UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2007
Commission File No. 0-17038
Concord Camera Corp.
(Exact name of registrant as specified in its charter)
New Jersey 13-3152196
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
4000 Hollywood Boulevard,
Presidential Circle - 6th Floor,
North Tower, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 331-4200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value per share The NASDAQ Stock Market LLC
------------------------------------ -------------------------------------------
(Title of class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of December 29, 2006, the last day of
business of our most recently completed second fiscal quarter, was approximately
$17,790,988 based on the closing price for
the registrant's common stock as traded on the NASDAQ Global Market of The
NASDAQ Stock Market LLC on such date of $4.50 per share. Solely for the purpose
of this calculation, shares held by directors, executive officers and 10%
shareholders of the registrant have been excluded.
As of September 5, 2007, there were 5,847,408 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2007 Annual
Meeting of Shareholders are incorporated by reference in Items 10, 11, 12, 13
and 14 of Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
Item Page
PART I
1. Business ......................................................... 2
1A. Risk Factors ..................................................... 7
1B. Unresolved Staff Comments ........................................ 16
2. Properties ....................................................... 16
3. Legal Proceedings ................................................ 17
4. Submission of Matters to a Vote of Security Holders .............. 19
PART II
5. Market for Registrant's Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity Securities..... 20
6. Selected Financial Data .......................................... 22
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 23
7A. Quantitative and Qualitative Disclosures About Market Risk ....... 36
8. Financial Statements and Supplementary Data ...................... 38
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ........................... 75
9A. Controls and Procedures .......................................... 75
9B. Other Information ................................................ 75
PART III
10. Directors and Executive Officers and Corporate Governance......... 76
11. Executive Compensation ........................................... 76
12. Security Ownership of Certain Beneficial Owners
and Management and Related Shareholder Matters ................... 76
13. Certain Relationships and Related Transactions
and Director Independence......................................... 76
14. Principal Accountant Fees and Services ........................... 76
PART IV
15. Exhibits and Financial Statement Schedules ....................... 77
Signatures ....................................................... 87
ii
PART I
Unless the context indicates otherwise, when used in this report, "we," "us,"
"our," "Concord" and the "Company" refer to Concord Camera Corp. and its
subsidiaries. Our fiscal year ends on the Saturday closest to June 30. Fiscal
2007 refers to the fiscal year ended on June 30, 2007; fiscal 2006 refers to the
fiscal year ended July 1, 2006; fiscal 2005 refers to the fiscal year ended July
2, 2005; fiscal 2004 refers to the fiscal year ended July 3, 2004; fiscal 2003
refers to the fiscal year ended June 28, 2003. Also for reference purposes, the
Company's fiscal year ending on June 28, 2008 is designated as "fiscal 2008."
Cautionary Statement Regarding 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," "forecasts" 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" below and
subsequently filed reports. We wish to caution the reader that these
forward-looking statements, including, without limitation, statements regarding
expected cost reductions, anticipated or expected results of the implementation
of our cost-reduction initiatives and new business initiatives, anticipated
financial benefits of de-emphasizing the sale of digital cameras and increasing
our focus on the sale of single-use and 35mm traditional film cameras, the
development of our business, anticipated revenues or capital expenditures, our
ability to improve gross margin percentages on the sale of our products,
projected profits or losses, the expected market size for single-use and 35 mm
traditional film cameras, our expected fulfillment of backlog orders, our
assessment of and estimates of royalty payments in connection with intellectual
property claims, our remediation of our material weaknesses in our internal
control over financial reporting, the sufficiency of our working capital and
cash to fund our operations in the next twelve months, our belief regarding the
lack of merit in pending litigations, coverage from our insurance carrier in
connection with pending litigations and our expectation that there is no
material tax exposure to the company on account of our operations in the
People's Republic of China ("PRC"), 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, our expected results could be adversely affected by, among other
things, production difficulties or economic conditions negatively affecting our
suppliers, customers or the market for our products, by our inability to develop
and maintain relationships with suppliers, customers or licensors or by our
inability to negotiate favorable terms with our suppliers, our customers or
licensors. Obtaining the results expected from the introduction of any new
products or product lines may require successful and timely completion of
development, successful and timely ramp-up of full-scale production and customer
and consumer acceptance of those products. In addition, future relationships or
agreements may require an ability to meet high quality and performance
standards, to successfully implement and sustain production at greatly increased
volumes, as to all of which there can be no assurance. There also can be no
assurance that products and new business initiatives under consideration or
development will be successfully developed or that once developed such products
and initiatives 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.
1
Item 1. Business.
We incorporated in New Jersey in 1982. We design, develop, manufacture,
outsource and sell worldwide easy-to-use single-use and 35mm traditional film
cameras. We manufacture and assemble most of our single-use cameras and certain
of our 35mm traditional film cameras at our manufacturing facilities in the
Peoples Republic of China ("PRC") and outsource the manufacture of certain of
our single-use and 35mm traditional film cameras for sale to retail sales and
distribution ("RSD") customers. We sell our private label and brand-name
products to our RSD customers worldwide either directly or through third-party
distributors.
During fiscal 2005, we experienced a substantial reduction in single-use camera
sales to design and manufacturing services ("DMS") customers, primarily as a
result of the decision of Eastman Kodak Company ("Kodak") to cease purchases of
single-use cameras under its two DMS contracts with us. Although we continued to
seek and evaluate DMS single-use camera business opportunities, DMS sales in
fiscal 2007 and fiscal 2006 were not material.
In fiscal 2004, we initiated a strategic review process to determine how we may
better compete in the digital camera market, increase sales of our popular
single-use cameras and reduce our operating costs. The strategic review, which
continued through fiscal 2007, led to our initiating a restructuring plan and
cost-reduction initiatives and resulted in our exiting the digital camera
market. During the first quarter of fiscal 2007, we sold a limited quantity of
digital cameras as a result of fulfilling certain customer orders placed in the
fourth quarter of fiscal 2006. Also, during fiscal 2007, we eliminated most of
our digital camera inventories, maintaining only sufficient quantities to
satisfy consumer warranties. You can find more information on our cost-reduction
initiatives and our fiscal 2007 results of operations in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
In fiscal 2005, we initiated a new business initiative to identify, assess and,
as appropriate, commercialize new business opportunities and products. As a
result of this initiative, we have introduced a limited number of new products.
For additional information, see, "New Business Initiatives" below.
The mailing address of our headquarters is 4000 Hollywood Boulevard, 6th Floor,
North Tower, Hollywood, Florida 33021, and our telephone number is (954)
331-4200. Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, amendments to those reports and our proxy
statements are available free of charge on our Internet website, at
http://www.concord-camera.com, as soon as reasonably practicable after such
reports are electronically filed with or furnished to the Securities and
Exchange Commission ("SEC"). The information found on our website is not part of
this or any other report we file with or furnish to the SEC.
The Film Camera Market
We manufacture, market and sell single-use and 35mm traditional film cameras to
our RSD customers.
o Single-use cameras - Single-use cameras are inexpensive, easy-to-use
cameras that are sold preloaded with film and batteries and are
designed to be used only once by the consumer. After use, the
consumer returns the entire camera to the photo processor. The
processor then extracts the film and either disposes of the used
camera or returns and/or sells it for recycling uses.
o 35mm traditional film cameras - This category includes reloadable
cameras that use 35mm silver halide film.
2
Film Camera Market Trends
Market trends for single-use and 35mm traditional film cameras include the
following:
o Single-use cameras - According to available third-party market
research data, after years of robust growth, the single-use camera
market reached its peak of 450 million units sold worldwide in
calendar year 2004. Total worldwide sales of single-use cameras
declined to 409 million units in calendar year 2005, declined to 366
million units in calendar year 2006 and are projected to decline to
309 million units in calendar year 2007. We believe, however, that
single-use cameras remain a large and viable category. We also
believe that we are currently the third largest producer of
single-use cameras in the world. (Market Research Source-PMA 7-2006)
o 35mm traditional film cameras - 35mm traditional film cameras are
being displaced by digital cameras. In the U.S. market, digital
cameras began to outsell film cameras in calendar year 2005. The
calendar year 2005 35mm traditional film camera sales in the United
States were reported at 4.3 million units, a 36% decrease from the
previous year. The decline of 35mm traditional film cameras
continued during calendar year 2006 at approximately 51% and is
projected to decline during calendar year 2007, with sales projected
at 1.2 million units, which represents about a 43% year-over-year
decrease in sales. In fiscal 2006, total sales of 35mm traditional
film cameras in the U.S. represented approximately 17.5% of the
total image capture product sales in the U.S. and are expected to be
approximately 10% in the U.S. during calendar year 2007. (Market
Research Source-PMAI 2006 Newsletter) In response to the declining
market for 35mm traditional film cameras, in fiscal 2006, we reduced
our 35mm traditional film camera offerings to two models. During
fiscal 2007, we continued to focus our sales effort on these two
models, which provide features that satisfies different consumers'
needs at affordable retail prices below $25.
Based on the market trends discussed above, we believe that the market for
single-use cameras remains a viable market for our company. As a result, we are
focusing on increasing our sales of single-use cameras through various sales and
marketing initiatives and reducing our product costs, while maintaining product
performance and quality.
Film Camera Products
Our film camera products include single-use and 35mm traditional film cameras.
We sell private label and brand-name products to our RSD customers worldwide
either directly or through third-party distributors. We design, develop and
manufacture most of our single-use cameras and outsource the manufacture of
certain of our single-use and 35mm traditional film cameras.
We offer a complete line of single-use cameras, including outdoor, flash, zoom
and underwater models. We believe that we are uniquely structured to provide
encasements, finishes, packaging and film speed and lengths to accommodate
different user and customer preferences.
Our 35mm traditional film cameras range from entry-level to fully featured zoom
models and include models used by certain RSD customers to support special
promotion and loyalty programs offered to their customers.
Our expenditures for product engineering, design and development decreased to
$2.5 million in fiscal 2007 from $3.8 million in fiscal 2006, mainly as a result
of our discontinuing digital camera sales. For additional information regarding
product development costs, see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
3
Sales and Marketing
Our film camera products are sold to retailers on a worldwide basis through
direct sales offices, independent sales representatives and distributors in the
United States, Canada, Latin America (the "Americas"), the United Kingdom,
France and Germany ("Europe"), and Hong Kong, China and Japan ("Asia"). We
currently market our film camera products to retailers on a private label basis
and/or under the Polaroid and Polaroid Fun Shooter brand names.
We have established our presence with our retail customers by offering
attractive, easy-to-use single-use and 35mm traditional film cameras. We market
many different styles of cameras that are sold through many retail outlets.
We have in-house sales and marketing personnel who make the majority of our
direct sales to our RSD customers. We also have independent sales
representatives who serve specific geographic areas. Sales representatives
generally receive commissions ranging from 1.0% to 3.0% of net sales to retail
customers, depending on the type of customer and product, and may act as sales
representatives for manufacturers of other photographic and non-photographic
products. We also sell products to distributors on a wholesale basis who, in
turn, sell our products to retailers.
Competition in the Film Camera Market
The film camera market is highly competitive with many companies marketing
products to the retail market. As a producer and/or marketer of single-use and
35mm traditional film camera products, we encounter substantial competition from
a number of companies, many of which have longer operating histories, more
established markets and brand recognition, and more extensive research,
development and manufacturing capabilities than we have. Our key competitors in
the single-use camera market are Fuji and Kodak, both of whom have greater
resources than we have or may reasonably be expected to have in the foreseeable
future. Maintaining a competitive advantage depends on our ability to develop
and manufacture or purchase high quality products from outsourced manufacturers
at the lowest cost.
Backlog
Due to the lead time required for production and shipping and the need to build
inventory to meet seasonal demand, we may at times have a backlog of orders for
products. We define backlog as unfulfilled orders supported by signed contracts
or purchase orders for delivery of our products generally within the next six
months. Our backlog at June 30, 2007 was approximately $10.2 million. We
experience fluctuations in our backlog at various times during our fiscal year.
We expect that approximately $9.7 million of the unfulfilled orders at June 30,
2007 will be shipped during the first quarter of fiscal 2008. Although we
believe that our entire backlog consists of firm orders, our backlog as of any
particular date may not be indicative of actual revenue for any future period
because of the possibility of customer cancellations, order changes, changes in
delivery schedules and delays inherent in the shipments of products. No
assurance can be given that the current backlog will necessarily lead to revenue
in any specific future period.
Major Customers
In fiscal 2007, sales to two of our retail customers represented in excess of
10% of our total net sales: (i) Wal-Mart Stores, Inc. ("Wal-Mart") represented
40.9% of total net sales; and (ii) Walgreen Co. ("Walgreens") represented 20.8%
of total net sales. See Note 18, Geographic Area and Significant Customer
Information, in the Notes to Consolidated Financial Statements.
4
Seasonality
Sales of our film camera products are linked to the timing of vacations,
holidays and other leisure activities. Sales are normally strongest in the first
and second quarters (summer, fall and early winter) of our fiscal year when
demand is high as retailers prepare for the holiday season. Sales are also
strong in the fourth quarter of our fiscal year (spring to early summer) due to
demand driven by heavy vacation activity and events such as weddings and
graduations. Sales are normally lowest in the third quarter of our fiscal year
(winter to early spring) with the absence of holidays and fewer people taking
vacations.
Licensing Activities
We have a worldwide non-exclusive license (which excluded Japan until January 1,
2005) to use certain of the single-use camera patents and patent applications of
Fuji Photo Film Ltd. ("Fuji") in connection with the manufacture, remanufacture
and sale of single-use cameras. The license extends until the later of February
26, 2021 or the expiration of the last of the licensed Fuji patents and provides
for payment of a license fee and certain royalty payments to Fuji. Our ability
to manufacture and sell single-use cameras may depend on the continuation of our
right to use the Fuji patents. As a result, we believe the loss of the Fuji
license prior to the expiration of the patents would have a material adverse
effect on our financial position and results of operation.
We have the worldwide, exclusive right to use the Polaroid brand name and
trademark in connection with the manufacture, distribution, promotion and sale
of single-use and traditional film-based cameras, including zoom cameras and
certain related accessories but excluding instant and digital cameras, except
for products released by Polaroid Corporation ("Polaroid") into the distribution
chain before August 26, 2002. The single-use camera license agreement expires on
February 1, 2009 and provides for the payment of $3.0 million of minimum
royalties to Polaroid, which will be fully credited against percentage
royalties. As of July 1, 2007, we paid $2.5 million of the minimum royalties.
The traditional film camera license agreement expires on January 31, 2009 and
provided for a minimum royalty payment of $50,000 to Polaroid on or before
October 31, 2006, which was fully credited against percentage royalties during
the first year of the term ended January 31, 2007. There are no minimum
guaranteed royalty payments under the traditional film camera license agreement
after the first year of the term. As of July 1, 2006, our traditional film
camera percentage royalties exceeded the minimum royalty amount. We believe that
the loss of the Polaroid license could have a material adverse effect on our
financial position and results of operations.
As part of our acquisition of Jenimage Europe GmbH ("Jenimage") in 2004, we
entered into a twenty-year, worldwide trademark license agreement with Jenoptik
AG for the exclusive use of the JENOPTIK brand name and trademark on
non-professional consumer imaging products including, but not limited to,
digital, single-use and traditional film cameras, and other imaging products and
related accessories. The license provides for the payment of percentage
royalties but does not require any minimum guaranteed royalty payments.
For further discussion of our license and royalty agreements, see Note 14,
Commitments and Contingencies, "License and Royalty Agreements," in the Notes to
Consolidated Financial Statements.
5
Manufacturing
We conduct all of our manufacturing in the PRC. Our vertically integrated
manufacturing facilities include plastic injection molding of lenses and other
parts, stamping and machining of metal parts, manufacturing of printed circuit
boards ("PCBs"), assembly of PCBs using surface mount technology machinery and
manual insertion, quality control, quality assurance, painting and final
assembly and testing. In fiscal 2007, as a result of our previous restructuring
plan, our manufacturing facility focused predominantly on the manufacture of
high volume, low cost single-use cameras.
Our manufacturing and related dormitory facilities in the PRC occupy
approximately 600,000 square feet. See Item 2, Properties, for information on
the leases and land use agreements related to our manufacturing facilities in
the PRC. Our PRC manufacturing facilities have been certified under the Social
Accountability 8000 standard ("SA8000") since November 2001. The SA8000 is an
international standard designed to ensure safe working conditions, fair
management practices and the protection of workers' rights. Our PRC
manufacturing facilities are ISO 9000 and 9001 accredited.
In addition, we outsource the manufacture of certain of our film cameras and
other products.
Equipment, Components, Raw Materials and Products from Outsourced Manufacturers
We own the tools and equipment necessary to manufacture a significant number of
our single-use camera products and components used in our single-use camera
products. Manufacturers and suppliers located in the Far East and other parts of
the world supply us with raw materials, components and finished products that we
do not manufacture. We may experience a shortage of supply of, or a delay in,
receiving certain components and products as a result of strong demand, capacity
constraints, diminishing sources of supply or other problems experienced by our
suppliers. Our net sales, gross profits and margins could be adversely affected
if we encounter supplier issues and/or fail to manage supplier issues properly.
See Item 1A, Risk Factors.
PRC Operations
Our operations are substantially dependent upon our manufacturing and assembly
activities in the PRC. Our current processing agreement with the PRC
governmental entities, which allows us to operate in the PRC, was renewed in
October 2006 for an additional ten-year term until October 2016. See Item 2,
Properties, for information on the leases and land use agreements related to our
manufacturing facilities in the PRC.
In 2002, we established, registered and commenced operations of a wholly-owned
foreign enterprise, Concord Camera (Shenzhen) Company Limited ("Concord
Shenzhen"), which is a wholly-owned subsidiary of Concord Camera HK Limited
("CCHK"), pursuant to the laws of the PRC relating to enterprises with a sole
foreign investor. The business license of Concord Shenzhen permits it to design,
develop, manufacture and sell single-use, 35mm traditional film and digital
cameras and camera components in the PRC and worldwide.
Trademarks and Patents
Our trademarks include, among others, CONCORD, CONCORD EYE Q, GO WIRELESS, FUN
SHOOTER, EASYSHOT, LE CLIC, KEYSTONE, APEX and GOLDLINE for cameras sold in the
United States and/or numerous foreign countries. We license the POLAROID
trademark for exclusive use worldwide in connection with the manufacture,
distribution, promotion and sale of single-use and traditional film cameras
(excluding instant and digital cameras). We also license the JENOPTIK trademark
for exclusive use worldwide for non-professional consumer imaging products and
accessories (both digital and film-based). We own numerous patents, some of
which are used in our current products.
6
We have applied for, and will continue to apply for, in the United States and
foreign countries, patents to protect the inventions and technologies developed
by or for us. We do not believe our competitiveness and market share are
dependent on the ultimate disposition of our patent applications. We license
patents and patent applications related to single-use cameras from Fuji in
connection with the manufacture and sale of single-use cameras. See "Licensing
Activities" above.
New Business Initiatives
During fiscal 2005, we initiated a process to identify, assess, quantify and
define new products and services potentially capable of increasing our sales and
building a profitable business on a sustainable basis. With this objective, we
evaluated opportunities that we had identified based on their industry
attractiveness, competitive dynamics, channel compatibility and potential for
providing a profitable business model. We conducted quantitative and qualitative
research, during which we exposed various target audiences to our unique product
concepts and obtained their feedback to inquiries regarding purchase intent,
channel preference and price sensitivity.
We believe a market opportunity exists in the area of personal safety for
products that provide peace-of-mind to a broad base of consumers at an
affordable price. In August 2006, we introduced a new product, OnGuard Kids, a
personal safety alert system for children aged five years and older that
combines a fashionable digital watch with a 110 decibel emergency alarm signal
that can easily be activated by children to call for help in an emergency. We
are now marketing and selling the product to new and existing RSD consumers in
the Americas and Europe.
Although the product is suitable for teen-agers and young adults, we are
initially targeting the five to twelve-year-old market. Based on U.S. Census
Bureau data, there are approximately 36 million children in the United States
between the ages of five and thirteen years old.
Employee Relations
As of August 10, 2007, we had 108 employees, of whom 54, or 50.0% were located
in Hong Kong, 7, or 6.5%, were located in Europe and 47, or 43.5%, were located
in the Americas. We currently have one collective bargaining agreement covering
one employee in France that has no stated expiration date. During fiscal 2007,
pursuant to our agreements with PRC governmental entities, and based upon
production demand, approximately 1,600 to 3,100 people worked in our PRC
manufacturing facilities. We believe that our relationship with our employees
and workers is satisfactory.
Financial Information about Geographic Areas
For financial information about geographic areas, see Note 18, Geographic Area
and Significant Customer Information, in the Notes to Consolidated Financial
Statements. The risks attendant to our foreign operations are described in Item
1A, Risks Factors, below.
Item 1A. Risk Factors.
You should carefully consider the following risks regarding our company. These
and other risks could materially and adversely affect our business, results of
operations or financial condition. You should also refer to the other
information contained or incorporated by reference in this report.
7
We depend on third-party suppliers, and our net sales, gross profits and margins
could be adversely affected if we encounter supplier issues and/or fail to
manage supplier issues properly.
We currently purchase certain components from our suppliers and outsource the
manufacture of certain of our single-use and 35mm traditional film camera and
other products for sale to our customers worldwide. The term "components"
includes film, batteries, packaging and any other items used in the manufacture
of our products by our company or outsourced manufacturers. Our manufacturing,
sales and distribution operations depend on our ability to anticipate our needs
for components and products and our suppliers' ability to deliver sufficient
quantities of quality components and products at reasonable prices in time to
meet critical manufacturing, sales and distribution schedules. Given the variety
of products that we offer and might offer in the future, the dispersal of our
suppliers and outsourced manufacturers across the globe, the diminishing number
of our suppliers of certain components and the long lead times that are required
to manufacture, assemble and deliver certain components and products, adverse
circumstances, issues and problems could arise in planning production,
procurement and managing inventory levels that could negatively impact our
business and increase our financial exposure and risk. Other supplier problems
that we could face include component and product shortages, excess supply and
risks related to fixed-price contracts that would require us to pay more than
the open market price, as more fully described below.
o Supply shortages. We may experience a shortage of supply of, or a delay
in receiving, certain components and products as a result of strong
demand, capacity constraints, diminishing sources of supply or other
problems experienced by suppliers. If shortages or delays occur or
persist, the price of these components and products may increase, we may
be exposed to quality issues or the components and products may not be
available at all. We may not be able to secure enough components and/or
products at reasonable prices or of acceptable quality to build, sell and
distribute new products in a timely manner in the quantities or
configurations needed. Accordingly, our revenue, gross profits and margins
could suffer as we could lose time-sensitive sales, incur additional
freight costs or be unable to pass on price increases to our customers. If
we cannot adequately address supply issues, we may have to re-engineer
and/or seek other sources for some components and products, resulting in
additional costs, delays or insufficient supply of products for our
customers. The number of film suppliers has diminished and we currently
rely on our two major competitors in the single-use camera market to
supply the majority of the film used in the manufacture of our single-use
cameras. If either of these suppliers reduces or eliminates its supply of
film to us and we are unable to secure film from alternative sources at
reasonable prices or of acceptable quality, we will not be able to
manufacture the quantities of single-use cameras necessary to fulfill our
customer orders and our financial condition and results of operations
would be materially adversely affected.
o Oversupply. In order to secure products or components for the production
of products, at times we may make advance payments to suppliers or might
purchase components in advance of forecasted requirements, or we may enter
into non-cancelable commitments with suppliers. If we fail to properly
anticipate customer demand, an oversupply of products and/or components
could result in excess or obsolete inventory. This excess or obsolete
inventory may result in lowering the carrying value of these components
and/or products by recording an inventory charge which could adversely
affect our gross profits and margins.
o Long-term pricing commitments. As a result of binding price or purchase
commitments with suppliers, we may be obligated to purchase components
and/or products at prices that are higher than those available in the
current market and be limited in our ability to respond to changing market
conditions. In the event that we become committed to purchase components
and/or products in advance of forecasted requirements and/or for prices in
excess of the current market price, we may be at a disadvantage to
competitors who have access to components and/or products at the times
required and/or at lower prices. This excess in component purchases and in
purchase price over current market
8
price may result in lowering the carrying value of those components and/or
products by recording an inventory charge that could adversely affect our
gross profits and margins.
In many instances, we rely on offshore suppliers, including, but not limited to,
manufacturers in the PRC, for the production of cameras and other products and
other suppliers in Asia for product assembly and manufacture. Regional economic,
business, environmental, political, medical or military conditions or events
could disrupt supplies in foreign locations.
We are dependent on third-party service providers to provide distribution
facilities for all of our operations in the United States, Latin America and
Europe.
The warehousing and distribution services for our (i) United States and Latin
American operations are handled from two distribution facilities operated by
third-party service providers in San Pedro, California and Memphis, Tennessee;
and (ii) European operations are currently handled from a distribution facility
operated by a third-party service provider in the Netherlands and are being
transitioned to a third-party distribution facility in the United Kingdom. Our
products are prepared for shipment and shipped to our customers by such
third-party service providers at these distribution facilities. Any failure by
these third-party service providers to maintain a regular flow of products from
us to our customers or any significant interruption in the business of these
service providers or the operation of these distribution facilities due to
natural disasters, accidents, system failures, work stoppages or other causes
would have a material adverse effect on our business, financial condition and
results of operations. Additionally, if the cost of these services increases,
our gross profits and margins could suffer.
We face significant risks related to the single-use and 35mm traditional film
camera markets.
Based upon available third-party market research data, the single-use camera
market is in decline and the 35mm traditional film camera market is in
significant decline and is expected to continue to decline further. See Item 1,
Business, "Film Camera Market Trends," above. As discussed in this report, we
are concentrating on increasing sales of our single-use camera products. There
is no assurance, however, that our single-use camera sales will increase, or
that, even if they do increase, that we will be profitable or that we will be
able to maintain our market share in the single-use and 35mm traditional film
camera markets.
The camera and photographic products industry is highly competitive.
As a manufacturer, marketer and distributor of single-use and 35mm traditional
film cameras, we encounter intense competition from a number of companies,
including, without limitation, Fuji, Kodak and other single-use camera
manufacturers, each of which has or may have longer operating histories, more
established markets, better brand recognition, more extensive facilities and, in
some cases, greater resources than we have. Maintaining a competitive advantage
against our competitors depends on our ability to develop and manufacture or
purchase from outsourced manufacturers high quality cameras at the lowest cost
and our ability to market and sell cameras profitably. These competitive
pressures may result in decreased sales volumes, price reductions, and/or
increased operating costs, such as for marketing and sales incentives, resulting
in lower revenues, gross margins and income.
We are dependent on a small number of customers.
We have a small number of customers that represent a high percentage of our
revenues. Our products are sold in very competitive markets. Our competitors may
adopt more aggressive policies and devote greater resources to the development,
promotion and sale of their products, which could result in a loss of sales or
of customers. The loss of sales or of one or more of these important customers
could have a material adverse effect on our business, results of operations and
financial condition. The loss of Wal-Mart or Walgreens as customers would have a
9
material adverse effect on our financial condition and results of operations.
