projected profits 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 the
Company 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 the Company's products. Obtaining the results expected from the introduction
of the Company's 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, the Company's DMS agreements
require an ability to meet high quality and performance standards, successful
implementation of production at greatly increased volumes and an ability 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 the Company's 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 its estimates as of any subsequent date. While the Company may
elect to update forward-looking statements at some point in the future, it
specifically disclaims any obligation to do so, even if its estimates change.
19
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 exposures to
changes in interest rates and foreign currency exchange rates through our
regular operating and financing activities.
At March 29, 2003, our exposure to changes in interest rates was minimal, since
we had no long-term or short-term debt outstanding. However, we do borrow from
time to time under our credit facilities. These borrowings are of a short-term
nature typically subject to variable interest rates based on a prime rate or
LIBOR plus or minus a margin. Since we have no debt outstanding, we do not deem
interest rate risk to be significant or material to our financial position or
results of operations. We do not presently use derivative instruments to adjust
our interest rate risk profile. We do not utilize financial instruments for
trading or speculative purposes, nor do we utilize leveraged financial
instruments.
Each of our foreign subsidiaries purchases the majority of their finished goods
inventories in U.S. Dollars and certain of their sales are in foreign currency,
thereby creating an exposure to fluctuations in foreign currency exchange rates.
We purchase certain components, raw materials and services needed to manufacture
our products in foreign currencies including Japanese Yen. The impact of foreign
exchange transactions is reflected in our statements of operations. As of March
29, 2003, we were not engaged in any hedging activities and we had no forward
exchange contracts outstanding. See Note 1 - Basis of Presentation, in the
accompanying Notes to Condensed Consolidated Financial Statements.
Item 4. CONTROLS AND PROCEDURES
CEO and CFO Certifications. Immediately following the "Signatures" section
of this quarterly report are the certifications of the CEO and the CFO required
by Rules 13a-14 and 15d-14 the Securities Exchange Act of 1934 (the
"Certifications"). This section of the quarterly report contains the information
concerning the evaluation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 (c) and 15d-14 (c)) ("Disclosure
Controls") and changes to 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.
Disclosure Controls and Internal Controls. Disclosure Controls are
controls and other procedures that are designed for the purpose of ensuring that
information required to be disclosed in the Company's reports filed under the
Securities Exchange Act of 1934 (such as this quarterly report), is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Internal Controls are designed for the purpose of
providing reasonable assurance that the Company's transactions are properly
authorized, recorded and reported and that the Company's assets are safeguarded
from improper use to permit the preparation of the Company's financial
statements in conformity with generally accepted accounting principles.
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that the Company's Disclosure
Controls or Internal Controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the limitations in 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.
Changes to Internal Controls. In accordance with the SEC's requirements,
the CEO and the CFO note that, since the date of their last evaluation, there
have been no significant changes in Internal Controls or in other factors that
could significantly affect Internal Controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
20
Conclusions regarding Disclosure Controls. Within the 90 days prior to the
date of this report, the Company carried out an evaluation, under the
supervision and with the participation of management, including the CEO and CFO,
of the effectiveness of the design and operation of the Company's Disclosure
Controls. Based upon that evaluation, the CEO and CFO have concluded that,
subject to the limitations noted above, the Company's Disclosure Controls are
effective to ensure that material information relating to the Company and its
consolidated subsidiaries is made known to management, including the CEO and
CFO, particularly during the period when the Company's periodic reports are
being prepared.
21
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
-----------------
See Note 9 -- Litigation, in the accompanying 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 21, 2003. 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 21,144,541 4,767,194
Ronald S. Cooper 24,281,604 1,630,131
Morris H. Gindi 24,887,275 1,024,460
J. David Hakman 24,267,901 1,643,834
William J. Lloyd 24,956,076 955,659
William J. O'Neill, Jr 24,284,006 1,627,729
The shareholders ratified the appointment of Ernst & Young LLP as the Company's
independent auditors for Fiscal 2003 by the following vote: 25,709,096 votes
"For", 188,996 votes "Against"; and 13,643 abstentions.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
No. Description Method of Filing
--- ----------- ----------------
3.1 Certificate of Incorporation, as Incorporated by reference to the
amended through May 9, 2000 Company's annual report on Form
10-K for the year ended July 1,
2000.
3.2 Restated By-Laws, as amended Incorporated by reference to the
through December 4, 2002 Company's quarterly report on
Form 10-Q for the quarter ended
December 28, 2002.
10.1 Amendment No. 6, dated February Filed herewith.
10, 2003, to Amended and
Restated Employment Agreement
dated as of May 1, 1997, between
Ira B. Lampert and the Company
10.2 Amendment No.3, dated as of Filed herewith.
January 1, 2003, to Terms of
Employment dated as of April 17,
2000, between Gerald J. Angeli
and the Company
22
10.3 Amendment No. 2 dated as of Filed herewith.
February 26, 2003, and Amendment
No. 3 dated as of March 30,
2003, to Terms of Employment
dated as of January 1, 2000,
between Urs W. Stampfli and the
Company
10.4 Amendment No. 2 dated as of Filed herewith.
February 26, 2003, and Amendment
No. 3, dated as of March 30,
2003, to Terms of Employment
dated as of January 1, 2000,
between Brian F. King and the
Company
10.5 Amendment dated as of January Filed herewith.
20, 2003 to Incentive Plan
(1993)
99.1 Certification of Chief Executive Filed herewith.
Officer pursuant to Section 906
of the Sarbanes-Oxley Act of
2002
99.2 Certification of Chief Financial Filed herewith.
Officer pursuant to Section 906
of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the quarter ended
March 29, 2003.
23
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)
By: /s/ Richard M. Finkbeiner
------------------------------------
(Signature)
Richard M. Finkbeiner
Senior Vice President
and Chief Financial Officer
DULY AUTHORIZED AND PRINCIPAL FINANCIAL OFFICER
DATE: May 12, 2003
24
CERTIFICATION
--------------
I, Ira B. Lampert, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Concord
Camera Corp. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 12, 2003
/s/ Ira B. Lampert
---------------------------------------
Ira B. Lampert, Chief Executive Officer
25
CERTIFICATION
--------------
I, Richard M. Finkbeiner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Concord
Camera Corp. (the "Company");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 12, 2003
/s/ Richard M. Finkbeiner
-----------------------------------------------
Richard M. Finkbeiner, Chief Financial Officer
26