We are exposed to credit risk associated with sales to our customers.
We sell a significant number of products to a small number of customers.
Receivables arising from these sales are generally not collateralized. We
monitor the creditworthiness of our customers and review outstanding receivable
balances for collectibility on a regular basis and record provisions for
doubtful accounts, sales allowances and sales returns, as necessary. If we are
unable to collect or timely collect outstanding receivables from our customers
or our customers seek protection from their creditors under the federal
bankruptcy code or applicable foreign bankruptcy regulations, our business and
results of operations may be materially adversely affected.
Our new business initiatives may not succeed.
During the normal course of our business, we evaluate, develop and implement
various short-term and long-term business strategies such as our new business
initiatives, discussed in Part II, Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations. These strategies required, and
may continue to require, significant financial and human resources. There can be
no assurance that any such strategies, if implemented, will be successful. The
failure of such strategies could have a material adverse effect on our business.
We may not be able to identify and integrate future acquisitions.
We may pursue strategic acquisitions that we consider reasonable in light of the
revenues and the results of operations we believe we will be able to achieve
from these acquisitions, once combined and integrated with us. We compete for
acquisitions with other industry competitors, some of which have greater
financial and other resources than us. Increased demand for acquisitions may
result in fewer acquisition opportunities for us as well as higher acquisition
prices. Although we believe opportunities may exist for us to grow through
acquisitions, we may not be able to identify and consummate acquisitions on
acceptable terms. If we do acquire another company or companies, we may not be
able to profitably manage and successfully integrate the acquired company or
companies with our operations, sales and marketing efforts without substantial
costs or delays. Acquisitions involve a number of potential risks, including the
potential loss of customers and contracts, increased leverage and debt service
requirements, combining disparate company cultures and facilities and operating
in geographically diverse markets. An inability to identify and/or integrate
future acquisitions may have a material adverse effect on our financial
condition and results of operations.
Our internal control over financial reporting may be insufficient to detect in a
timely manner misstatements that could occur in our financial statements in
amounts that may be material.
We have previously identified material weaknesses in our internal control over
financial reporting. We believe that all ten material weaknesses in our internal
control over financial reporting that we identified as of July 2, 2005 were
remediated as of June 30, 2007. We may, however, continue to experience
significant deficiencies and material weaknesses in our internal control over
financial reporting in the future, which, if not remediated, may render us
unable to detect in a timely manner misstatements that could occur in our
financial statements in amounts that may be material and which may require
significant financial and human resources to address and remediate.
For a discussion of our remediation efforts, see Item 9A, Controls and
Procedures, below and the periodic reports that we previously filed with the
SEC.
10
We may not continue to meet NASDAQ listing standards regarding minimum per-share
prices.
Under NASDAQ continued listing standard one (Rule 4450(a)), companies listed on
the NASDAQ Global Market are required to have, among other criteria, a minimum
per-share price of at least $1.00. A company may be de-listed from the NASDAQ
Global Market if its common stock trades below $1.00 per share for 30
consecutive business days and, after receiving a deficiency notice from NASDAQ,
does not maintain a minimum bid price of at least $1.00 for 10 consecutive
trading days within a period of 180 days from the date of such notice.
If our common stock is de-listed from NASDAQ, we will face a significant
reduction in the liquidity of our common stock and a material reduction in the
per-share price of our common stock. In addition, any such de-listing could harm
our ability to raise capital through alternative financing sources on terms
acceptable to us, or at all, and may result in the loss of confidence in our
financial stability by suppliers, customers and employees. If our securities are
de-listed from the NASDAQ Global Market, we may face a lengthy process to
re-list our securities, if we are able to re-list them at all, and the liquidity
that NASDAQ provides will no longer be available to investors.
We cannot give investors in our common stock any assurance that we will be able
to maintain compliance with the $1.00 per-share minimum price requirement for
continued listing on NASDAQ or that our stock will not be de-listed by NASDAQ.
The market price of our common stock may fluctuate and/or continue to decline.
The stock markets have experienced extreme price and volume fluctuations that
have affected the market prices of equity securities of many companies and that
often have been unrelated or disproportionate to the operating results of such
companies. These broad market movements may adversely affect the market price of
our common stock. In many instances, securities class action litigation has been
instituted following periods of volatility in the market price of a company's
securities. Such litigation was instituted against us, is currently being
defended and could continue to result in substantial costs and a diversion of
management's attention and resources, which could harm our business. See Item 3,
Legal Proceedings, below and Note 15, Litigation and Settlements, in the Notes
to Consolidated Financial Statements.
If we continue to incur substantial losses, we may not have sufficient liquidity
to meet our working capital needs.
Although we believe that we have sufficient working capital to fund our
operations for at least the next twelve months, our ability to fund our
operating requirements and maintain an adequate level of working capital and
liquidity may be impaired if we continue to incur losses, fail to generate
substantial growth in sales of our products or fail to control operating
expenses. If we require funding to meet our cash flow needs, we may seek to
obtain such funding through, among other things, loans or the issuance of debt
or equity securities. To the extent we raise additional capital by issuing
equity securities or by issuing debt that is convertible into equity, existing
shareholders will experience dilution in their ownership percentage. Moreover,
additional funding or capital may not be available to us on acceptable terms or
at all.
We may experience liquidity issues if our reliance on financing facilities
increases.
Our primary source of liquidity has been provided by our short-term investments,
funds provided by the collection of accounts receivable and borrowing
availability under our financing facilities. Our borrowing capacity under the
import facility provided by The Hongkong and Shanghai Banking Corporation
Limited ("HSBC") was reduced during calendar year 2005 from $24.0 million in
January 2005 to $14.0 million in September 2005. In January 2006, the HSBC
financing facilities were further reduced to an aggregate of approximately $8.2
million and we were required to provide cash deposits pledged as security in the
11
amount of approximately $8.2 million against the facility, which we subsequently
reduced during fiscal 2007 by $3.0 million to $5.2 million and obtained $3.0
million of alternative financing from two other Hong Kong-based financial
institutions. See Part II, Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Hong Kong Financing Facilities,"
under the caption, "Liquidity and Capital Resources," for additional information
on our financing facilities. Due to our recent losses, we may need to increase
our reliance on financing facilities, whether through HSBC or other financial
institutions and, as a result, we may face liquidity issues due to potential
funding limits and debt service requirements imposed by lenders. Additionally,
we may not be able to secure such financing on reasonable terms or at all. A
significant increase in our indebtedness could increase our financing costs,
interfere with our ability to operate our business effectively and have a
material adverse effect on our financial condition and results of operations.
Our future income tax rates could increase and our tax positions may be
challenged.
A number of factors will affect our income tax rate in the future, and the
combined effect of these factors could result in an increase in our effective
income tax rate as compared to our effective income tax rate in fiscal 2007.
This potential increase in future effective income tax rates would adversely
affect net income in future periods. We operate in different countries that have
different income tax rates. Based upon our apportionment of income, our
effective income tax rate could fluctuate. Changes in income tax laws in the
United States or countries where we presently have operations may further limit
our ability to utilize our net operating losses. Any further limitation on our
ability to utilize our net operating losses could adversely affect our financial
condition and results of operations.
During the fourth quarter of fiscal 2007, we reviewed certain tax positions of
our German subsidiary in conjunction with a German tax audit. If all of these
tax positions are not sustained following the audit, we preliminarily estimate
that the potential taxes due to the German taxing authority could be up to $3.5
million in the aggregate. The actual tax amounts due, if any, are dependent upon
the outcome of the audit and any negotiations or appeals related thereto. If
these or other tax positions that we take are challenged and not sustained, our
financial condition and results of operations could be materially adversely
affected.
Our cost-reduction initiatives may not be successful.
As a result of our continued evaluation of our cost structure and the on-going
strategic review process, we reduced certain costs including, among other
things, employee costs as a result of our eliminating certain employee positions
and reducing the size of our operations in the Americas, Europe and Asia. The
expected benefits from these initiatives are subject to many estimates and
assumptions, including, but not limited to, assumptions regarding (i) the amount
and timing of cost reductions we can achieve; (ii) our ability to develop and
maintain relationships with outsourced manufacturers for the design,
co-development and purchase of our products; (iii) our ability to meet customer
demands and fulfill customer service obligations; and (iv) the costs and timing
of activities undertaken in connection with these initiatives. These estimates
and assumptions are subject to significant economic, competitive and other
uncertainties that are difficult to predict and beyond our control. If these
assumptions are not realized, or if other unforeseen events occur, the
initiatives may not be successful and our financial condition, results of
operations and ability to compete could be adversely affected. See Note 16,
Other Charges, in the Notes to Consolidated Financial Statements.
The termination of our processing agreement with the PRC would disrupt our
operations.
Our operations are substantially dependent upon our ability to manufacture and
assemble our products in the PRC. Our current processing agreement with the PRC
governmental entities, which allows us to operate in the PRC, expires in October
2016. If, however, the agreement is terminated prior to its
12
expiration and we cannot enter into an arrangement that will permit us to
continue to operate in the PRC under similar terms and conditions, our financial
condition, results of operations and ability to carry on our business could be
materially adversely affected.
Most of our operations in the PRC are subject to regulation by local
governmental agencies.
The continuing viability of our PRC agreements is critical to our business
operations. We manufacture a large number of the components used in our cameras
and assemble all of our own manufactured finished products at our facility in
the PRC. During fiscal 2007, based upon production demand, we had approximately
1,600 to 3,100 workers at our manufacturing facility in the PRC either employed
by our PRC subsidiary or provided through our agreements with various PRC
government or quasi-government entities. We are responsible for their wages,
food and housing and must comply with a variety of local labor and employee
benefit laws covering these workers. While we believe we are in substantial
compliance with applicable laws as currently enforced, these laws are subject to
modification and interpretation by local governmental authorities. We cannot
predict the effect of any future modifications to or strict enforcement of the
existing laws. In addition, the termination or material modification of any of
our agreements with the PRC governmental or quasi-government entities could have
a material adverse impact on our financial condition and results of operations.
We are exposed to political, economic and other risks that arise from operating
a multinational business.
We have significant operations outside the United States. We currently have
operations in the Americas, Europe and Asia. Further, we obtain raw materials,
components and finished camera products from foreign suppliers, particularly in
Asia, and import into the PRC those materials, components and products obtained
from suppliers outside of the PRC which may require certain approvals by the
PRC, including but not limited to certificates, permits and licenses.
Accordingly, our business is subject to the political, economic, regulatory and
other risks that are inherent in operating in foreign countries. These risks
include, but are not limited to:
o the difficulty of ensuring that foreign suppliers and workers are
complying with applicable laws, rules and regulation regarding
manufacturing, safety and environmental standards;
o the difficulty of enforcing agreements, collecting receivables and
protecting assets through foreign legal systems;
o trade protection measures and import or export licensing
requirements;
o the imposition of tariffs, exchange controls or other restrictions;
o difficulty in staffing and managing widespread operations and the
application of foreign labor regulations;
o inability to obtain approvals or authorizations necessary to import
materials, components and/or products into our manufacturing
facility or increased costs relating thereto;
o required compliance with a variety of foreign laws and regulations;
o changes in the general political and economic conditions in the
countries where we operate, particularly in emerging markets; and
o increased costs and risks of doing business in a number of foreign
jurisdictions.
Our business depends in part on our ability to successfully anticipate and
effectively manage these and other risks. We cannot assure you that such risks
will not have a material adverse effect on our business, financial condition and
results of operations.
13
Relocation time and expenses could result in substantial losses.
If we determine it is necessary to relocate our manufacturing facilities from
the PRC, or to another location within or outside of the PRC, due to
confiscation, expropriation, nationalization, embargoes, governmental
restrictions or for other regulatory, business and/or financial reasons, we
would incur substantial operating and capital losses, including losses resulting
from business interruption and delays in production. In addition, as a result of
a relocation of our manufacturing equipment and other assets, we may incur
relatively higher manufacturing costs, which could reduce sales and decrease the
gross profits and margins on the products we manufacture. Relocation of our
manufacturing operations could also result in disruption in the delivery of our
products, which could, in turn, reduce demand for our products in the future.
We are exposed to risks associated with intellectual property used in our
products.
Our products use technology which may be protected by United States or foreign
patents. The right to use such intellectual property is subject to the
availability of licenses from the owners of the intellectual property. If
licenses are not available, or are only available on onerous terms, our business
could be materially and adversely affected.
Third parties also may claim that we, or the customers we indemnify, are
infringing upon their intellectual property rights. Even if we believe that the
claims are without merit, the claims can be time-consuming and costly to defend
and divert management's attention and resources away from our business. Claims
of intellectual property infringement also may require us to redesign affected
products, enter into costly settlement or license agreements, pay costly damage
awards or cease marketing of certain products subject to the claims. Even if we
have an agreement with a third party to indemnify us against such costs, the
indemnifying party may be unable to uphold its contractual obligations to us. If
we cannot or do not license the infringed technology at all or on reasonable
terms or substitute similar technology from another source, our operations could
suffer.
Those claims for which legal proceedings have been initiated against us are
discussed in Item 3, Legal Proceedings, and in Note 15, Litigation and
Settlements, in the Notes to Consolidated Financial Statements. We have also
received notifications from two entities, one of which was a significant
customer, alleging that certain of our digital cameras infringe upon those
entities' respective patents. We have engaged in discussions with these entities
regarding resolution of the claims.
Based on our initial assessment of these two claims, infringement of one or more
patents is probable if the patents are valid. Based upon the licensing
discussions to date, we preliminarily estimate the potential royalties due to
these two claimants for digital camera sales through June 30, 2007 to be between
$0 and approximately $6.7 million in the aggregate. The actual royalty amounts,
if any, for past and future sales are dependent upon the outcome of the
negotiations. We have notified certain of our suppliers of our right to be
indemnified by the suppliers in the event we are required to pay royalties or
damages to either claimant. We are unable to reasonably estimate the amount of
the potential loss, if any, within the range of estimates relating to these
claims. Accordingly, no amounts have been accrued related to these claims as of
June 30, 2007. If these and other claims are determined to be valid, our
financial condition and results of operations could be materially adversely
affected.
Our ability to manufacture and sell single-use cameras is substantially
dependent on our licensing agreement with Fuji.
Our business is substantially dependent on our license from Fuji, which granted
us a worldwide non-exclusive right to use certain Fuji patents and patent
applications related to single-use cameras. The license extends until the later
of the expiration of the last of the licensed Fuji patents or February 26, 2021.
After the term of the license expires, we expect to continue to be able to
manufacture and sell single-use cameras without a license. If, however, the
license is terminated prior to the expiration of the
14
patents, we may not be able to continue to manufacture and sell single-use
cameras and, as a result, our financial position and results of operations could
be materially adversely affected.
The loss of our licensing agreement with Polaroid could impact our sales.
We currently market and sell our branded single-use and 35mm traditional film
camera products under the Polaroid brand name pursuant to license agreements
with Polaroid which expire on February 1, 2009 and January 30, 2009,
respectively. If either license agreement is terminated prior to its expiration
or if we are unable to renew the license agreements upon their expiration, our
sales volumes and/or prices will decrease, resulting in lower revenues, gross
margins and income and our financial condition and results of operations would
be materially adversely affected.
We are exposed to interest rate and exchange rate risk.
As a result of our global operating and financing activities, we are exposed to
fluctuation in currency exchange rates and interest rates, which may adversely
affect our results of operations and financial position. Exchange rates and
interest rates in certain markets in which we do business tend to be more
volatile than those in the United States and Western Europe. If there is a
significant devaluation of the currency in a specific country, the prices of our
products will increase relative to that country's currency and our products may
be less competitive in that country. We generally do not engage in currency
hedging activities.
The PRC government announced on July 21, 2005 that its currency will no longer
be pegged to the U.S. Dollar. Instead, the exchange rates for the Chinese Yuan,
or Renminbi, will be determined by a basket of foreign currencies and continues
to fluctuate. Currently, we generate nominal net sales valued in Renminbi. Net
sales recorded in Hong Kong are denominated in Hong Kong Dollars, the exchange
rate of which has not been affected by the Yuan revaluation and is still pegged
to the U.S. Dollar. Significant fluctuations in the exchange rates on the
currency revaluation could have a materially adverse effect on our financial
position and results of operations.
The interest rate related to our Hong Kong financing facilities provided by HSBC
and other Hong-Kong based financial institutions is based on a spread over the
Hong Kong Interbank Offered Rate on import loans denominated in Hong Kong
Dollars and over the U.S. Prime Rate, London Interbank Offered Rate or the
Singapore Interbank Offered Rate on import loans denominated in other
currencies. A significant change in these rates could have an adverse effect on
our business, financial condition and results of operations. Currently, we are
not utilizing any interest rate protection agreements to limit our exposure to
this risk.
We are dependent on a small group of key personnel.
Our business is managed by a small number of key management and operating
personnel. The loss of key management and operating personnel could have a
material adverse impact on our business. We believe our future success will
depend in large part on our continued ability to attract highly skilled and
qualified personnel. Competition for such personnel is intense. We may not be
able to hire the necessary personnel to implement our business strategies, or we
may need to pay higher compensation for employees than currently budgeted and/or
anticipated in the future. Our inability to attract and retain such personnel
could limit our growth and affect our financial condition and results of
operations.
International trade restrictions could adversely affect our business and growth.
The United States, the PRC, Hong Kong, the European Union or other countries
where we do business may impose trade restrictions that could adversely affect
our operations. In addition, the United States is currently monitoring various
PRC practices, including trade, investment and government procurement, as
15
well as the PRC's compliance with various multilateral and bilateral agreements.
We cannot predict whether the United States will take future trade actions
against the PRC that may result in increased tariffs against PRC products,
including products that we import into the United States.
Our operations may be impaired as a result of disasters, business interruptions
or similar events.
Disasters such as hurricanes, typhoons, earthquakes, or other acts of nature,
terrorist attacks, fire, water or electricity failure, or accidents affecting
our operating activities, facilities, and employees' and customers' health could
materially and adversely affect our results of operations and financial
condition. In particular, our operations in the PRC, as well as most of our
outsourced manufacturers, suppliers and service providers involved in the
manufacturing of components and products are located within a relatively close
proximity of one another in the PRC. Therefore, any disaster that strikes within
close proximity of that geographic area could disrupt our business and could
materially and adversely affect our results of operations and financial
condition.
In the event of another outbreak of severe acute respiratory syndrome, or SARS,
or some other disease or health-related issue, our facilities and/or the
facilities of our outsourced manufacturers, suppliers and service providers
located in Hong Kong, the PRC and other parts of the world could be quarantined,
temporarily closed and/or disrupted. If such an outbreak occurs, it could delay
or prevent us from developing new products or manufacturing, testing or shipping
our current or future products, and may require us to find other providers of
such services and/or products, which may be unavailable or more expensive.
Further, if a SARS or other disease outbreak or other health-related issue has
an adverse impact on the businesses of our customers, it could reduce the size
and/or frequency of our customers' purchases, which could adversely impact our
results of operations.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
In Hollywood, Florida, we lease approximately 20,000 square feet of office
space. The lease expires on January 31, 2014. As of August 1, 2006, we sublet
approximately 5,500 square feet of our office space and are currently occupying
approximately 14,500 square feet.
In Hong Kong, we own approximately 6,600 square feet of office space occupying
one floor, lease approximately 6,600 square feet of office space occupying one
floor under a lease expiring in November 2009 and lease a warehouse comprised of
approximately 1,760 square feet under a lease expiring November 30, 2007. The
office space we own is collateralized by a mortgage in favor of a certain
financing facility. For more information on the financing facility, see Note 7,
Short-Term Borrowings and Financing Facilities, in the Notes to the Consolidated
Financial Statements. The land on which the office building is situated is
subject to a governmental ground lease that will expire in 2047.
We also lease office space in the United Kingdom. The leases for office space in
France, Germany and Japan were terminated as of May 31, 2007, December 15, 2006
and September 29, 2006, respectively.
In the PRC, we own manufacturing facilities in the Longgang District of Shenzhen
and we lease several employee dormitories and warehouse space. The size of the
entire facility is approximately 600,000 square feet. Pursuant to land use
agreements entered into with certain PRC governmental entities, we obtained the
title and rights to use approximately eight acres of land for factory buildings,
dormitories and related ancillary buildings. Under the land use agreements, we
have the right to use the land through September 22, 2038. At the end of the
term, a PRC governmental entity will own the facilities and we may have the
right to extend the usage term of the land and improvements at then prevailing
terms.
16
We also lease a 13,700 square feet warehouse in Fort Lauderdale, Florida that we
previously used to warehouse and distribute products. We sublet this space to a
subtenant through the expiration of the lease in January 2009.
We believe that our facilities will be adequate to meet our requirements at
least through fiscal 2008 and that suitable additional or substitute space will
be available if needed.
Item 3. Legal Proceedings.
In July 2002, a class action complaint was filed against the Company and certain
of its officers in the United States District Court for the Southern District of
Florida by individuals purporting to be holders of the Company's Common Stock.
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. On August 27, 2004, the court dismissed the claims against the newly
added current and former directors. On September 8, 2005, the court granted the
plaintiffs' motion for class certification and certified as plaintiffs all
persons who purchased the Common Stock between January 18, 2001 and June 22,
2001, inclusive, and who were allegedly damaged thereby (the period January 18,
2001 through June 22, 2001 hereinafter referred to as the "Class Period"). The
allegations remaining in the Amended Complaint were centered around claims that
the Company failed to disclose, in periodic reports it filed with the SEC and in
press releases it made to the public during the Class Period regarding its
operations and financial results, that a large portion of its accounts
receivable was represented by a delinquent and uncollectible balance due from
then customer, KB Gear Interactive, Inc. ("KB Gear"), and that a material
portion of its inventory consisted of customized components that had no
alternative usage. The Amended Complaint claimed that such failures artificially
inflated the price of the Common Stock. The Amended Complaint sought unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. On October 13, 2006, a Stipulation of Settlement
was filed with the court and on January 26, 2007, the court issued a Final
Judgment and Order of Dismissal approving the settlement set forth in the
Stipulation of Settlement and dismissing the case with prejudice. The Company
sought coverage from its insurance carrier for this lawsuit under its directors
and officers liability insurance policy. The settlement amount is within the
policy limits and was approved and paid by the Company's insurance carrier. On
September 17, 2002, the Company was advised by the staff of the SEC that it was
conducting an informal inquiry related to the matters described above and
requested certain information and materials related thereto. On October 15,
2002, the staff of NASDAQ also requested certain information and materials
related to the matters described above and to matters related to the previously
reported embezzlement of Company funds by a former employee, uncovered in April
2002. The Company provided the requested information to the staff of the SEC and
NASDAQ and has not received any further communication from the staff of the SEC
with respect to the informal inquiry or from NASDAQ with respect to its request
since the Company last responded in February 2003.
In September 2004, 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 holders of the Company's
Common Stock. In August 2005, an amended consolidated complaint (the "Amended
Complaint") was filed adding a former officer of the Company as a defendant. The
lead plaintiff under the Amended Complaint seeks to act as a representative of a
class consisting of all persons who purchased the Company's Common Stock during
the period from August 14, 2003 through August 31, 2004, inclusive. On March 23,
2007, the court granted the plaintiff's motion for class certification and
certified as plaintiffs all persons who purchased the Common Stock between
August 14, 2003 and August 31, 2004, inclusive, and who were allegedly damaged
thereby (the period August 14, 2003 through August 31, 2004 hereinafter referred
as the "Class Period"). The allegations in the Amended Complaint are centered
around claims that the Company failed to disclose, in periodic reports it filed
with the SEC and in press releases it made to the public during the Class Period
regarding its operations and financial results, (i) the full extent of the
Company's excess, obsolete and otherwise impaired inventory;
17
(ii) the departure from the Company of the aforementioned former officer
defendant until several months after his departure; and (iii) that Eastman Kodak
Company ("Kodak") had notified the Company that it would stop purchasing cameras
from the Company under its two design and manufacturing services ("DMS")
contracts with the Company due to the Company's alleged infringement of Kodak's
patents. The Amended Complaint also alleged that the Company improperly
recognized revenue contrary to generally accepted accounting principles due to
an alleged inability to reasonably estimate digital camera returns. The Amended
Complaint claimed that such failures artificially inflated the price of the
Common Stock. The Amended Complaint sought unspecified damages, interest,
attorneys' fees, costs of suit and unspecified other and further relief from the
court. The Company has reached an agreement in principle with the plaintiffs on
the settlement of this lawsuit. The settlement is subject to the negotiation and
execution of a mutually agreeable settlement agreement and approval by the class
shareholders and the court. The Company has sought coverage from its insurance
carrier for this lawsuit under its directors' and officers' liability insurance
policy and the insurance carrier is defending the action under a reservation of
rights. The agreed upon pending settlement amount is within the policy limits
and the insurance carrier has agreed to pay such amount. Although the Company
believes the settlement will be consummated and approved by the court, the
Company cannot guarantee this result and if the lawsuit continues and is
adversely determined, the Company's ultimate liability, which could be material,
cannot be ascertained. In a letter dated November 19, 2004, the Company was
advised by the staff of the SEC that it is conducting an investigation related
to the matters described above. The Company has provided the requested
information to the staff of the SEC and has not received any further
communication from the SEC with respect to its request since the Company last
responded in May 2005.
On November 16, 2004, a shareholder derivative suit was filed against certain of
the Company's current and former officers and directors, and the Company as a
nominal defendant, in the United States District Court for the District of New
Jersey by an individual purporting to be a holder of the Company's Common Stock.
The complaint alleged that the individual defendants breached their duties of
loyalty and good faith by causing the Company to misrepresent its financial
results and prospects, resulting in the class action complaints described in the
immediately preceding paragraph. The complaint sought unspecified damages,
repayment of salaries and other remuneration from the individual defendants,
interest, attorneys' fees, costs of suit and unspecified other and further
relief from the court. In March 2005, the court granted a motion by the
individual defendants and the Company to transfer the action to the United
States District Court for the Southern District of Florida where the related
class action suit is currently pending. In May 2005, the court consolidated this
case with the related class action suit for discovery purposes only. Although
the Company believes this lawsuit is without merit, its outcome cannot be
predicted, and if adversely determined, the ultimate effect on the Company,
which could be material, cannot be ascertained. The Company has sought coverage
from its insurance carrier for this lawsuit under its directors' and officers'
liability insurance policy, and the insurance carrier is defending the action
under a reservation of rights.
Pursuant to the Company's Certificate of Incorporation, as amended, the personal
liability of the Company's directors is limited to the fullest extent permitted
under the New Jersey Business Corporation Act ("NJBCA"), and the Company is
required to indemnify its officers and directors to the fullest extent permitted
under the NJBCA. In accordance with the terms of the Certificate of
Incorporation and the NJBCA, the Board of Directors approved the payment of
expenses for each of the current and former officers and directors named as
defendants (the "individual defendants") in the above described class action and
derivative action litigations (collectively, the "actions") in advance of the
final disposition of such actions. The individual defendants have executed and
delivered to the Company written undertakings to repay the Company all amounts
so advanced if it shall ultimately be determined that the individual defendants
are not entitled to be indemnified by the Company under the NJBCA.
On October 6, 2004, a patent infringement complaint was filed by Honeywell
International, Inc. and Honeywell Intellectual Properties, Inc., against 27
defendants, including the Company, in the United States District Court for the
District of Delaware. The complaint asserted that the defendants have
18
conducted activities which infringe U.S. Patent No. 5,280,371, entitled,
"Directional Diffuser for a Liquid Crystal Display." The complaint sought
unspecified damages, interest, attorneys' fees, costs of suit and unspecified
other and further relief from the court. The proceedings in this action against
the Company and other similarly situated defendants were stayed by the court
pending the resolution of the infringement actions against the liquid crystal
display manufacturers. It is too early to assess the probability of a favorable
or unfavorable outcome or the loss or range of loss, if any, and therefore, no
amounts have been accrued relating to this action. The Company has notified
several third parties of its intent to seek indemnity from such parties for any
costs or damages incurred by the Company as a result of this action.
In June 2006, St. Clair Intellectual Properties Consultants, Inc. filed a patent
infringement complaint against 22 defendants, including the Company, in the
United States District Court for the District of Delaware. The complaint
asserted that the defendants conducted activities which infringe U.S. Patent
Nos. 5,138,459, 6,094,219, 6,233,010 and 6,323,899. The complaint sought
injunctive relief, unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. The proceedings in this
action against the Company and the other defendants were stayed by the court
until further order of the court. It is too early to assess the probability of a
favorable or unfavorable outcome or the loss or range of loss, if any, and,
therefore, no amounts have been accrued relating to this action. The Company is
assessing potential claims of indemnification against certain of its suppliers
with respect to this action.
The Company is also involved from time to time in routine legal matters
incidental to its business. Based upon available information, the Company
believes that the resolution of such matters will not have a material adverse
effect on its financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
19
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities.
Our common stock has been listed on the NASDAQ Stock Market LLC under the symbol
"LENS" since July 12, 1988. The following table shows, for each quarter in
fiscal 2007 and fiscal 2006, the high and low sales prices per share of our
common stock as reported by the NASDAQ Global Market.
On October 26, 2006, our Board of Directors approved, without action by the
shareholders, a Certificate of Amendment to our Certificate of Incorporation to
implement a one-for-five split of our common stock with an effective date of
November 21, 2006. All shares of common stock and per-share and related stock
option amounts have been retroactively adjusted for the reverse stock split in
the accompanying financial tables and selected financial data.
Quarter Ended High Low
------------- ---- ---
June 30, 2007 $4.88 $3.97
March 31, 2007 $5.40 $4.28
December 30, 2006 $5.00 $2.20
September 30, 2006 $3.35 $2.10
July 1, 2006 $5.95 $3.05
April 1, 2006 $6.60 $5.10
December 31, 2005 $7.10 $5.00
October 1, 2005 $8.00 $5.80
On September 5, 2007, the last reported sale of our common stock as reported on
the NASDAQ Global Market was $3.38 per share. According to the records of our
transfer agent, there were 949 shareholders of record of Concord's common stock
at September 5, 2007. Because many of our shares of common stock are held by
brokers and other institutions on behalf of shareholders, we are unable to
estimate the total number of shareholders represented by these record holders.
Dividend Policy
The Company has never declared or paid any cash dividends and does not presently
intend to pay cash dividends on our common stock in the future.
Stock Repurchase
We did not repurchase any of our shares during fiscal 2007.
Comparative Stock Performance
The following graph and table compare the cumulative total shareholder return in
U.S. dollars on our common stock for the years ended June 30, 2002 through June
30, 2007 with The NASDAQ Stock Market LLC - U.S. Index and a seven-company peer
group based on SIC Code 3861 (Photographic
20
Equipment and Supplies) for the same periods. The graph and table assume an
investment of $100 in our common stock, in the NASDAQ Index and in the peer
group on June 30, 2002 and the reinvestment of all dividends. The peer group
cumulative total return is calculated on a weighted average basis. The stock
performance shown is not intended to forecast, and may not be indicative of,
future stock performance.
[GRAPHIC OMITTED]
6/02 6/03 6/04 6/05 6/06 6/07
---- ---- ---- ---- ---- ----
(dollars)
Concord Camera Corp. $100 $136.44 $ 64.69 $ 24.50 $ 12.55 $ 17.84
Nasdaq Stock Market - U.S. Index $100 $110.23 $135.64 $133.12 $140.91 $170.78
Peer Group Index $100 $111.43 $130.21 $130.84 $170.93 $211.45
21
Item 6. Selected Financial Data.
(Dollars in thousands, except per share data)
As of and for the
Fiscal Years Ended
-----------------------------------------------------------------------------
STATEMENT OF June 30, July 1, July 2, July 3, June 28,
OPERATIONS DATA: 2007 2006 2005 2004 2003
--------- --------- --------- --------- ---------
Net sales $ 86,653 $ 137,529 $ 174,348 $ 203,132 $ 189,783
Cost of products sold 77,452 122,928 180,130 188,954 153,532
--------- --------- --------- --------- ---------
Gross profit (deficit) 9,201 14,601 (5,782) 14,178 36,251
Operating expenses 22,584 34,873 39,794 43,426(b) 30,421(a)
--------- --------- --------- --------- ---------
Operating (loss) income (13,383) (20,272) (45,576) (29,248) 5,830
Interest expense 336 374 931 715 1,230
Other income, net (1,999) (1,142) (1,770) (500) (2,372)
--------- --------- --------- --------- ---------
(Loss) income before income taxes
and extraordinary item (11,720) (19,504) (44,737) (29,463) 6,972
Provision for income taxes 6 107 186 7,537 569
--------- --------- --------- --------- ---------
(Loss) income before extraordinary item (11,726) (19,611) (44,923) (37,000) 6,403
Extraordinary gain -- -- -- 5,778(c) --
--------- --------- --------- --------- ---------
Net (loss) income $ (11,726) $ (19,611) $ (44,923) $ (31,222) $ 6,403
========= ========= ========= ========= =========
Net (loss) income per common share:
Basic and diluted:
(Loss) income before extraordinary item $ (1.99)(d) $ (3.36)(d) $ (7.70)(d) $ (6.45)(d) $ 1.15(d)
Extraordinary gain -- -- -- 1.00(d) --
--------- --------- --------- --------- ---------
(Loss) income per common share $ (1.99) $ (3.36) $ (7.70) $ (5.45) $ 1.15
========= ========= ========= ========= =========
22
BALANCE SHEET DATA:
As of and for the
Fiscal Years Ended
June 30, July 1, July 2, July 3, June 28,
2007 2006 2005 2004 2003
-------- --------- -------- -------- --------
Working capital $ 39,019 $ 46,843 $ 61,761 $100,603 $121,077
======== ========= ======== ======== ========
Total assets $ 82,504 $ 104,742 $146,756 $189,517 $205,814
======== ========= ======== ======== ========
Total debt $ 2,756 $ -- $ 2,936 $ 9,170 $ --
======== ========= ======== ======== ========
Total stockholders' equity $ 51,644 $ 62,967 $ 82,303 $127,125 $156,828
======== ========= ======== ======== ========
(a) Includes $0.9 million of variable stock-based compensation expense. For
further discussion, see Note 1 and Note 11, Description of Business and
Summary of Significant Accounting Policies and Stock Option Plans,
respectively, in the Notes to Consolidated Financial Statements.
(b) Includes $0.7 million of variable stock-based compensation income. For
further discussion, see Note 1 and Note 11, Description of Business and
Summary of Significant Accounting Policies and Stock Option Plans,
respectively, in the Notes to Consolidated Financial Statements.
(c) Represents the excess of estimated fair value of net assets acquired over
cost (negative goodwill) for the Jenimage acquisition.
(d) On October 26, 2006, our Board of Directors approved, without action by
the shareholders, a Certificate of Amendment to our Certificate of
Incorporation to implement a one-for-five split of our common stock with
an effective date of November 21, 2006. All issued shares of our common
stock (including treasury shares and shares held in trust) and per-share
and related stock option amounts have been retroactively adjusted for the
reverse stock split in the accompanying selected financial data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with Item 6, Selected Financial Data
and our audited consolidated financial statements and the related notes included
in Item 8, Financial Statements and Supplementary Data. In addition to
historical information, this discussion contains forward-looking statements that
involve risk and uncertainties, such as statements of our plans, objectives,
expectations and intentions. See our cautionary language preceding Item 1,
Business, of this report regarding these statements. Our actual results could
differ materially from those discussed here. See Item 1A, Risk Factors, for
factors that could cause future results to differ materially.
References to fiscal 2007, fiscal 2006 and fiscal 2005 in this section are to
fiscal years ended June 30, 2007, July 1, 2006 and July 2, 2005, respectively.
23
OVERVIEW
We market and sell easy-to-use single-use and 35mm traditional film cameras. We
design, develop, manufacture and assemble most of our single-use cameras and
certain of our 35mm traditional film cameras at our manufacturing facilities in
the Peoples Republic of China ("PRC") and outsource the manufacture of certain
of our single-use and our 35mm traditional film cameras. In fiscal 2006, we
significantly de-emphasized the sale of digital cameras. Digital camera sales in
fiscal 2007 were not material and we do not expect digital camera sales in
fiscal 2008. We sell our private label and brand-name products to our customers
worldwide either directly or through third-party distributors.
Executive Summary
Year-over-Year Results of Operations
Our operating loss in fiscal 2007 decreased $6.9 million to $(13.4) million as
compared to an operating loss of $(20.3) million for fiscal 2006.
The decrease in our operating loss year-over-year is primarily related to
decreases in selling, general and administrative expense. Year-over-year selling
expenses decreased by $4.8 million due to (i) lower selling-related employee
compensation costs in the amount of $2.4 million net of severance charges
resulting from the elimination of certain positions in connection with our cost
reduction initiatives; and (ii) lower freight and royalty costs in the amount of
$1.3 million and $1.1 million, respectively, as a result of a decrease in
year-over-year net sales and certain other costs. Year-over-year general and
administrative ("G&A") expenses decreased by $7.5 million primarily due to (i) a
decrease in employee compensation costs of $3.9 million net of severance costs
as a result of the elimination of certain positions in connection with our
cost-reduction initiatives; (ii) lower professional fees in the amount of $1.1
million related to our internal control remediation efforts and $0.6 million of
certain other professional fees; (iii) a decrease in amortization and
depreciation expense of $1.4 million due primarily to a year-over-year reduction
in long-lived assets and property, plant and equipment asset balances resulting
from prior year reductions in carrying values; and (iv) a net reduction of
certain other costs totaling $0.5 million.
Although we experienced decreases in our year-over-year selling, general and
administrative expenses of $12.3 million, our gross profit for fiscal 2007
decreased by $5.4 million as compared to our gross profit for fiscal 2006. The
decrease in the gross profit for fiscal 2007 was primarily due to unfavorable
manufacturing material, labor and overhead cost variances of $5.4 million,
unanticipated air freight costs of $1.1 million partially offset by improved
average gross margin percentages due to a change in our product mix totaling
$1.1 million.
Fiscal 2007 Results of Operations
Although we significantly reduced our operating loss by $6.9 million, or 34.0%,
in fiscal 2007 as compared to fiscal 2006, we still recorded an operating loss
of $(13.4) million during fiscal 2007.
Factors contributing to the fiscal 2007 operating loss were:
1. Insufficient Net Sales and Related Gross Profit to Fully Absorb
Non-Manufacturing Overhead Costs;
2. Unfavorable Manufacturing Material, Labor and Overhead Cost
Variances;
3. Unanticipated Air Freight Costs; and
4. Internal Control Remediation Costs.
24
1. Insufficient Net Sales and Related Gross Profit to Fully Absorb
Non-Manufacturing Overhead Costs
During fiscal 2007, we experienced a significant decrease in net sales and
related gross profit resulting in insufficient gross profit to fully absorb our
non-manufacturing overhead costs. This net sales and related gross profit
reduction contributed approximately $7.4 million to the operating loss.
2. Unfavorable Manufacturing Material, Labor and Overhead Cost Variances
During fiscal 2007, we experienced unfavorable manufacturing material, labor and
overhead cost variances of $4.1 million primarily attributable to lower than
anticipated production volume during the period.
3. Unanticipated Air Freight Costs
During the fourth quarter of fiscal 2007, we experienced a temporary shortage of
camera film which affected the production schedule of our single-use and 35mm
traditional film cameras. As a result of this film shortage and its impact on
our production schedule, certain of our products were shipped by air from Asia
to the United States in order to meet our customers' delivery schedules. Due to
this unanticipated usage of air freight, we incurred an additional $1.1 million
in freight costs.
4. Internal Control Remediation Costs
During fiscal 2007, we recorded charges of $0.8 million related to internal
control costs incurred in connection with the remediation of certain previously
disclosed material weaknesses in our internal control over financial reporting.
We continue to take action and to review our strategies, including and relating
to: (i) acquisition of new single-use and 35mm traditional film camera
customers, (ii) potential new business initiatives and (iii) implementation of
additional cost reductions related to worldwide overhead costs. There can be no
assurances that implementing any such strategies will successfully reverse our
losses, increase our revenues, decrease our costs or improve our results of
operations. See Item 1, Business, for more information regarding our new
business initiatives.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Our application of
accounting policies affects these estimates and assumptions. Actual results
could differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies affect our more significant
estimates and assumptions used in the preparation of our consolidated financial
statements and accompanying notes.
Revenue Recognition
We recognize revenue, in accordance with Staff Accounting Bulletin ("SAB") No.
101, Revenue Recognition in Financial Statements, as amended by SAB No. 104,
Revenue Recognition: Corrected Copy, when title and risk of loss are transferred
to the customer, the sales price is fixed or determinable, persuasive evidence
of an arrangement exists, and collectibility is probable. Title and risk of loss
generally transfer when the product is delivered to the customer or upon
shipment, depending upon negotiated contractual arrangements. Sales are recorded
net of anticipated returns which we estimate 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
25
("SFAS No. 48"). If actual future returns are higher than estimated, then net
sales could be adversely affected.
We may enter into arrangements to offer certain pricing discounts and allowances
that do not provide an identifiable separate benefit or service or may enter
into arrangements to provide certain free products. 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), we record the pricing
discounts and allowances as a reduction of sales and record the cost of free
products ratably into cost of products sold based upon the underlying revenue
transaction.
Sales Returns
We establish a provision for estimated sales returns based on historical product
return trends. If the actual future returns are higher than we originally
estimated, which we based upon historical data, our net sales could be adversely
affected.
Provision for Doubtful Accounts
We establish a provision for doubtful accounts 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 amounts of recoverability are lower than our historical experience,
our estimates of the recoverability of amounts owed to us could be adversely
affected.
Inventories
Inventory purchases and commitments are based upon estimates of future demand
that are difficult to forecast. If (i) there is a sudden and significant
decrease in demand for our products; (ii) there is a higher rate of inventory
obsolescence because of rapidly changing technology and customer requirements;
and/or (iii) the market value and selling prices of our products to our
customers decline or the price at which these customers can purchase similar
products from other manufacturers is lower than ours, we may be required to
reduce our inventory values which would result in lower-of-cost-or-market value
adjustments. Such a reduction could have a material adverse effect on our gross
profit. See Item 1A, Risk Factors, above.
Deferred Income Taxes
The deferred income tax asset valuation allowance is based on our assessment of
the realizability of our deferred income tax assets on an ongoing basis and may
be adjusted from time to time as necessary. In determining the valuation
allowance, we have considered future taxable income and the feasibility of tax
planning initiatives and strategies. We have a full valuation allowance on all
of our deferred income tax assets as of June 30, 2007 and July 1, 2006. Should
we determine that it is more likely than not that we will realize certain of our
deferred income tax assets in the future, an adjustment would be required to
reduce the existing valuation allowance and increase income. Alternatively, if
we determine that we would not be able to realize a recorded deferred income tax
asset, an adjustment to increase our valuation allowance would be charged to the
results of operations in the period in which we reach such a conclusion.
Impairment of Long-Lived and Other Assets
Periodically, we review our long-lived assets for impairment. We record an
impairment loss when indications of impairment are present and undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying values. Since we incurred significant operating losses in fiscal 2006
and fiscal 2007, a potential impairment indicator, we performed an impairment
test of our long-lived
26
and other assets as of June 30, 2007 by summarizing the undiscounted cash flows
expected to result from the use and eventual sale of our long-lived and other
assets. If the carrying value of the assets exceed the estimated undiscounted
cash flows, we record an impairment charge to the extent the carrying value of
long-lived asset exceeds its fair value. We determine fair value through quoted
market prices in active markets or, if quoted market prices are unavailable,
through the performance of internal analyses of discounted cash flows or
external appraisals. Assets reviewed included patents, prepaid amounts related
to licensing and royalty agreements and property, plant and equipment. See Note
5, Property, Plant and Equipment, Net and Note 16, Other Charges, in the Notes
to Consolidated Financial Statements.
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. While certain of these matters involve
substantial amounts, management believes, based on available information, that
the ultimate resolution of such legal proceedings will not have a material
adverse effect on our financial condition taken as a whole.
RESULTS OF OPERATIONS
Fiscal 2007 Compared to Fiscal 2006
Net Sales
Net sales for fiscal 2007 were $86.7 million, a decrease of $50.8 million, or
37.0%, as compared to net sales for fiscal 2006. The decrease in net sales was
due primarily to a decrease in sales of digital cameras in fiscal 2007
attributable to our decision in fiscal 2006 to de-emphasize digital camera sales
and to a lesser extent, a reduction in 35mm traditional film camera sales and in
single-use camera sales.
Net sales from our operations in the Americas for fiscal 2007 were $66.8
million, a decrease of $21.4 million, or 24.3%, as compared to fiscal 2006. The
decrease in net sales was due primarily to a reduction in sales of single-use
cameras, 35mm traditional film cameras and digital cameras.
Net sales from our operations in Europe for fiscal 2007 were $15.1 million, a
decrease of $33.4 million, or 68.9%, as compared to fiscal 2006. The decrease
was primarily due to reduced digital camera sales attributable to our decision
in fiscal 2006 to de-emphasize sales of digital cameras and, to a lesser extent,
35mm traditional film cameras, partially offset by an increase in single-use
cameras.
Net sales from our operations in Asia for fiscal 2007 were $4.8 million, an
increase of $4.0 million, or 500.0%, as compared to fiscal 2006. The increase in
net sales in Asia was due to an increase in sales of single-use cameras in
Japan.
See Note 18, Geographic Area and Significant Customers, in the Notes to
Consolidated Financial Statements.
Gross Profit (Deficit)
Gross profit for fiscal 2007 was $9.2 million, or 10.6% of net sales, versus
gross profit of $14.6 million, or 10.6 % of net sales, in fiscal 2006. The
decrease in the gross profit for fiscal 2007 was primarily due to unfavorable
manufacturing material, labor and overhead cost variances of $5.4 million and
unanticipated air freight costs of $1.1 million, partially offset by improved
gross margin percentages due to a change in our product mix totaling $1.1
million.
Product engineering, design and development costs for fiscal 2007
27
and fiscal 2006, in dollars and as a percentage of net sales, were $2.5 million,
or 2.9%, and $3.8 million, or 2.8%, respectively.
Operating Expenses
Selling expenses for fiscal 2007 were $9.1 million, or 10.5% of net sales,
compared to $13.9 million, or 10.1% of net sales, for fiscal 2006. The decrease
of $4.8 million was primarily due to a reduction in selling-related employee
compensation costs of $2.4 million including a year-over-year increase in other
charges of $0.1 million, resulting from the elimination of certain positions in
connection with our cost-reduction initiatives and a reduction in freight and
royalty costs in the amounts of $1.3 million and $1.1 million, respectively, as
a result of the decrease in year-over-year net sales.
General and administrative expenses for fiscal 2007 were $13.5 million, or 15.6%
of net sales, compared to $21.0 million, or 15.3% of net sales, for fiscal 2006.
The decrease of $7.5 million in general and administrative expenses in fiscal
2007 was primarily due to a reduction in employee compensation costs of $3.9
million, including a year-over-year decrease in other charges of $2.2 million,
resulting from the elimination of certain positions in connection with our
fiscal 2006 cost-reduction initiatives, a reduction in professional fees of $1.1
million related to our internal control remediation efforts and $0.6 million of
certain other professional fees, and a decrease in amortization and depreciation
of long-lived assets and expense of $1.4 million due primarily to a
year-over-year reduction in property, plant and equipment asset balances
resulting from the prior year's reductions in carrying values, and a net
reduction totaling $0.5 million of certain other costs. For further discussion,
see Note 16, Other Charges, in the Notes to Consolidated Financial Statements.
Share-Based Compensation Expenses
During fiscal 2007 and fiscal 2006, we recorded approximately $61,000 and
$275,000, respectively, of share-based compensation expenses. We consider all of
our share-based compensation as a component of general and administrative
expenses. In addition, no amount of share-based compensation expense was
capitalized as part of capital expenditures or inventory for the periods
presented. For further discussion, see Note 11, Share-Based Compensation, in the
Notes to the Consolidated Financial Statements.
Interest Expense
Interest expense decreased to $0.3 million in fiscal 2007 as compared to $0.4
million in fiscal 2006. The decrease of $0.1 million was the result of the
reduction in the interest expense associated with the amortization of intangible
assets.
Other Income, Net
Other income, net was $2.0 million and $1.1 million for fiscal 2007 and fiscal
2006, respectively. The increase was primarily attributable to an increase in
investment income and higher interest rates on the invested balances during
fiscal 2007 as compared to fiscal 2006, See Note 1, Description of Business and
Summary of Significant Accounting Policies, in the Notes to Consolidated
Financial Statements.
Income Taxes
We recorded a provision for income taxes of $6,000 and $0.1 million in fiscal
2007 and fiscal 2006, respectively. The fiscal 2007 income tax provision relates
primarily to income tax liabilities incurred for state and federal tax
liabilities.
As a result of current and prior year losses realized by our foreign
subsidiaries, the foreign subsidiaries have an accumulated earnings deficit of
approximately $44.3 million as of June 30, 2007. Although, we
28
have an accumulated earnings deficit related to most of our foreign
subsidiaries, certain of our foreign subsidiaries have undistributed earnings.
Historically, we do not provide for U.S. federal and state income taxes on such
undistributed earnings based on the re-investment of such earnings outside the
United States.
As of June 30, 2007, we had net operating loss carryforwards for U.S. federal
tax purposes of approximately $18.2 million. The net operating loss
carryforwards are scheduled to expire between 2010 and 2027. The U.S. net
operating loss carryforwards include a portion arising from the exercise of
stock options and will be credited to additional paid-in capital when the
related tax benefit is realized.
Additionally, we have approximately $53.9 million of net operating loss
carryforwards related to our foreign operations, of which $48.5 million relates
to Hong Kong. A significant portion of these net operating loss carryforwards
have no expiration dates.
In fiscal 2007, management evaluated the realizability of our deferred income
tax assets. As part of assessing the realizability of our deferred income tax
assets, management evaluated whether it is more likely than not that some
portion, or all, of our deferred income tax assets, will be realized. The
realization of U.S., Europe and Hong Kong deferred income tax assets relates
directly to our tax planning initiatives and strategies for U.S. federal and
state, Europe and Hong Kong tax purposes. In fiscal 2007, based on all the
available evidence, management determined that it is not more likely than not
that our deferred income tax assets will be fully realized. Accordingly, we
recorded a full valuation allowance against all of our deferred income tax
assets in fiscal 2007. Historically, we have recorded a full valuation allowance
against all of our deferred tax assets in each fiscal year subsequent to and
including fiscal 2005. For fiscal 2007 and fiscal 2006, our effective tax rate
was 0 % and 0.6%, respectively. Our future effective tax rate will depend on the
apportionment between foreign and domestic taxable income and losses, the
statutory rates of the related tax jurisdictions, results of pending tax audits
and any changes to the valuation allowance.
For further discussion, see Note 1and Note 13, Description of Business and
Summary of Significant Accounting Policies and Income Taxes, respectively, in
the Notes to Consolidated Financial Statements.
Net Loss
We incurred a net loss of $(11.7) million, or $(1.99) per common share, for
fiscal 2007 as compared to a net loss of $(19.6) million, or $(3.36) per common
share, for fiscal 2006.
Fiscal 2006 Compared to Fiscal 2005
Net Sales
Net sales for fiscal 2006 were $137.5 million, a decrease of $36.8 million, or
21%, as compared to net sales for fiscal 2005. The decrease in net sales was due
to the cessation of DMS single-use camera sales to Kodak and a decrease in RSD
digital and 35mm traditional film camera sales, partially offset by an overall
increase in RSD single-use camera sales. RSD net sales accounted for 100% of
total net sales.
RSD net sales from our operations in the Americas for fiscal 2006 were $88.2
million, an increase of $1.0 million, or 1.1%, as compared to fiscal 2005. The
increase in RSD net sales was due primarily to increased single-use camera sales
to Walgreens and Wal-Mart.
RSD net sales from our operations in Europe for fiscal 2006 were $48.5 million,
a decrease of $19.8 million, or 29%, as compared to fiscal 2005. The decrease
was primarily due to reduced digital camera sales attributable to our decision
to de-emphasize sales of digital cameras.
29
RSD net sales from our operations in Asia for fiscal 2006 were $0.8 million, a
decrease of $4.5 million, or 84.9%, as compared to fiscal 2005. The decrease was
attributable primarily to reduced digital camera sales by our subsidiary in
Japan due to our decision to de-emphasize sales of digital cameras.
There were no DMS sales in fiscal 2006, as compared to DMS net sales of $13.6
million for fiscal 2005, because of the cessation of sales to Kodak, for whom
the Company previously manufactured products under two DMS agreements. For
fiscal 2005, sales to Kodak accounted for 10.2% of total net sales.
See Note 18, Geographic Area and Significant Customers, in the Notes to
Consolidated Financial Statements.
Gross Profit (Deficit)
Gross profit for fiscal 2006 was $14.6 million, or 10.6% of net sales, versus
gross (deficit) of $(5.8) million, or 3.3% of net sales, in fiscal 2005. During
fiscal 2006, gross profit, in dollars and as a percentage of net sales, was
positively affected by the following factors: (i) a reduction of $7.1 million in
charges to reduce the carrying value of certain finished goods and return camera
inventory below their cost basis to their estimated net realizable market value
resulting from price declines, and (ii) lower product design costs and reduced
under-absorption of manufacturing labor and overhead of $4.6 million and $6.6
million, respectively; and was negatively affected by (i) negative gross profit
margins on the sales of digital cameras and (ii) no gross profit on the sales of
certain digital cameras whose carrying values were lowered in fiscal 2005 and
fiscal 2006. Since we lowered the carrying value of certain digital inventory in
the fiscal 2005 and fiscal 2006 periods, sales of such digital inventory in
future periods will result, on average, in a nominal gross profit margin.
Product engineering, design and development costs for fiscal 2006 and fiscal
2005, in dollars and as a percentage of net sales, were $3.8 million, or 2.8%,
and $8.4 million, or 4.8%, respectively.
Operating Expenses
Selling expenses for fiscal 2006 were $13.9 million, or 10.1% of net sales,
compared to $16.8 million, or 9.6% of net sales, for fiscal 2005. The decrease
of $2.9 million was primarily due to the reduction of sales and marketing
personnel and related marketing activities associated with our de-emphasis of
digital camera sales.
General and administrative expenses for fiscal 2006 were $21.0 million, or 15.3%
of net sales, compared to $22.9 million, or 13.1% of net sales, for fiscal 2005.
The decrease of $1.9 million in general and administrative expenses in fiscal
2006 was primarily due to a decrease in professional fees. As a result of new
rules that the SEC adopted in December 2005, combined with our declining public
float, we were classified as a non-accelerated filer as of the end of fiscal
2006 and, as such, were not required to report on our internal control over
financial reporting as of July 1, 2006.
Interest Expense
Interest expense decreased to $0.4 million in fiscal 2006 as compared to $0.9
million in fiscal 2005. The decrease of $0.5 million was the result of a
reduction in our short-term borrowings partially offset by an increase in
short-term borrowing rates.
Other Income, Net
Other income, net was $1.1 million and $1.8 million for fiscal 2006 and fiscal
2005, respectively. The decrease was primarily attributable to foreign exchange
losses incurred during fiscal 2006 as compared to foreign exchange gains
recorded during fiscal 2005, partially offset by an increase in investment
income.
30
See Note 1, Description of Business and Summary of Significant Accounting
Policies, in the Notes to Consolidated Financial Statements.
Income Taxes
We recorded a provision for income taxes of $0.1 million and $0.2 million in
fiscal 2006 and fiscal 2005, respectively. The fiscal 2006 income tax provision
relates primarily to income tax liabilities incurred by certain of our foreign
subsidiaries. These foreign subsidiaries do not have net operating losses to
offset such liabilities.
As a result of current and prior year losses realized by our foreign
subsidiaries, the foreign subsidiaries have an accumulated earnings deficit of
approximately $37.9 million as of July 1, 2006. Although we have an accumulated
earnings deficit related to most of our foreign subsidiaries, certain of our
foreign subsidiaries have undistributed earnings. Historically, we do not
provide for U.S. federal and state income taxes on such undistributed earnings
based on the re-investment of such earnings outside the United States.
As of July 1, 2006, we had net operating loss carryforwards for U.S. federal tax
purposes of approximately $16.7 million. The net operating loss carryforwards
are scheduled to expire between 2010 and 2026. The U.S. net operating loss
carryforwards include a portion arising from the exercise of stock options and
will be credited to additional paid-in capital when the related tax benefit is
realized. Additionally, we have approximately $51.4 million of net operating
loss carryforwards related to our foreign operations, of which $46.7 million
relates to Hong Kong. A significant portion of these net operating loss
carryforwards have no expiration dates.
In fiscal 2006, management evaluated the realizability of our deferred income
tax assets. As part of assessing the realizability of our deferred income tax
assets, management evaluated whether it is more likely than not that some
portion, or all, of our deferred income tax assets, will be realized. The
realization of U.S., Europe and Hong Kong deferred income tax assets relates
directly to our tax planning initiatives and strategies for U.S. federal and
state, Europe and Hong Kong tax purposes. In fiscal 2006, based on all the
available evidence, management determined that it is not more likely than not
that our deferred income tax assets will be fully realized. Accordingly, we
recorded a full valuation allowance against all of our deferred income tax
assets in fiscal 2006. Historically, we have recorded a full valuation allowance
against all of our deferred tax assets in each fiscal year subsequent to and
including fiscal 2004. For fiscal 2006 and fiscal 2005, our effective tax rate
was 0.5% and 0.4%, respectively. Our future effective tax rate will depend on
the apportionment between foreign and domestic taxable income and losses, the
statutory rates of the related tax jurisdictions and any changes to the
valuation allowance.
For further discussion, see Note 1 and Note 13, "Description of Business and
Summary of Significant Accounting Policies" and "Income Taxes," respectively, in
the Notes to Consolidated Financial Statements.
Net Loss
We incurred a net loss of $(19.6) million, or $(3.36) per common share, for
fiscal 2006 as compared to a net loss of $(44.9) million, or $(7.70) per common
share, for fiscal 2005.
Cost-Reduction Initiatives
We continue to evaluate our cost structure and implement cost-reduction
initiatives as appropriate. During fiscal 2007, cost-reduction initiatives
included, among other things, the elimination of certain employee positions. As
a result, during fiscal 2007, we recorded total charges of $0.9 million related
to severance costs for the elimination of certain employee positions.
31
During the fourth quarter of fiscal 2006, we began implementing an operating
strategy designed to significantly de-emphasize the sale of digital cameras and
increase our focus on the sales of single-use and 35mm traditional film cameras.
In connection with this strategy, we realigned our operations in Europe,
including ceasing our operations in France and Germany. As a result of the
France and Germany office closures, in fiscal 2007, we recorded charges of
approximately $0.4 million for severance costs. In addition, as a result of the
de-emphasis of digital camera sales, we reduced our outsourcing organization in
Asia and recorded a total of $0.1 million for employee severance costs. We also
recorded impairment charges totaling $1.8 million related to the impairment of
certain long-lived assets that included a reduction in the carrying value of a
license used primarily in the branding of digital cameras and certain machinery
held for sale in the amounts of $1.0 million and $0.8 million, respectively.
Table I -- Other Charges Liability reconciles the beginning and ending balances
of the other charges liability.
(in thousands)
Other Charges Liability
Severance Retention Leases Total
--------- --------- ------ -----
Balance as of July 2, 2005 $ 190 $ 129 $ -- $ 319
------- ------- ------- -------
Charges 1,630 177 -- 1,807
Reversals -- (24) -- (24)
Payments (645) (275) -- (920)
------- ------- ------- -------
Balance as July 1, 2006 $ 1,175 $ 7 -- $ 1,182
------- ------- ------- -------
Charges 943 9 26 978
Reversals (44) (7) (1) (52)
Payments (1,838) -- (25) (1,863)
------- ------- ------- -------
Balance as June 30, 2007 $ 236 $ 9 $ -- $ 245
======= ======= ======= =======
32
Table II -- Other Charges presents the related expenses and their classification
in the consolidated statements of operations.
(in thousands)
Long-Lived
Asset
Other Charges Severance Retention Impairment Leases Total
------------- --------- --------- ---------- ------ -----
Fiscal 2007
-----------
Cost of products sold $ 341 $ -- $ -- $ -- $ 341
Selling expense 470 (7) -- 16 479
General and administrative expense 88 9 -- 9 106
------ ------ ------ ------ ------
Total $ 899 $ 2 $ -- $ 25 $ 926
====== ====== ====== ====== ======
Fiscal 2006
-----------
Cost of products sold $ 29 $ 96 $ 788 $ -- $ 913
Selling expense 357 14 -- -- 371
General and administrative expense 1,244 43 1,039 -- 2,326
------ ------ ------ ------ ------
Total $1,630 $ 153 $1,827 $ -- $3,610
====== ====== ====== ====== ======
Fiscal 2005
-----------
Cost of products sold $ -- $ 142 $ -- $ -- $ 142
Selling expense 107 47 -- -- 154
General and administrative expense 153 147 -- -- 300
------ ------ ------ ------ ------
Total $ 260 $ 336 $ -- $ -- $ 596
====== ====== ====== ====== ======
As a result of the cost-reduction initiatives implemented in fiscal 2006 and
fiscal 2007, we expect to make cash payments totaling $0.2 million during fiscal
2008 related to severance.
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 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. There can be no assurance, however, that any definitive agreement will
be reached regarding any of the foregoing.
LIQUIDITY AND CAPITAL RESOURCES
We are not engaged in hedging activities and had no forward exchange contracts
outstanding at June 30, 2007. In the ordinary course of business, we enter into
operating lease commitments, purchase commitments and other contractual
obligations. These transactions are recognized in our financial statements in
accordance with generally accepted accounting principles in the United States
and are more fully discussed below.
We believe that our cash and cash equivalents, short-term investments,
anticipated cash flow from working capital and amounts available under our
credit facilities provide sufficient liquidity and capital resources for our
anticipated working capital and capital expenditure requirements for at least
the next twelve months.
Cash and Cash Equivalents - Cash and cash equivalents decreased by $2.9 million
from $6.8 million at July 1, 2006 to $3.9 million at June 30, 2007. The decrease
was primarily the result of cash used for the net purchases of short-term
investments of $6.9 million, net capital expenditures of $0.1 million and
changes in net working capital accounts of $1.1 million, partially offset by $
2.1 million from the reduction in restricted cash and net borrowings related to
short-term debt of $2.8 million and proceeds from the exercise of stock options
in the amount of $0.3 million.
33
Short-Term Investments - Short-term investments, including available-for-sale
investments, increased by $6.9 million from $23.6 million at July 1, 2006 to
$30.5 million at June 30, 2007, primarily as a result of the purchase of
short-term investments.
Cash Used in Operating Activities - Cash used in operations in fiscal 2007 was
$1.1 million, which compared unfavorably to cash used in operating activities of
$27,000 for fiscal 2006 and favorably to cash used in operating activities of
$7.8 million for fiscal 2005. The changes in cash used in operating activities
for the respective fiscal years were primarily attributable to changes in
accounts receivable as a result of improved collections, inventories as a result
of a focused effort to control inventory balances, accounts payable and accrued
expenses as a result of lower overall costs.
Cash (Used in) Provided by Investing Activities - For fiscal 2007, the decrease
in cash from investing was primarily due to the net purchase of short-term
investments of $6.9 million and net capital expenditures of $0.1 million and a
decrease in restricted cash of $2.1 million, representing a decrease in cash
deposits as security for borrowings under our financing facilities. For fiscal
2006, the increase in cash provided by investing was primarily due to proceeds
from the sale of short-term investments partially offset by the increase in
restricted cash. During fiscal 2006, restricted cash increased by $8.3 million
representing required minimum cash deposits as security for borrowings under our
financing facilities. Capital expenditures for fiscal 2007, fiscal 2006 and
fiscal 2005 were $0.6 million, $1.6 million and $2.8 million, respectively, and
related primarily to expenditures on plant and equipment for our manufacturing
facilities in the PRC. The cash provided by investing activities in fiscal 2005
was primarily due to the sale of short-term investments and the proceeds of
approximately $0.9 million on the sale of our property in Coalville, England
that was previously used in connection with our operations in the United
Kingdom.
Cash Provided by (Used in) Financing Activities - Cash provided by financing
activities in fiscal 2007 was $3.1 resulting from the net borrowings under the
credit facilities of $2.8 million and $0.3 million from net proceeds for the
issuance of common stock from the exercise of stock options. Cash used in
financing activities in fiscal 2006 was $(2.9) million resulting from the
repayment of net borrowings under the credit facilities. In fiscal 2005, cash
used in financing activities resulted from repayments of net borrowings under
the credit facility.
OFF-BALANCE SHEET ARRANGEMENTS
Under SEC regulations, in certain circumstances, we are required to make certain
disclosures regarding the following off-balance sheet arrangements, if material:
- Any obligation under certain guarantee contracts;
- Any retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to that entity for such assets;
- Any obligation under certain derivative instruments; and
- Any obligation arising out of a material variable interest held by
us in an unconsolidated entity that provides financing, liquidity,
market risk or credit risk support to us, or engages in leasing,
hedging or research and development services with us.
As of June 30, 2007, we had $2.1 million in letters of credit outstanding, which
were issued primarily to certain suppliers to guarantee payment of our purchase
orders with such suppliers. The letters of credit are issued under our
approximately $6.8 million import facility from our Hong Kong financing
facilities. See "Hong Kong Financing Facilities" below.
We do not have any off-balance sheet arrangements pursuant to these regulations,
other than those described above and in the Notes to Consolidated Financial
Statements. We do not participate in transactions that generate relationships
with unconsolidated entities or financial partnerships including variable
interest entities. We are not engaged in hedging activities and had no forward
exchange contracts or other derivatives outstanding as of June 30, 2007. In the
ordinary course of business, we
34
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 under the caption "Liquidity
and Capital Resources."
CONTRACTUAL OBLIGATIONS AS OF June 30, 2007
(in millions)
Payments due by period
Less than 1-3 3-5 More than
Contractual Obligations Total 1 year years years 5 years
----- ------ ----- ----- -------
Purchase Obligations $13.5 $13.5 $ -- $ -- $ --
Borrowings under Financing Facilities 2.8 2.8
Letters of Credit 2.1 2.1
Employment Contract Obligations 2.7 0.9 1.8
Operating Leases 2.6 0.7 0.8 0.6 0.5
Patent, Trademark, Licensing and Royalty Obligations 2.3 0.5 0.6 0.6 0.6
----- ----- ----- ----- -----
Total $26.0 $20.5 $ 3.2 $ 1.2 $ 1.1
===== ===== ===== ===== =====
Operating Leases - We enter into operating leases in the ordinary course of
business (e.g., warehouse facilities, office space and equipment). The effects
of outstanding leases are not material to us either in terms of annual costs or
in total future minimum payments. See Note 14, Commitments and Contingencies, in
the Notes to Consolidated Financial Statements.
Purchase Commitments - In the ordinary course of our business, we enter into
purchase commitments for components, raw materials, supplies, services, finished
camera products, and property, plant and equipment. In the aggregate, such
commitments are not at prices in excess of current market prices (except for
those instances in which the cost basis has been lowered to net realizable
value) 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 below for information about our
financial guarantees.
Hong Kong Financing Facilities - At June 30, 2007 and July 1, 2006, we had $2.1
million and $1.5 million, respectively, in letters of credit outstanding, which
were issued primarily to certain suppliers to guarantee payment of our purchase
orders with such suppliers. The letters of credit were issued under our
financing facilities that have been granted to CCHK. See Note 7, Short-Term
Borrowings and Financing Facilities, in the Notes to the Consolidated Financial
Statements.
35
Reverse Split of Common Stock - On October 26, 2006, our Board of Directors
approved, without action by the shareholders, a Certificate of Amendment to our
Certificate of Incorporation to implement a one-for-five split of our common
stock with an effective date of November 21, 2006. On the effective date of the
reverse split, each five shares of issued common stock (including treasury
shares and shares held in trust) were converted automatically into one share of
common stock. Our authorized common stock was reduced from 100,000,000 shares to
20,000,000 shares. All shares of our common stock and per-share and related
stock option amounts have been retroactively adjusted for the reverse stock
split in the accompanying consolidated financial statements and footnotes.
License Agreements - See Note 14, Commitments and Contingencies, in the Notes to
Consolidated Financial Statements for a discussion of our licensing activities.
Intellectual Property Claims - See Note 14, Commitments and Contingencies, and
Note 15, Litigation and Settlements, in the Notes to Consolidated Financial
Statements regarding intellectual property claims and litigations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For a discussion of recently issued accounting pronouncements, see Note 1,
Description of Business and Summary of Significant Accounting Policies,
"Recently Issued Accounting Pronouncements," in the Notes to Consolidated
Financial Statements.
Other Events
In fiscal 2005 and fiscal 2004, certain of our foreign subsidiaries
inadvertently sold approximately $16,000 and $22,000, respectively, of our
products that were shipped to Cuba, Iran and Syria. One or more of the shipments
may be in violation of regulations of the U.S. Treasury Department's Office of
Foreign Assets Control ("OFAC"). We informed the U.S. Treasury Department of
these matters and took steps to ensure future compliance with all OFAC
regulations. To the extent we violated any regulations with respect to the above
or other transactions, we may be subject to civil fines or other sanctions,
which we believe will not be material. We do not expect these matters to have a
material adverse effect on our financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
As a result of our global operating and financial activities, we are exposed to
changes in interest rates and foreign currency exchange rates that may adversely
affect our results of operations and financial condition. In seeking to minimize
the risks and/or costs associated with such activities, we manage exposures to
changes in interest rates and foreign currency exchange rates through our
regular operating and financing activities.
At June 30, 2007, our exposure to changes in interest rates was limited, since
we had no significant debt outstanding. Since we have no significant debt
outstanding, we do not deem interest rate risk to be
36
significant or material to our financial condition or results of operations. We
do not presently use derivative instruments to adjust our interest rate risk
profile. We do not utilize financial instruments for trading or speculative
purposes, nor do we utilize leveraged financial instruments.
Each of our foreign subsidiaries purchases their inventories in U.S. Dollars and
certain of their sales are in foreign currency, thereby creating an exposure to
fluctuations in foreign currency exchange rates. We have purchased and continue
to purchase in foreign currencies certain components, products, raw materials
and services needed to manufacture and sell our products. The impact of foreign
exchange transactions is reflected in our statements of operations. Although we
have previously analyzed the benefits and costs associated with hedging against
foreign currency fluctuations, as of June 30, 2007, we were not engaged in any
hedging activities and we had no forward exchange contracts outstanding.
37
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm 39
Consolidated Balance Sheets at June 30, 2007 and July 1, 2006 40
Consolidated Statements of Operations for the years ended
June 30, 2007, July 1, 2006 and July 2, 2005 41
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 2007, July 1, 2006 and July 2, 2005 42
Consolidated Statements of Cash Flows for the years
ended June 30, 2007, July 1, 2006 and July 2, 2005 43
Notes to Consolidated Financial Statements 44
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Concord Camera Corp.
We have audited the accompanying consolidated balance sheets of Concord Camera
Corp. and its subsidiaries as of June 30, 2007 and July 1, 2006 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years ended June 30, 2007. We have also audited the schedule
for the three years ended June 30, 2007 listed in the accompanying index. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements and schedule, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Concord
Camera Corp. and its subsidiaries at June 30, 2007 and July 1, 2006, and the
results of its operations and its cash flows for the three years ended June 30,
2007, in conformity with accounting principles generally accepted in the United
States of America.
Also, in our opinion, the 2007, 2006 and 2005 schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
Certified Public Accountants
Miami, Florida
September 26, 2007
39
Concord Camera Corp. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
June 30, July 1,
2007 2006
--------- ---------
Assets
Current Assets:
Cash and cash equivalents $ 3,853 $ 6,795
Restricted cash 6,200 8,264
Short-term investments 30,475 23,550
Accounts receivable, net 10,702 16,648
Inventories 15,806 28,260
Prepaid expenses and other current assets 1,401 3,277
--------- ---------
Total current assets 68,437 86,794
Property, plant and equipment, net 10,616 13,778
Other assets 3,451 4,170
--------- ---------
Total assets $ 82,504 $ 104,742
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term borrowings under financing facilities $ 2,756 $ --
Accounts payable 17,042 26,589
Accrued royalty 2,499 3,223
Accrued expenses 5,775 8,265
Other current liabilities 1,346 1,874
--------- ---------
Total current liabilities 29,418 39,951
Other long-term liabilities 1,442 1,824
--------- ---------
Total liabilities 30,860 41,775
Commitments and contingencies
Stockholders' Equity:
Blank check preferred stock, no par value,
1,000 shares authorized, none issued -- --
Common stock, no par value, 20,000 shares
authorized; 6,261 and 6,185 shares issued
as of June 30, 2007 and July 1, 2006 143,860 143,518
Additional paid-in capital 5,189 5,128
Deferred share arrangement 413 624
Accumulated deficit (92,412) (80,686)
--------- ---------
57,050 68,584
Less: treasury stock, at cost, 347 shares as
of June 30, 2007 and July 1, 2006 (4,993) (4,993)
Less: common stock held in trust, 66 and 102 shares as
of June 30, 2007 and July 1, 2006 (413) (624)
--------- ---------
Total stockholders' equity 51,644 62,967
--------- ---------
Total liabilities and stockholders' equity $ 82,504 $ 104,742
========= =========
See accompanying notes to consolidated financial statements.
40
Concord Camera Corp. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Fiscal Year Ended
---------------------------------------------------
June 30, July 1, July 2,
2007 2006 2005
--------- --------- ---------
Net sales $ 86,653 $ 137,529 $ 174,348
Cost of products sold 77,452 122,928 180,130
--------- --------- ---------
Gross profit (deficit) 9,201 14,601 (5,782)
Selling expenses 9,133 13,895 16,846
General and administrative expenses 13,451 20,978 22,948
--------- --------- ---------
Operating loss (13,383) (20,272) (45,576)
Interest expense 336 374 931
Other income, net (1,999) (1,142) (1,770)
--------- --------- ---------
Loss before provision for income taxes (11,720) (19,504) (44,737)
Provision for income taxes 6 107 186
--------- --------- ---------
Net loss $ (11,726) $ (19,611) $ (44,923)
========= ========= =========
Net loss per common share:
Basic and diluted
loss per common share $ (1.99) $ (3.36) $ (7.70)
========= ========= =========
Weighted average
common shares outstanding - basic and diluted 5,878 5,838 5,831
========= ========= =========
See accompanying notes to consolidated financial statements.
41
Concord Camera Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
(Accumulated
Common Stock Additional Deferred Deferred Deficit)
Issued Stated Paid-in Share-Based Share Retained
Shares Value Capital Compensation Arrangement Earnings
------------------------------------------------------------------------------------------------------------------------------------
Balance as of July 3, 2004 6,114 $143,073 $4,853 $(29) $413 $ (16,152)
Exercise of stock options 71 445 -- -- -- --
Deferred stock-based
compensation -- -- -- 29 -- --
Purchase of treasury stock -- -- -- -- -- --
Common stock held in Trust -- -- -- -- -- --
Deferred share arrangement -- -- -- -- 211 --
Net loss -- -- -- -- -- (44,923)
------------------------------------------------------------------------------------------------------------------------------------
Balance as of July 2, 2005 6,185 $143,518 $4,853 $ -- $624 $ (61,075)
Share-based compensation expense -- -- 275 -- -- --
Net loss -- -- -- -- -- (19,611)
------------------------------------------------------------------------------------------------------------------------------------
Balance as of July 1, 2006 6,185 $143,518 $5,128 $ -- $624 $ (80,686)
Exercise of stock options 76 342 -- -- -- --
Share-based compensation expense -- -- 61 -- -- --
Deferred share arrangement -- -- -- -- (211)
Net loss -- -- -- -- -- (11,726)
------------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2007 6,261 $143,860 $5,189 -- $413 $ (92,412)
====================================================================================================================================
Common Stock
Treasury Stock Held in Trust
Shares Cost Shares Cost Total
-------------------------------------------------------------------------------------------------------
Balance as of July 3, 2004 320 $(4,620) 66 $(413) $127,125
Exercise of stock options -- -- -- -- 445
Deferred stock-based
compensation -- -- -- -- 29
Purchase of treasury stock 27 (373) -- -- (373)
Common stock held in Trust -- -- 36 (211) (211)
Deferred share arrangement -- -- -- -- 211
Net loss -- -- -- -- (44,923)
-------------------------------------------------------------------------------------------------------
Balance as of July 2, 2005 347 $(4,993) 102 $(624) $ 82,303
Share-based compensation expense -- -- -- -- 275
Net loss -- -- -- -- (19,611)
-------------------------------------------------------------------------------------------------------
Balance as of July 1, 2006 347 $(4,993) 102 $(624) $ 62,967
Exercise of stock options -- -- -- -- 342
Share-based compensation expense -- -- -- -- 61
Deferred share arrangement (36) 211 --
Net loss -- -- -- -- (11,726)
-------------------------------------------------------------------------------------------------------
Balance as of June 30, 2007 347 $(4,993) 66 $(413) $ 51,644
=======================================================================================================
See accompanying notes to consolidated financial statements.
42
Concord Camera Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year Ended
--------------------------------------------
June 30, July 1, July 2,
2007 2006 2005
-------- -------- --------
Cash flows from operating activities:
Net loss $(11,726) $(19,611) $(44,923)
Adjustments to reconcile net loss to net cash used in operating
activities:
Provision for inventory charges 418 1,586 12,954
Depreciation and amortization 3,981 5,164 8,823
Gain on sale of short-term investments -- -- (1,124)
Gain on sale of building -- -- (450)
Gain on disposal of property, plant and equipment (48) -- --
Impairment of long-lived assets -- 1,828 --
Share-based compensation 61 275 --
Changes in operating assets and liabilities:
Accounts receivable, net 5,946 15,212 (2,493)
Inventories 12,036 6,536 3,081
Deferred compensation assets 112 8,339 (34)
Prepaid expenses and other current assets 1,549 (197) 3,806
Other assets 267 583 1,159
Accounts payable (9,547) (8,720) 13,812
Accrued expenses (2,490) (42) (3,559)
Accrued royalty (724) 584 932
Restructuring reserve net of payments -- (110) --
Deferred compensation liabilities (97) (8,373) 773
Other current liabilities (430) (1,568) (75)
Other long-term liabilities (381) (1,513) (473)
-------- -------- --------
Net cash used in operating activities (1,073) (27) (7,791)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments, net -- -- (1,846)
Proceeds from sales of available-for-sale investments 78,400 52,650 13,401
Purchase of available-for-sale investments (85,325) (41,000) (6,031)
Restricted cash 2,064 (8,264) --
Purchases of property, plant and equipment (597) (1,644) (2,819)
Proceeds from sale of property, plant and equipment 491 -- 941
-------- -------- --------
Net cash (used in) provided by investing activities (4,967) 1,742 3,646
-------- -------- --------
Cash flows from financing activities:
Borrowings (repayments) under financing facilities, net 2,756 (2,936) (6,234)
Net proceeds from issuance of common stock 342 -- 72
-------- -------- --------
Net cash provided by (used in) financing activities 3,098 (2,936) (6,162)
-------- -------- --------
Net decrease in cash and cash equivalents (2,942) (1,221) (10,307)
Cash and cash equivalents at beginning of the year 6,795 8,016 18,323
-------- -------- --------
Cash and cash equivalents at end of the year $ 3,853 $ 6,795 $ 8,016
======== ======== ========
See Note 2, Supplemental Cash Flow Information, and accompanying notes to
consolidated financial statements.
43
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Concord Camera Corp., a New Jersey corporation, and its consolidated
subsidiaries (collectively referred to as the "Company" or "Concord") design,
develop, manufacture, outsource and sell easy-to-use film camera products
worldwide. The Company's products include single-use and 35mm traditional film
cameras. The Company manufactures and assembles most of its single-use cameras
and certain of its 35mm traditional cameras at its manufacturing facility in the
Peoples Republic of China ("PRC") and outsources the manufacture of certain of
its single-use and its 35mm traditional film cameras. In Fiscal 2006, the
Company de-emphasized the sale of digital cameras and in Fiscal 2007 sales of
digital cameras were not material. The Company sells its private label and
brand-name products to its customers worldwide either directly or through
third-party distributors.
Fiscal Periods
The Company's fiscal year is comprised of 52 or 53 weeks, ending on the Saturday
closest to June 30. Fiscal 2007 and 2005 were each comprised of 52 weeks,
whereas Fiscal 2006 was comprised of 53 weeks.
References to Fiscal 2007, Fiscal 2006 and Fiscal 2005 in this section are to
the fiscal years ended June 30, 2007, July 1, 2006 and July 2, 2005,
respectively.
For reference purposes, the Company's Fiscal 2007 quarters are defined as the
quarter ended: September 30, 2006 ("First Quarter Fiscal 2007"), December 30,
2006 ("Second Quarter Fiscal 2007"), March 31, 2007 ("Third Quarter Fiscal
2007"), and June 30, 2007 ("Fourth Quarter Fiscal 2007"). Also for reference
purposes, the Company's fiscal year ending on June 28, 2008 is designated as
"Fiscal 2008."
Reverse Split of Common Stock
On October 26, 2006, the Board of Directors of the Company approved, without
action by the shareholders of the Company, a Certificate of Amendment to the
Company's Certificate of Incorporation to implement a one-for-five split of the
Company's Common Stock with an effective date of November 21, 2006. On the
effective date of the reverse split, each five shares of issued Common Stock
(including treasury shares and shares held in trust) were converted
automatically into one share of Common Stock. The number of authorized shares of
the Company's Common Stock was reduced from 100,000,000 shares to 20,000,000
shares. All Common Stock shares and per-share and related stock option amounts
have been retroactively adjusted for the reverse stock split in the accompanying
consolidated financial statements and footnotes.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States
and include the accounts of the Company. All significant intercompany balances
and transactions have been eliminated.
44
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The more significant of the
Company's estimates includes sales returns and allowances, provision for bad
debts, inventory valuation charges, realizability of intangibles, realizability
of deferred tax assets, and accounting for litigation and settlements, among
others.
Foreign Currency Transactions
The Company operates on a worldwide basis and its results may be adversely or
positively affected by fluctuations of various foreign currencies against the
U.S. Dollar, specifically, the Canadian Dollar, European Euro, British Pound
Sterling, PRC Renminbi, Hong Kong Dollar and the Japanese Yen. Although certain
net sales to customers and purchases of certain components and services are
transacted in local currencies, each of the Company's foreign subsidiaries
purchases substantially all of its finished goods inventories in U.S. Dollars.
Therefore, the Company has determined the U.S. Dollar is the functional currency
for all of its subsidiaries. The accounting records for subsidiaries that are
maintained in a local currency are remeasured into the U.S. Dollar. Accordingly,
most non-monetary balance sheet items and related income statement accounts are
remeasured from the applicable local currency to the U.S. Dollar using average
historical exchange rates, producing substantially the same result as if the
entity's accounting records had been maintained in the U.S. Dollar. Adjustments
resulting from the remeasurement process are recorded into earnings. Gains or
losses resulting from foreign currency transactions and remeasurement are
included in "Other income, net" in the accompanying consolidated statements of
operations. For Fiscal 2007, Fiscal 2006 and Fiscal 2005 included in "Other
income, net" in the accompanying consolidated statements of operations are
approximately $ 0.1 million, $0.3 million and $0.4 million, respectively, of net
foreign currency losses.
Hedging Activities
During Fiscal 2007, Fiscal 2006 and Fiscal 2005, the Company had no forward
exchange contracts or other derivatives outstanding and did not participate in
any other type of hedging activities.
Concentration of Credit Risk
The Company sells a significant percentage of its products to a relatively small
number of customers. These customers operate in markets located principally in
the United States, Canada, the United Kingdom, Germany, France and Japan.
Receivables arising from these sales are generally not collateralized. The
Company's credit terms extended to customers are generally 60 days or less. The
Company does not charge interest on amounts outstanding. The Company monitors
the credit-worthiness of its customers and reviews outstanding receivable
balances for collectibility on a regular basis and records allowances for
doubtful accounts, sales returns and allowances, as necessary. Customers that
individually account for greater than 10% of the Company's total net sales
create a concentration of credit risk. During Fiscal 2007, there were two such
customers. See Note 18, Geographic Area and Significant Customer Information,
for further discussion of significant customers.
Estimated Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents; restricted cash; short-term
investments; accounts receivable, net; short-term borrowings under credit or
revolving facilities; accounts payable; and accrued expenses approximate fair
value because of their liquidity, short duration to maturity or short repayment
term. Because judgment is required in interpreting market data to develop
estimates of fair value, the
45
estimates are not necessarily indicative of the amounts that could be realized
or would be paid in a current market exchange. The effect of using different
market assumptions or estimation methodologies may be material to the estimated
fair value amounts.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
Restricted Cash
The Company's financing facilities require a minimum cash deposit as security in
the amount of $6.2 million for borrowings outstanding under its revolving demand
financing facilities. The restricted cash amount is classified as a current
asset in the consolidated balance sheets since the borrowings it secures are
classified as a current liability. The total amount of restricted cash as of
June 30, 2007 and July 1, 2006 was $6.2 million and $8.3 million, respectively,
on the consolidated balance sheets.
Investments
At June 30, 2007 and July 1, 2006, the Company's "Short-term investments" as
classified in the accompanying consolidated balance sheets consisted of auction
rate debt securities and are considered to be available-for-sale securities.
During Fiscal 2007, no other comprehensive income or loss is recorded because
the variable interest rate feature and short maturities of the auction rate debt
securities cause their carrying values to approximate market value. Realized
gains and losses, interest and dividends are classified as investment income in
"Other income, net" in the accompanying consolidated statements of operations.
During Fiscal 2005, the Company recorded a $1.1 million gain on the sale of a
short-term investment denominated in European Central Bank Euros. The gain on
the sale of short-term investments is included in "Other income, net" in the
accompanying consolidated statement of operations. Investment income of $1.9
million, $1.5 million and $1.0 million related to the short-term investments is
included in "Other income, net" for Fiscal 2007, Fiscal 2006 and Fiscal 2005,
respectively. See "Comprehensive Income (Loss)" below for further discussion of
unrealized losses related to available-for-sale securities. Investments held in
deferred compensation rabbi trusts directed by participants are classified as
trading, and changes in the fair value of such investments are recorded in
earnings.
Inventories
Inventories, consisting of raw materials, components, work-in-process and
finished goods, are stated at the lower of cost or market value and are
determined on a first-in, first-out basis. Work-in-process and component
inventory costs include materials, labor and manufacturing overhead. The Company
records lower of cost or market value adjustments based upon changes in market
pricing, customer demand, technological developments or other economic factors
and for on-hand excess, obsolete or slow-moving inventory. See Note 4,
Inventories, for further discussion.
Property, Plant and Equipment, Net
Property, plant and equipment, net are carried at cost less accumulated
depreciation and amortization. Depreciation is computed by use of the
straight-line method over the estimated useful lives of the respective assets.
Small tools and accessories used in production in the PRC are charged to
operations when purchased. Leasehold costs and improvements are amortized on a
straight-line basis over the term of the lease or the estimated useful lives of
such improvements, whichever is shorter. Depreciation expense for Fiscal 2007,
Fiscal 2006 and Fiscal 2005 was approximately $3.5 million, $4.8 million and
$8.2 million, respectively. Depreciation expense for Fiscal 2005 includes $1.4
million related to a
46
reduction in the remaining useful lives of certain molds and tooling. See Note
5, Property, Plant and Equipment, Net and Note 16, Other Charges for further
discussion.
Useful Lives
Asset Class (in years)
----------- ----------
Buildings and improvements 30-50
Equipment, including tooling 1-10
Office furniture and equipment 3-7
Transportation equipment 5-7
Leasehold improvements 3-11
Intangible Assets
Identifiable intangible assets that have finite useful lives are amortized over
their useful lives. The Company's amortizable intangible assets include patents,
trademarks and licenses and their respective costs are amortized on a
straight-line basis over their estimated useful lives. See Note 6, Other Assets.
Impairment of Long-Lived and Other Assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company records impairment losses when indications of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. The Company reviews
the carrying value of its long-lived assets for impairment whenever events or
changes in conditions indicate that the carrying value of such assets may not be
recoverable. Since the Company incurred a significant operating loss during
Fiscal 2007, Fiscal 2006 and Fiscal 2005, a potential impairment indicator, it
performed an impairment test of its long-lived assets as of June 30, 2007, July
1, 2006 and July 2, 2005. The Company performed the impairment tests by
summarizing the undiscounted cash flows expected to result from the use and
eventual sale of its long-lived assets for each year tested, excluding goodwill.
If the carrying values of the assets exceed the estimated undiscounted cash
flows, the Company records an impairment charge to the extent the carrying value
of the long-lived asset exceeds its fair value. The Company determines fair
value through quoted market prices in active markets, or if quoted market prices
are not available, through the performance of internal analyses of the
discounted cash flows or external appraisals. Assets reviewed include patents,
prepaid amounts related to licensing and royalty agreements and property, plant
and equipment. See Note 5, Property, Plant and Equipment, Net and Note 16,
Restructuring and Other Charges.
47
Revenue Recognition
The Company recognizes revenue, in accordance with Staff Accounting Bulletin
("SAB") No. 101, Revenue Recognition in Financial Statements, as amended by SAB
No. 104, Revenue Recognition: Corrected Copy, when title and risk of loss are
transferred to the customer, the sales price is fixed or determinable,
persuasive evidence of an arrangement exists, and collectibility is probable.
Title and risk of loss generally transfer when the product is delivered to the
customer or upon shipment, depending upon negotiated contractual arrangements.
Sales are recorded net of anticipated returns which the Company estimates based
on historical rates of return, adjusted for current events as appropriate, in
accordance with Statement of Financial Accounting Standard No. 48, Revenue
Recognition When Right of Return Exists ("SFAS No. 48"). If actual future
returns are higher than estimated, then net sales could be adversely affected.
Shipping, Handling and Related Costs
The Company incurred shipping, handling and related costs of approximately $2.0
million, $3.1 million and $3.6 million during Fiscal 2007, Fiscal 2006 and
Fiscal 2005, respectively, which are included in the accompanying consolidated
statements of operations under the caption "Selling expenses." Shipping,
handling and related costs incurred by the Company to ready products for sale
(i.e., freight, duty and custom charges incurred to deliver products to the
Company's manufacturing facility and warehouses) are included in the
accompanying consolidated statements of operations under the caption "Cost of
products sold."
Product Design and Development Costs
Product design and development costs, which include costs in connection with new
product development, product design, fundamental and exploratory research,
process improvement, product use technology, and product quality assurance, are
part of the production process and are expensed as incurred. Certain of the
Company's products are developed, designed and engineered by its own engineers
in the Company's facilities located in the U.S., Hong Kong and the PRC. The
Company incurred $2.5 million, $3.8 million and $8.4 million during Fiscal 2007,
Fiscal 2006 and Fiscal 2005, respectively, for product design and development.
These costs are included in the accompanying consolidated statements of
operations under the caption, "Cost of products sold."
Sales Allowances
The Company may enter into arrangements to offer certain pricing discounts and
allowances that do not provide an identifiable separate benefit or service. In
accordance with Emerging Issues Task Force Issue No. 01-09, Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ("EITF
Issue No. 01-09"), the Company records these pricing discounts and allowances as
a reduction of sales. Advertising and promotional costs, which include
advertising allowances and other discounts, have been expensed as incurred. In
accordance with EITF Issue No. 01-09, which addresses the statement of
operations classification of consideration between a vendor and a retailer, the
Company records certain variable selling expenses, including advertising
allowances, other discounts and other allowances, as a reduction of sales. The
Company may enter into arrangements to provide certain free products. In
accordance with EITF Issue No. 01-09, the Company records the cost of free
products ratably into cost of products sold based upon the underlying revenue
transaction.
Share-Based Compensation
The Company has four share-based employee compensation plans, which are
described more fully in Note 11, Stock Option Plans. Effective July 3, 2005, the
Company adopted the fair value recognition provisions of Statement of Accounting
Standards ("SFAS") No. 123R, "Share-Based Payment," as
48
interpreted by Financial Accounting Standards Board ("FASB") Staff Positions No.
123R-1, 123R-2, 123R-3, 123R-4, 123R-5 and 123R-6. The Company's loss before
income taxes for the years ended June 30, 2007 and July 1, 2006 includes
approximately $61,000 and $275,000 of share-based compensation expense.
Prior to July 1, 2005, the Company accounted for its employee stock incentive
plans under the recognition and measurement provisions of Accounting Principles
Board Opinion ("APB Opinion") No. 25, Accounting for Stock Issued to Employees
("APB No. 25") and related Interpretations, 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 had complied with the disclosure requirement of SFAS No. 148 prior
to adopting SFAS No. 123 (revised 2004) Share-Based Payment ("SFAS 123R").
Accordingly, no share-based compensation was recognized in the consolidated
statements of operations for Fiscal 2005, as all of the options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant.
The total income tax benefit recognized in the consolidated statement of
operations for the share-based compensation arrangements was $0 for each Fiscal
2006 and Fiscal 2007. The Company considers all of its share-based compensation
expense as a component of general and administrative expenses. In addition, no
amount of share-based compensation was capitalized as part of capital
expenditures or inventory for Fiscal 2007 and Fiscal 2006.
Pro forma information regarding net loss and loss per share required by SFAS No.
123, as amended by SFAS No. 148, had been determined as if the Company had
accounted for its employee stock options under the fair value method for the
periods presented below. The fair value for these options was estimated at the
date of grant using a Black-Scholes option-pricing model with the following
weighted average assumptions for the year ended July 2, 2005:
For Fiscal
2005
----------
Risk-Free Interest Rates 3.8%
Expected Option Lives 3-5 years
Expected Volatilities 75.1
Expected Dividend Yields 0%
Weighted Average Fair Value
of Options Granted $1.16
49
The following table illustrates the effect on net loss and loss per share if the
fair value based method had been applied to all outstanding and unvested awards
in each period presented (in thousands, except per share amounts):
For Fiscal
2005
----------
Net loss, as reported $(44,923)
Deduct: total stock-based compensation
expense determined under fair value based
method for all awards, (858)
--------
Pro forma net loss $(45,781)
========
Loss per share:
Basic - as reported $ (7.70)
========
Basic - pro forma $ (7.85)
========
Diluted - as reported $ (7.70)
========
Diluted - pro forma $ (7.85)
========
Income Taxes
The provision for income taxes is based on the consolidated United States
entities' and individual foreign companies' estimated tax rates for the
applicable year. Deferred taxes are determined utilizing the asset and liability
method based on the difference between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Deferred
income tax provisions and benefits are based on the changes in the net deferred
tax asset or liability from period to period. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. See Note 13, Income Taxes.
Comprehensive (Loss) 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. During Fiscal 2007,
Fiscal 2006 and Fiscal 2005, the Company's comprehensive (loss) was $(11.7)
million, $(19.6) million and $(44.9) million. The Company did not have any items
of other comprehensive income or (loss) during Fiscal 2007, Fiscal 2006 and
Fiscal 2005.
(Loss) Income Per Share
Basic and diluted (loss) income per share are calculated in accordance with SFAS
No. 128, Earnings per Share ("SFAS No. 128"). All applicable (loss) income per
share amounts have been presented in conformity with SFAS No. 128 requirements.
During the past three fiscal years, the Company has issued shares of Common
Stock upon the exercise of stock options as follows: Fiscal 2007 (75,532
shares), Fiscal 2006 (0 shares) and Fiscal 2005 (70,695 shares). In Fiscal 2007,
Fiscal 2006 and Fiscal 2005, potentially dilutive securities, comprised of
options to purchase 39,896 shares, 67,470 shares, 453,177 shares of Common
Stock, respectively, were not included in the calculation of diluted loss per
share because their impact was antidilutive.
For Fiscal 2007, the weighted average effect of the 66,202 shares for which
delivery was deferred under the Company's Deferred Delivery Plan was included in
the denominator of both the basic and diluted loss per share calculations. For
Fiscal 2006 and Fiscal 2005, the weighted average effect of the 101,811 shares
for which delivery was deferred under the Company's Deferred Delivery Plan, was
included in the denominator of both basic and diluted loss per share
calculations. See Note 10, Deferred Share Arrangement.
50
Recently Issued Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109." FIN
48 clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements by prescribing a recognition threshold and
measurement attribute for financial statement recognition and measurement of a
tax position taken or expected to be taken on a tax return. Additionally, FIN 48
provides guidance on de-recognition of tax benefits previously recognized and
additional disclosures for unrecognized tax benefits, interest and penalties.
FIN 48 is effective for fiscal years beginning after December 15, 2006, and is
required to be adopted by the Company in the first quarter of fiscal year 2008.
The Company is currently evaluating the impact of adopting FIN 48 and as a
result, is not able to estimate the effect the adoption will have on its
consolidated financial position and results of operations or cash flows.
In September 2006, the FASB issued Statement of Accounting Standards No. 157,
Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosure about fair value measurements. SFAS
No. 157 applies under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS
No. 157 is effective for fiscal years beginning after December 15, 2007. The
Company is currently evaluating the impact, if any, the adoption of SFAS No. 157
will have on the Company's consolidated financial position and results of
operations or cash flows.
Reclassifications
Certain amounts in prior years have been reclassified to conform to the current
year presentation.
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION:
(in thousands)
Fiscal Year
------------------------------
2007 2006 2005
---- ---- ----
Cash paid for interest $166 $184 $442
==== ==== ====
Cash paid for income taxes $ 26 $134 $ --
==== ==== ====
Non-Cash Investing Activities:
Deferred Share Arrangement 2007 2006 2005
-------------------------- ---- ---- ----
Common stock issued to
participant and trust $ -- $ -- $ 373
Treasury stock received
by Company -- -- (373)
Deferred share arrangement
obligation to participant (211) -- 211
Common stock received and
held in trust 211 -- (211)
----- ---- -----
$ -- $ -- $ --
===== ==== =====
See Note 10, Deferred Share Arrangement for a description of the deferred share
arrangement transactions in Fiscal 2007, Fiscal 2006 and Fiscal 2005.
51
NOTE 3 - ACCOUNTS RECEIVABLE, NET:
(in thousands)
Accounts receivable, net consists of the following:
June 30, July 1,
2007 2006
-------- --------
Trade accounts receivable $ 12,738 $ 20,475
Less: allowances for sales returns
and allowances, discounts, and
doubtful accounts (2,036) (3,827)
-------- --------
Total accounts receivable, net $ 10,702 $ 16,648
======== ========
NOTE 4 - INVENTORIES:
(table in thousands)
Inventories consist of the following:
June 30, July 1,
2007 2006
-------- --------
Raw material, components and
work-in-process $ 5,431 $ 9,589
Finished goods 10,375 18,671
-------- --------
Total inventories $ 15,806 $ 28,260
======== ========
During Fiscal 2007 and Fiscal 2006, the Company recorded inventory related
pre-tax charges of approximately $0.4 million and $1.6 million, respectively.
The inventory charges were primarily attributable to price declines and
increased competitive pricing pressures in the digital camera market and excess
customer inventory levels that adversely affected the value of the Company's
digital camera inventories. For Fiscal 2007, the inventory related pre-tax
charges had the effect of decreasing inventory by $0.4 million and increasing
cost of products sold by $0.4 million. For Fiscal 2006, the inventory related
pre-tax charges had the effect of decreasing inventory by $1.6 million and
increasing cost of products sold by $1.6 million. For Fiscal 2005, the inventory
related pre-tax charges had the effect of decreasing inventory by $13.0 million
and increasing cost of products sold by $13.0 million. See Note 16, Other
Charges.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET:
(in thousands)
Property, plant and equipment, net consist of the following:
June 30, July 1,
2007 2006
-------- --------
Buildings and improvements $ 6,804 $ 6,804
Equipment, including tooling 34,065 36,238
Office furniture and equipment 12,891 15,412
Transportation equipment 509 509
Leasehold improvements 5,474 5,593
-------- --------
59,743 64,556
Less: accumulated depreciation
and amortization (49,127) (50,778)
-------- --------
Total property, plant and
equipment, net $ 10,616 $ 13,778
======== ========
52
During Fiscal 2006, the Company recorded an impairment charge of $0.8 million to
lower the carrying value of certain machinery held for sale and reclassified the
$0.3 million carrying value of certain machinery to current assets in the
accompanying consolidated balance sheets at July 1, 2006. The Company sold the
machinery held for sale during Fiscal 2007. See Note 16, Other Charges.
NOTE 6 - OTHER ASSETS
(tables in thousands)
Other assets consist of:
June 30, July 1,
2007 2006
-------- -------
Patents, trademarks and licenses, net $3,347 $3,800
Other 104 370
------ ------
Total other assets $3,451 $4,170
====== ======
Patents, trademarks, and licenses, net consist of the following:
Useful Lives June 30, July 1,
(in Years) 2007 2006
------------ -------- -------
Patents, trademarks and licenses 3 - 20 $10,109 $10,109
Less: accumulated amortization (6,762) (6,309)
------- -------
Patents, trademarks and licenses, net $ 3,347 $ 3,800
======= =======
As of June 30, 2007, the aggregate weighted average amortization period for
patents, trademarks, and licenses was approximately 12 years. For Fiscal 2007,
Fiscal 2006 and Fiscal 2005, intangible asset amortization expense was $0.5
million, $0.4 million and $0.6 million, respectively. Estimated future aggregate
annual amortization expense for each of the next five years is as follows:
Estimated Aggregate
Fiscal Year Amortization Expense
----------- --------------------
2008 $ 426
2009 426
2010 237
2011 237
2012 237
See Note 14, Commitments and Contingencies for a description of license and
royalty agreements and the Fiscal 2006 impairment charges related to the
Jenoptik license.
NOTE 7 - SHORT-TERM BORROWINGS AND FINANCING FACILITIES
Hong Kong Financing Facilities
During Fiscal 2007, Concord Camera HK Limited ("CCHK"), the Company's Hong Kong
subsidiary, (i) reduced the demand financing facilities provided by The Hongkong
and Shanghai Banking Corporation ("HSBC") by approximately US$3.0 million, from
an aggregate amount of approximately US$8.2 million to approximately US$5.2
million, and the corresponding cash on deposit as security for the facilities by
approximately US$3.0 million; and (ii) accepted additional demand financing
facilities from each of Dah Sing Bank, Limited ("Dah Sing") and Shanghai
Commercial Bank Ltd ("SCB") in an aggregate amount of approximately US$3.4
million. As security for the Dah Sing and SCB financing facilities, among other
53
things, the Company provided a corporate guarantee to Dah Sing in the amount of
approximately US$2.3 million and to SCB in the amount of approximately US$1.1
million. The Dah Sing and SCB financing facilities are discussed in detail
below.
On December 5, 2006, CCHK accepted a proposal from SCB dated June 12, 2006 (the
"SCB Agreement") for the provision to CCHK of certain demand banking facilities
up to an amount of approximately HKD9,000,000 (approximately, US$1.125 million)
(collectively, the "SCB Facilities"). Pursuant to the SCB Agreement, subject to
certain terms and conditions set forth in the agreement, CCHK may use (i) up to
HKD6,000,000 (approximately US$750,000) of the SCB Facilities for opening
letters of credit, import loans for settlement of draw-downs under letters of
credit, releasing goods under trust receipts, payables financing loans against
vendor's invoices and packing loans; and (ii) up to HKD3,000,000 (approximately
US$375,000) for negotiating export documents under letters of credit in CCHK's
favor. The SCB Agreement has no stated expiration date.
The SCB Facilities bear interest at variable rates, as follows: 0.5% per annum
over the Hong Kong prime rate on facilities denominated in Hong Kong Dollars;
and 0.5% per annum over the U.S. prime rate on facilities denominated in U.S.
Dollars. At June 30, 2007, the Hong Kong prime rate was 6.57% and the U.S. prime
rate was 8.25%.
As security for the SCB Facilities, in addition to the Company's corporate
guarantee in the amount of HKD9,000,000 (approximately US$1.125 million), CCHK
executed a mortgage in favor of SCB on the Hong Kong office property owned by
CCHK.
On October 4, 2006, CCHK accepted a proposal from Dah Sing dated June 19, 2006
(the "Dah Sing Agreement") for the provision to CCHK of certain demand banking
facilities up to an amount of approximately $2.3 million (collectively, the "Dah
Sing Facilities"). Pursuant to the proposal, CCHK may use the Dah Sing
Facilities for opening letters of credit, draft loans, negotiating export
letters of credit with a letter of guarantee and/or outward bills loans. Of this
credit line, approximately $1.9 million will be available for trust receipts,
invoice financing, packing loans and/or advances against receivables. The Dah
Sing Agreement was to have expired on June 30, 2007. The Dah Sing Facilities
were extended on their existing terms until August 31, 2007 by a letter dated
June 27, 2007, and until September 30, 2007 by a letter dated August 27, 2007,
and until October 31, 2007 by a letter dated September 25, 2007, pending
completion of Dah Sing's review of the facilities.
The Dah Sing Facilities bear interest at variable rates, as follows: 1.5% per
annum over the Hong Kong Interbank Offered Rate on facilities denominated in
Hong Kong Dollars; 1.5% per annum over the London Interbank Offered Rate on
facilities denominated in U.S. Dollars; and 1.5% per annum over the Singapore
Interbank Offered Rate on facilities denominated in any other foreign currency.
As security for the Dah Sing Facilities, in addition to the Company's corporate
guarantee in the amount of approximately $2.3 million, CCHK provided to Dah Sing
a pledged deposit in the amount of $1.0 million and CCHK had undertaken (A) to
maintain a net worth of not less than HKD80.0 million (approximately US$10.0
million); (B) to provide audited financial statements of each of CCHK and the
Company within nine months after the Company's fiscal year end; (C) to provide
an audited report of CCHK reflecting a net profit as of June 30, 2007, the end
of the Company's 2007 fiscal year; and (D) to direct import/export business to
Dah Sing of not less than HKD60.0 million (approximately US$7.5 million) per
year. As of June 30, 2007, CCHK may not be compliant with one or more of these
undertakings and, as a result, Dah Sing may not renew or further extend the Dah
Sing Facilities and may demand full repayment of all indebtedness outstanding
thereunder. There is no guarantee that Dah Sing will agree to renew or further
extend the Dah Sing Facilities. The Company does not believe that the potential
loss of the Dah Sing Facilities will have a material adverse effect on the
Company's liquidity or financial condition because the Company has sufficient
capital resources to fully repay all indebtedness outstanding under the Dah Sing
Facilities and to continue to finance its operations.
At June 30, 2007 and July 1, 2006, the Company had $2.8 million and zero,
respectively, in short-term borrowings outstanding under the import facilities
described above. The weighted average borrowing
54
rates on the short-term borrowings as of June 30, 2007 and July 1, 2006, were
6.85% and 6.79%, respectively.
At June 30, 2007 and July 1, 2006, the Company had $2.1 million and $1.5
million, respectively, in letters of credit outstanding, which were issued
primarily to certain suppliers to guarantee payment for our purchase orders with
such suppliers. The letters of credit are issued under the Company's import
facilities that have been granted to CCHK.
NOTE 8 - OTHER LONG-TERM LIABILITIES
(tables in thousands)
Other long-term liabilities consist of the following:
June 30, July 1,
2007 2006
-------- -------
Licensing and royalty related obligations $1,257 $1,588
Other 185 236
------ ------
Total other long-term liabilities $1,442 $1,824
====== ======
Licensing and royalty related obligations represent the total of future minimum
royalty payment amounts and an amount equal to the present value of future
payments related to various licensing agreements. See Note 14, Commitments and
Contingencies.
NOTE 9 - STOCKHOLDERS' EQUITY
In the fourth quarter of the year ended July 1, 2000 ("Fiscal 2000"), the
shareholders authorized the Company to issue up to 1.0 million shares of blank
check preferred stock, with such rights and preferences as may be determined by
the Board from time to time. No preferred stock has been issued to date.
On October 26, 2006, the Board of Directors of the Company approved, without
action by the shareholders of the Company, a Certificate of Amendment to the
Company's Certificate of Incorporation to implement a one-for-five split of the
Company's Common Stock with an effective date of November 21, 2006. On the
effective date of the reverse split, each five shares of issued Common Stock
(including treasury shares and shares held in trust) were converted
automatically into one share of Common Stock, resulting in the total number of
shares outstanding being reduced from 28,859,385 shares to 5,771,877 shares, and
the number of authorized shares of the Company's Common Stock reduced from
100,000,000 shares to 20,000,000 shares. All Common Stock shares and per-share
and related stock option amounts have been retroactively adjusted for the
reverse stock split in the accompanying consolidated financial statements and
footnotes.
The Company has not declared or paid any cash dividends for any of the fiscal
years presented in the accompanying consolidated financial statements.
NOTE 10 - DEFERRED SHARE ARRANGEMENT
The Company's Deferred Delivery Plan allows designated executive officers to
elect, subject to the approval of the Compensation and Stock Option Committee of
the Company's Board of Directors (the "Compensation Committee"), to defer the
gains on certain stock option exercises by deferring delivery of the "profit"
shares to be received upon exercise.
Pursuant to the Deferred Delivery Plan and an election previously made on August
9, 2004, the Company's Chairman, Chief Executive Officer and President
("Chairman") tendered 27,254 fully paid and owned shares of Common Stock to the
Company in payment of the exercise price (the "Payment
55
Shares") of his option to purchase 62,862 shares of Common Stock ("2005 Delivery
Plan Transaction"). Upon consummation of the 2005 Delivery Plan Transaction, the
27,254 Payment Shares were classified as "Treasury stock" and recorded at a cost
of $373,375. The Company issued 62,862 new shares of Common Stock and classified
them as "Common stock" at a cost of $373,375, of which 27,254 shares were issued
to the Chairman in exchange for the Payment Shares. The remaining 35,609 shares,
the delivery of which was deferred by the Chairman, were issued to a rabbi
trust. The 35,609 shares held in the rabbi trust were recorded at a cost of
$211,500 and were classified as "Common stock held in trust." The corresponding
liability to the Chairman was recorded as $211,500 and was classified as
"Deferred share arrangement" in the stockholders' equity section of the
accompanying consolidated balance sheets. On August 9, 2006, the Chairman took
delivery of the 35,609 shares held in trust upon expiration of the two-year
deferral period, reducing the deferred share arrangement in the stockholders'
equity section by $211,500.
Pursuant to an election previously made under the Deferred Delivery Plan on July
14, 2003, the Chairman exercised an option to purchase 77,400 shares of Common
Stock and tendered 11,198 fully paid and owned shares of Common Stock to the
Company in payment of the exercise price ("2004 Delivery Plan Transaction").
Upon the consummation of the 2004 Delivery Plan Transaction, the 11,198 Payment
Shares were classified as "Treasury stock" and recorded at a cost of $482,625.
The Company issued 77,400 new shares of Common Stock and classified them as
"Common stock" at a cost of $482,625, of which 11,198 shares were issued to the
Chairman in exchange for the Payment Shares. The remaining 66,202 shares, the
delivery of which was deferred by the Chairman, were issued to a rabbi trust.
The 66,202 shares held in the rabbi trust were recorded at a cost of $412,825
and were classified as "Common stock held in trust." The corresponding liability
to the Chairman was recorded at $412,825 and was classified as "Deferred share
arrangement" in the stockholders' equity section of the accompanying
consolidated balance sheet. On July 2, 2007, the Chairman took delivery of the
66,202 shares held in trust upon the expiration of the extended deferral period,
reducing the deferred share arrangement in the stockholders' equity section by
$412,825. See Note 20, Subsequent Events.
NOTE 11 - STOCK OPTION PLANS
On September 4, 2002, the Company adopted a non-qualified stock option plan that
provides for a maximum number of 100,000 shares of Common Stock for awards
issuable to new employees ("SEP 2002 Plan"). The SEP 2002 Plan permits the
Compensation Committee or the Board of Directors (the "Board") to grant, at
their discretion, a variety of Common Stock awards on a stand-alone,
combination, or tandem basis. The SEP 2002 Plan expires in September 2012.
On April 26, 2002, the Company adopted a non-qualified stock option plan that
provides for a maximum number of 100,000 shares of Common Stock for awards
issuable to non-officer employees, new employees, and consultants ("APR 2002
Plan"). The APR 2002 Plan permits the Compensation Committee or the Board to
grant, at their discretion, a variety of Common Stock awards on a stand-alone,
combination or tandem basis. The APR 2002 Plan expires in April 2013.
On August 28, 2001, the Company launched an offer to exchange outstanding stock
options with an exercise price of more than $35.00 per share for new options to
purchase 75% of the shares subject to the outstanding options at an exercise
price of $29.85 per share (the closing price of the Common Stock as reported on
the NASDAQ National Market on the date the Board approved the exchange offer).
The exchange offer expired on October 16, 2001. The Company accepted for
exchange and cancelled options to purchase a total of 275,175 shares of Common
Stock and issued new options to purchase a total of 206,381 shares of Common
Stock in exchange for the cancelled options. As a result of the exchange offer,
the Company applied variable accounting for these new stock options until July
3, 2005, when the Company adopted FASB 123R.
56
The Company's 1993 Incentive Plan permitted the Compensation Committee to grant
a variety of Common Stock awards. As of June 30, 2007, 114,307 shares of Common
Stock were outstanding in the amended 1993 Incentive Plan. The 1993 Incentive
Plan expired on December 1, 2003.
In addition, the Company, from time to time, has granted stock options to
certain individuals as an inducement to employment.
Option awards are granted with an exercise price equal to the market price of
the Company's stock at the date of grant. For all plans, options granted have a
maximum term of ten years and generally vest annually over a three- to five-year
period, provided that the optionee remains a full-time employee of the Company.
The Company uses the Black-Scholes-Merton option valuation model to calculate
the fair value of a stock option grant. The stock-based compensation recorded in
Fiscal 2007 was calculated using the assumptions noted in the following table.
Expected volatilities are based on the historical volatility of the Company's
Common Stock over the period of time commensurate with the expected life of the
stock options. The dividend yield of zero is based on the fact that the Company
has never paid cash dividends and has no present intention to pay cash
dividends. The Company estimated its future stock option exercise and employee
termination information used in the valuation model. The expected term of
options granted is based upon the observed and expected time to the date of
post-vesting exercise and forfeitures of options by the Company's employees. The
risk-free interest rate is derived from the average U.S. Treasury rate for the
period, which approximates the rate in effect at the time of the stock option
grant.
Fiscal 2007 Fiscal 2006
----------- -----------
Expected volatility 61.9%-64.7% 64%-73.4%
Expected dividend yield 0% 0%
Expected term (in years) 4 5
Risk-free interest rate 4.6%-4.8% 4.0%-5.1%
A summary of stock option activity under the Company's stock option plans as of
June 30, 2007, and changes during the year then ended is presented below:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Total Stock Options Shares Price Term (Years) Value
---------------------------- ------- -------- ------------ ---------
Outstanding at July 1, 2006 327,690 $ 21.06
Granted 12,500 $ 4.40
Exercised (75,532) $ 4.53
Canceled (60,707) $ 30.86
-------
Outstanding at June 30, 2007 203,951 $ 23.24 3.2 $ 3,650
=======
Exercisable at June 30, 2007 178,658 $ 25.65 2.6 $ 300
=======
The weighted average grant-date fair value of options granted during Fiscal
2007, Fiscal 2006 and Fiscal 2005 was $2.36, $3.57 and $6.47 respectively.
During Fiscal 2007, 75,532 options were exercised. No options were exercised
during Fiscal 2006. The total intrinsic value of options exercised during Fiscal
2007, Fiscal 2006 and Fiscal 2005 was approximately, $1,511, $0 and $508,000,
respectively. The intrinsic value of a stock option is the amount by which the
current market value of the underlying stock exceeds the exercise price of the
stock option.
57
A summary of the status of the Company's nonvested shares as of June 30, 2007,
and changes during Fiscal 2007 is presented below:
Weighted
Average Grant
Nonvested Stock Options Shares Date Fair Value
-------------------------- ------- ---------------
Nonvested at July 1, 2006 32,169 $ 7.90
Granted 12,500 $ 2.36
Vested (10,190) $ 12.96
Canceled (9,186) $ 6.37
-------
Nonvested at June 30, 2007 25,293 $ 3.68
=======
As of June 30, 2007, there was approximately $78,000 of total unrecognized
compensation cost related to nonvested stock-based compensation arrangements
granted under the Company's stock option plans. That cost is expected to be
recognized over a weighted-average vesting period of 3.3 years. The total fair
value of stock options vested during Fiscal 2007, Fiscal 2006 and Fiscal 2005
was approximately $132,000, $506,000 and $929,000, respectively.
NOTE 12 - DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution "401(k)" plan that covers
substantially all United States employees meeting certain service requirements.
The Company, at its sole discretion, makes matching cash contributions up to
specified percentages of employees' contributions and may make additional
discretionary contributions if the Company achieves certain profitability
requirements.
During Fiscal 2007, the Company contributed a 2% matching contribution to the
401(k) plan in the amount of $65,000 for employees who were participants in the
plan from July 1, 2005 through June 30, 2006. For Fiscal 2006 and Fiscal 2005,
the Company did not make any contribution to the 401(k) plan.
NOTE 13 - INCOME TAXES
(in thousands)
Loss before income taxes in the accompanying consolidated statements of
operations consists of the following:
Fiscal Year
------------------------------------------
2007 2006 2005
-------- -------- --------
United States $ 88 $ (1,224) $ (4,451)
Foreign (11,808) (18,280) (40,286)
-------- -------- --------
Total $(11,720) $(19,504) $(44,737)
======== ======== ========
The provision (benefit) for income taxes is comprised of the following:
Fiscal Year
------------------------------------------
2007 2006 2005
-------- -------- --------
Current:
United States federal and state $ 6 $ 17 $ --
Foreign -- 90 186
Deferred
United States federal and state -- -- --
Foreign -- -- --
-------- -------- --------
$ 6 $ 107 $ 186
======== ======== ========
58
Deferred income tax assets and liabilities reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
(b) operating loss carryforwards. The tax effects of significant items
comprising the Company's deferred income tax assets and liabilities as of June
30, 2007 and July 1, 2006 were as follows:
Fiscal Year
---------------------
2007 2006
-------- --------
Deferred Income Tax Liabilities:
--------------------------------
Depreciation $ (65) $ --
Other deferred tax liabilities (4) --
-------- --------
Total deferred income tax liabilities $ (69) $ --
-------- --------
Deferred Income Tax Assets:
---------------------------
Operating loss carryforwards $ 17,205 $ 16,091
Difference between book and tax basis of inventory 1,228 1,493
Compensation accruals 834 1,124
Reserves not currently deductible 114 487
Alternative minimum tax credit 227 227
Amortization 231 220
Depreciation -- 313
Contributions carryover 65 65
Other deferred income tax assets -- 10
-------- --------
Total deferred income tax assets 19,904 20,030
Less: valuation allowance (19,835) (20,030)
-------- --------
Net deferred income tax assets $ -- $ --
======== ========
Income attributable to Hong Kong business activities is taxed separately from
income attributable to the PRC business activities. The annual effective income
tax rate of the Company's Hong Kong subsidiary is 8.75%.
The Company has never paid any income or turnover tax to the PRC related to its
processing activities in the PRC, but there can be no assurance that the Company
will not be required to pay such taxes in the future. Existing PRC statutes can
be construed as providing for a minimum of 10% to 15% income tax and a 3%
turnover tax on the Company's business activities; however, the PRC has never
attempted to enforce those statutes. The Company has been advised that the PRC's
State Tax Bureau is reviewing the applicability of those statutes to processing
activities of the type that the Company engages in, but it has not yet announced
any final decisions as to the taxability of those activities. After consultation
with its tax advisors, the Company does not believe that any tax exposure it may
have on account of its operations in the PRC will be material to the Company's
financial position or results of operations.
59
As a result of current and prior year losses realized by its foreign
subsidiaries, the foreign subsidiaries had an accumulated earnings deficit of
approximately $53.9 million as of June 30, 2007. Although the Company has an
accumulated earnings deficit related to its foreign subsidiaries, certain of its
foreign subsidiaries have undistributed earnings. Historically, the Company does
not provide for U.S. federal and state income tax on such undistributed earnings
based on the re-investment of such earnings outside the United States. For
Fiscal 2007, the Company recorded an income tax provision of $6,000 related to
income tax liabilities incurred for U.S. state taxes.
As of June 30, 2007, the Company had net operating loss carryforwards for U.S.
federal tax purposes of approximately $18.2 million. The net operating loss
carryforwards are scheduled to expire between 2010 and 2027. The U.S. net
operating loss carryforwards include a portion arising from the exercise of
stock options and will be credited to additional paid-in capital when the
related tax benefit is realized. Additionally, as of June 30, 2007, the Company
had approximately $53.9 million of net operating loss carryforwards related to
its foreign operations, of which $48.5 million relates to Hong Kong. A
significant portion of these net operating loss carryforwards have no expiration
dates.
As of June 30, 2007, management evaluated the realizability of the Company's
deferred income tax assets. As part of assessing the realizability of its
deferred income tax assets, management evaluated whether it is more likely than
not that some portion, or all, of its deferred income tax assets will be
realized. The realization of its U.S., Europe, and Hong Kong deferred income tax
assets relates directly to the Company's tax planning initiatives and strategies
for U.S. federal and state, Europe and Hong Kong tax purposes. In Fiscal 2007,
based on all the available evidence, management determined that it is not more
likely than not that its deferred income tax assets will be fully realized.
Accordingly, the Company recorded a full valuation allowance against all of its
deferred income tax assets in Fiscal 2007. Historically, the Company has
recorded a full valuation allowance against all of its deferred tax assets in
each fiscal year subsequent to and including Fiscal 2004. For Fiscal 2007,
Fiscal 2006 and Fiscal 2005, the Company's effective income tax rate was 0 %,
0.6 % and 0.4% respectively. The Company's future effective income tax rate will
depend on the apportionment between domestic and foreign taxable income and
losses, the statutory rates of the related tax jurisdictions and any changes to
the valuation allowance.
A reconciliation of income tax expense computed at the statutory U.S. federal
rate to the actual provision for income taxes is as follows:
Fiscal Year
--------------------------------------------
2007 2006 2005
-------- -------- --------
Computed benefit at U.S. federal statutory tax rate of 35% $ (4,102) $ (6,826) $(15,658)
(Decrease) increase in valuation allowance (195) 1,127 6,761
Effect of foreign subsidiaries subject to a different tax rate 3,049 5,013 10,832
Previously unrecorded provision (benefit) 944 762 (1,641)
Permanent differences 263 20 (12)
State income tax, net of federal benefit 4 11 --
Other 43 -- (96)
-------- -------- --------
Provision for income taxes $ 6 $ 107 $ 186
======== ======== ========
In Fiscal 2007, the Company identified net adjustments totaling $0.9 million. In
Fiscal 2006, the Company identified net adjustments totaling approximately $0.8
million related to the prior year, primarily related to U.S. operations. In
Fiscal 2005, the Company identified an adjustment to its net U.S. operating loss
carryforwards with a tax effect of $1.6 million related to prior years. These
amounts were fully offset by changes in a valuation allowance in each of Fiscal
2007, Fiscal 2006 and 2005 and would
60
have been similarly offset by changes in a valuation allowance had they been
reflected in the appropriate prior periods, which, accordingly, have not been
reclassified.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Offices and Warehouses
United States
The Company leases approximately 20,000 square feet of office space at 4000
Hollywood Boulevard, Hollywood, Florida, of which approximately 5,500 square
feet was sublet as of August 1, 2006. The Company also leases, but no longer
uses, a warehouse of approximately 13,700 square feet in Fort Lauderdale,
Florida, which was sublet as of January 7, 2005. The subleases pursuant to which
the Company sublets these facilities provide for rental income of approximately
$16,000 and $11,000 per month, respectively, with annual increases ranging from
2-3% and 3%, respectively, and expire on January 31, 2009, and January 31, 2014,
respectively.
As of July 3, 2004, the Company ceased operations in the Fort Lauderdale
warehouse facility. The Company subleased these premises at the prevailing
market rate which was $0.1 million lower than the existing contractual rate.
Accordingly, at June 30, 2007 and July 1, 2006, the Company had recorded an
accrued liability in the accompanying consolidated balance sheets related to the
present value of the unfavorable rent differential between the total future
lease expense offset by the estimated total future sublease income.
Hong Kong
The Company owns a total of 6,600 square feet of office space on one floor at
ADP Pentagon Centre, 98 Texaco Road, Tsuen Wan, New Territories, Hong Kong. In
the same facility, the Company leases a total of approximately 6,600 square feet
of office space of one floor under a lease expiring in November 2009 at a cost
of approximately $5,050 per month including rent and maintenance. The land on
which the building is situated is subject to a governmental ground lease that
will expire in 2047.
The Company leases a warehouse for document storage comprised of approximately
1,760 square feet at Hing Yip Center, Room 1105, 72-76 Texaco Road, Tsuen Wan,
Hong Kong for approximately $770 per month including rent and maintenance under
a lease expiring November 30, 2007.
PRC Operations
The Company's manufacturing activities are conducted at its facilities located
in the Longgang District of Shenzhen, PRC (the "Company Facility"). The Company
leases three employee dormitories (the "Dormitories") at a cost of approximately
$19,000 per month. The aggregate square footage of the Company Facility and the
Dormitories is approximately 600,000 square feet.
The current processing agreement with the PRC expires in October 2016. Pursuant
to a land use agreement, the Company has the title and right to use the land
upon which the Company Facility is situated through September 22, 2038. At the
end of the term, title and ownership to the land and Company Facility transfer
to a PRC governmental agency. At that time, the Company may be able to extend
the usage term of the PRC land and improvements thereon at then prevailing
rates.
61
Other Jurisdictions
In Fiscal 2005, the Company sold its property in Coalville, England that was
previously used in connection with its operations in the United Kingdom. Under
the terms of sale, the property was sold for approximately $0.9 million with a
carrying value of approximately $0.5 million. The Company received net proceeds
of approximately $0.9 million and recorded a gain on the sale of the property in
the accompanying consolidated statements of operations of approximately $0.4
million. The Company leases office space in the United Kingdom. The leases for
office space in France, Germany and Japan were terminated as of May 31, 2007,
December 15, 2006 and September 29, 2006, respectively. The Company's lease for
its facility in Canada expired October 31, 2005. The Company relocated its
Canadian warehousing activity to a third-party service provider under a contract
that was terminated effective September 30, 2006.
Leases
Future minimum rental payments for operating leases as of June 30, 2007 are as
follows:
(in thousands)
Fiscal Year
2008 $ 698
2009 413
2010 340
2011 324
2012 324
Thereafter 521
------
Total minimum payments $2,620
======
Minimum payments have not been reduced by minimum sublease rentals of $0.4
million due in the future under non-cancelable subleases.
Rental expense for operating leases of approximately $1.4 million, $1.8 million
and $2.1 million was incurred for Fiscal 2007, Fiscal 2006 and Fiscal 2005,
respectively.
Employment Agreements and Executive SERPS
Effective as of July 1, 2005, the employment agreement between the Company and
Ira B. Lampert was amended (the "Lampert Agreement") to provide a four-year term
that expires on July 1, 2009 and to end the Company's obligation to make a
$500,000 annual contribution to a Supplemental Executive Retirement Plan and
Agreement ("SERP") adopted for the benefit of Ira B. Lampert. The Lampert
Agreement provides for an annual base salary of $900,000. Mr. Lampert
voluntarily reduced his base salary from $900,000 to $800,000 per annum for the
period from July 1, 2004 to June 30, 2005 and also voluntarily reduced the
Company's $500,000 annual SERP contribution to $350,000 beginning with the
payment that was due on January 1, 2005.
The Lampert Agreement provides that if his employment with the Company is
terminated by reason of death or disability, Mr. Lampert or his legal
representative would be entitled to receive, in addition to accrued compensation
(including, without limitation, any earned but unpaid bonus or long-term
incentive awards, any amount of base salary accrued or earned but unpaid, any
deferred compensation earned but unpaid, any accrued but unused vacation pay and
unreimbursed business expenses (the "Accrued Amounts")), his base salary for the
scheduled balance of the term (payable in the case of death in a lump sum), a
prorated bonus for the year in which the death or disability occurred, and any
other or additional benefits owed to the executive under the then applicable
employee benefit plans or policies of the
62
Company, subject in the case of disability to offset against the base salary
payment by the amount of any disability benefits provided to him by the Company
or under any disability insurance that the Company provides or pays for.
The Lampert Agreement entitles Ira B. Lampert to participate generally in all
pensions, retirement, insurance, savings, welfare and other employee benefit
plans and arrangements and fringe benefits and perquisites maintained by the
Company from time to time for senior executives of a comparable level. In
addition to any life insurance provided pursuant to one of the Company's plans,
Mr. Lampert is also provided with term life insurance, for such beneficiaries as
are designated by Mr. Lampert, of $5 million face value, and long-term
disability coverage with a $352,000 annual benefit and a $1.0 million lump sum
payment payable in the event that Mr. Lampert's employment with the Company is
terminated due to his disability (the "Additional Life and Disability
Insurance"). In addition, the Company may purchase key man life insurance on the
life of Mr. Lampert, which may be used to satisfy the Company's obligations
under the Lampert Agreement in the event of Mr. Lampert's death. The Company
currently maintains $5 million in key life insurance on the life of Mr. Lampert.
If Mr. Lampert's employment is terminated by the Company without cause or if
there is a constructive termination without cause, Mr. Lampert would be entitled
to receive the Accrued Amounts, his base salary and continuation of his benefits
(or the economic equivalent of such benefits), the Additional Life and
Disability Insurance and certain perquisites for the scheduled balance of the
term and for an additional twelve months thereafter, and a prorated bonus for
the year in which the termination occurred. If such termination followed a
change of control of the Company, Mr. Lampert would be entitled to receive the
salary continuation benefit as a lump sum payment without any discount and,
subject to limited exceptions, any benefits, including options, in which he is
not at such time fully vested would become fully vested and any options would
remain exercisable for the full stated term of the option. If the automatic
extensions of the term of the Lampert Agreement are discontinued at the request
of the Company and Mr. Lampert's employment is terminated upon expiration of the
term, Mr. Lampert would be entitled to receive the Accrued Amounts, his base
salary and continuation of his benefits (or the economic equivalent of such
benefits), the Additional Life and Disability Insurance and certain perquisites
for twelve months after the end of the term, and a prorated bonus for the year
in which the termination occurred. In addition, if the severance payments to Mr.
Lampert under the Lampert Agreement follow a change in control and, together
with other amounts paid to Mr. Lampert, exceed certain threshold amounts and are
determined to constitute a parachute payment (as defined in Section 280G(b)(2)
of the Internal Revenue Code), Mr. Lampert is to receive an additional amount to
cover the federal excise tax with respect thereto on a "grossed up" basis. If
Mr. Lampert is terminated for cause, or he voluntarily resigns, he will only
receive the Accrued Amounts and benefits provided in benefit plans.
Pursuant to the Lampert Agreement, the Company adopted a SERP for the benefit of
Ira B. Lampert (the "Lampert SERP"). Initially, $500,000 was credited to the
Lampert SERP account each year. These yearly credits were 100% vested and not
subject to forfeiture. Mr. Lampert voluntarily reduced the amount of the credit
to be made in January 2005 from $500,000 to $350,000. Effective as of July 1,
2005, the Company was no longer obligated to make $500,000 annual contributions
to the Lampert SERP. However, if a change of control of the Company occurs and
Mr. Lampert remains employed by the Company thereafter, the Company will be
obligated to pay Mr. Lampert $500,000 within 30 days after the date of the
change of control and annually during the remaining term of his employment with
the Company on the first business day of each calendar year following the change
of control. Pursuant to a one-time grant to Mr. Lampert of $1,549,998 in
deferred compensation, made as of April 19, 2000, an additional $1,549,998 was
credited to the Lampert SERP. It vested in three equal annual installments
beginning January 1, 2001 and, as such, became fully vested on January 1, 2003.
Additional credits were made to the Lampert SERP for the Deferred LTCIP Award of
August 6, 2003 (described below under "Deferred Long-Term Compensation") and the
deferred compensation awarded to him pursuant to the
63
conditional release program because he prepaid the total amount of the
indebtedness before it was scheduled to be forgiven by the Company.
The Company also has employment agreements with its other executive officers
that provide for annual salaries ranging from approximately $220,000 to
$275,000, plus certain other fringe benefits. These agreements prohibit the
executives from competing with the Company for one year following termination of
employment with the Company. These agreements contain, among other things,
termination provisions that may result in the Company being obligated to make
severance payments equal to four months' or one year's base salary, as the case
may be, plus certain other fringe benefits.
In connection with grants of deferred compensation to five of its former and/or
current executive officers other than Ira B. Lampert, the Company adopted
various SERPs for the benefit of those executives. A total of $1,090,000 was
contributed to rabbi trusts established by the Company in connection with the
executive SERPs (other than the Lampert SERP), which ranged from $100,000 to
$550,000 per executive, before giving effect to the Deferred LTCIP Awards added
to the SERPs of those executive officers who were granted a Deferred LTCIP Award
on August 6, 2003. Generally, the amounts in the executive SERPs vested in
installments over a period of not less than three years, subject to the
executive's continued employment, and many provide for accelerated vesting, in
whole or in part, if the executive's employment is terminated by the Company
without cause. Additionally, Mr. Lampert and another executive officer elected
to defer compensation from time to time, pursuant to their respective SERP
agreements with the Company.
Each time the Company made an initial credit to an executive's account under a
SERP agreement, the Company simultaneously contributed an equal amount to a
trust established for the purpose of accumulating funds to satisfy the
obligations incurred by the Company pursuant to the SERP.
The SERP and other deferred compensation account balances, including investment
earnings, were recorded as a deferred compensation asset and the related vested
balances were recorded as a deferred compensation liability.
Deferred Long-Term Compensation
On August 6, 2003, the following former and/or current executive officers were
awarded the following amounts of contingent deferred compensation under the
Company's Amended and Restated 2002 Long Term Cash Incentive Plan ("2002 LTCIP")
with respect to the Fiscal 2002-2003 performance period (the "Deferred LTCIP
Awards"): (i) Ira B. Lampert, $670,474; (ii) Brian F. King, $335,237; (iii)
Keith L. Lampert, $389,629; (iv) Urs W. Stampfli, $274,021; and (v) Richard M.
Finkbeiner, $224,722. The Deferred LTCIP Awards to Keith L. Lampert and Urs W.
Stampfli vested, so long as the executive continued to be employed by the
Company, in three equal annual installments on August 6, 2004, 2005 and 2006, or
immediately upon: (i) a change of control of the Company; or (ii) the
executive's death or disability. The Deferred LTCIP Awards to Brian King and
Rick Finkbeiner were forfeited when their employment terminated before any
vesting had occurred. Ira B. Lampert voluntarily agreed to delay the vesting of
his Deferred LTCIP Award by one year, such that it vested in three equal
installments on August 6, 2005, 2006 and 2007 instead of August 6, 2004, 2005
and 2006. Otherwise, the Deferred LTCIP Award granted to Ira B. Lampert had
substantially the same terms and conditions as the other Deferred LTCIP Awards;
however, in addition to the events that will accelerate the vesting of the other
Deferred LTCIP Awards, it provides for immediate vesting in the event of
termination without cause, a constructive termination of employment without
cause, or the non-renewal of his employment contract. The Lampert SERP and the
other SERPs were all amended to include appropriate terms to govern the Deferred
LTCIP Awards. The Company contributed the foregoing amounts to trusts
established for the purpose of holding funds to satisfy the Company's
obligations under the Deferred LTCIP Awards. Pursuant to the Separation
Agreement between Mr. Keith Lampert and the Company, the vesting date of the
installment of his Deferred LTCIP Award that was to have vested on August 6,
2006, was accelerated
64
to March 31, 2006, the effective date of the termination of Mr. Keith Lampert's
employment with the Company. See "Executive Separation Agreements" below.
Deferred Compensation Distribution Election
Effective April 5, 2005, Ira B. Lampert and Keith L. Lampert, then the Company's
Executive Vice President and Chief Operating Officer, made elections to have
their vested deferred compensation account balances that were earned and vested
prior to December 31, 2004 under their respective Amended and Restated SERPs
paid to them in one lump sum payment on the business day following the first
anniversary of the effective date of the election. Messrs. Ira Lampert and Keith
Lampert advised the Company that they made these elections primarily because of
the potential exposure to penalties and the uncertainty of tax consequences
related to the deferred compensation arrangements under The American Jobs
Creation Act of 2004. The amounts payable to Messrs. Ira Lampert and Keith
Lampert under their respective SERPs and Deferred LTCIP Awards were $7.0 million
and $1.6 million, respectively. An amount equal to the then current deferred
compensation account balances of the SERPS was held in "rabbi trusts" previously
established by the Company to fund its obligations under the SERPs.
As disclosed in a Current Report on Form 8-K filed with the SEC on November 29,
2005, on November 28, 2005, the Company entered into amendments to the SERP
between the Company and each of executive officers Ira B. Lampert, Keith L.
Lampert, Gerald J. Angeli, Harlan I. Press, Alan Schutzman and Urs W. Stampfli.
The amendments modified each SERP in response to new Section 409A ("Section
409A") of the Internal Revenue Code of 1986, as amended, that affects
non-qualified deferred compensation plans such as the SERPs. As discussed below
under the caption, "Executive Separation Agreements," Messrs. Keith Lampert,
Press and Schutzman separated from the Company effective as of April 1, 2006.
The amendments addressed two types of deferred compensation governed by the
SERPs: amounts deferred and vested on or before December 31, 2004 that were not
subject to Section 409A ("Grandfathered Amounts") and amounts deferred on or
before December 31, 2004 but not vested on such date that were subject to
Section 409A ("409A Amounts"). The amendments addressing Grandfathered Amounts
terminated each SERP as to all Grandfathered Amounts and provided for the
payment of such Grandfathered Amounts to be disbursed during calendar year 2005,
except that the SERP between the Company and Ira B. Lampert was amended to
permit Mr. Lampert, on or before November 30, 2005, to make an immediately
effective election to withdraw his Grandfathered Amounts on January 3, 2006. The
amendments addressing 409A Amounts permitted a SERP participant to elect, prior
to December 31, 2005, to terminate his participation in his respective SERP as
to all or a portion of the 409A Amounts, provided that all such vested 409A
Amounts would be disbursed on or before December 31, 2005 or, if not earned and
vested on such date, during the calendar year in which such 409A Amounts will be
earned and vested.
As disclosed in the Company's Quarterly Report on Form 10-Q for the period ended
December 31, 2005, the Grandfathered Amounts were distributed to the SERP
participants in accordance with the elections made by each participant. The 409A
Amounts were distributed immediately upon vesting.
Executive Separation Agreements
The Company and Brian F. King entered into a separation agreement, dated as of
March 29, 2004, pursuant to which Mr. King's employment terminated effective
July 1, 2004. Pursuant to this agreement, Mr. King was to receive, among other
things, the equivalent of his base salary of $450,000 per annum and auto
allowance of $18,000 per annum (in installments in accordance with the normal
payroll schedule) through June 30, 2005, in accordance with the severance
provisions of his employment agreement.
65
The Company and Richard M. Finkbeiner entered into a separation agreement, dated
as of August 18, 2004, pursuant to which Mr. Finkbeiner's employment terminated
effective July 27, 2004. Pursuant to this agreement, Mr. Finkbeiner was to
receive, among other things, the equivalent of his base salary of $262,500 per
annum (in installments in accordance with the normal payroll schedule) through
July 26, 2005, in accordance with the severance provisions of his employment
agreement.
Under these separation agreements, Messrs. King and Finkbeiner were required:
(a) not to compete with the Company for one year; (b) to provide the Company
with certain cooperation and assistance (without receiving additional
compensation for same during the period covered by the severance payments); and
(c) to execute a release prior to receiving any severance payments.
On December 24, 2005, the Company and each of Keith L. Lampert, Alan Schutzman
and Harlan I. Press entered into Separation Agreements, pursuant to which their
employment was terminated effective April 1, 2006.
Each Separation Agreement provided that the separating executive was to receive,
among other things, in addition to the benefits to which he was entitled under
the Company's 401(k) plan and his individual SERP: (a) the equivalent of his
base salary per annum plus his auto allowance for a period of twelve (12) months
from and after the effective date of his termination other than for "cause" (as
defined in his respective Terms of Employment) (March 31, 2006 or the date of
any earlier voluntary termination or termination without cause) (the
"Post-Employment Period") in accordance with the severance provisions of his
Terms of Employment, payable in accordance with the Company's normal payroll
practices; (b) his full vacation allotment for calendar year 2006 as though he
was in the employ of the Company throughout calendar year 2006; (c) payment for
his accrued but unused vacation allotment; (d) reimbursement of premiums for the
continuation of his health insurance coverage under COBRA during the
Post-Employment Period; and (e) reimbursement of certain agreed upon amounts for
life and disability insurance coverage during the Post-Employment Period. Mr.
Keith Lampert's Separation Agreement also provided for the acceleration of the
vesting date of one of his deferred compensation accounts under his SERP from
August 6, 2006 to the earlier of (i) March 31, 2006 or (ii) the effective date
of any earlier termination without cause or any earlier voluntary termination.
Under the terms of their respective Separation Agreements, each of Messrs. Keith
Lampert, Schutzman and Press (a) was prohibited from competing with the Company
for a period of one year following the effective date of his separation from the
Company; (b) agreed to provide to the Company certain cooperation and assistance
(without additional compensation therefore during the one-year period covered by
their severance payments); and (c) agreed to release the Company from any claims
each may have against the Company.
License and Royalty Agreements
On May 10, 2004, the Company entered into a twenty year, worldwide trademark
license agreement with Jenoptik AG for the exclusive use of the JENOPTIK brand
name and trademark on non-professional consumer imaging products including, but
not limited to, digital, single-use and traditional cameras, and other imaging
products and related accessories. The license agreement provides for a royalty
of one-half of one percent (0.5%) of net sales of non-professional consumer
imaging products bearing the JENOPTIK brand name for the first ten (10) years of
the license and a royalty of six-tenths of one percent (0.6%) for the second ten
(10) years of the license. There are no minimum guaranteed royalty payments.
During Fiscal 2006, the Company recorded an impairment charge of $1.0 million to
lower the carrying value of the Jenoptik license. The license's carrying value
was reduced to $0.6 million as a result of the impairment.
66
Effective January 1, 2001, the Company entered into a new twenty-year license
agreement with Fuji Photo Film Ltd ("Fuji"). Under the new license agreement,
Fuji granted the Company a worldwide non-exclusive license (excluding Japan
until January 1, 2005) to use certain of Fuji's patents and patent applications
related to single-use cameras. The license extends until the later of the
expiration of the last of the licensed Fuji patents or February 26, 2021. In
consideration of the license, the Company agreed to pay a license fee and
certain royalty payments to Fuji. Accordingly, a significant portion of the
balance for patents, trademarks and licenses, net in "Other assets" in the
accompanying consolidated balance sheets at June 30, 2007 and July 1, 2006, was
an asset associated with the Fuji license. The Company also recorded as a
liability a corresponding amount that was included in licensing related
obligations in "Other liabilities" in the accompanying consolidated balance
sheets at June 30, 2007 and July 1, 2006 which was equal to the present value of
future license fee payments. The Company amortizes these assets based upon
quantities of units produced.
On August 26, 2002, the Company entered into two Polaroid licensing agreements.
The two license agreements provided it with the exclusive (with the exception of
products already released by Polaroid into the distribution chain), worldwide
use of the Polaroid brand trademark in connection with the manufacture,
distribution, promotion and sale of single-use and traditional film based
cameras, including zoom cameras and certain related accessories. The license
agreements did not include instant or digital cameras. Each license agreement
included an initial term expiring on February 1, 2006, provided the Company the
right to renew the license under the same economic terms for an additional
three-year period and provided for the payment by the Company of $3.0 million of
minimum royalties, or $6.0 million in total for both license agreements, which
were fully credited against percentage royalties. On November 28, 2005, the
Company exercised its right to renew the single-use camera license agreement
with Polaroid for an additional three-year term expiring on February 1, 2009 in
accordance with the same economic terms included in the original agreement.
Pursuant to the terms of the single-use camera license agreement, as of July 1,
2007, the Company paid $2.5 million of minimum royalties and recorded the
payment as a prepaid asset. The Company amortizes this asset based upon a
percentage of net sales of Polaroid branded single-use cameras during the
three-year renewal term expiring February 1, 2009. In January 2006, the Company
entered into a new license agreement with Polaroid providing it with the
exclusive, worldwide use of the Polaroid brand trademark in connection with the
manufacture, distribution, promotion and sale of traditional film cameras. The
new license agreement is for a term of three years expiring on January 31, 2009
and provided for the payment by the Company of $50,000 of minimum royalties on
or before October 31, 2006, which was fully credited against percentage
royalties during the first year of the term. There are no minimum guaranteed
royalty payments under the traditional film license agreement after the first
year of the term.
Additionally, the Company has other license and royalty agreements that require
the payment of royalties based on the manufacture and/or sale of certain
products. Its license and royalty agreements expire at various dates through
Fiscal 2023. Total amortization and royalty expense for all licensing and
royalty agreements for Fiscal 2007, Fiscal 2006 and Fiscal 2005 was $6.6
million, $9.4 million and $6.9 million, respectively.
Intellectual Property Claims
From time to time, the Company receives patent infringement claims which it
analyzes and, if appropriate, takes action to avoid infringement, settle the
claim or negotiate a license. Those claims for which legal proceedings have been
initiated against the Company are discussed in Note 15, Litigation and
Settlements. The Company has also received notifications from two entities, one
of which was a significant customer, alleging that certain of the Company's
digital cameras infringe upon those entities' respective patents. The Company
has engaged in discussions with these entities regarding resolution of the
claims.
67
Based on the Company's initial assessment of these claims, infringement of one
or more patents is probable if the patents are valid. Based upon the licensing
discussions to date, the Company preliminarily estimates the potential royalties
due to these two claimants for digital camera sales through June 30, 2007 to be
between $0 and approximately $6.7 million in the aggregate. The actual royalty
amounts, if any, for past and future sales are dependent upon the outcome of the
negotiations. The Company has notified certain of its suppliers of its right to
be indemnified by the suppliers if it is required to pay royalties or damages to
either claimant. The Company is unable to reasonably estimate the amount of the
potential loss, if any, within the range of estimates relating to these claims.
Accordingly, the Company has not accrued any amounts related to these claims as
of June 30, 2007.
German Income Tax Contingencies
During the fourth quarter of Fiscal 2007, the Company reviewed certain tax
positions of its German subsidiary in conjunction with a German tax audit.
Although the Company maintains that these tax positions should be sustained, the
Company cannot guarantee that they will be sustained following the audit. Based
upon the Company's evaluation of these tax positions, if all of its positions
are not sustained, the Company preliminarily estimates that the potential taxes
due to the German taxing authority could be up to $ 3.5 million in the
aggregate. The actual tax amounts due, if any, are dependent upon the outcome of
the audit and any negotiations or appeals related thereto. The Company is unable
to reasonably estimate the amount of the potential loss, if any, within the
range of estimate. Accordingly, the Company has not accrued any amounts related
to these taxes as of June 30, 2007.
Purchase Commitments
At June 30, 2007, the Company had $13.5 million in non-cancelable purchase
commitments relating to the procurement of raw materials, components and
finished goods inventory from various suppliers. In the aggregate, such
commitments are not at prices in excess of current marker values and typically
do not exceed one year.
NOTE 15 - 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 holders of the Company's Common Stock.
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. On August 27, 2004, the court dismissed the claims against the newly
added current and former directors. On September 8, 2005, the court granted the
plaintiffs' motion for class certification and certified as plaintiffs all
persons who purchased the Common Stock between January 18, 2001 and June 22,
2001, inclusive, and who were allegedly damaged thereby (the period January 18,
2001 through June 22, 2001 hereinafter referred to as the "Class Period"). The
allegations remaining in the Amended Complaint were centered around claims that
the Company failed to disclose, in periodic reports it filed with the SEC and in
press releases it made to the public during the Class Period regarding its
operations and financial results, that a large portion of its accounts
receivable was represented by a delinquent and uncollectible balance due from
then customer, KB Gear Interactive, Inc. ("KB Gear"), and that a material
portion of its inventory consisted of customized components that had no
alternative usage. The Amended Complaint claimed that such failures artificially
inflated the price of the Common Stock. The Amended Complaint sought unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. On October 13, 2006, a Stipulation of Settlement
was filed with the court and on January 26, 2007, the court issued a Final
Judgment and Order of Dismissal approving the settlement set forth in the
Stipulation of Settlement and dismissing the case with prejudice. The Company
sought coverage from its insurance carrier for this lawsuit under its directors
and officers liability insurance policy. The settlement amount is within the
policy limits and was approved and paid by the Company's insurance carrier. On
September 17, 2002, the Company was advised by the staff of the SEC that it was
conducting an informal
68
inquiry related to the matters described above and requested certain information
and materials related thereto. On October 15, 2002, the staff of NASDAQ also
requested certain information and materials related to the matters described
above and to matters related to the previously reported embezzlement of Company
funds by a former employee, uncovered in April 2002. The Company provided the
requested information to the staff of the SEC and NASDAQ and has not received
any further communication from the staff of the SEC with respect to the informal
inquiry or from NASDAQ with respect to its request since the Company last
responded in February 2003.
In September 2004, 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 holders of the Company's
Common Stock. In August 2005, an amended consolidated complaint (the "Amended
Complaint") was filed adding a former officer of the Company as a defendant. The
lead plaintiff under the Amended Complaint seeks to act as a representative of a
class consisting of all persons who purchased the Company's Common Stock during
the period from August 14, 2003 through August 31, 2004, inclusive. On March 23,
2007, the court granted the plaintiff's motion for class certification and
certified as plaintiffs all persons who purchased the Common Stock between
August 14, 2003 and August 31, 2004, inclusive, and who were allegedly damaged
thereby (the period August 14, 2003 through August 31, 2004 hereinafter referred
as the "Class Period"). The allegations in the Amended Complaint are centered
around claims that the Company failed to disclose, in periodic reports it filed
with the SEC and in press releases it made to the public during the Class Period
regarding its operations and financial results, (i) the full extent of the
Company's excess, obsolete and otherwise impaired inventory; (ii) the departure
from the Company of the aforementioned former officer defendant until several
months after his departure; and (iii) that Eastman Kodak Company ("Kodak") had
notified the Company that it would stop purchasing cameras from the Company
under its two design and manufacturing services ("DMS") contracts with the
Company due to the Company's alleged infringement of Kodak's patents. The
Amended Complaint also alleged that the Company improperly recognized revenue
contrary to generally accepted accounting principles due to an alleged inability
to reasonably estimate digital camera returns. The Amended Complaint claimed
that such failures artificially inflated the price of the Common Stock. The
Amended Complaint sought unspecified damages, interest, attorneys' fees, costs
of suit and unspecified other and further relief from the court. The Company has
reached an agreement in principle with the plaintiffs on the settlement of this
lawsuit. The settlement is subject to the negotiation and execution of a
mutually agreeable settlement agreement and approval by the class shareholders
and the court. The Company has sought coverage from its insurance carrier for
this lawsuit under its directors' and officers' liability insurance policy and
the insurance carrier is defending the action under a reservation of rights. The
agreed upon pending settlement amount is within the policy limits and the
insurance carrier has agreed to pay such amount. Although the Company believes
the settlement will be consummated and approved by the court, the Company cannot
guarantee this result and if the lawsuit continues and is adversely determined,
the Company's ultimate liability, which could be material, cannot be
ascertained. In a letter dated November 19, 2004, the Company was advised by the
staff of the SEC that it is conducting an investigation related to the matters
described above. The Company has provided the requested information to the staff
of the SEC and has not received any further communication from the SEC with
respect to its request since the Company last responded in May 2005.
On November 16, 2004, a shareholder derivative suit was filed against certain of
the Company's current and former officers and directors, and the Company as a
nominal defendant, in the United States District Court for the District of New
Jersey by an individual purporting to be a holder of the Company's Common Stock.
The complaint alleged that the individual defendants breached their duties of
loyalty and good faith by causing the Company to misrepresent its financial
results and prospects, resulting in the class action complaints described in the
immediately preceding paragraph. The complaint sought unspecified damages,
repayment of salaries and other remuneration from the individual defendants,
interest, attorneys' fees, costs of suit and unspecified other and further
relief from the court. In March 2005, the court granted a motion by the
individual defendants and the Company to transfer the action to the United
States District Court for the Southern District of Florida where the related
class action suit is
69
currently pending. In May 2005, the court consolidated this case with the
related class action suit for discovery purposes only. Although the Company
believes this lawsuit is without merit, its outcome cannot be predicted, and if
adversely determined, the ultimate effect on the Company, which could be
material, cannot be ascertained. The Company has sought coverage from its
insurance carrier for this lawsuit under its directors' and officers' liability
insurance policy, and the insurance carrier is defending the action under a
reservation of rights.
Pursuant to the Company's Certificate of Incorporation, as amended, the personal
liability of the Company's directors is limited to the fullest extent permitted
under the New Jersey Business Corporation Act ("NJBCA"), and the Company is
required to indemnify its officers and directors to the fullest extent permitted
under the NJBCA. In accordance with the terms of the Certificate of
Incorporation and the NJBCA, the Board of Directors approved the payment of
expenses for each of the current and former officers and directors named as
defendants (the "individual defendants") in the above described class action and
derivative action litigations (collectively, the "actions") in advance of the
final disposition of such actions. The individual defendants have executed and
delivered to the Company written undertakings to repay the Company all amounts
so advanced if it shall ultimately be determined that the individual defendants
are not entitled to be indemnified by the Company under the NJBCA.
On October 6, 2004, a patent infringement complaint was filed by Honeywell
International, Inc. and Honeywell Intellectual Properties, Inc., against 27
defendants, including the Company, in the United States District Court for the
District of Delaware. The complaint asserted that the defendants have conducted
activities which infringe U.S. Patent No. 5,280,371, entitled, "Directional
Diffuser for a Liquid Crystal Display." The complaint sought unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. The proceedings in this action against the
Company and other similarly situated defendants were stayed by the court pending
the resolution of the infringement actions against the liquid crystal display
manufacturers. It is too early to assess the probability of a favorable or
unfavorable outcome or the loss or range of loss, if any, and therefore, no
amounts have been accrued relating to this action. The Company has notified
several third parties of its intent to seek indemnity from such parties for any
costs or damages incurred by the Company as a result of this action.
In June 2006, St. Clair Intellectual Properties Consultants, Inc. filed a patent
infringement complaint against 22 defendants, including the Company, in the
United States District Court for the District of Delaware. The complaint
asserted that the defendants conducted activities which infringe U.S. Patent
Nos. 5,138,459, 6,094,219, 6,233,010 and 6,323,899. The complaint sought
injunctive relief, unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. The proceedings in this
action against the Company and the other defendants were stayed by the court
until further order of the court. It is too early to assess the probability of a
favorable or unfavorable outcome or the loss or range of loss, if any, and,
therefore, no amounts have been accrued relating to this action. The Company is
assessing potential claims of indemnification against certain of its suppliers
with respect to this action.
The Company is also involved from time to time in routine legal matters
incidental to its business. Based upon available information, the Company
believes that the resolution of such matters will not have a material adverse
effect on its financial position or results of operations.
NOTE 16 - OTHER CHARGES
Cost-Reduction Initiatives
The Company continues to evaluate its cost structure and implement
cost-reduction initiatives as appropriate. During Fiscal 2007, cost-reduction
initiatives included, among other things, the elimination
70
of certain employee positions. As a result, during Fiscal 2007, the Company
recorded total charges of $0.9 million related to severance costs for the
elimination of certain employee positions.
During the fourth quarter of Fiscal 2006, the Company began implementing an
operating strategy designed to significantly de-emphasize the sale of digital
cameras and increase its focus on the sales of single-use and 35mm traditional
film cameras. In connection with this strategy, the Company has realigned its
operations in Europe, including ceasing its operations in France and Germany. As
a result of the France and Germany office closures in Fiscal 2007, the Company
recorded charges of approximately $0.4 million for severance costs. In addition,
as a result of the de-emphasis of digital camera sales, the Company reduced its
outsourcing organization in Asia and recorded a total of $0.1 million for
employee severance costs. The Company also recorded impairment charges totaling
$1.8 million related to the impairment of certain long-lived assets that
included a reduction in the carrying value of a license used primarily in the
branding of digital cameras and certain machinery held for sale in the amounts
of $1.0 million and $0.8 million, respectively.
Table I -- Other Charges Liability reconciles the beginning and ending balances
of the other charges liability.
(in thousands)
Other Charges Liability
Severance Retention Leases Total
--------- --------- ------ -----
Balance as of July 2, 2005 $ 190 $ 129 $ -- $ 319
------- ------- ------- -------
Charges 1,630 177 -- 1,807
Reversals -- (24) -- (24)
Payments (645) (275) -- (920)
------- ------- ------- -------
Balance as July 1, 2006 $ 1,175 $ 7 $ -- $ 1,182
------- ------- ------- -------
Charges 943 9 26 978
Reversals (44) (7) (1) (52)
Payments (1,838) -- (25) (1,863)
------- ------- ------- -------
Balance as June 30, 2007 $ 236 $ 9 $ -- $ 245
======= ======= ======= =======
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Table II -- Other Charges presents the related expenses and their classification
in the consolidated statements of operations.
(in thousands)
Long-Lived
Asset
Other Charges Severance Retention Impairment Leases Total
------------- ------------------------------------------------------------------------
Fiscal 2007
-----------
Cost of products sold $ 341 $ -- $ -- $ -- $ 341
Selling expense 470 (7) -- 16 479
General and administrative expense 88 9 -- 9 106
------ ------ --------- ------ ------
Total $ 899 $ 2 $ -- $ 25 $ 926
====== ====== ========= ====== ======
Fiscal 2006
-----------
Cost of products sold $ 29 $ 96 $ 788 $ -- $ 913
Selling expense 357 14 -- -- 371
General and administrative expense 1,244 43 1,039 -- 2,326
------ ------ --------- ------ ------
Total $1,630 $ 153 $ 1,827 $ -- $3,610
====== ====== ========= ====== ======
Fiscal 2005
-----------
Cost of products sold $ -- $ 142 $ $ -- $ 142
Selling expense 107 47 -- -- 154
General and administrative expense 153 147 -- -- 300
------ ------ --------- ------ ------
Total $ 260 $ 336 $ -- $ -- $ 596
====== ====== ========= ====== ======
As a result of the cost-reduction initiatives implemented in Fiscal 2006 and
Fiscal 2007, the Company expects to make cash payments totaling $0.2 million
during Fiscal 2008 related to severance.
NOTE 17 - OTHER INCOME, NET
Included in the accompanying consolidated statements of operations under the
caption, "Other income, net" is the following:
(in thousands)
Fiscal Year
-----------------------------------
2007 2006 2005
------- ------- -------
Investment income $(1,927) $(1,525) $ (947)
Gain on sale of securities -- -- (1,124)
Gain on sale of building -- -- (450)
Foreign currency loss, net 105 276 426
Other (income) expense, net (177) 107 325
------- ------- -------
Other income, net $(1,999) $(1,142) $(1,770)
======= ======= =======
NOTE 18 - GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER INFORMATION
Pursuant to SFAS No. 131, Disclosure About Segments of a Business Enterprise and
Related Information, the Company is required to report segment information. The
Company operates in only one business segment, imaging equipment, and sells only
one type of product, image capture devices. Accordingly, the
72
Company's reported consolidated annual net sales reflect the revenue from the
sale of such image capture devices from external customers and no additional
segment reporting is required. SFAS No. 131 also requires certain revenue
disclosures of geographic information based upon the Company's determination as
to which regions such revenues were attributed. Accordingly, for purposes of
this disclosure, the Company attributed sales to the region where the customer's
home office was located. A summary of selected financial information regarding
the Company's geographic operations is set forth below. The Americas consist of
the United States, Canada and Latin America; Europe consists of Germany, the
United Kingdom, France and certain other countries in the European Union; Asia
consists of Hong Kong, Japan and the PRC.
(in thousands)
Fiscal Year
------------------------------------------
Sales made to unaffiliated
customers: 2007 2006 2005
-------- -------- --------
Americas $ 66,767 $ 88,167 $ 87,211
Asia 4,829 813 18,860
Europe 15,057 48,549 68,277
-------- -------- --------
Total $ 86,653 $137,529 $174,348
======== ======== ========
June 30, July 1,
Identifiable assets: 2007 2006
-------- --------
Americas $ 51,733 $ 54,396
Asia 29,096 45,326
Europe 1,675 5,020
-------- --------
Total $ 82,504 $104,742
======== ========
(Percentage of net sales)
Product groups: Fiscal Year
-------------------------------
2007 2006 2005
----- ----- -----
Single-use cameras 89.0% 60.4% 45.9%
Digital cameras 2.5% 28.3 41.1
35mm traditional film cameras 8.5% 11.3 13.0
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
During Fiscal 2007, each of the following customers accounted for at least 10%
of the Company's net sales: Wal-Mart Stores, Inc. ("Wal-Mart") and Walgreen Co.
("Walgreens"). These companies represented the Company's two largest customers
generating sales in Fiscal 2007 of approximately $35.5 million (40.9% of total
net sales) and $18.0 million (20.8% of total net sales), respectively.
During Fiscal 2006, each of the following customers accounted for at least 10%
of the Company's net sales, Wal-Mart and Walgreens. These companies represented
the Company's two largest customers generating net sales in Fiscal 2006 of
approximately $46.5 million (33.8% of total net sales) and $20.9 million (15.2%
of total net sales), respectively.
During Fiscal 2005, Wal-Mart and Walgreens accounted for at least 10% of the
Company's net sales. These companies represented the Company's two largest
customers generating net sales in Fiscal 2005 of approximately $39.3 million
(22.6% of total net sales) and $20.4 million (11.7% of total net sales),
respectively. As previously reported in the Company's Form 10-K for Fiscal 2004,
the Company received notification from a third customer, Kodak, of its intent to
cease purchases under its two DMS
73
contracts with the Company by the end of Second Quarter Fiscal 2005. The winding
down of sales to Kodak had a material adverse effect on the Company's results of
operations for Fiscal 2005 and Fiscal 2006. The loss of any other significant
customer or substantially reduced sales to any other significant customer could
have a material adverse impact on the Company's financial condition and results
of operations.
No other customer accounted for 10% or more of consolidated net sales of the
Company during Fiscal 2007, Fiscal 2006 or Fiscal 2005.
NOTE 19 - QUARTERLY RESULTS (UNAUDITED)
(in thousands, except per share data)
Quarter Ended
-----------------------------------------------------------------------
Fiscal 2007 Sept. 30, Dec.30, March 31, June 30,
----------- 2006 2006 2007 2007
-------- -------- -------- --------
Net sales $ 28,825 $ 19,338 $ 16,375 $ 22,115
Gross profit 4,503 1,501 1,133 2,064
Loss before income taxes (1,623) (3,529) (3,362) (3,206)
Net loss (1,640) (3,547) (3,361) (3,178)
Basic loss per share $ (0.28) $ (0.61) $ (0.57) $ (0.54)
Diluted loss per share $ (0.28) $ (0.61) $ (0.57) $ (0.54)
Quarter Ended
-----------------------------------------------------------------------
Fiscal 2006 Oct. 1, Dec. 31, Apr. 1, July 1,
----------- 2005 2005 2006 2006
-------- -------- -------- --------
Net sales $ 44,586 $ 41,109 $ 18,870 $ 32,964
Gross profit 4,129 4,021 1,797 4,654
Loss before income taxes (5,710) (5,641) (4,699) (3,454)
Net loss (5,760) (5,779) (4,739) (3,333)
Basic loss per share $ (0.99) $ (0.99) $ (0.81) $ (0.57)
Diluted loss per share $ (0.99) $ (0.99) $ (0.81) $ (0.57)
See Note 16, Restructuring and Other Charges for a description of items that had
a significant effect on certain fiscal quarters.
NOTE 20 - SUBSEQUENT EVENTS
On July 2, 2007, the Chairman took delivery of the 66,202 shares held in trust
upon the expiration of the extended deferral period, reducing the deferred share
arrangement in the stockholders' equity section by $412,825.
The Dah Sing Facilities were extended on their existing terms from August 31,
2007 until October 31, 2007 by letters dated August 27, 2007 and September 25,
2007. For additional information regarding the Dah Sing Facilities, see Note 7,
Short-Term Borrowings and Financing Facilities, in the Notes to Consolidated
Financial Statements.
The Company has reached an agreement in principle with the plaintiffs on the
settlement of the class action lawsuit that was filed in September 2004. The
settlement is subject to the negotiation and execution of a mutually agreeable
settlement agreement and approval by the class shareholders and the court. The
agreed upon pending settlement amount is within the limits of the Company's
directors' and officers' liability insurance policy and the insurance carrier
has agreed to pay such amount. See Item 3, Legal Proceeding, and Note 15,
74
Litigation and Settlements, in the Notes to Consolidated Financial Statements
for more information regarding this class action suit and the agreement in
principle.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. We maintain disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), designed to
ensure that information required to be disclosed in our filings under the
Exchange Act is (1) recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms, and (2)
accumulated and communicated to our management, including the principal
executive officer and the principal financial officer, to allow timely decisions
regarding required disclosures.
Our management has reviewed and evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this Annual Report on Form 10-K. Based on this evaluation, our
principal executive officer and principal financial officer concluded that as of
June 30, 2007, our disclosure controls and procedures were effective in
providing reasonable assurance of achieving their objectives in internal control
over financial reporting as described above.
Since we are not an accelerated filer, we are not currently required to provide
an annual report on internal control over financial reporting required by Item
308(a) of Regulation S-K and our independent registered public accounting firm
is not required to issue a separate attestation report on the effectiveness of
our internal control over financial reporting under Item 308(b) of Regulation
S-K.
As of June 30, 2007, we remediated the previously reported weakness in its
internal control over financial reporting related to information technology.
(b) Changes in Internal Control over Financial Reporting. Except for the
remediation of the material weakness described above, there was no change in the
our internal control over financial reporting that occurred during the period
ended June 30, 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
75
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information about directors required for this item is incorporated into this
report by reference to our definitive proxy statement to be filed in connection
with our Annual Meeting of Shareholders that will be held in December 2007 (the
"Annual Meeting").
The information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated by reference to the section in our
definitive proxy statement that will be entitled "Section 16 Beneficial
Ownership Reporting Compliance."
The information concerning our code of ethics is incorporated by reference to
the section in our definitive proxy statement that will be entitled "Code of
Conduct."
Item 11. Executive Compensation.
Information required by this item relating to executive compensation will be
presented under the caption "Executive Compensation" in our definitive proxy
statement in connection with the Annual Meeting. That information is
incorporated into this report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters.
Information required by this item relating to the security ownership of our
common stock by our management and other beneficial owners will be presented
under the caption "Security Ownership of Certain Beneficial Owners and
Management" in our definitive proxy statement in connection with the Annual
Meeting. That information is incorporated into this report by reference.
Information required by this item relating to the securities authorized for
issuance under our equity compensation plans will be presented under the caption
"Equity Compensation Plans" in our definitive proxy statement in connection with
the Annual Meeting. That information is incorporated into this report by
reference.
Item 13. Certain Relationships and Related Transactions, and Director
Independence.
Information required by this item relating to certain relationships of our
directors, executive officers and 5% shareholders and related transactions will
be presented under the caption "Certain Relationships and Related Transactions"
in our definitive proxy statement in connection with the Annual Meeting. That
information is incorporated into this report by reference.
Item 14. Principal Accountant Fees and Services.
Information required by this item relating to the fees charged and services
performed by our independent registered public accounting firm will be presented
under the caption "Ratification of Appointment of Independent Auditors" in our
definitive proxy statement in connection with the Annual Meeting. That
information is incorporated into this report by reference.
76
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) (1) Financial Statements: Consolidated financial statements filed
as part of this report are set forth under Part II, Item 8 of
this report.
(2) Financial Statement Schedule
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Column A Column B Column C Column D Column E
Additions
----------------------------
Balance at Charged to Charged to Balance
beginning of costs and other at end
Description period expenses accounts Deductions of period
----------- ------------ ---------- ---------- ---------- ---------
1. Allowances for sales returns and allowances, discounts, and doubtful accounts
Fiscal Year:
2007 $ 3,827 1,766 3,559 $ 2,034
2006 $ 8,111 7,527 -- 11,811 $ 3,827
2005 $ 9,731 24,225 -- 25,845 $ 8,111
2. Deferred income tax valuation allowance
Fiscal Year:
2007 $20,030 -- -- 195 $19,835
2006 $18,903 1,127 -- -- $20,030
2005 $12,142 6,761 -- -- $18,903
77
(3) Exhibits: Each management contract or compensatory plan listed
below is identified with an asterisk. The exhibits listed in
the accompanying Exhibit Index are filed as part of this
report.
No. Description Method of Filing
--- ----------- ----------------
2.1 Purchase of Share and Claims and Transfer Agreement, Incorporated by reference to the Company's
dated May 10, 2004, by and between Concord Camera Current Report on Form 8-K ("8-K") filed with
GmbH and 4MBO International Electronic AG for the the SEC on May 25, 2004.
purchase of Jenimage Europe GmbH and Jenimage UK
Limited
3.1 Certificate of Incorporation, as amended through Filed herewith.
November 3, 2006
3.2 Restated By-Laws, as amended through July 12, 2004 Incorporated by reference to the Company's
Annual Report on Form 10-K ("10-K") for the
year ended July 3, 2004.
4.1 Form of Common Stock Certificate Incorporated by reference to the Company's
registration statement on Form 8-A filed
September 20, 2000.
9.1* Amended and Restated Voting Agreement, dated Incorporated by reference to the Company's
February 28, 1997, among the parties signatory 10-K for the year ended July 1, 2000.
thereto, including among others, Ira B. Lampert,
Brian King and Arthur Zawodny, as amended on
various dates in 1998 to add certain additional
shares of the Company's Common Stock owned by
Ira B. Lampert, Brian King and Keith Lampert and
as further amended on January 6, 2000
10.1 Second renewal agreement of Master Processing Incorporated by reference to the Company's
Contract No. (86)507, dated March 15, 1996, and Quarterly Report on Form 10-Q ("10-Q") for the
approval notice issued by the Longgang Economic quarter ended September 30, 2000.
Development Bureau (English translations)
10.2 Contract for Grant of State-Owned Land Use Right,
Incorporated by reference to the Company's dated
November 8, 1994, with the Shenzhen Land 10-Q for
the quarter ended September 30, 2000. Bureau
(English translation)
78
10.3 Agreement for Contract Processing among Shenzhen Incorporated by reference to the Company's 8-K
Henggang Investment Co., Ltd., Shenzhen Longgang filed with the SEC on September 21, 2006.
Henggang Xietao Electronics Factory and Concord
Camera HK Limited ("CCHK") dated July 11, 2006
(English translation)
10.4 Debenture, dated June 10, 2004, by CCHK in favor of Incorporated by reference to the Company's
The Hongkong and Shanghai Banking Corporation 10-K for the year ended July 3, 2004.
Limited ("HSBC")
10.5 Capitalization and Subordination Agreement dated as Incorporated by reference to the Company's 8-K
of March 31, 2005 between the Company and CCHK filed with the SEC on October 24, 2005.
10.6 Subordination Agreement dated as of March 31, 2005 Incorporated by reference to the Company's 8-K
between the Company and CCHK filed with the SEC on October 24, 2005.
10.7 Letter Agreement between HSBC and CCHK, dated Incorporated by reference to the Company's 8-K
January 4, 2006, relating to the provision of filed with the SEC on January 26, 2006.
certain financing facilities to CCHK and the
conditions thereof
10.8 Renewal of Business License of Concord Camera Incorporated by reference to the Company's
(Shenzhen) Company Limited, issued by the 10-K for the year ended July 3, 2004.
Shenzhen Municipal Administration for Industry
and Commerce on May 17, 2004 (English translation)
10.9 Special Permitted Business License No. 06999 issued Incorporated by reference to the Company's 8-K
to Concord Camera Henggang Electronic Factory filed with the SEC on September 21, 2006.
(listed as "Concord Camera H.G. Limited" on the
license), Longgang, Shenzhen, valid from October
1991 to October 26, 2016 (English translation)
10.10 Letter agreement between HSBC and CCHK, dated Incorporated by reference to the Company's
October 18, 2006, relating to the reduction of the 10-Q for the quarter ended December 30, 2006.
financing facilities provided to CCHK and the
conditions thereof
10.11 Letter agreement between Dah Sing Bank Limited ("Dah Incorporated by reference to the Company's
Sing") and CCHK, dated June 19, 2006, relating to 10-Q for the quarter ended December 30, 2006.
certain financing facilities provided to CCHK and
the conditions thereof (the "Dah Sing Facilities")
79
10.12 Letter agreement between Shanghai Commercial Bank Incorporated by reference to the Company's
Ltd. and CCHK, dated June 12, 2006, relating to 10-Q for the quarter ended December 30, 2006.
certain financing facilities provided to CCHK and
the conditions thereof
10.13 Letter agreement between Dah Sing and CCHK, dated Filed herewith.
June 27, 2006, extending the Dah Sing Facilities
until August 31, 2007 under existing conditions
10.14 Letter Agreement between Dah Sing Bank Limited and Filed herewith.
CCHK, dated August 27, 2007, extending the Dah Sing
Facilities until September 30, 2007 under existing
conditions
10.15* Incentive Plan (1993), as amended through April 24, Incorporated by reference to the Company's 10-K
2000 for the year ended July 1, 2000.
10.16* Amendments to Incentive Plan (1993) dated as of Incorporated by reference to the Company's
April 19, 2001 and August 2, 2001 Schedule TO/A-1 filed August 28, 2001.
10.17* Amendment to Incentive Plan (1993) dated as of Incorporated by reference to the Company's
January 20, 2003 10-Q for the quarter ended March 29, 2003.
10.18* Amendments to Incentive Plan (1993) dated as of Incorporated by reference to the Company's
February 10, 2003 and June 2, 2003 10-K for the year ended June 28, 2003.
10.19* 2002 Incentive Plan for Non-Officer Employees, New Incorporated by reference to the Company's
Recruits and Consultants, and Amendment No. 1 to 10-K for the year ended June 29, 2002.
same dated September 4, 2002
10.20* Amendment No. 2 dated as of June 2, 2003 to 2002 Incorporated by reference to the Company's
Incentive Plan for Non-Officer Employees, New 10-K for the year ended June 28, 2003.
Recruits and Consultants
10.21* 2002 Incentive Plan for New Recruits, and Amendment Incorporated by reference to the Company's
No. 1 to same dated as of June 2, 2003 10-K for the year ended June 28, 2003.
10.22* Stock Option (Plan and) Agreement, dated as of May Incorporated by reference to the Company's
15, 1998, between Urs W. Stampfli and the Company 10-K for the year ended June 29, 2002.
80
10.23* Amendment, effective as of February 11, 2003, to Incorporated by reference to the Company's
Stock Option (Plan and) Agreement, dated as of 10-K for the year ended June 28, 2003.
May 15, 1998, between Urs W. Stampfli and the
Company
10.24* Amended and Restated Deferred Delivery Plan, as Incorporated by reference to the Company's
amended through June 30, 2004 10-K for the year ended July 3, 2004.
10.25* Amended and Restated Annual Incentive Compensation Incorporated by reference to the Company's
Plan, as amended through June 30, 2004 10-K for the year ended July 3, 2004.
10.26* Amended and Restated Long Term Incentive Plan Incorporated by reference to the Company's
Commencing Fiscal 2004, as amended through June 30, 10-K for the year ended July 3, 2004.
2004, and 2004-2006 Performance Criteria
10.27* Restated Flexible Perquisite Spending Account Incorporated by reference to the Company's
Program for Corporate Officers, as amended through 10-K for the year ended July 3, 2004.
July 12, 2004
10.28* Appendix A, dated June 6, 2002, to Flexible Incorporated by reference to the Company's
Perquisite Spending Account Program 10-Q for the quarter ended December 28, 2002.
10.29* The Company Executive Management Tax Equalization Incorporated by reference to the Company's
Policy 10-K for the year ended June 29, 2002.
10.30* Amended and Restated Employment Agreement, dated as Incorporated by reference to the Company's
of May 1, 1997, between the Company and Ira B. 10-K for the year ended July 3, 2004.
Lampert
10.31* Amendment No. 1 dated as of August 25, 1998, Incorporated by reference to the Company's
Amendment No. 3 dated as of April 19, 2000, and 10-K for the year ended June 30, 2001.
Amendment No. 4 dated as of January 1, 2001, to
Amended and Restated Employment Agreement dated as
of May 1, 1997, between Ira B. Lampert and the
Company
10.32* Amendment No. 2, dated as of January 1, 1999, to Incorporated by reference to the Company's
Amended and Restated Employment Agreement dated as 10-Q for the quarter ended January 2, 1999.
of May 1, 1997, between Ira B. Lampert and the
Company
81
10.33* Amendment No. 5, dated as of December 2, 2002, to Incorporated by reference to the Company's
Amended and Restated Employment Agreement dated as 10-Q for the quarter ended December 28, 2002.
of May 1, 1997, between Ira B. Lampert and the
Company
10.34* Amendment No. 6, dated February 10, 2003, to Amended Incorporated by reference to the Company's
and Restated Employment Agreement dated as of May 1, 10-Q for the quarter ended March 29, 2003.
1997, between Ira B. Lampert and the Company
10.35* Memorandum from Ira B. Lampert dated July 28, 2004 Incorporated by reference to the Company's
to the Company regarding the waiver of certain 10-K for the year ended July 3, 2004.
compensation and modification to vesting dates,
along with releases signed by Ira B. Lampert
10.36* Amendment No. 7, dated July 1, 2005, to Amended and Incorporated by reference to the Company's 8-K
Restated Employment Agreement dated as of May 1, filed with the SEC on September 9, 2005.
1997, between Ira B. Lampert and the Company and
Amendment No. 1 to Amended and Restated Supplemental
Executive Retirement Plan and Agreement ("SERP") for
Ira B. Lampert, dated as of August 18, 2004, between
Ira B. Lampert and the Company
10.37* Terms of Employment between Urs W. Stampfli and the Incorporated by reference to the Company's
Company, effective as of January 1, 2000 10-K for the year ended June 30, 2001.
10.38* Amendment, dated as of November 20, 2002, to Terms Incorporated by reference to the Company's
of Employment dated as of January 1, 2000, between 10-Q for the quarter ended December 28, 2002.
Urs W. Stampfli and the Company
10.39* Amendment No. 2 dated as of February 26, 2003, and Incorporated by reference to the Company's
Amendment No. 3 dated as of March 30, 2003, to Terms 10-Q for the quarter ended March 29, 2003.
of Employment dated as of January 1, 2000, between
Urs W. Stampfli and the Company
10.40* Extension and Amendment of Terms of Employment of Incorporated by reference to the Company's 8-K
Urs W. Stampfli with Concord Camera Corp. effective filed with the SEC on December 27, 2005.
as of January 1, 2006, by and between the Company
and Urs W. Stampfli
82
10.41* Amendment No. 5 to Terms of Employment of Urs W. Incorporated by reference to the Company's 8-K
Stampfli with the Company, effective as of January filed with the SEC on January 9, 2007.
1, 2007
10.42* Gerald J. Angeli Terms of Employment with the Incorporated by reference to the Company's 8-K
Company as of April 17, 2000 filed with the SEC on November 29, 2005.
10.43* Amendment to Terms of Employment of Gerald J. Angeli Incorporated by reference to the Company's 8-K
with the Company dated as of June 11, 2001 filed with the SEC on November 29, 2005.
10.44* Amendment No. 2 to Terms of Employment of Gerald Incorporated by reference to the Company's 8-K
J. Angeli with the Company dated as of August filed with the SEC on November 29, 2005.
12, 2002
10.45* Amendment No. 3 to Terms of Employment of Gerald J. Incorporated by reference to the Company's 8-K
Angeli with the Company dated as of January 1, 2003 filed with the SEC on November 29, 2005.
10.46* Amendment No. 4 to Terms of Employment of Gerald J. Incorporated by reference to the Company's 8-K
Angeli with the Company dated as of March 22, 2004 filed with the SEC on November 29, 2005.
(exclusive of Exhibit A thereto, "the Company
Executive Management Tax Equalization Policy" which
is incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 29, 2002
and exclusive Exhibit B thereto, "Concord Camera
Corp. Code of Conduct," which is posted on the
Company's website, www.concord-camera.com)
10.47* Confidentiality/Intellectual Property Restrictions Incorporated by reference to the Company's 8-K
and Non-Compete (Rev. February 12, 2001) between the filed with the SEC on November 29, 2005.
Company and Gerald J. Angeli
10.48* Amendment No. 5 to Terms of Employment of Gerald J. Incorporated by reference to the Company's 8-K
Angeli with the Company dated April 3, 2006 filed with the SEC on April 6, 2006.
10.49* Amendment No. 6 to Terms of Employment of Gerald J. Incorporated by reference to the Company's 8-K
Angeli with the Company, effective as of January 1, filed with the SEC on January 9, 2007.
2007
10.50* Terms of Employment between Blaine Robinson and the Incorporated by reference to the Company's
Company, effective as of February 11, 2003 and 10-Q for the quarter ended October 2, 2004.
Amendment No. 1 to same dated as of January 7, 2005.
83
10.51* Amendment No. 2 to Terms of Employment of Blaine Incorporated by reference to the Company's 8-K
Robinson with the Company dated April 1, 2006 filed with the SEC on April 6, 2006.
10.52* Amendment No. 3 to Terms of Employment of Blaine Incorporated by reference to the Company's 8-K
Robinson with the Company dated April 1, 2006 filed with the SEC on April 6, 2006.
(exclusive of Exhibits C, D and E thereto, which
were each previously filed with the SEC as exhibits
to the Company's Annual Report on Form 10-K for the
year ended July 3, 2004)
10.53* Terms of Employment of Scott L. Lampert with the Incorporated by reference to the Company's 8-K
Company effective August 1, 2001. filed with the SEC on April 6, 2006.
10.54* Amendment No. 1 to Terms of Employment of Scott L. Incorporated by reference to the Company's 8-K
Lampert with the Company dated April 1, 2006 filed with the SEC on April 6, 2006.
(exclusive of Exhibits C, D and E thereto, which
were each previously filed with the SEC as exhibits
to the Company's Annual Report on Form 10-K for the
year ended July 3, 2004)
10.55* Amendment No. 2 to Amended and Restated SERP for Ira Incorporated by reference to the Company's 8-K
B. Lampert dated as of November 28, 2005 filed with the SEC on November 29, 2005.
10.56* Amendment No. 3 to Amended and Restated SERP for Ira Incorporated by reference to the Company's 8-K
B. Lampert dated as of November 28, 2005 filed with the SEC on November 29, 2005.
10.57* Amendment No. 1 to Amended and Restated SERP for Incorporated by reference to the Company's 8-K
Keith L. Lampert dated as of November 28, 2005 filed with the SEC on November 29, 2005.
10.58* Amendment No. 2 to Amended and Restated SERP for Incorporated by reference to the Company's 8-K
Keith L. Lampert dated as of November 28, 2005 filed with the SEC on November 29, 2005.
10.59* Amendment No. 2 to SERP for Gerald J. Angeli dated Incorporated by reference to the Company's 8-K
as of November 28, 2005 filed with the SEC on November 29, 2005.
10.60* Amendment No. 3 to SERP for Gerald J. Angeli dated Incorporated by reference to the Company's 8-K
as of November 28, 2005 filed with the SEC on November 29, 2005.
10.61* Amendment No. 3 to SERP for Harlan I. Press dated as Incorporated by reference to the Company's 8-K
of November 28, 2005 filed with the SEC on November 29, 2005.
84
10.62* Amendment No. 1 to SERP for Alan Schutzman dated as Incorporated by reference to the Company's 8-K
of November 28, 2005 filed with the SEC on November 29, 2005.
10.63* Amendment No. 4 to Amended and Restated SERP for Urs Incorporated by reference to the Company's 8-K
W. Stampfli dated as of November 28, 2005 filed with the SEC on November 29, 2005.
10.64* Amendment No. 5 to Amended and Restated SERP for Urs Incorporated by reference to the Company's 8-K
W. Stampfli dated as of November 28, 2005 filed with the SEC on November 29, 2005.
10.65* Separation Agreement between the Company and Incorporated by reference to the Company's
Harlan I. Press dated as of December 24, 2005 10-Q for the quarter ended December 31, 2005.
10.66* Separation Agreement between the Company and Incorporated by reference to the Company's 10-Q
Alan Schutzman dated as of December 24, 2005 for the quarter ended December 31, 2005.
10.67* Separation Agreement between the Company and Incorporated by reference to the Company's
Keith L. Lampert dated as of December 24, 2005 10-Q for the quarter ended December 31,
2005.
10.68 Lease Agreement, undated between Prologis Trust, a Incorporated by reference to the Company's
Maryland real estate investment trust, and the 10-Q for the quarter ended January 2, 1999.
Company
10.69 Lease Agreement, dated as of August 12, 1998, Incorporated by reference to the Company's
between CarrAmerica Realty Corp. and the Company 10-Q for the quarter ended January 2, 1999.
10.70 First Amendment, dated October 12, 1999, to Lease Incorporated by reference to the Company's
dated as of August 12, 1998, between CarrAmerica 10-Q for the quarter ended October 2, 1999.
Realty Corp. and the Company
10.71 Second Amendment, dated January 3, 2000, to Lease Incorporated by reference to the Company's
dated as of August 12, 1998, between CarrAmerica 10-K for the year ended July 1, 2000.
Realty Corp. and the Company
10.72 Third Amendment, dated January 6, 2003, to Lease Incorporated by reference to the Company's
dated as of August 12, 1998, between CRD 10-Q for the quarter ended December 28, 2002.
Presidential, LLC and the Company
10.73 Letter agreement between Dah Sing and CCHK, Filed herewith.
dated September 25, 2007, extending the Dah Sing
Facilities until October 31, 2007 under existing
conditions
14.1 The Company Code of Conduct (Rev. 3-30-06) Incorporated by reference to the Company's 8-K
filed with the SEC on April 6, 2006.
85
16.1 Letter from Ernst & Young LLP to the SEC dated June Incorporated by reference to the Company's 8-K
20, 2005. filed with the SEC on June 20, 2005.
17.1 Resignation of J. David Hakman as a member of the Incorporated by reference to the Company's 8-K
Board of Directors filed with the SEC on November 23, 2004.
21 Subsidiaries of the Company Filed herewith.
23.1 Consent of BDO Seidman, LLP Filed herewith.
31.1 Certification of Principal Executive Officer Filed herewith.
pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Principal Financial Officer Filed herewith.
pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Principal Executive Officer Filed herewith.
pursuant to 18 U.S.C. ss.1350
32.2 Certification of Principal Financial Officer Filed herewith.
pursuant to 18 U.S.C. ss.1350
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONCORD CAMERA CORP.
Date: September 27, 2007 By: /s/ Ira B. Lampert
--- ---------------------------
Ira B. Lampert, Chairman, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated, and on the date set forth above.
Signature Title
--------- -----
/s/ Ira B. Lampert Chairman of the Board, Chief Executive
------------------------------- Officer and President
Ira B. Lampert (Principal Executive Officer)
/s/ Blaine A. Robinson Vice President - Finance, Treasurer and
------------------------------- Assistant Secretary (Principal
Blaine A. Robinson Financial and Accounting Officer)
/s/ Morris H. Gindi Director
-------------------------------
Morris H. Gindi
/s/ Ronald S. Cooper Director
-------------------------------
Ronald S. Cooper
/s/ William J. O'Neill, Jr. Director
-------------------------------
William J. O'Neill, Jr.
87
Exhibit Index
No. Description
----- -----------
3.1 Certificate of Incorporation, as amended through November 3, 2006
10.13 Letter agreement between Dah Sing Bank Limited and CCHK, dated June
27, 2006, extending until August 31, 2007 financing facilities
provided to CCHK under existing conditions
10.14 Letter agreement between Dah Sing Bank Limited and CCHK, dated
August 27, 2007, extending until September 30, 2007, financing
facilities provided to CCHK under existing conditions
10.73 Letter agreement between Dah Sing and CCHK, dated September 25,
2007, extending the Dah Sing Facilities until October 31, 2007 under
existing conditions
21 Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C.
ss.1350
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.
ss.1350
88